The Foreign Service Journal, January-February 2019

70 JANUARY-FEBRUARY 2019 | THE FOREIGN SERVICE JOURNAL AFSA NEWS The $2,000 credit per qualifying child begins to phase out for those with a modified adjusted gross income of $200,000 ($400,000 for married filing jointly). Similarly, a nonrefundable credit of up to $500 is available for eligible dependents who do not qualify as children. Both are calculated on the IRS Child Tax Credit and Credit for Other Dependents Worksheet. The work- sheet, along with a flow chart for determining “Who Qualifies as Your Dependent,” can be found in the 1040 instructions. Official Relocation Expenses Paid by the State Department under IRC Sec. 912 Remain In April 2018, Charleston General Financial Services (CGFS) advised AFSA that, based on an unofficial opinion from the IRS, all travel authorized under Section 901 of the Foreign Service Act, which includes Permanent Change of Station (PCS), R&R, emergency visitation travel and medevacs, is exempt from taxation under the terms of IRC Section 912. Foreign Earned Income Exclusion The Tax Cuts and Jobs Act of 2017 did not change the laws governing the FEIE. As such, taxpayers living and working overseas may be eligible for this exclusion, but not if they are employees of the U.S. government. In 2018, the first $103,900 earned overseas as a (non-USG) employee or self-employed person may be exempt from income taxes but not self-employ- ment taxes. To receive this exclusion the taxpayer must: (1) Establish a tax home in a foreign country, which is the general area of the taxpayer’s “main place of business, employ- ment or post of duty.” (In other words, where the taxpayer is “permanently or indefinitely engaged to work as an employee or self-employed individual.”) and (2) Either (a) meet 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, or (b) meet the “physical presence” test, which requires the taxpayer to 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). 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 U.S. 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. 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 over the 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. The U.S. Tax Court took up three FEIE cases in 2018, of which the most relevant to the Foreign Service was O’Kagu v. IRS, 151 T.C. No. 6 (Sept. 19, 2018). There, a binding D.C. Circuit Court precedent required the Tax Court to conclude that Sidney O’Kagu was an employee of the U.S. government for tax purposes. As such, he did not qualify for the FEIE, despite his argument that the Office of Management and Budget catego- rized him as a contractor under 22 USC Sec. 2669(c). All three cases are available via Google Scholar by searching “foreign earned” income. Important note on claiming FEIE: Taxpayers must add the amount excluded under the FEIE back to AGI to figure what their tax liability would be, then exclude the tax that would have been due on the excludable income alone, to properly calculate their tax liability with an FEIE exclusion. For example: A Foreign Service employee earns $80,000 and their teacher spouse earns $30,000. All else being equal, tax liability on $110,000 gross income is $16,079; tax on $30,000 foreign income is $3,219; and, therefore, net tax liability is $16,079 minus $3,219, or $12,860. Foreign Accounts & Asset Reporting When a U.S. person (defined as a citizen, resident or green card holder) has offshore income, assets, accounts and/or entities, their U.S. income tax and reporting obligations can become a minefield of potential penalties. Many additional reporting forms apply to such taxpayers, but only a handful of accountants have the expertise to identify which forms need CHILD CARE TAX CREDIT WHEN OVERSEAS To claim the child care tax credit while serving overseas, you must submit IRS Form 2441. Pursuant to the 2441 instructions: “If you are living abroad, your care provider may not have, and may not be required to get, a U.S. taxpayer identification number (e.g., SSN or Employer Identification Number). If so, enter ‘LAFCP’ (Living Abroad Foreign Care Provider) in the space for the care provider’s taxpayer identification number.”