Notice 2007-25, 2007-12 IRB
A new Notice effectively increases the maximum housing cost exclusion for U.S. citizens and residents working abroad in specified high-cost locations. It not only increases the higher maximums authorized by an earlier notice but also adds new high cost locations to the pre-existing list of such locations.
Background. A qualified individual may elect to exclude from U.S. gross income his foreign earned income and housing cost amount. (Code Sec. 911(a)) Under Code Sec. 911(c)(1), as amended by the Tax Increase Prevention and Reconciliation Act (TIPRA, P.L. 109-222), the maximum excludable housing cost amount is calculated by way of a complex formula.
The excludable housing cost amount is the excess, if any, of (1) the individual's allowable housing expenses for the year over (2) a base amount. For 2006, a taxpayer's allowable housing expenses, assuming he is eligible for entire year, generally is $24,720; subtracting his base amount of $13,184 yields a generally applicable maximum housing amount exclusion of $11,536 (see Federal Taxes Weekly Alert 06/15/2006 and 10/12/2006 for details).
Increases for high-cost areas. In Notice 2006-87, 2006-43 IRB 766, IRS made adjustments for high-cost foreign areas (see Federal Taxes Weekly Alert 10/12/2006). Specifically, it contains a table that (1) identifies locations within countries with high housing costs relative to U.S. housing costs, and (2) provides an adjusted limitation on allowable housing expenses for a qualified individual incurring housing expenses in one or more specified high cost localities in 2006 to use (instead of the otherwise applicable limitation of $24,720) in determining his housing expenses. A qualified individual incurring housing expenses in one or more of the high cost localities identified in the table for the year 2006 may use the adjusted limit provided in the table (in lieu of $24,720) in determining his housing cost amount on Form 2555, Foreign Earned Income.
Additional increases. Notice 2007-25 increases the limitation on housing expenses for a few foreign locations. For example, the full year limitation on housing expenses is $28,824 for Vienna, Austria, and $75,720 for Moscow, Russia, (versus $27,200 and $27,500, respectively, in Notice 2006-87). Notice 2007-25 also carries modified housing expense limits for some foreign locations not carried in Notice 2006-87, such as Beijing and Shanghai, China, Mumbai and New Delhi, India, and Zurich, Switzerland.
In Notice 2007-25, IRS says it intends to provide guidance for housing expenses for 2007 as soon as possible, but warns that this year's adjusted limitations on housing expenses for some high-cost foreign locations may be lower than the 2006 limitations in Notice 2006-87.
