NEW TAX BILL MAKES SIGNIFICANT CHANGES FOR EXPATRIATE TAXATION

Modification to Foreign Earned Income and Employer-Provided Housing Exclusion Rules for U.S. Citizens Living Abroad

A foreign earned income exclusion generally is available for a qualified individual's non-U.S. source earned income attributable to personal services performed by that individual during the period of foreign residence or presence. The maximum exclusion amount for any calendar year is currently $80,000. This amount is indexed for inflation after 2007. A qualified individual is allowed an exclusion from gross income (or, alternatively, a deduction) for certain foreign housing costs paid or incurred by or on behalf of the individual. The amount of this housing cost exclusion is equal to the excess of a taxpayer's "housing expenses" over a base housing amount

The Bill reforms the rules applicable to these citizens by: (1) accelerating indexing of the $80,000 foreign earned income exclusion cap; (2) tying the employer-provided housing exclusion to the foreign earned exclusion cap and applying an objective standard in determining the amount of reasonable housing expenses; and (3) applying a "stacking rule" to ensure that these citizens are subject to the same U.S. tax rates as individuals living and working in the U.S. The limitation in 2006 is increased to $82,400.

The base housing amount for the housing cost exclusion is changed to 16% of the foreign earned income exclusion, computed on a daily basis. It is also limited to 30% of the maximum amount of the taxpayer’s foreign earned income exclusion.

This provision is effective for years beginning after 2005.