Individuals who work abroad have been allowed to exclude far less earned income and housing costs from their U.S. gross income starting in 2006 as the result of the Tax Increase Protection and Reconciliation Act (TIPRA). To lessen the sting, the IRS has acted again under its Congressional authority - this time for the 2007 tax year - to provide tax relief to those who live in various "high-cost" areas throughout the world

The IRS has issued the 2007 "adjusted foreign housing limitations" table, expanding the number of qualifying "high-cost" areas to 288 (up from 168 in 2006) and raising the housing allowance significantly for many locations. In addition, it announced the inflation-adjusted standard cost-allowance amount for 2007, computed to be $25,710, up from $24,720 for 2006, for all areas not on the list.

Comment. The most expensive place to live in the world, according to the IRS list, remained the same from 2006 to 2007, at $114,300 for Hong Kong. The rise in many areas, however, had to do more with the fall of the dollar against local currency than changes in a particular location's housing market.

Background

TIPRA-created Code Sec. 911(c)(2)(B) allows the IRS discretion to adjust the standard formula limitation for determining the amount of employer-paid housing excluded from foreign earned income, based on geographic differences in housing costs relative to housing costs in the U.S. The IRS uses publicly available data, such as indices published by the U.S. State Department.

New Adjustments

The IRS "Table of Adjusted Limitations for 2007" identifies 288 locations within countries with high housing costs relative to housing costs in the U.S. and provides adjusted limitations on housing expenses for qualified individuals living in those high cost localities in lieu of the otherwise applicable limitation of $25,710 for 2007. Examples of these locations and their adjusted limitations (one for "daily" and the other for "full year") include:

• Buenos Aires: $120.27/$43,900, same as 2006
• Versailles, France: $238.90/$87,200, up from standard $67.72/$24,720 in 2006
• Paris: $238.90/$87,200, up from $217.26/$79,300 in 2006
• Berlin: $143.29/$52,300, up from $132.05/$48,200 in 2006
• Tokyo: $234.79/$85,700, same as 2006
• London: $213.15/$77,800, up from $197.53/$72,100 in 2006
• Mumbai, India: $156.19/$57,011, up from standard $67.72/$24,720 in 2006

If you have any questions about the adjusted foreign housing limitations, please give our office a call.

(Notice 2007-77)