Expat Tax Help

IRS boosts 2008 housing cost allowances for those working abroad in high-cost areas Notice 2008-107, 2008-50 IRB

Mike Habib, EA

A new Notice effectively increases the maximum housing cost exclusion for U.S. citizens and residents working abroad in specified high-cost locations. The increases are based on geographic differences in foreign housing costs relative to U.S. housing costs.

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), 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 (i.e., the housing expense limitation) over (2) a base amount. For 2008, a taxpayer’s allowable housing expenses, assuming he is eligible for the entire year, generally can’t exceed $26,280; subtracting the base amount of $14,016 yields a generally applicable maximum housing amount exclusion of $12,264.

IRS may issue regs or other guidance providing for the adjustment of the maximum allowable housing expense limitation on the basis of geographic differences in housing costs relative to housing costs in the U.S. (Code Sec. 911(c)(2)(B))

Increases for high-cost areas. Notice 2008-107 makes adjustments for housing costs during 2008 in high-cost foreign areas. 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 annual maximum and daily housing expense limitation for a qualified individual incurring housing expenses in one or more specified high cost localities in 2008 to use (instead of the otherwise applicable annual housing expense limitation of $26,280, or the prorated daily amount) 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 2008 may use the adjusted limit provided in the table (in lieu of $26,280 or the prorated daily amount) in determining his housing cost amount on Form 2555, Foreign Earned Income.

Illustration : A U.S. taxpayer is posted to Paris, France, for all of 2008. His maximum housing cost exclusion is $86,084 ($100,100 full year limit on housing expense in Paris minus $14,016 base amount).

Observation: Many, but not all, of the maximum housing expense limitations for specified high cost localities are higher for 2008 than they were for 2007. For example, for 2008, the maximum housing expense limitation for Tokyo, Japan, is $94,200; it was $85,700 for 2007. On the other hand, for Rio de Janeiro, Brazil, the maximum housing expense limitation remains unchanged at $35,100.

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