The Foreign Service Journal, January-February 2021

THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2021 65 Act, which includes permanent change of station (PCS), representational travel, R&R, emergency visitation travel and medevac, is exempt from taxation per IRC Sec. 912. Charleston General Financial Services (CGFS) secured advice from the IRS to this effect, which is consistent with IRS guidance issued in April 2018. None of these reimbursements appears on a W-2 for State Department employees. Non–State Department employees and anyone who doubts they are traveling under the Foreign Service Act should contact a professional to determine what relocation expenses may now be taxable. Personally Incurred Expenses for Home Leave and R&R Personal expenses paid by a direct-hire employee while on R&R are not tax deductible. Prior to the 2017 Tax Cuts and Jobs Act, lodging, food and transportation expenses paid by an employee on official home leave were deductible on Schedule A as unreimbursed employee business expenses. The 2017 Tax Cuts and Jobs Act eliminated the tax deduc- tion for unreimbursed employee business expenses, so these expenses cannot be deducted until 2026 (filed April 2027). The Schedule A line 16 “other itemized deductions” section is not appropriate for deducting these expenses. Representational & Official Residence Expenses Certain Foreign Service employees receive a nontaxable allowance for representation expenses. If the actual expenses exceed the allowance, the excess expenses are not deductible under current tax law. Further, other Foreign Service employ- ees incurring expenses related to their job may not deduct such expenses. Alimony for Divorces, Settlements and Modifications Alimony paid pursuant to agreements and orders entered into before Jan. 1, 2019, is deductible by the payor and taxed as income to the payee. Alimony payments paid pursuant to divorce or separation instruments entered into or modified after Dec. 31, 2018, are not deductible by the payor or taxed as income to the payee. Any modifications after Dec. 31, 2018, must explicitly state that the repeal of the alimony and main- tenance rules will apply to the modification, otherwise the pre- 2019 rules apply. Taxpayers should read Form 1040 Schedule 1, the Form 1040 Instructions and Tax Topic 452. Note the Tax Cuts and Jobs Act of 2017 generally repealed IRC Section 71 and 26 CFR 1.71-1 for agreements entered into after Dec. 31, 2018. Foreign Earned Income Exclusion (FEIE) Taxpayers living and working overseas may be eligible for the FEIE. In 2020 the first $107,600 earned overseas as a non– U.S. government employee or self-employed person may be excluded from federal income taxes but not from self-employ- ment taxes. To qualify for this exclusion, the taxpayer must: (1) Establish a tax home in a foreign country; (2) Either (a) meet the “bona fide residence” test, or (b) meet the “physical presence” test; and (3) File a Form 1040 tax return with Form 2555 for the year the FEIE is claimed. Tax Home The tax home is the general area of the taxpayer’s “main place of business, employment or post of duty” (i.e., where the taxpayer is “permanently or indefinitely engaged to work as an employee or self-employed individual”). The U.S. Tax Court has explained that the congressional purpose of the FEIE is 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 house- hold, 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 coun- try and working in the foreign country long-term are other factors the federal courts have cumulatively recognized as establishing a foreign tax home. Bona Fide Residence Test The bona fide residence test is a facts and circumstances test aimed at assessing whether the taxpayer intends to make a home outside the United States for an indefinite period. This test requires that the taxpayer be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. The taxpayer may leave the foreign country for brief or temporary trips back to the United States (for periods not greater than six months in a calendar year) or elsewhere during the bona fide resident period but must have a clear intention of returning to the foreign country. Physical Presence Test The physical presence test requires that a taxpayer be present in a foreign country for at least 330 full (midnight-to-midnight) days during any 12 consecutive months (the 12-month period may be different from the tax year). Taxpayers who qualify for the physical presence test using a 12-month period other than a full calendar year are required to prorate the maximum exclusion allowed for that tax year. Travel days to and from the United States generally do not count toward the total for days inside the foreign country (they are considered U.S. days).