Some Americans working abroad are getting an additional dose of relief from tax increases enacted last year.

By Tom Herman
From The Wall Street Journal Online

Some Americans working abroad are getting an additional dose of relief from tax increases enacted last year.

The U.S. Treasury Department recently issued new limits on housing costs that Americans in foreign locales may deduct or exclude on their U.S. tax returns for 2007. Among those places where the limits are higher than last year: Singapore, Moscow and Kuala Lumpur. The Treasury notice also includes more locations than its previous notices did, bringing relief to more expatriates.

Even so, U.S. business groups are still seething over last year's tax-law changes, which a congressional committee estimates will raise around $2.1 billion in additional revenue for the Treasury over the next decade. That law -- which included complex changes in taxation of many U.S. expats -- was "bad policy," says Catherine Schultz, vice president for tax policy at the National Foreign Trade Council in Washington. It "puts American companies, who want to hire American employees to work in their facilities overseas, at a competitive disadvantage." However, Ms. Schultz says "we applaud" the Treasury's efforts to apply "more reasonable housing allowances and encourage them to continue these efforts."

Complaints about how the U.S. taxes its citizens abroad aren't new. U.S. tax laws have been "a deterrent for hiring Americans overseas for many years," says Tami Overby, president and chief executive officer of the American Chamber of Commerce in Korea. She says major American companies in South Korea have been "systematically replacing Americans with Australians, Indians and just about any other nationality to keep a lid on total costs of expatriates."

The impact from last year's law has varied widely from place to place. But among those hit especially hard have been upper-income Americans in places with unusually high housing costs and low taxes (such as Hong Kong and Singapore) and whose companies don't protect them against the additional tax costs of working abroad in certain places, says Clarissa Dougherty of PricewaterhouseCoopers in Los Angeles.

Moreover, for many companies that do offer tax-equalization plans, the 2006 law led to "a substantial increase in cost, particularly in certain locations," says Geoffrey Latta, executive vice president of ORC Worldwide in New York, a management-consulting firm specializing in compensation. "If a company has any choice between sending an American and someone of another nationality, [the 2006 law] gives them one more incentive not to select the American."

Some members of Congress have called for overhauling the law. But these efforts face an uphill battle, especially because of congressional rules that generally require new tax cuts or spending to be offset by either tax increases or spending cuts.

The U.S. is "the only major industrialized country in the world that taxes its citizens without regard to where they reside or work," wrote Newt Gingrich, the former House Speaker, and Ken Kies, a former chief of staff of Congress's Joint Committee on Taxation, in an opinion piece in this newspaper last year. "Global business competition is already fierce enough. We shouldn't sabotage ourselves."

The current system can be highly complex. Here are the basics: If you live and work abroad, you may be eligible to exclude a certain amount of your pay and other "earned income." This is known as the foreign earned-income exclusion. For 2007, the exclusion is as much as $85,700, up from $82,400 for 2006 and $80,000 for 2005. (For details on who qualifies and other issues, see IRS Publication 54.) You may also be eligible either to deduct part of your housing expenses from your income or treat a limited amount of employer-provided housing benefits as not taxable by the U.S., the IRS publication says.

As part of last year's law, earned income above the exclusion amount effectively became subject to tax at higher rates than before. The 2006 law specified that income above the exclusion cap is taxed at rates that would apply as if the exclusion didn't exist. The new law also imposed limits on the foreign housing expense provision, although Congress authorized the Treasury to adjust those amounts for differences in housing costs relative to U.S. housing costs.

Based on the latest Treasury notice, here's an example worked out by Carol-Ann Simon, expatriate-services leader at BDO Seidman LLP in San Jose, Calif. Suppose an American employed in Singapore makes $300,000 (U.S. dollars), is married and has two children. With the increased housing limit announced for 2007, that family would save nearly $1,400 in U.S. taxes, Ms. Simon says.

In some places, the Treasury's housing-expense limit for 2007 is the same as last year, but the housing-expense floor increased, which cut the actual limits affecting expats. For example, consider Hong Kong, which has the highest maximum housing exclusion listed in the notice. The 2007 limit is $114,300, the same as last year. To arrive at the actual exclusion or deduction amount for 2007, subtract the floor of $13,712, leaving $100,588. For 2006, the floor was $13,184, leaving $101,116.

An IRS spokesman says Americans working abroad filed about 304,000 individual income-tax returns for 2005 claiming the foreign-earned income exclusion. Of those, about 135,000 had a U.S. tax liability.

Even with the increased housing-cost limits in many locations, "you should carefully consider whether claiming the housing and foreign earned income exclusion is still the best approach," says Kent Klaus of Deloitte Tax LLP in Chicago. Due to last year's changes, "taxpayers in higher-tax countries may find that they are better off not claiming the exclusion and using foreign tax credits instead," he says.

This can be very complicated, even if you've been doing your own tax return for years. If you're overseas or considering a foreign assignment, check with a tax adviser who has mastered the fine print.

Email your comments to cjeditor@dowjones.com.