Sec. 911 housing guidance likely to reduce some employers' costs.

As anticipated, Treasury issued guidance (in Notice 2006-87) providing for new higher housing costs amounts based on geographic locations, effective Jan. 1, 2006. These rules should reduce the effects of changes the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) made to Sec. 911, which negatively affected employers and employees working overseas.

Background

Prior to the TIPRA, individuals working overseas could exclude from income "reasonable housing expenses" in excess of an annually determined base amount; however, that term was open to broad interpretation. Provisions in the TIPRA limit the amount of eligible housing costs that an individual may exclude from U.S. income taxation to 300/0 of the annual earned income exclusion amount (as indexed for inflation); for 2006, that amount is $82,400. In addition, the new law fixes this base amount at 16% of the annual earned income exclusion, resulting in a maximum homing exclusion of $11,536 for 2006. (For more details, see Godfrey and Sullivan, "The Post-TIPRA Foreign Earned Income and Housing Exclusions for Individuals," TTA, December 2006, p. 716.)

New Guidance

The TIPRA allows the Treasury to issue regulations or other guidance providing for the adjustment of the 30% limit, to reflect geographic differences in housing costs relative to U.S. housing costs. Under Notice 2006-87, individuals riving in foreign locations with high housing costs may deduct or exclude a greater portion of such expenses. The guidance provides a table by country, and some cities. For example, in Hong Kong, the maximum housing exclusion for 2006 will rise from $11,536 to $114,300; for London, the maximum housing exclusion for 2006 will be $72,100.

Treasury developed the housing cost limits from the Living Quarters Allowance table prepared by the Office of Allowances of the U.S. State Department as of Aug. 20, 2006. The notice's table will be updated annually, based on the living quarters allowance for U.S. State Department employees in Group 2, with family. The notice also offers guidance on providing comments, if taxpayers believe that the average housing costs for a specific location differ significantly from the numbers provided.

The guidance will likely result in a significant decrease in the cost to employers with expatriates and for individuals living outside the U.S not covered by an employer tax-reimbursement policy.

Example: Company X operates a tax-reimbursement program. I, a married X employee with no children, earned $35,000 total compensation in 2006, including $120,000 housing costs and $55,000 other allowances. If I had lived and worked in Hong Kong (a low tax-rate and tax-base country) for all of 2006, Notice 2006-87 would result in an estimated $23,000 decrease in X's costs. Had I lived in London for all of 2006 (a high tax-rate and tax-base country), the guidance would not likely affect X's 2006 U.S. tax significantly; however, it should result in an approximate increase of $5,000 in foreign taxes available for carryback or carryforward. (The U.K. is an example of a country for which electing Sec. 911 may not be beneficial.)

Next Steps

The change to Sec. 911 was retroactive and applies to the entire 2006 tax year. Care should be exercised in determining whether Sec. 911 should be elected.

Employers might consider submitting comments if a particular location in which they have employees is not covered or if the table amounts appear inaccurate, based on their housing allowances.

FROM MICHAEL ABDALIAN, CPA, CLEVELAND, OH