In May 2006, the US Congress passed a law which significantly increased the level of US income tax payable by many American expatriates. However, a notice from the Internal Revenue Service issued in October 2006 has made some modifications to the rules, increasing the housing deductions which people living in some overseas cities can take. Some expatriates should receive a significant benefit compared to the increase they were expecting, but the impact will be irregular. It may also make some cities more attractive than others for tax purposes.

The change earlier this year was to make only $11,536 of housing prices excludable from income earned abroad. Before, everything over that approximate figure was excludable. However, this tended to punish people in places with expensive housing. The IRS’s new notice includes a list of different excludable amounts for different cities.

Out of Asian cities, the two highest by far are Hong Kong, with $101,116 excludable yearly, and Tokyo, with $72,516. Others standing out in the list are Seoul, Yokohama, and Hanoi. Oddly, no cities at all in mainland China, Taiwan, or India are included. This means the standard $11,536 still applies in those countries, even though housing prices in cities like Shanghai are just as high as many countries on the list.

As a result of these changes, international companies may give more consideration to places like Hong Kong and Tokyo and less to China or India for their expatriate employees, especially if the companies guarantee tax equalization for their employees.