The Foreign Service Journal, January-February 2014

THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2014 65 AFSA NEWS 2013 AFSA TAX GUIDE storage and travel costs of moving your possessions and yourself and your family to the new location; it does not include meals. Medical expenses (includ- ing health and long-term care insurance, but not health insurance premiums deducted from government salaries) are now subject to a threshold of 10 percent of Adjusted Gross Income, unless the taxpayer is over 65, in which case it remains at 7.5 percent. This means that to be deductible, the medical cost would have to exceed $3,000 for a taxpayer with a $30,000 AGI. There is a reduction of itemized deductions for higher income taxpayers for 2013. State and local income taxes and real estate and per- sonal property taxes remain fully deductible for itemizers, as are charitable contribu- tions to U.S.-based charities for most taxpayers (dona- tions to overseas charitable organizations such as local churches at post, are not deductible). Donations to the AFSA Scholarship Fund and the Fund for American Diplo- macy are fully deductible as charitable contributions, as are donations to AFSA via the Combined Federal Campaign. Individuals may also dispose of any profit from the sale of personal property abroad in this manner. For 2013 tax returns, any interest paid on auto or personal loans, credit cards, department stores and other personal interest will not be allowed as itemized deductions. If such debts are consolidated, however, and paid with a home equity loan, interest on the home equity loan is allowable. Interest on educational loans will be allowed as an adjustment to gross income. Mortgage interest is still, for the most part, fully deductible. Interest on loans intended to finance investments is deductible up to the amount of net income from investments. Interest on loans intended to finance a business is 100-percent deductible. Passive-invest- ment interest on investments in which the taxpayer is an inactive participant (i.e., a limited partnership) can be deducted only from the income produced by other passive activities. Interest on loans that do not fall into the above categories, such as money borrowed to buy tax-exempt securities, is not deductible. Home Leave Expenses Employee business expenses, such as home leave and representation, may be listed as miscellaneous itemized deductions and claimed on Form 2106. In addition to the 2-percent floor, only 50 per- cent for meals and entertain- ment may be claimed (100 percent for unreimbursed travel and lodging). Only the employee’s (not family mem- bers’) home leave expenses are deductible. AFSA recom- mends maintaining a travel log and retaining a copy of home leave orders, which will help if the IRS ever questions claimed expenses. It is important to save receipts: without receipts for food, a taxpayer may deduct only the federal meals- and-incidentals (M&IE) per diem rate at the home leave address, no matter how large the grocery or restaurant bill. Lodging is deductible, as long as it is not with friends or relatives, or in one’s own home. The IRS will disallow use of per diem rates and any expenses claimed for family members. If a hotel bill indi- cates double rates, the single room rate should be claimed; and, if possible, the hotel’s rate sheet should be saved for IRS scrutiny. Car rental, mileage and other unreimbursed travel expenses, including park- ing fees and tolls, may be deducted. The rate for business miles driven is 56.5 cents for 2013. Those who use this optional mile- age method need not keep detailed records of actual vehicle expenses. They must, however, keep a detailed odometer log to justify the business use of the vehicle and track the percentage of business use. This optional mileage method applies to leased vehicles, as well. Official Residence Expenses For ORE, the only expenses that are deductible are those above the 3.5 percent paid out of pocket. Since Oct. 1, 1990, employees who receive official residence expenses have not been allowed to reduce their reportable income by 3.5 percent. An IRS ruling in 1990 states that “usual expenses,” defined as 3.5 percent of salary, are not deductible. These expenses can be deducted as miscella- neous business expenses. Home Ownership Individuals may deduct interest on up to $1 million of acquisition debt for loans secured by a first home, sec- ond home or both. This also includes loans taken out for major home improvements. On home equity loans, inter- est is deductible on up to $100,000, no matter how much the home cost, unless the loan is used for home CHILD CARE TAX CREDIT WHEN OVERSEAS Bear in mind that in order to claim the Child Care Tax Credit while serving overseas, you must submit IRS Form 2441, for which the instructions say: “For U.S. citizens and resident aliens living abroad, your care provider may not have, and  may not be required to get, a U.S. taxpayer identification number (for example, an SSN or EIN). If so, enter “LAFCP” (Living Abroad Foreign Care Provider) in the space for the care provider’s taxpayer identification number.”