I'm a dual US-Bermuda citizen living in Bermuda with a Chilean wife. Only I work and we recently bought a house in Bermuda. I receive a housing allowance from my employer. Can we deduct both the housing allowance and mortgage interest on the same property, or should we rent a second property to qualify for both?

You do NOT deduct the housing allowance. You MAY need to add it to your income, or use it to partially offset your mortgage interest deduction, or it may be totally tax-exempt; I cannot comment one way or another without more information. It IS likely that both the housing allowance and up to $91,000 of your Bermuda salary can be excluded using Form 2555 (Foreign Earned Income Exclusion).

You CAN deduct the mortgage interest (and real estate taxes, if such taxes are assessed in Bermuda) on Schedule A as itemized deductions.

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