United States: IRS Releases New Sec. 911-Related Housing Cost Limitations
On February 13, 2012, the U.S. Internal Revenue Service (IRS) released an advance copy of Notice 2012-19,1 which provides adjustments to the limitation on housing expenses for purposes of section 911 of the U.S. Internal Revenue Code (I.R.C.) for certain specified foreign locations with high housing costs relative to housing costs in the United States for 2012.
I.R.C. section 911 allows qualifying individuals whose tax home is in a foreign country, and who meet specified requirements as to residence or presence in a foreign country, to exclude certain amounts of foreign earned income and housing amounts from U.S. tax. The foreign earned income exclusion amount is indexed annually and the maximum amount for 2012 is $95,100. The housing cost exclusion generally is equal to the housing expenses of the taxpayer to the extent they exceed a base equal to 16 percent of the foreign earned income exclusion ($15,216 for 2012), subject to a limitation, or cap, equal to 30 percent of the foreign earned income exclusion ($28,530 for 2012). However, for certain foreign localities with high housing costs, the 30-percent limitation can be adjusted by the U.S. Department of the Treasury.
Notice 2012-19 provides a table that identifies localities within foreign countries with high housing costs relative to housing costs in the United States. The table provides an adjusted limitation to the excludible housing expenses for individuals who qualify to claim the section 911 exclusions for 2012. Thus, a qualified individual incurring housing expenses in one or more of the high-cost localities identified in the table for 2012, may use the adjusted limit provided (in lieu of $28,530) in determining the excludible housing cost amount. A qualified individual who incurs housing expenses in a locality other than one of those listed in the table is subject to the housing expense cap of $28,530 for 2012.
A few locations are listed in the table for 2012 that did not appear in the table for 2011. These include Darwin (Australia) and Port of Spain (Trinidad and Tobago). Some cities were also dropped from the list for 2012, including Canberra (Australia), Quebec (Canada), Pohnpei (Micronesia), and three cities in Turkey.
Use of 2012 Amounts for 2011
Section 4 of Notice 2012-19 provides that in cases where the 2012 housing limitation amounts provided in the Notice are higher than those provided for 20112, taxpayers can elect to use the higher 2012 amounts for 2011. Additionally, the Notice advises that the IRS and Treasury anticipate that future annual notices providing the annual housing cost limitation adjustments will allow a similar election to apply the new higher limitations to the immediately preceding year.
Although the majority of limitation amounts remained unchanged from 2011 to 2012, those that changed were almost evenly split between increases and decreases. Also, although most adjustments were slight, some were significant. For example, the limitation amount for London, United Kingdom was raised by $200, but the amount for Tokyo, Japan was raised by $9,500, and the amount for Mexico City was lowered by $5,700. To ensure that the maximum housing exclusion possible is claimed, both tables should be checked.