Internal Revenue Bulletin: 2006-43
October 23, 2006
This notice provides adjustments to the limitation on housing expenses for purposes of section 911 of the Internal Revenue Code (Code) for specific locations, on the basis of geographic differences in housing costs relative to housing costs in the United States.
Section 911(a) of the Code allows a qualified individual to elect to exclude from U.S. gross income the foreign earned income and housing cost amount of such individual. Section 911(c)(1), as amended by section 515 of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), defines the term “housing cost amount” as an amount equal to the excess of (A) the housing expenses of an individual for the taxable year to the extent such expenses do not exceed the amount determined under section 911(c)(2), over (B) 16 percent of the exclusion amount (computed on a daily basis) in effect under section 911(b)(2)(D) for the calendar year in which such taxable year begins ($67.73 per day for 2006, or $82,400 for the full year), multiplied by the number of days of that taxable year within the applicable period described in section 911(d)(1). The applicable period is the period during which the individual meets the tax home requirement of section 911(d)(1) and either the bona fide residence requirement of section 911(d)(1)(A) or the physical presence requirement of section 911(d)(1)(B). Assuming that the entire taxable year of a qualified individual is within the applicable period, the section 911(c)(1)(B) amount for 2006 is $13,184 ($82,400 x .16).
Section 515 of TIPRA also added a new section 911(c)(2)(A) of the Code, which limits the housing expenses taken into account in section 911(c)(1)(A) to an amount equal to the product of — (i) 30 percent (adjusted as may be provided under the Secretary’s authority under section 911(c)(2)(B)) of the amount in effect under section 911(b)(2)(D) for the calendar year in which the taxable year of the individual begins, multiplied by (ii) the number of days of that taxable year within the applicable period described in section 911(d)(1). Thus, for the year 2006, a qualified individual whose entire taxable year is within the applicable period is limited to maximum housing expenses of $24,720 ($82,400 x .30). Accordingly, the maximum housing cost amount a qualified individual may exclude from income in year 2006 is $11,536 ($24,720 - $13,184). The TIPRA changes apply to taxable years beginning after December 31, 2005.
To the extent the housing cost amount of any individual for any taxable year is not attributable to employer provided amounts, section 911(c)(4)(A) of the Code provides that such amount shall be treated as a deduction in computing adjusted gross income. Under section 911(c)(4)(B), however, the amount of this deduction is limited to the excess of the foreign earned income of the individual for the taxable year over the amount of such income excluded from gross income under section 911(a).
In addition, section 911(d)(7) of the Code prohibits the total amount excluded or deducted under section 911 for the taxable year from exceeding the individual’s foreign earned income for such year. Further, section 911(b)(1)(B) excludes from the definition of foreign earned income certain amounts, including amounts paid by the United States or an agency thereof to an employee of the United States or an agency thereof. As a result, the exclusion or deduction from gross income of the housing cost amount under section 911 is not available to an individual whose earned income consists solely of amounts paid by the United States or an agency thereof to an employee of the United States or an agency thereof.
Section 911(c)(2)(B) of the Code authorizes the Secretary to issue regulations or other guidance to adjust the percentage under section 911(c)(2)(A)(i) based on geographic differences in housing costs relative to housing costs in the United States. The Joint Explanatory Statement of the Committee of Conference accompanying TIPRA states the conferees’ intent that the Secretary be permitted to use publicly available data, such as the Quarterly Report Indexes published by the U.S. Department of State or any other information that the Secretary deems reliable, in making adjustments. See H.R. Conf. Rep. No. 304, 109th Cong., 1st Sess. 309 (2005).
Accordingly, the following table, which was derived from the Living Quarters Allowance table prepared by the Office of Allowances of the U.S. Department of State as of August 20, 2006, identifies locations within countries with high housing costs relative to housing costs in the United States, and provides an adjusted limitation on housing expenses for a qualified individual incurring housing expenses in one or more of these high cost localities in 2006 to use (in lieu of the otherwise applicable limitation of $24,720) in determining his or her housing expenses under section 911(c)(2)(A) of the Code. The table will be updated each year by administrative pronouncement (e.g., through issuing a notice, amending Form 2555 or the instructions thereto, or by making a revised table available on the IRS website at http://www.irs.gov), beginning in 2007, based on the living quarters allowance for employees of the U.S. Department of State who are in Group 2, with family, contained in the first Living Quarters Allowance table released in that calendar year by the Office of Allowances of the U.S. Department of State.
|Country||Location||Limitation on Housing Expenses (daily)||Limitation on Housing Expenses (full year)|
|Brazil||Rio de Janeiro||96.16||35,100|
|Colombia||All cities other than Bogota and Barranquilla||123.01||44,900|
|Costa Rica||San Jose||71.78||26,200|
|Dominican Republic||Santo Domingo||110.96||40,500|
|El Salvador||San Salvador||69.04||25,200|
|Germany||Frankfurt am Main||112.88||41,200|
|Germany||All cities other than Augsburg, Bad Aibling, Bad Kreuznach, Baumholder, Berchtesgaden, Berlin, Bonn, Bremen, Bremerhaven, Cologne, Darmstadt, Duesseldorf, Flensburg, Frankfurt am Main, Friedberg, Garmisch-Partenkirchen, Geilenkirchen, Germersheim, Giessen, Grafenwoehr, Hamburg, Hanau, Hannover, Heidelberg, Heilbron, Kaiserslautern, Landkreis, Karlsruhe, Kerpen, Koblenz, Leipzig, Muenster, Munich, Nuernberg, Osterholz-Scharmbeck, Rheinberg, Stuttgart, Wiesbaden, Worms, and Wuerzburg.||92.60||33,800|
|Holy See, The||Holy See, The||146.58||53,500|
|Hong Kong||Hong Kong||313.15||114,300|
|Italy||All cities other than Avellino, Brindisi, Catania, Florence, Gaeta, Genoa, Gioia Tauro, Leghorn, Milan, Naples, Nettuno, Pordenone-Aviano, Rome, Sardinia, Turin, Verona, and Vicenza.||84.11||30,700|
|Korea||All cities other than Changwon, Chinhae, Chunchon, Kunsun, Kwangju, Osan AB, Pusan, Seoul, Taegu, Tongduchon, Uijongbu, and Waegwan.||83.29||30,400|
|Kuwait||All cities other than Kuwait City||146.85||53,600|
|Malaysia||All cities other than Kuala Lampur||92.33||33,700|
|Netherlands||All cities other than Amsterdam, Brunssum, Coevorden, the Hague, Margraten, and Rotterdam.||76.71||28,000|
|Norway||All cities other than Oslo and Stavanger.||91.78||33,500|
|Switzerland||All cities other than Bern and Geneva.||90.14||32,900|
|United Kingdom||High Wycombe||157.53||57,500|
|United Kingdom||All cities other than Bath, Belfast, Birmingham, Bristol, Brough, Bude, Cambridge, Caversham, Chelmsford, Cheltenham, Chicksands, Dunstable, Edinburgh, Edzell, Fairford, Farnborough, Felixstowe, Ft. Halstead, Glenrothes, Harrogate, High Wycombe, Hythe, Lakenheath, London, Loudwater, Nottingham, Oxfordshire, Rochester, Welford, West Byfleet, and Wiltshire.||96.16||35,100|
A qualified individual incurring housing expenses in one or more of the high cost localities identified above for the year 2006 may use the adjusted limit provided in the table (in lieu of $24,720) in determining his or her housing cost amount on Form 2555, Foreign Earned Income. A qualified individual who does not incur housing expenses in a locality identified above for the year 2006 is limited to maximum housing expenses of $67.73 per day ($24,720 per year) in determining his or her housing cost amount.
The principal author of this notice is Paul J. Carlino of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Mr. Carlino at (202) 622-3840 (not a toll-free call).
Comments are requested on the method identified in the notice for annual updates to the list contained in this notice. If a taxpayer believes that the average housing costs for a specific location differ significantly from the amount provided in this notice, the IRS and Treasury Department are particularly interested in information on housing costs that can be verified through publicly available data. Comments may be submitted to CC:PA:LPD:PR (Notice 2006-87), Room 5203, Internal Revenue Service, PO Box 7604, Washington, DC 20044. Submissions may also be hand-delivered Monday through Friday between the hours of 8 a.m. and 4:30 p.m. to Crystal Mall 4, room 108, 1901 South Bell Street, Arlington, VA 22202, Attn: CC:PA:LPD:PR (Notice 2006-87). Submissions may also be sent electronically via the internet to the following email address: Notice.email@example.com. Include the notice number (Notice 2006-87) in the subject line.
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