International provisions of TIPRA.

• Author: Sherr, Eileen
• Position: Tax Increase Prevention and Reconciliation Act of 2005

On May 17, 2006, President Bush signed into law the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). Among its provisions were several involving international taxes.

Americans Living Overseas

The TIPRA makes three changes to the $80,000 foreign earned income exclusion and housing allowance (i.e., the Sec. 911 exclusion).The most significant change is to cap the homing exclusion. This modification has the potential to increase dramatically the worldwide tax obligations of U.S. citizens and green card holders working in high-housing-cost dries (e.g., Tokyo, Hong Kong, London, etc.) or to increase the cost to their employers if they are tax-equalized.

The act also indexes the exclusion for inflation, imposes a stacking rule and provides regulatory authority to allow for geographical differences. This provision is effective for tax years beginning Her 2005.

Sec. 911: Some of the details on the changes to the Sec. 911 exclusion are as follows.

First, the income exclusion is indexed for inflation starting in 2006 (rather than 2008, as under current law), and is $82,400 for 2006.

Second, the base housing amount used in calculating the foreign housing cost exclusion in a tax year is 16% of the amount of the foreign earned income exclusion limit (instead of the present-law 16% of the grade GS-14, step 1 amount). Reasonable foreign housing expenses in excess of the base housing amount remain excluded from gross income, but the exclusion is limited to 30% of the taxpayer's foreign earned income exclusion. Treasury was given the authority to issue regulations or other guidance providing for the adjustment of the 30% housing cost limit based on geographic differences in housing costs relative to housing costs in the U.S.

Third, income excluded as either foreign earned income or as a housing allowance is included for purposes of determining the marginal tax rates applicable to nonexcluded income.

According to a Senate Finance Committee explanation of the provision, these changes are intended to provide an objective standard for determining the amount that taxpayers working abroad can exclude from income, and also to subject such individuals to the same tax rates applicable to those living and working in the U.S. who have the same amount of economic income.

CPAs with clients living and working overseas may want to notify them of this change to the foreign earned income exclusion.

Anti-Deferral of Subpart F Rules

The TIPRA includes two...