Prior to 2006, both the exclusion and the additional housing allowance were deducted off-the-top.  In other words, they were excluded at the taxpayer’s top tax bracket. However, beginning in 2006 the exclusion is taken off the bottom or at the taxpayer’s lowest tax bracket leaving the taxpayer’s other income to be taxed at the taxpayer’s top marginal rates. Result: the taxpayer’s “other” income is taxed at higher rates in post2005 years. A worksheet for calculating the tax is provided in the current year instructions to Form 1040.