The Foreign Service Journal, January-February 2016

THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2016 71 AFSA NEWS records of actual vehicle expenses. They must, how- ever, keep a detailed odom- eter 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. Of f i c i a l Res i den c e Ex pen s es For official residence expenses, the only deductible expenses 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 Owne r s h i p Individuals may deduct interest on up to $1 million of acquisition debt for loans secured by a primary and/ or secondary residence. This also includes loans taken out for major home improve- ments. On home equity loans, interest is deductible 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 prin- cipal 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 accommodations, including sleeping, 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. Ren t a l o f Home Taxpayers who rented out their homes in 2015 can continue to deduct mortgage interest as a rental expense. Also deductible are property management fees, condo fees, depreciation costs, taxes and all other rental expenses. Losses up to $25,000 may be offset against other income, as long as the modi- fied adjusted gross income (MAGI) does not exceed $100,000 to $150,000 and the taxpayer is actively man- aging the property. Note that a taxpayer who retains a property manager does not lose this benefit, as this is still considered active management of the property. All passive losses that cannot be deducted currently are carried forward and deducted in the year the property is sold. Sa l e o f a Pr i n c i pa l Res i den c e Current tax laws allow an exclusion of up to $500,000 for couples filing jointly and up to $250,000 for single taxpayers on the long-term gain from the sale of their principal residence. One need not purchase another residence to claim this exclusion. All depreciation taken after May 7, 1997, will, however, be recaptured (added to income) at the time of sale and taxed at 25 percent. Since January 2009, gain from the sale of a home can no longer be excluded from gross income for periods when it was rented out before you occupied it as a principal residence for the first time. The only qualification for the capital-gains exclusion is that the house sold must have been owned and occupied by the taxpayer as his or her principal residence for at least two of the last five years prior to the date of the sale. Mi l i t a r y Fami l i es Ta x Re l i e f Ac t As a result of the Military Families Tax Relief Act of 2003, the five-year period may be extended for mem- bers of the Foreign Service by any period during which the taxpayer has been away from the area on a Foreign Service assignment, up to a maxi- mum of 15 years (including the five years). There are some exceptions to the two-year occupancy requirement, including a sale due to a “change in place of employment” (this would include foreign transfers). This exclusion is not limited to a once-in-a-lifetime sale, but may be taken once every two years. When a principal residence is sold, capital gains realized above the exclusion amounts are subject to taxation. This exclusion replaces the earlier tax-law provision that allowed both the deferral of gain and a one-time exclusion of a principal residence sale. 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.”