Tax Increase Prevention and
Reconciliation Act of 2005

Theodore Kleinman CPA

ted@ustaxhelp.com

Public Law 109-222

New law, IRC §911: The new law includes the following reforms:

• The $80,000 is adjusted for inflation beginning in 2006 and the cost-of-living adjustment under Section 1(f)(3) is determined by substituting ‘2004’ for ‘1992’ in Section 1(f)(3)(B). Thus, the $80,000 is adjusted to $82,400 for 2006.
• The employer-provided housing exclusion is tied to the foreign earned income exclusion cap. The base housing amount used in calculating the foreign housing cost exclusion in a taxable year is 16% of the amount (computed on a daily basis) of the foreign earned income exclusion limitation (instead of the present law 16% of the grade GS-14, step 1 amount), multiplied by the number of days of foreign residence or presence in that year.
• An objective standard is applied in determining the amount of reasonable housing expenses. The amount of the exclusion is limited to 30% of the maximum amount of a taxpayer's foreign earned income exclusion. Thus, the maximum amount of the foreign housing cost exclusion in 2006 is $11,536 [($82,400 × 30%) minus ($82,400 × 16%)].
• A stacking rule is applied to ensure that citizens living and working abroad are subject to the same U.S. tax rates as individuals living and working in the U.S. Thus, any income in excess of the exclusion amount is taxed by applying to that income the tax rates that would have been applicable had the individual not taken the foreign earned income exclusion or housing exclusion. For example, a single individual with $82,400 of foreign earned income in 2006 that is excluded under Section 911, and $20,000 in other taxable income after deductions, is subject to tax at the marginal rate of 28% on the $20,000 of excess income.

These new rules are effective for taxable years beginning after December 31, 2005.

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