The Foreign Service Journal, February 2012

F E B R U A R Y 2 0 1 2 / F O R E I G N S E R V I C E J O U R N A L 33 able income up to $17,001 for married couples, $8,501 for singles. The 15-per- cent rate is for income up to $69,001 for married couples, $34,501 for singles. The 25-percent rate is for income up to $139,351 for married couples, $83,601 for singles. The 28-percent rate is for in- come up to $212,301 for married cou- ples and up to $174,401 for singles. The 33-percent rate is for income up to $379,151 for married couples and sin- gles. Annual income above $379,151 is taxed at 35 percent. Long-term capital gains are taxed at a maximum rate of 15 percent and are reported on Schedule D. This rate is effective for all sales in 2011, except for those people who fall within the 10- or 15-percent tax bracket: their rate is either 0 or 5 percent. Long-term capital gain is defined as gain from the sale of property held for 12 months or longer. Personal Exemption For each taxpayer, spouse and de- pendent the personal exemption re- mains at $3,700. There is no personal exemption phase-out for 2011. Foreign Earned Income Exclusion Many Foreign Service spouses and dependents work in the private sector overseas and, thus, are eligible for the Foreign Earned Income Exclusion. American citizens and residents living and working overseas are eligible for the income exclusion, unless they are em- ployees of the United States govern- ment. The first $92,900 earned overseas as an employee or as self-employed may be exempt from income taxes. To receive the exemption, the tax- payer must meet one of two tests: 1) the Physical Presence Test, which requires that the taxpayer be present in a foreign country for at least 330 full (midnight to midnight) days during any 12-month period (the periodmay be different from the tax year); or 2) the Bona Fide Resi- dence Test, which requires that the tax- payer has been a bona fide resident of a foreign country for an uninterrupted pe- riod that includes an entire tax year. Most Foreign Service spouses and de- pendents qualify under the bona fide residence test, but they must wait until they have been overseas for a full calen- dar year before claiming it. Keep in mind that self-employed taxpayers must still pay self-employment (Social Secu- rity and Medicare) tax on their income. Only the income tax is excluded. Note: The method for calculating the tax on non-excluded income in tax returns that include both excluded and non-ex- cluded income was changed, beginning in 2006, so as to result in higher tax on the non-excluded portion. (See the box on this page for a full explanation.) Extension for Taxpayers Abroad Taxpayers whose tax home is outside the U.S. onApril 15 are entitled to an au- tomatic extension until June 15 to file their returns. When filing the return, these taxpayers should write “Taxpayer Abroad” at the top of the first page and attach a statement of explanation. There are no late filing or late payment penal- ties for returns filed and taxes paid by June 15, but the IRS does charge interest on any amount owed fromApril 15 until the date it receives payment. Standard Deduction The standard deduction is given to non-itemizers. For couples, the deduc- tion is now $11,600, and for singles, $5,800. Married couples filing separately get a standard deduction of $5,800 each, and head-of-household filers receive an $8,500 deduction. An additional amount is allowed for taxpayers over age 65 and for those who are blind. Most unreimbursed employee busi- ness expenses must be reported as mis- cellaneous itemized deductions, which are subject to a threshold of 2 percent of Adjusted Gross Income. These include professional dues and subscriptions to publications; employment and educa- tional expenses; home office, legal, ac- counting, custodial and tax preparation fees; home leave, representational and other employee business expenses; and contributions to AFSA’s Legislative Ac- tion Fund. Unreimbursed moving ex- penses are an adjustment to income, whichmeans that youmay deduct them even if you are taking the standard de- A F S A N E W S The Foreign Earned Income Exclusion allows U.S. citizens who are not U.S. govern- ment employees and are living outside the U.S. to exclude up to $92,900 of their 2011 foreign-source income if they meet certain requirements. Beginning in 2006, the IRS changed how the excluded amount must be calculated. This affects the tax liability for couples with one member employed on the local econ- omy overseas. Previously, you subtracted your excluded income fromyour total income and paid tax on the remainder. The change now requires that you take your total income and figure what your tax would be, then deduct the tax that you would have paid on the excludable income. For example: A Foreign Service employee earns $80,000. A spouse working as a teacher earns $30,000. Before 2006: Tax on $110,000 minus $30,000 = tax on $80,000 = tax bill of $13,121. Now (2006 and later): Tax on $110,000 = $20,615; tax on $30,000 = $3,749; total tax = $20,615 minus $3,749 = tax bill of $16,866. Foreign Earned Income — Important Note