The Foreign Service Journal, January-February 2014

64 JANUARY-FEBRUARY 2014 | THE FOREIGN SERVICE JOURNAL AFSA NEWS 2013 AFSA TAX GUIDE Tax Guide continued from page 53 as gain from the sale of property held for 12 months or longer. Also for 2013, since the Supreme Court decision on same-sex marriages, same-sex couples who were married before Dec. 31, 2013, in a state where it is legal must now file their federal tax return either as married filing separately or married filing jointly, not single. Personal Exemption For each taxpayer, spouse and dependent the personal exemption is $3,900. There is a personal exemption phase- out for 2013. Foreign Earned Income Exclusion Many Foreign Service spouses and dependents work in the private sector overseas and thus are eli- gible for the Foreign Earned Income Exclusion. American citizens and residents living and working overseas are eligible for the income exclusion, unless they are employees of the United States government. The first $97,600 earned overseas as an employee or as self-employed may be exempt from income taxes. To receive the exemption, the taxpayer must meet one of two tests: 1) the Physical Presence Test, which requires that the taxpayer be pres- ent in a foreign country for at least 330 full (midnight to midnight) days during any 12-month period (the period may be different from the tax year); or 2) the Bona Fide Residence Test, which requires that the taxpayer has been a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. Most Foreign Service spouses and dependents qualify under the bona fide residence test, but they must wait until they have been overseas for a full calendar year before claiming it. Keep in mind that self-employed taxpayers must still pay self- employment (Social Security and Medicare) tax on their foreign-earned 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-excluded income was changed, begin- ning in 2006, so as to result in higher tax on the non- excluded portion. (See the box below for a full explana- tion.) Extension for Taxpayers Abroad Taxpayers whose tax home is outside the U.S. on April 15 are entitled to an automatic extension until June 15 to file their returns. When filing the return, these taxpay- ers 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 penalties for returns filed and taxes paid by June 15, but the IRS does charge interest on any amount owed from April 15 until the date it receives payment. Standard Deduction The standard deduction is given to non-itemizers. For couples, the deduction is now $12,200, and for singles, $6,100. Married couples filing separately get a standard deduction of $6,100 each, and head-of-household filers receive an $8,950 deduction. An additional amount is allowed for taxpayers over age 65 and for those who are blind. Most unreimbursed employee business expenses must be reported as miscel- laneous itemized deductions, which are subject to a thresh- old of 2 percent of Adjusted Gross Income. These include professional dues and sub- scriptions to publications; employment and educational expenses; home office, legal, accounting, custodial and tax preparation fees; home leave, representational and other employee business expenses; and contribu- tions to AFSA’s Legislative Action Fund. Unreimbursed moving expenses (includ- ing unreimbursed expenses incurred in moving pets) are an adjustment to income, which means that you may deduct them even if you are taking the standard deduc- tion. However, the deduction includes only the unre- imbursed transportation, IMPORTANT NOTE: FOREIGN EARNED INCOME The Foreign Earned Income Exclusion allows U.S. citizens who are not United States government employees and are living outside the U.S. to exclude up to $97,600 of their 2013 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 economy overseas. Previously, you subtracted your excluded income from your 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 and their teacher spouse earns $30,000. Before 2006 : Tax on $110,000 minus $30,000 = tax on $80,000 = tax bill of $13,121. Since 2006 : Tax on $110,000 = $20,615; tax on $30,000 = $3,749; total tax = $20,615 minus $3,749 = tax bill of $16,866.