The Foreign Service Journal, January-February 2020

72 JANUARY-FEBRUARY 2020 | THE FOREIGN SERVICE JOURNAL AFSA NEWS 2019 STATE TAX PROVISIONS Liability Every employer, including the State Department and other for- eign affairs agencies, is required to withhold state taxes for the location in which the employee either lives or works. Employ- ees serving overseas must maintain a state of domicile in the United States where they may be liable for income tax; the consequent tax liability that employees face will vary greatly from state to state. Further, the many laws on taxability of Foreign Service pen- sions and annuities also vary by state. This section briefly cov- ers both those situations. In addition, see separate box on state tax withholding for State employees. We also encourage you to read the CGFS Knowledge Base article on the Tax Guide page of the AFSA website at www.afsa.org/afsa-tax-guide. Domicile and Residency Many criteria are used in determining which state is a citizen’s domicile. One of the strongest determinants is prolonged physical presence, a standard that Foreign Service personnel frequently cannot meet because of overseas service. In such cases, the states will determine the individual’s income tax status based on other factors, including where the individual has family ties, has been filing resident tax returns, is regis- tered to vote, has a driver’s license, owns property, or has bank accounts or other financial holdings. In the case of Foreign Service employees, the domicile might be the state from which the person joined the Service, where his or her home leave address is or where he or she intends to return upon separation. For purposes of this article, the term “domicile” refers to legal residence; some states also define it as permanent residence. “Residence” refers to physical pres- ence in the state. Foreign Service personnel must continue to pay taxes to the state of domicile (or to the District of Colum- bia) while residing outside the state, including during assign- ments abroad, unless the state of residence does not require it. Members are encouraged to review the Overseas Briefing Center’s guide to Residence and Domicile, available on AFSA’s website at www.afsa.org/domicile. Domestic Employees in the D.C. Area Foreign Service employees residing in the metropolitan Wash- ington, D.C., area are generally required to pay income tax to the District of Columbia, Maryland or Virginia, in addition to paying tax to the state of their domicile. Virginia requires tax returns frommost temporary residents, tax incentive with the capped deduction for state and local taxes above. AFSA recommends Tax Topic 506, Publication 526, the Schedule A and 1040 instructions, and IRC Section 170 for more information. Casualty and Theft Losses The value of property lost by taxpayers to theft (for business property only) or natural disaster of over $500 is deductible under IRC Section 165. The requirement that such losses exceed 10 percent of AGI is suspended from 2018 through 2025. For individual taxpayer personal use property only, losses must be attributable to federally declared disasters defined by Sec. 165(i). Note that amounts claimed for deduc- tions must be reduced by amounts received for salvage or insurance benefits. AFSA recommends Tax Topic 515, Publica- tion 547 and IRC Sec. 165. Health Care Savings Account (HSA) In 2020 State Department employees may contribute up to $2,750 to a Health Care Savings Account. Each qualifying employee may do so, for a combined total limit of $5,500. Additional contributions may be made to Limited Expense Health Care Flexible Spending Accounts, but only eligible den- tal and vision expenses may be reimbursed therefrom. The contributions are pre-tax, expenditures on qualifying medical expenses are not taxed and unused amounts can be rolled over from year to year with a proper election. AFSA recom- mends Publication 969, the Form 8889 instructions and the basics from the FSA Feds website. Conclusion Despite some administrative reorganization with the 1040 and numbered schedules this year, the tax code remained stable in 2019. Those administrative differences are, however, reason to file a revised W-4 with your employer as soon as possible. Other than some adjustments to dates and for inflation, the only probable variables for this year’s tax return are changes to a source of income or an asset. While AFSA encourages its members to continue their tax education by reading the Internal Revenue Code, IRS regula- tions and referenced IRS publications, there is no substitute for professional help for specific questions, particularly for thorny international income and assets issues. For now, enjoy the relative calm. The upcoming general election may shake up the tax code next year. n