The Foreign Service Journal, January-February 2019

72 JANUARY-FEBRUARY 2019 | THE FOREIGN SERVICE JOURNAL AFSA NEWS Foreign sales tax (Value Added Tax) is not deductible. In 2018, the aggregate amount of taxes 1, 2 and 3 and sales taxes deducted in lieu of income taxes is capped at $10,000 for married filing joint or individual returns ($5,000 per person if married filing separately). Foreign real and personal property taxes may not be deducted. State and local income taxes for 2018 are treated as if they were paid that year, even if they were paid in 2017. Finally, there is no $10,000 limit for these taxes if they are paid while carrying on a trade or business. AFSA recommends that taxpayers wishing to claim this deduc- tion read IRS tax topic 503 and IRC Section 164. Medical & Dental Expenses In 2018, taxpayers can deduct medical expenses to the extent they exceed 7.5 percent of their adjusted gross income (AGI), including health and long-term care insurance, but not health insurance premiums deducted from government salaries. The current law increases this floor to 10 percent of AGI in 2019 (filed April 2020). AFSA recommends that members claiming these deductions read IRS publication 502, tax topic 502 and IRC Section 213. Charitable Contributions Up to 60 percent of a taxpayer’s income base can be deducted for charitable contributions. Common issues include contrib- uting to a qualified organization, properly documenting con- tributions of $250 or more, accounting for benefits received in return for donations and calculating the income base. AFSA recommends Publication 526 and IRC Section 170. Home Mortgage Interest The cost of personal borrowing is not usually deductible. However, qualifying mortgage interest on loan balances of up to $750,000 of for acquisition debt for married filing jointly or individual returns ($375,000 per person for married filing separately) and up to $100,000 home equity debt ($50,000 married filing separately) for loans secured by a primary or secondary residence that are also used to improve that resi- dence may qualify for a deduction. Home equity debt used to fund any purpose other than to purchase or improve the quali- fying residence is no longer deductible. AFSA recommends IR 2018-32, Publication 936, and IRC Sections 163(h) and 163(h) (3)(F) for further reading on this and on the deductibility of “points” on a mortgage. Business Use of Home & U.S. Real Property Held for the Production of Income Taxpayers may still be entitled to deductions for the business use of part of a home. When income is earned by renting out the home, for reporting, to avoid errors. Provide the tax preparer with a com- plete set of statements for each asset, each and every year, and save every bank, life insurance and pension statement received from a financial institution for a minimum of seven years. Itemized Deductions, Particularly Disallowed Miscellaneous Deductions Although the overall limit on specific itemized deductions does not apply for 2018, miscellaneous itemized deductions have been eliminated for 2018. Travel expenses for a job, union dues, professional education, tax preparation fees, investment expenses and other expenses for the production of taxable income are among the miscellaneous itemized deductions for individuals that can no longer be deducted (compare 2017 with 2018 Schedule A). For Foreign Service members, unreimbursed employee expenses (which include home leave expenses) will not be deductible on Schedule A in 2018. One silver lining is that W-2 employees probably will not have to complete a Schedule A, while contractors and small businesses operating as sole proprietors, LLCs or S-corporations can deduct many of these same expenses on Schedules C and E. A New Deduction: QBID The 2017 tax reform legislation left us with this new deduc- tion, the qualified business income deduction (QBID), deemed important enough to be included on the revised 1040. While it may be very attractive to deduct up to 20 percent of qualified income from a qualified trade or business in addition to 20 percent of qualified real estate investment trust (REIT) income or qualified publicly traded partnership (PTP) income, the devil is in the details. All caveats for the four separate legal definitions can be found in IRC Sec. 199A, which is long, complex and difficult to understand. Start instead by reading the instructions for 1040 line 9 and the simplified QBID worksheet to determine if you qualify. Tax services and software companies are also publish- ing more reader-friendly information on this topic with varying degrees of reliability (and terms of service disclaimers). Publication 535 will likely be useful after it is revised for 2018. If after studying these resources you still believe you qualify for the QBID, contact a tax preparer competent in this area. Itemized Deductions That Are Still Allowed Taxes, Including State & Local Real Property & Income Taxes There are only four kinds of deductible nonbusiness taxes: (1) State and local real property taxes; (2) State and local personal property taxes; (3) State, local and foreign income, war profits and excess profits taxes; and (4) generation-skipping transfer tax on income distributions. State and local general sales taxes may be deducted in lieu of (not in addition to) income taxes.