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Foreign Income and Taxpayers

Foreign earned income exclusion on housing cost limitations increase.

December 2007
by Alistair Nevius/The Tax Adviser

In Notice 2007-77, the IRS has adjusted the 2007 limitation on housing expenses under Sec. 911 for specific locations in countries with high housing costs relative to U.S. housing costs. The adjusted housing expense limitations are to be used in determining the housing cost amount eligible for exclusion or deduction for tax year 2007.

Under Sec. 911, a qualified individual may elect to exclude his or her foreign housing cost amount from gross income. The individual can exclude foreign housing expenses paid or incurred during the tax year, with a limit of 30 percent of the individual’s foreign earned income exclusion for the year, minus 16 percent of the individual’s foreign earned income exclusion for the year. The Service is authorized to adjust the 30 percent-of-foreign-earned-income-exclusion limit for locations where housing costs are determined to be high relative to U.S. housing costs (Sec. 911(c)(2)(B)).

Notice 2007-77 contains a complete list of such foreign locations, with the adjusted per-day and per-year limitations for those locations. Some locations with the highest adjusted annual housing expense limitations for 2007 are Hong Kong ($114,300), Moscow ($90,900), Paris ($87,200), Milan ($86,700), Tokyo ($85,700) and London ($77,800).

Practitioners with clients who are U.S. citizens living abroad, especially those in high housing cost countries, should review the newly released 2007 tables before calculating their foreign earned income and housing exclusion or deduction and any gross-up calculations.

Alistair B. Nevius, J.D., is Managing Editor of The Tax Adviser.