On May 17, 2006, TIPRA was enacted into law. Section 515 of TIPRA made several changes to section 911 of the Code. First, TIPRA increased the foreign earned income exclusion cap by indexing it for inflation after 2005. Thus, the amount of foreign earned income that may be excluded in 2006 is $82,400. Second, TIPRA modified the housing cost amount by changing the manner in which the floor is calculated and by generally imposing a cap equal to 30% of the maximum amount of the taxpayer's foreign earned income exclusion. Third, TIPRA imposed a “stacking” rule on the amounts excluded under section 911, so that income not excluded by section 911 is subject to the same rate of tax as would have been applicable had the taxpayer not elected the section 911 exclusion. Thus, an individual with $82,400 of excluded income and $20,000 of taxable income will be taxed at rates that apply to taxable income in the range of $82,400 to $102,400 (25% or 28%), rather than $0 to $20,000 (10% or 15%).

The TIPRA changes to section 911 were enacted in May 2006, but they are effective for taxable years beginning after December 31, 2005. Therefore, taxpayers relying on the law as it existed prior to the retroactive change may have underpaid their estimated tax liabilities for 2006.

The IRS will waive the penalty for calendar year 2006 for an underpayment of estimated tax to the extent that the underpayment is attributable to the modifications made by section 515 of TIPRA. This waiver is available only to qualified individuals who file a Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, with their timely filed Form 1040, U.S. Individual Income Tax Return, or Form 1040X, Amended U.S. Individual Income Tax Return.

For more information on the foreign earned income changes made under TIPRA, please see our related article.  

Please contact Bill Burns at 215-564-1900 if you have any questions.

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