 |
Oct 2006
|
In Brief:
The Internal Revenue Service has just released Notice 2006-87 (Determination of Housing Cost Amount Eligible for Exclusion or Deduction) which adjusts the limit on the amount of foreign housing exclusion for U.S. expatriates living in certain locations as a result of the Tax Increase Prevention and Reconciliation Act of 2005 ("TIPRA") which was introduced in May 2006.
For U.S. expatriates living in Hong Kong, the maximum housing cost amount a qualified individual may exclude from income is US$101,116.
The Notice is effective for taxable years beginning on or after 1 January 2006. |
Background
Pursuant to the TIPRA, the maximum amount of foreign housing exclusion which a qualified U.S. expatriate may claim is limited to US$11,536 per each tax year, being 30% of the foreign earned income exclusion limitation (US$24,720 = US$82,400 x 30%) less the base housing amount (US$13,184 = US$82,400 x 16%).
The changes to the Internal Revenue Code under the TIPRA authorizes the Secretary to issue regulations or other guidance to adjust the aforementioned limitation on housing amount based on geographic differences in housing costs relative to housing costs in the U.S.
Impact on Foreign Housing Exclusion per Notice 2006-87
Enclosed in Notice 2006-87 is a 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 20 August 2006. The table identifies locations with high housing costs and provides an adjusted limitation on foreign housing exclusion (in lieu of the otherwise applicable limitation of US$24,720). The table will be updated on an annual basis. Here are the highlights on some locations (all in US$):
|
Location |
Limitation on Housing Expenses (full year) |
Less: Base Housing Amount |
Maximum Foreign Housing Exclusion (full year) |
|
Hong Kong |
114,300 |
13,184 |
101,116 |
|
Tokyo |
85,700 |
13,184 |
72,516 |
|
Seoul |
56,200 |
13,184 |
43,016 |
|
Kuala Lampur |
35,300 |
13,184 |
22,116 |
|
Singapore |
42,900 |
13,184 |
29,716 |
A qualified individual who does not incur housing expenses in one of the locations listed in Notice 2006-87 (including cities in China) is restricted to the amount of US$24,720 (full year).
Illustrative Example
As the following illustrations demonstrate, the US income tax impact of the new provisions varies widely based on the individual's income level, the cost of housing in a particular jurisdiction, and the foreign tax imposed by that jurisdiction.
The calculation is based on the following assumption:
- Annual salary and bonus of US$800,000
- Married filing joint (spouse has no income)
- No dependents
- Standard deduction
- No outside income or losses
- All compensation, housing, etc. are taxed by the foreign location
- Hong Kong salaries tax is imposed at a flat rate of 16%
|
(All in US$) |
Housing cost - $100,000 |
Housing cost - $200,000 |
|
Tax - before Notice 2006-87 |
142,162 |
175,695 |
|
Tax - after Notice 2006-87 |
133,733 |
164,096 |
|
Difference |
8,429 |
11,599 |
Observation
One may recall that the TIPRA also includes a "stacking rule" which adds back the exclusion to determine the rate of tax to ensure that U.S. expatriates are subject to the same U.S. tax rates on income not excluded under Section 911 as taxpayers living and working in the U.S.
In this regard, although Notice 2006-87 provides relief to U.S. taxpayers living in locations with high housing costs, the net tax impact may be lower than expected as a result of the "stacking rule".
|
|
