The Foreign Service Journal, January-February 2021

64 JANUARY-FEBRUARY 2021 | THE FOREIGN SERVICE JOURNAL AFSA NEWS Selling a Property That Was Previously Rented Taxpayers who sell a property that was used as a rental prop- erty at any time during the taxpayer’s ownership must reduce the property’s adjusted basis by the mandatory depreciation required during the rental period of the property before calcu- lating the final net taxable capital gain from the property sale. The portion of the net capital gain created from the manda- tory depreciation (whether or not claimed during the rental period(s)) is taxed as IRC Section 1250 unrecaptured gain and is not eligible for capital gain exclusion under IRC Section 121. The portion of the remaining net capital gain is eligible for exclusion under IRC Section 121 if all requirements are met. Due to the impact of IRC Section 1250 unrecaptured gain rules, taxpayers who sell a property that was previously rented often still have a tax bill due even if they qualify to exclude a portion of their net capital gain under IRC Section 121. Non-Rental Business Use of Home Although most Foreign Service families find themselves in government-funded housing overseas much of the time, some may own or rent property in the United States that they both occupy for personal purposes and use to operate a private business on the side. To qualify for a deduction for business-related expenses for a portion of a residence used for a business, a taxpayer must use a portion of their home exclusively and regularly as a principal place of business (and file a Schedule C). A taxpayer who meets that thresh- old must then either calculate the actual expenses of the home office—e.g., cost of a business phone line and part of state and local property taxes, utilities, mortgage interest and depreciation—or use the IRS’ simplified method based on a flat rate for the square footage used for business (up to a maximum of 300 square feet). Also note that expenses incurred for the entire home, such as property taxes, must be prorated based on the percentage of the home used exclusively for the business if you choose the regular (not simplified) calculation. For more information, contact a pro- fessional and follow up with IRS Topic 509, Publication 587, the instructions for Form 8829, 1040 Schedule C, and IRC Sections 162, 212 and associated regulations. Three Separate but Related Child and Dependent Credits Child Tax Credit A tax credit of up to $2,000 (limit of $1,400 refundable) per year is available for each qualifying child under age 17 for quali- fied taxpayers. This credit is claimed directly on Form 1040. Other Dependent Credit A separate but related Other Dependent Credit of up to $500 is available, often for those who do not meet the qualifying child requirement or with other dependent relatives. Calculate both the child tax credit and the other dependent credit on the Child Tax Credit and Credit for Other Dependents Work- sheet. The worksheet and a flow chart for determining “Who Qualifies as Your Dependent?” are in the Form 1040 instruc- tions for line 19. AFSA also recommends IRS Publication 5307, Publication 927, the instructions for Schedule 8812 (additional child tax credit) and IRC Section 24 for the Child Tax Credit and Other Dependent Credit. Child and Dependent Care Tax Credit Taxpayers with a qualifying dependent may be separately eligible for a credit for part of their child and dependent care expenses. To claim this credit for foreign care providers who do not have a U.S. taxpayer identification number (either a Social Security number or Employer Identification Number), enter “LAFCP” (Living Abroad Foreign Care Provider) on Form 2441 in the space for the care provider’s taxpayer identifica- tion number. Taxpayers who utilize an FSAFEDS dependent care account to pay for qualifying childcare expenses must still file Form 2441 to report that they used the funds for qualifying child care. For taxpayers with two or more children who maxed out their FSAFEDS dependent care account con- tribution of $5,000, a credit calculated on up to an additional $1,000 of qualifying childcare expenses is available on Form 2441. Married taxpayers where one or both spouses exclude all their earned income with the FEIE will not qualify for this credit. AFSA recommends IRS Tax Topic 602, Form 2441 and instructions, as well as Form 1040 Schedule 3 and corre- sponding Form 1040 instructions. For all three credits related to children and dependents, qualifying child and dependent rules can quickly become com- plex, especially in the case of divorce or separation. Moving for a New Job & Retiring from Overseas Deductions Not Available Now The personal costs incurred to move to a new job (IRC Section 217(j)) and for moving back to the United States after retiring from overseas are no longer deductible following amendments to the 2017 Tax Cuts and Jobs Act. Only active- duty members of the armed forces should use Form 3903 to calculate and deduct their moving expenses from their mili- tary moves. Visit the IRS web page “Moving Expenses to and from the United States,” read Publication 521, and contact a professional to discuss future planning opportunities on these issues for 2026—the tax year many provisions of the Tax Cuts and Jobs Act sunset. Official Relocation Under the Foreign Service Act Is Not Taxed (PCS, R&R, Medevac) All travel authorized under Section 901 of the Foreign Service