Click here for the pdf version of this page
TREASURY DEPARTMENT
INTERNAL REVENUE SERVICE
Notice 2006-87
LIMITATION ON HOUSING
EXPENSES FOR THE PURPOSES OF SECTION 911 OF THE TAX CODE
Part III - Administrative, Procedural,
and Miscellaneous
Determination of housing cost amount
eligible for exclusion or deduction.
This notice provides adjustments
to the limitation on housing expenses for purposes of section 911 of
the Internal Revenue Code (Code) for specific locations, on the basis
of geographic differences in housing costs relative to housing costs
in the United States.
Section 911(a) of the Code allows a qualified
individual to elect to exclude from U.S. gross income the foreign earned
income and housing cost amount of such individual. Section 911(c)(1),
as amended by section 515 of the Tax Increase Prevention and Reconciliation
Act of 2005 (TIPRA), defines the term “housing cost amount” as an
amount equal to the excess of (A) the housing expenses of an individual
for the taxable year to the extent such expenses do not exceed the amount
determined under section 911(c)(2), over (B) 16 percent of the exclusion
amount (computed on a daily basis) in effect under section 911(b)(2)(D)
for the calendar year in which such taxable year begins ($67.73 per
day for 2006, or $82,400 for the full year), multiplied by the number
of days of that taxable year within the applicable period
described in section 911(d)(1). The applicable period is the period
during which the individual meets the tax home requirement of section
911(d)(1) and either the bona fide residence requirement of section
911(d)(1)(A) or the physical presence requirement of section 911(d)(1)(B).
Assuming that the entire taxable year of a qualified individual is within
the applicable period, the section 911(c)(1)(B) amount for 2006 is $13,184
($82,400 x .16).
Section 515 of TIPRA also added a new
section 911(c)(2)(A) of the Code, which limits the housing expenses
taken into account in section 911(c)(1)(A) to an amount equal to the
product of – (i) 30 percent (adjusted as may be provided under the
Secretary’s authority under section 911(c)(2)(B)) of the amount in
effect under section 911(b)(2)(D) for the calendar year in which the
taxable year of the individual begins, multiplied by (ii) the number
of days of that taxable year within the applicable period described
in section 911(d)(1). Thus, for the year 2006, a qualified individual
whose entire taxable year is within the applicable period is limited
to maximum housing expenses of $24,720 ($82,400 x .30). Accordingly,
the maximum housing cost amount a qualified individual may exclude from
income in year 2006 is $11,536 ($24,720 – $13,184). The TIPRA
changes apply to taxable years beginning after December 31, 2005.
To the extent the housing cost amount
of any individual for any taxable year is not attributable to employer
provided amounts, section 911(c)(4)(A) of the Code provides that such
amount shall be treated as a deduction in computing adjusted gross income.
Under section 911(c)(4)(B), however, the amount of this deduction is
limited to the excess of the foreign earned income of the individual
for the taxable year over the amount of such income excluded from gross
income under section 911(a).
In addition, section 911(d)(7) of the
Code prohibits the total amount excluded or deducted under section 911
for the taxable year from exceeding the individual's foreign earned
income for such year. Further, section 911(b)(1)(B) excludes from the
definition of foreign earned income certain amounts, including amounts
paid by the United States or an agency thereof to an employee of the
United States or an agency thereof. As a result, the exclusion or deduction
from gross income of the housing cost amount under section 911 is not
available to an individual whose earned income consists solely of amounts
paid by the United States or an agency thereof to an employee of the
United States or an agency thereof.
Section 911(c)(2)(B) of the Code authorizes
the Secretary to issue regulations or other guidance to adjust the percentage
under section 911(c)(2)(A)(i) based on geographic differences in housing
costs relative to housing costs in the United States. The Joint
Explanatory Statement of the Committee of Conference accompanying TIPRA
states the conferees’ intent that the Secretary be permitted to use
publicly available data, such as the Quarterly Report Indexes published
by the U.S. Department of State or any other information that the Secretary
deems reliable, in making adjustments. See H.R. Conf. Rep. No.
304, 109th Cong., 1st Sess. 309 (2005).
Accordingly, the following table, which
was derived from the Living Quarters Allowance table prepared by the
Office of Allowances of the U.S. Department of State
as of August 20, 2006, identifies locations within countries
with high housing costs relative to housing costs in the United States,
and provides an adjusted limitation on housing expenses for a qualified
individual incurring housing expenses in one or more of these high cost
localities in 2006 to use (in lieu of the otherwise applicable limitation
of $24,720) in determining his or her housing expenses under section
911(c)(2)(A) of the Code.
The table will be updated each year by
administrative pronouncement (e.g., through issuing a notice, amending
Form 2555 or the instructions thereto, or by making a revised table
available on the IRS website at http://www.irs.gov), beginning in 2007,
based on the living quarters allowance for employees of the U.S. Department
of State who are in Group 2, with family, contained in the first Living
Quarters Allowance table released in that calendar year by the Office
of Allowances of the U.S. Department of State.
A qualified individual incurring housing
expenses in one or more of the high cost localities identified above
for the year 2006 may use the adjusted limit provided in the table (in
lieu of $24,720) in determining his or her housing cost amount on Form
2555, Foreign Earned Income. A qualified individual who does not
incur housing expenses in a locality identified above for the year 2006
is limited to maximum housing expenses of $67.73 per day ($24,720 per
year) in determining his or her housing cost amount.
EFFECTIVE DATE
This notice is effective for taxable
years beginning on or after January 1, 2006.
DRAFTING INFORMATION
The principal author of this notice is
Paul J. Carlino of the Office of Associate Chief Counsel (International).
For further information regarding this notice contact Mr. Carlino at
(202) 622-3840 (not a toll-free call).
Request for Comments
Comments are requested on the method
identified in the notice for annual updates to the list contained in
this notice. If a taxpayer believes that the average housing costs
for a specific location differ significantly from the amount provided
in this notice, the IRS and Treasury Department are particularly interested
in information on housing costs that can be verified through publicly
available data. Comments may be submitted to CC:PA:LPD:PR (Notice 2006-87),
Room 5203, Internal Revenue Service, PO Box 7604, Washington,
DC 20044. Submissions may also be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4:30 p.m. to Crystal Mall 4,
room 108, 1901 South Bell Street, Arlington, VA 22202, Attn: CC:PA:LPD:PR
(Notice 2006-87). Submissions may also be sent electronically
via the internet to the following email address: Notice.comments@irscounsel