The Foreign Service Journal, January-February 2016

70 JANUARY-FEBRUARY 2016 | THE FOREIGN SERVICE JOURNAL 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 AGI, unless the taxpayer is over age 65, in which case it remains at 7.5 percent until 2017, after which it rises to 10 percent. In other words, medi- cal expenses would have to exceed $3,000 for a taxpayer with a $30,000 AGI in order to be deductible. There is a reduction of itemized deductions for higher income taxpayers for 2015. State and local income taxes and real estate and per- sonal property taxes remain fully deductible for itemizers, as are charitable contributions to U.S.-based charities for most taxpayers (donations to overseas charitable organiza- tions such as local churches at post are not deductible). Donations to the AFSASchol- arship Fund and the Fund for American Diplomacy are fully deductible as charitable contributions, as are donations toAFSA via the Combined Federal Campaign. Individuals may also dispose of any profit from the sale of personal prop- erty abroad in this manner. For 2015 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 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 inter- est on investments in which the taxpayer is an inactive participant (i.e., a limited part- nership) can be deducted only from the income produced by other passive activities. Interest on loans that do not fall into the above catego- ries, such as money borrowed to buy tax-exempt securities, is not deductible. Home Leave Ex pen s es 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 lodg- ing). Only the employee’s (not family members’) home leave expenses are deductible. AFSA recommends maintaining a travel log and retaining a copy of home leave orders, which will help if the IRS ever questions claimed expenses. It is impor- tant to save receipts: without receipts for food, a taxpayer may deduct only the federal meals-and-incidentals 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 rela- tives, 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, mile- age and other unreimbursed travel expenses, including parking fees and tolls, may be deducted. The rate for busi- ness miles driven is 57.5 cents for 2015. Those who use this optional mileage method need not keep detailed FOREIGN EARNED INCOME EXEMPTION DENIALS Some AFSAmembers report having difficulty claiming the foreign earned income exemp- tion (FEIE). To receive the exemption, the taxpayer must meet one of two tests: 1) The physical presence test requires that the taxpayer be present 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 requires that the taxpayer has been a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. We understand that IRS auditors have been denying the FEIE for Foreign Service spouses and dependents under the bona fide residence test, on the grounds that diplo- matic status overseas does not constitute “bona fide residence” in a foreign country. In this context, note that if you work for a company or organization on the local economy you generally have to pay local taxes, and your “tax home” is technically in the foreign country. You will have relinquished your diplomatic status in any matters related to your job, although of course for matters outside your job you would retain the diplomatic status that you derive from your FS employee spouse or parent. However, members report that they have successfully used the physical presence test. They have also used this in appealing a denial of the bona fide residence test. This test requires that you spend 330 full days during a calendar year actually in a foreign country, not just outside the United States. Time spent traveling to and from a country does not count. If using this test, you are advised to record all your travel carefully and to keep cop- ies of visas and tickets so that you can substantiate the 330 days in case of an audit.