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Wednesday, October 11, 2006

IRS RECOGNIZES VARIOUS COSTS OF LIVING FOR HOUSING COST EXCLUSION

Internal Revenue Code Section 911 allows U.S. citizens and residents who have a tax home abroad and either reside in a foreign country or spend almost all of their time in a foreign country to either exclude from income or deduct from income (depending on whether an employer pays their employment costs) a portion of their foreign housing costs. Computing the maximum excludible or deductible amount takes one through a maze of computations and limitations - an exercise not worth reproducing here.

The IRS has issued Notice 2006-87, which addresses one of the limitations included in the computation. More particularly, one standard limitation in the computation is a maximum amount allowable for housing expenses under Code Section 911(c)(2)(A). The standard limit for these expenses under that part of the computation is $24,720 per year.

In a break for many taxpayers living abroad, Notice 2006-87 recognizes that housing costs are different throughout the world. It contains a table that identifies locations within countries with high housing costs relative to U.S. housing costs, and provides an adjustment amount that can result in an increase in the $24,720 figure. For example, the figure is adjusted upwards to a maximum of $85,700 (for an overall maximum limitation, after the remaining limitations are figured in, of $72,516).

Individuals whose locality is not included on the table must use the generally applicable $24,720 limitation.

This table will be updated each year.

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