For many years the  foreign earned income exclusion has been set at a maximum of  $80,000 of earned income for those working and living abroad. That  exclusion has been increased to $82,400 for 2006, and  $85,700  for 2007.  To qualify for that exclusion you must live and work abroad for a full calendar year or work abroad for a 12 month fiscal year period and not return to the US more than 35 days during that 12 month period. 

This change is obviously good for everyone.  For partial tax years the exclusion is pro-rated. 

The not so good part of the change involves the tax that will now be imposed on the income (foreign or from the US) that you make in excess of the foreign earned income exclusion.  Under the old law, all taxable income in excess of the exclusion on your expat tax return began to be taxed in the lowest brackets (as if you had no previous income) and then the rate increased as the amount in excess of the exclusion increased..

This will cause a lot of high earning Americans in low tax countries to pay taxes since the higher bracket may not be totally offset by the credit of  their Mexican income tax.

The next change in the expatriate laws involves the foreign housing exclusion or foreign housing deduction.  Those expenses would be rent expense on your foreign residence plus cleaning, maintenance and utilities incurred in connection therewith. 

The housing deduction or exclusion is allowed in addition to the maximum foreign earned income exclusion and therefore comes into play when you exceeded that  maximum amount.  Previously in 2005, you could deduct all of these housing expenses in excess of approximately $12,000 without any maximum limit.  Now for 2006 you can only deduct these expenses in excess of $13,184 up to a maximum of $11,536 in most of the world. 

The IRS has published Notice 2006-87 which gives a higher maximum deduction to those living in countries with a higher cost of living.   Hong Kong is the highest with the maximum over $100,000. So if you are paying high rent, utilities, etc. you can no longer deduct those amounts.

If you own your foreign residence, you can still deduct all of your property taxes and mortgage interest on Schedule A but with some exceptions you cannot use the housing exclusion or deduction. 

Remember, if you live abroad on 4/15/07, your 2006 return receives an automatic extension until June 15th, but any tax due (as it may be for the first time in 2006) is payable on April 15th to avoid imposition of interest and penalties.