The Foreign Service Journal, January-February 2015

THE FOREIGN SERVICE JOURNAL | JANUARY FEBRUARY 2015 57 AFSA NEWS 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.” For 2014 tax returns, any interest paid on auto or personal loans, credit cards, department stores and other personal interest will not be allowed as itemized deduc- tions. If such debts are con- solidated, however, and paid with a home equity loan, inter- est on the home equity loan is deductible. Interest on edu- cational 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 invest- ments is deductible up to the amount of net income from investments. Interest on loans intended to finance a business is 100-percent deductible. Passive-investment interest on investments in which the taxpayer is an inactive partici- pant (i.e., a limited partner- ship) 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 unreimbursed representa- tion, may be listed as miscel- laneous itemized deductions and claimed on Form 2106. In addition to the 2-percent floor, only 50 percent for meals and entertainment may be claimed (100 percent for unreimbursed travel and lodging). Only the employee’s (not family members’) 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 ques- tions claimed expenses. It is important to save receipts: without receipts for food, a taxpayer may deduct only the federal meals-and-inciden- tals (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 unre- imbursed travel expenses, including parking fees and tolls, may be deducted. The rate for business miles driven is 56 cents for 2014. 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. Off icial 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 oŸcial 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 primary or sec- ondary residence. 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 improvements, in which case the $1 million limit applies. The $100,000 ceiling applies to the total of all home equity loans you may have. The same generally applies to refinancing a mortgage. Points paid to obtain a refi- nanced loan cannot be fully deducted the same year, but must be deducted over the life of the loan. It is advisable to save the settlement sheet (HUD-1 Form) for documen- tation in the event your tax return is selected by the IRS for audit. Qualified residences are defined as the taxpayer’s principal residence and one other residence. The second home can be a house, condo, co-op, mobile home or boat, as long as the structure includes basic living accom- modations, including sleep- ing, bathroom and cooking facilities. If the second home is a vacation property that you rent out for fewer than 15 days during the year, the income need not be reported. Rental expenses cannot be claimed either, but all property taxes and mortgage interest may be deducted.