Earlier this year President Bush signed into law the “Tax Increase Prevention Reconciliation Act of 2005.” Buried in this legislation are measures that erode tax protections for Americans living overseas. Overseas Digest has written an excellent article outlining three factors that the new law changes. In short the changes are:

1. A marginally increased foreign income exclusion (this is actually a good thing)
2. The foreign income housing exclusion was capped at 30%. This could hit some pocket books pretty hard.
3. Housing expenses that are included must now be included when determining the marginal tax rate on other taxable income.

This week the Treasury Department released this notice which effectively increases the housing exclusion for some places:

October 6, 2006
HP-133

Treasury Issues Notice Increasing Housing Cost Amount that May
Be Excluded by U.S. Citizens or Residents Living Abroad

The Treasury Department and IRS issued Notice 2006-87 today, which permits individuals who work outside the United States and live in foreign countries with high housing costs to deduct or exclude a greater portion of their housing costs.

Although U.S. citizens and residents are generally subject to U.S. tax on their worldwide income, section 911 of the Internal Revenue Code permits individuals who live and work outside the United States to exclude from U.S. tax portions of their earned income and housing costs. The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) made several changes to section 911, one of which effectively placed a limit on the amount of housing costs that could be taken into account under that section. TIPRA provided the Treasury Department with authority to adjust the new housing cost limitation based on geographic differences in housing costs relative to housing costs in the United States.

In the Notice, using the approach suggested in the legislative history to TIPRA, Treasury exercises its authority to increase the housing cost limitation, setting forth new higher housing cost amounts for specific locations. The relief provided by the Notice is retroactive to the effective date of TIPRA. The Notice also requests comments regarding the determination of locations and housing costs in future taxable years.

The exact rates for specific places may be found from the Treasury’s website in a PDF.

The Wall Street Journal (sorry–paid subscription only) had this to say about the new regulations:

Some Americans working in countries with high housing costs have won a partial reprieve from a recently enacted tax increase.

The Treasury Department issued a notice Friday that raises the amount of housing costs that some Americans working and living abroad may deduct or exclude when they are filing their U.S. income-tax returns. As a result, although numerous U.S. expatriates still face significantly higher taxes for this year, the increase won’t be as steep as initially feared for workers in some places, such as Hong Kong and Singapore.

The new Treasury notice also included revised housing-cost numbers for many places in Europe. But these changes may be less significant for many U.S. workers there because of high taxes imposed by numerous European nations.

The housing-cost numbers, which are based on a complex formula, vary widely from place to place. For example, the maximum amount of housing costs that an American working in Hong Kong may exclude for this year works out to $101,116, according to one Washington tax specialist. Previously, American expats in all overseas locations were allowed to exclude just $11,536. The Treasury says its table will be updated annually.