Friday, February 18, 2011

IRS Issues Housing Cost Exclusion Amounts for Individuals Working Abroad in High-Cost Areas

The IRS has issued a notice that allows certain individuals who work outside of the U.S. and live in certain high-cost areas to deduct or exclude a greater portion of their housing costs for the 2011 tax year than is otherwise allowable [Notice 2011-8, 2011-8 IRB].

The U.S. generally taxes its citizens and residents on their worldwide income. However, individuals who have a tax home in a foreign country, and who satisfy either the bona fide foreign residence test or the foreign physical presence test, may elect to exclude certain foreign housing costs paid or incurred on their behalf from gross income (or claim a deduction where the costs are not paid by the employer). This is known as the foreign housing cost exclusion.

The excludable housing cost amount is the excess, if any, of (1) the individual's allowable housing expenses for the year (i.e., the housing expense limitation) over (2) a base amount. For 2011, a taxpayer's allowable housing expenses, assuming he or she is eligible for the entire year, generally can't exceed $27,870. The base amount is $14,864. Therefore, the maximum housing cost exclusion for 2011 is generally $13,006 ($27,870 − $14,864). However, the IRS is permitted to issue regs or other guidance (e.g., Notice 2011-8, 2011-8 IRB) that provide for an adjustment to the maximum allowable housing expense limitation on the basis of geographic differences in housing costs relative to housing costs in the United States.

The notice. The new notice increases the maximum allowable housing expense limitation above the otherwise applicable limitation of $27,870 for localities in: Angola, Argentina, Australia, Austria, the Bahamas, Bahrain, Barbados, Belgium, Bermuda, Bosnia-Herzegovina, Brazil, Canada, Cayman Islands, Chile, China, Colombia, Costa Rica, Denmark, Dominican Republic, Ecuador, France, Germany, Ghana, Greece, Guatemala, Guyana, the Holy See, Hungary, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Korea, Kuwait, Luxembourg, Macedonia, Malaysia, Malta, Mexico, Micronesia, Mozambique, Namibia, the Netherlands, Netherlands Antilles, New Zealand, Nicaragua, Norway, Panama, Philippines, Poland, Portugal, Qatar, Russia, Rwanda, Saudi Arabia, Singapore, South Africa, Spain, Suriname, Switzerland, Taiwan, Tanzania, Thailand, Turkey, Ukraine, United Arab Emirates, United Kingdom, Venezuela, and Vietnam.

Illustration: A U.S. taxpayer works in Hong Kong, China, for all of 2011. His maximum housing cost exclusion is $99,436 ($114,300 full year limit on housing expenses in Hong Kong per Notice 2011-8, 2011-8 IRB, minus $14,864 base amount).

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