The Foreign Service Journal, January-February 2014

THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2014 67 AFSA NEWS 2013 AFSA TAX GUIDE basis. To qualify as legitimate fixing-up costs, the following conditions must be met: 1) the expenses must be for work performed during the 90-day period ending on the day on which the contract to sell the old residence was signed; 2) the expenses must be paid on or before the 30th day after sale of the house; and 3) the expenses must not be capital expenditures for permanent improvements or replacements (these can be added to the basis of the property, the original purchase price, thereby reducing the amount of profit). A new roof and kitchen counters are not “fix-up” items, but painting the house, cleaning up the garden and making minor repairs qualify. New for 2013 The Affordable Care Act imposes two new tax increases beginning in 2013. There is a 3.8-percent net investment tax on net invest- ment income to the extent it is in excess of modified adjusted gross income of $250,000 for those married filing jointly, and $200,000 for those filing single. Net investment income includes interest, dividends, rents, roy- alties, pensions and annui- ties, and gain from the sale of property. Secondly, the rate of the Medicare tax that is withheld from employees’ paychecks is increased by 0.9 percent on salaries or self-employment earnings over the same thresholds. STATE TAX PROVISIONS Most Foreign Service employees have questions about their liability to pay state income taxes during periods when they are posted overseas or assigned to Washington. Members of the Foreign Service are not treated as domiciled in their countries of assignment abroad. Every active-duty Foreign Service employee serving abroad must maintain a state of domicile in the United States, and the tax liability that the employee faces varies greatly from state to state. In addition, there are numerous regulations concerning the taxability of Foreign Service pensions and annuities that vary by state. The “State Overviews” (see p. 68) briefly review the laws regarding income tax and tax on annuities and pensions as they affect Foreign Service personnel by state. Please note that while AFSA makes every attempt to provide the most up-to- date information, readers with specific questions should consult a tax expert in the state in question at the addresses given. We also encourage readers to visit the state’s tax office website (also listed). There are many criteria used in determining which state is a citizen’s domicile. One of the strongest determi- nants is prolonged physical presence, a standard that Foreign Service personnel frequently cannot meet due to overseas service. In such cases, the states will make a determination of the indi- vidual’s income-tax status based on other factors, including where the indi- vidual has family ties, where he or she has been filing resi- dent tax returns, where he or she is registered to vote or has a driver’s license, where he or she owns property, or where the person has bank accounts or other financial holdings. In the case of Foreign Service employees, the domicile might be the state from which the person joined the Service, where his or her home leave address is, or where he or she intends to return upon separation. For purposes of this article, the term “domicile” refers to legal residence; some states also define it as permanent residence. Residence refers to physical presence in the state. Foreign Service per- sonnel must continue to pay taxes to the state of domicile (or to the District of Colum- bia) while residing outside of the state, including during assignments abroad, unless the state of residence does not require it. Members are encouraged to review the Overseas Brief- ing Center’s guide to Resi- dence and Domicile, available on AFSA’s website at www. afsa.org/domicile. A non-resident, according to most states’ definitions, is an individual who earns income sourced within the specific state but does not live there, or is living there for only part of the year (usu- ally fewer than six months). Individuals are generally considered residents, and are thus fully liable for taxes, if they are domiciled in the state or if they are living in the state (usually at least six months of the year) but are not domiciled there. Foreign Service employ- ees residing in the metropoli- tan Washington, D.C., area are required to pay income tax to the District of Colum- bia, Maryland or Virginia, in addition to paying tax to the state of their domicile. Most states allow a credit, however, so that the taxpayer pays the higher tax rate of the two states, with each state receiving a share. It is important to maintain ties with your state of domicile— by, for instance, continuing to file tax returns in that state if appropriate—so that when you leave the D.C. area for another overseas assign- ment, you can demonstrate to the District of Columbia, Virginia or Maryland your affiliation to your home state. Also, if possible, avoid using the D.C. pouch zip code as your return address on your federal return, since in some cases, the D.C. tax authorities have sought back taxes from those who have used this address. There are currently seven states with no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. In addition, New Hampshire and Tennessee have no tax on