The Foreign Service Journal, January-February 2015

56 JANUARY FEBRUARY 2015 | THE FOREIGN SERVICE JOURNAL 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 $99,200 of their 2014 foreign-source income if they meet certain requirements. Since 2006, you have been required to 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. period may be dierent 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 Medi- care) 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, beginning in 2006, so as to result in higher tax on the non-excluded portion. (See the box below for a full explanation.) 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 Deduct ion The standard deduction is given to non-itemizers. For couples, the deduction is now $12,400, and for singles, $6,200. Married couples filing separately get a standard deduction of $6,200 each, and head-of-household filers receive a $9,100 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 oce, 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, 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 until 2017, after which it rises to 10 percent. This means that to be deduct- ible, the medical cost would have to exceed $3,000 for a taxpayer with a $30,000 AGI. There is a reduction of item- ized deductions for higher income taxpayers for 2014. 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. 2014 AFSA TAX GUIDE