The Foreign Service Journal - January/February 2018

76 JANUARY-FEBRUARY 2018 | THE FOREIGN SERVICE JOURNAL AFSA NEWS Dedu c t i b l e Ta xes There are only four kinds of deductible non-business taxes: (1) State, local and foreign income taxes; (2) State, local and foreign real estate taxes; (3) State and local personal property taxes; and (4) State and local general sales taxes, which may be deducted in lieu of income taxes. For those residing abroad who are subject to foreign sales tax (also known as “Value Added Tax”), these may not be deducted in lieu of domestic sales taxes. The taxpayer must itemize and must have been charged and actually paid the taxes to be entitled to these deductions. Med i ca l and Den t a l Ex pen s es Taxpayers who itemize can deduct medical expenses to the extent they exceed 10 percent of AGI (including health and long-term care insurance, but not health insurance premiums deducted from government salaries). This is the first year in which the floor for this deduction has risen (from 7.5 percent in 2016). Cha r i t ab l e Con t r i bu t i on s For itemizers only, contributions to “qualified organizations” may be deducted, and then only to the extent the tax code permits. For example, the AFSA Fund for American Diplomacy qualifies as a public charity. Contributions to it, and any public charity, can be deducted, but a taxpayer’s deduction for charitable contributions is limited to 50 percent of AGI. The IRS provides an “Exempt Organizations” online check tool to determine whether a charity qualifies. Payments to individu- als are never deductible. I n t e r es t Ex pen s es Each kind of interest expense could qualify for a deduc- tion or credit under a unique tax provision. Two commonly deducted forms of interest for itemizers are investment interest (to the extent of income from investments) and qualified mortgage interest (discussed below). Other kinds of deductible interest are a portion of student loan interest, non-farm business interest and interest incurred to produce rents or royalties. The IRS publishes instructions and limitations for each, as well as guidance regarding at-risk loss limitation and passive activity loss limitation rules. It is recommended that you pursue additional information for each if you hope to claim any of these on your tax return. Taxpayers may not deduct interest paid on a loan to purchase a vehicle for personal use, credit card interest for personal expenses or interest related to tax-exempt income. Non-deductible debts may, however, be consolidated and paid with deductible home equity loan interest (discussed below). Home Owne r s h i p Home ownership may open the door to many tax benefits, including: (1) The mortgage interest deduction; (2) Deduction of points to obtain a home mortgage; (3) Business use of a home; and (4) Selling a home. (1) Mortgage Interest Deduction: The interest expense of up to $1 million of acquisition debt ($500,000 married filing separately) and up to $100,000 home equity debt ($50,000 married filing separately) for loans secured by a primary or FOREIGN EARNED INCOME EXEMPTION DENIALS Some AFSA members report having difficulty claiming the foreign earned income exemption (FEIE). Recent Tax Court guid- ance ( Evans v. IRS , 2015 TC Memo 12) indicates that a taxpayer must both: (1) Establish a “tax home” in a foreign country; and (2) Meet either the “bona fide residence” or “physical presence” test. AFSA understands that IRS auditors have denied the FEIE for Foreign Service spouses and dependents for failing to meet the bona fide residence or tax home elements of this test. The tax court has explained that the congressional purpose of the FEIE was to offset duplicative costs of maintain- ing distinct U.S. and foreign households. So increasing ties to the foreign country by personally paying for a foreign household, paying local taxes, waiving diplomatic immunity for matters related to your job, paying for vacation travel back to the United States, becoming a resident of the foreign country, and working in the foreign country long term are other factors the federal courts have cumulatively recognized as establishing a foreign tax home. The physical presence test, which requires that 330 full days during a calendar year are spent physically in a foreign country (not just outside the United States, so travel time does not count), has successfully been used by members to meet the second element of the test where bona fide residence cannot be established. If relying on physical presence, you are advised to record all your travel carefully and to keep copies of visas and tickets to substantiate the 330 days if audited.