Foreign Earned Income Exclusion and Housing Cost Exclusion

The US tax legislation finalized May 11, 2006, increases the "foreign earned income exclusion" for 2006 to $82,500. It is indexed for inflation thereafter.

However under the new legislation the bad news is that the tax rate on income in excess of the exclusion amount will be taxed at rates that would have been applicable if you had not elected the exclusion. For example an individual with $82,500 of income that is excluded under this provision and with $20,000 of other taxable income (after deductions) will be subject to tax on that $20,000 at the rate or rates applicable to taxable income in the range of $82,500 to $102,500.

The base housing amount for the housing cost exclusion is changed to 16% of the foreign earned income exclusion, computed on a daily basis. It is also limited to 30% of the maximum amount of the taxpayer's foreign earned income exclusion.

Expatriation Rules

The original Senate version of the new legislation (referred to above) called for a deemed disposition tax on certain individuals that expatiate, with a $600,000/$1.2 million exemption on gains. However this provision was not included in the final legislation.