The US Tax Increase Prevention and Reconciliation Act of June 2005 limited the amount of foreign housing exclusion that can be elected by US citizens and resident aliens living outside the United States.

A revision to the Bermuda housing cost tables a few months ago by the Treasury did little to bring the Bermuda housing cost table in line with the actual costs of rental housing in Bermuda. As an early Christmas present, the Treasury Department indicated that they may revise the table again in January 2007, retroactive to January 1, 2006.

While the Treasury Department appears to be open minded on this issue, they have also estimated that the housing allowance provision will increase tax collections by $5,000,000,000 over the next five years. What is disturbing is that comments have been made that this is an "employer issue" in that many Americans who are outside the United States are under "tax equalisation", wherein the employer will bear the ultimate increase in taxes.

The Treasury Department clearly does not understand the effect on individual US citizens in Bermuda who are not under "tax equalisation" programmes.

The Treasury Department also announced 2007 inflation adjustments, as follows:

Personal Exemptions

$3,400 per eligible person in 2007, an increase of $100 from 2006

Standard Deductio>

Married Filing Joint — $10,700, an increase of $400 from 2006

Single and Married Filing Separate - $5,350, an increase of $200 from 2006

Head of Household — $7,850, an increase of $300 from 2006

Tax BrackeB>

Each of the four tax bracket tables has also had an inflation increase. For example, the married filing joint tax bracket now goes from 15 percent to 25 percent at taxable income over $63,700 versus $61,300 in 2006.

Adoption Cre

$11,390 in 2007

2007 Standard Mileage Rs

Business mileage will be 48.5 cents per mile in 2007, an increase of four cents from 2006

Medical mileage will be 20 cents per mile in 2007, an increase of two cents from 2006

Charitable mileage will be 14 cents per mile in 2007, the same as 2006

Limitation on Itemised Deducns

Married individuals who file a joint return and have taxable income in excess of $156,400 will have itemised deductions reduced by one percent for each dollar of taxable income in excess of $156,400.

Limitation on Personal Exemons

For married filing joint, the personal exemption phase out will begin at $234,600 in 2007 and will reach the maximum phase out at $357,100.

Are you retired and still have incentive stock options to exise?

Normally, if you exercise an incentive stock option and hold the stock for a set period of time, there is no taxable income on the date of exercise and the future sale of the stock will be taxed as a long term capital gain. However, the law that allows this beneficial treatment requires a retiree to exercise the incentive stock options within 3 months of retirement. If you fail to exercise the an incentive stock option within this period, than when the an incentive stock option is exercised at a later date, you will lose the beneficial treatment, and you will be subject to income tax immediately on the difference between the fair market value on the date of exercise and the option price, even if you do not sell the stock.

Do you plan to prepare your own 2006 taxturn?

Beware. The Tax Relief and Health Care Act of 2006 that became law last week extended a number of deductions and other tax breaks that expired at December 31, 2005. Among the more popular deductions were higher education tuition and fees, educator expenses, and the state and local sales tax deduction. Because these deductions had expired in 2005 and as Congress gave no hint to the Internal Revenue Service that these deductions would be extended, the 2006 individual tax forms do not have a line for deducting these expenses. And the Internal Revenue Service has stated that they are unable to change the 2006 tax forms at this late date.

The Internal Revenue Service indicated that in about a month they will produce a publication instructing individuals how to claim these deductions. But the bottom line is that if you are unaware of this tax law change, and rely on the booklet sent to you by the Internal Revenue Service, you could overlook these deductions.

While the tax software that commercial preparers use is updated a few times during the tax preparation season to account for ongoing Internal Revenue Service changes and interpretations, it is uncertain as to what the producers of CD's that sell for $30 or so at your local computer store that allow you to prepare your own tax return will do as they already have hundred's of thousands of these CD's already distributed and on sale.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of ETS Ltd., PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo@expatriatetaxserviceom