Housing Costs Exclusion—Developments from the Department of Treasury
By Jane A. Bruno, J.D., LLM (Taxation)
Fall/Winter
2007
A year or so ago, Americans overseas were shocked to find that
the rules regarding U.S.taxation of their foreign income had changed overnight. Thanks to a last-minute
addition by Senator Grassley (R-Iowa) to the Tax Increase Prevention Act, much of the benefit of the housing
exclusion had been eliminated and the marginal rate for taxation of foreign income had increased substantially.
Since that time, the efforts of various organizations
representing the interests of Americans overseas—particularly American Citizens Abroad-- from private business
and from individual Americans have resulted in the introduction of a bill by Senator John DeMint
(R-South Carolina) titled “The Working American Competitiveness Act”. This, along with a similar bill
in the House of Representatives (H.R. 5986), would eliminate double taxation on the foreign income
of U.S. citizens. These bills are both still in committees for discussion and have not come before
Congress for a vote.
In the meantime, the Secretary of Treasury, acting on one
sentence in the new tax law in which he was “given authority to issue regulations or other guidance providing for
the adjustment of this 30% housing cost limitation based on geographic differences in housing costs relative to
housing costs in the United States”, has done just that. Notice 2006-87 notes that under the new law,
only $24,720 of housing expense (or 30% of the maximum exclusion of $82,400 in 2006) is eligible for exclusion,
and then only to the extent it exceeds 16% of the income exclusion amount (or $13,184). This translates
into a maximum housing exclusion of $11,536. Recognizing that there are extreme differences in housing costs
based on geographic location, the notice provides a chart based on information provided by the Department of
State to adjust the housing limitation for high cost localities.
This notice was followed by a more comprehensive list
of housing locations that merit a higher adjustment—Notice 2007-25 provides modifications and additions to the
previous notice and both are applicable to tax year 2006.
For 2007, still another notice—Notice 2007-77—has
been issued that will apply to the 2007 tax year. Using the new foreign income exclusion of $85,700 for
2007, the daily limitation on housing expense is $70.44 and the yearly limitation is $25,710.
Under Notice 2007-77, there are vastly different limitations based on locations.
For example:
| Country | Location | Daily Limitation | Yearly Limitation |
| France | Paris | $238.90 | $87,200 |
| Germany | Berlin | $143.29 | $52,300 |
| Italy | Rome | $159.18 | $58,100 |
| Switzerland | Geneva | $194.25 | $70,900 |
| United Kingdom | London | $213.15 | $77,800 |
These are just a few of the European cities listed
in the Notice. If one happens to live in one of these places, he will be able to take more in the way of
housing exclusion—namely, the yearly limitation of say, $87,200 in Paris, France less the $13,712 noted
above or $73,488 (vs. a maximum of $11,998 for the regular housing exclusion). However, and this a big
HOWEVER, if one lives in a locality not listed on the chart, his maximum housing expense is limited to $25,710 for the year no matter how high the actual cost is. And this translates, with the other provision of the law in place, to a real maximum housing exclusion in 2006 of
$11,998. (For the full text of the Treasury Notices go to: www.irs.gov and put the notice number in
the “search” box.
These changes in the tax law for Americans overseas
will continue to generate discussion and controversy as many perceive they are being treated unfairly.
Jane Bruno of Oceanwaves Tax, LLC is a tax consultant and preparer with 20 years of experience working with Americans overseas. She can be reached at: janebruno@bellsouth.net or by calling +1 561 222-9273