The Foreign Service Journal, January-February 2021

THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2021 67 specifically defined in the Internal Revenue Code, tax courts have taken a facts and circumstances approach in deciding whether an activity is a trade or business. If a taxpayer is rent- ing out their personal residence while overseas, it is generally not a trade or business for QBID purposes unless the taxpayer’s main source of income and/or main employment activity is from renting and managing rental real estate. Some trusts and estates may be eligible for the QBID, however, income earned as an employee of a C Corporation does not qualify. The Code specifies that certain trades and businesses, such as law firms, accounting firms and consulting businesses, do not qualify for the QBID unless the taxpayer’s taxable income is under certain thresholds ($326,600 for MFJ and $163,300 for all other returns). Other complicated limits and requirements may apply. Federal Estate and Gift Taxes In 2020, the first $11.58 million of a decedent’s aggregate estate (up to $23.16 million for a surviving spouse with a portability election on Form 1041) was exempt from the federal estate tax. The same amounts apply to (and are reduced by) lifetime gift-giving over the annual gift exclusion, which is $15,000 per donee ($30,000 for gifts split by married couples on Form 709). Other limits apply to gifts to non-U.S. citizens or gifts between spouses where both spouses are not U.S. citizens. Those who contribute to 529 Education Savings Plans should note that such a contribution is considered a completed gift and is applied to that taxpayer’s annual gift exclusion for the donee. Taxpayers interested in front-loading a 529 plan to maximize their tax-free earnings can select a five-year contribu- tion option allowing them to contribute in one tax year up to the annual gift tax exclusion ($15,000 for 2020) for five years ($75,000 maximum for 2020). Taxpayers choosing this five- year option must file a Form 709 Gift Tax Return and select the five-year election. Retirement Savings in TSP, 401(k)s and IRAs Individuals may contribute up to $19,500 to 401(k) plans, the Thrift Savings Plan and 403(b) plans in 2020. Taxpayers age 50 and older may make additional catch-up contributions of $6,500 to their qualified employer workplace retirement plan. The 2020 Traditional IRA and Roth contribution limits (in total) are $6,000 for those under age 50 and $7,000 for those age 50 and over. The 2020 tax year deadline for contributing to a Roth IRA or Traditional IRA is April 15, 2021. The IRS charges a penalty for ROTH or IRA contributions over the allowed limits. Over-contributions for the tax year being filed, however, may be removed without penalty by the filing due date (with extensions) of the tax return. Contributions to a 401(k), TSP or 403(b) plan may be made only via payroll deductions, the last of which is possible during the last pay period paid by Decem- ber 31, 2020. Married filing jointly self-employed spouses working outside the United States who elect the FEIE can make a spousal Roth or Traditional IRA contribution as permitted by income thresholds. Taxpayers with modified AGI above the per- mitted threshold for a Roth contribution may want to consider a back-door Roth contribution strategy. Itemized Deductions Still Allowed via Schedule A Although the 2017 Tax Cuts and Jobs Act removed the overall cap for itemized deductions, it suspended miscellaneous itemized deductions, to the extent they exceed 2 percent of AGI, through 2025. Schedule A and the instructions are the best guide for what remains deductible for itemizers. The following three sections provide 2020 updates on a few often- used itemized deductions. 1) Medical and Dental: Deduct for Expenses Over 7.5 Percent of AGI The 2020 deduction for unreimbursed medical and dental expenses is possible only to the extent qualifying expenses exceed 7.5 percent of a taxpayer’s AGI. This 7.5 percent thresh- old is set to expire after 2020, but Congress could extend it again for 2021. AFSA recommends that members claiming these deductions read IRS Publication 502, Tax Topic 502 and IRC Section 213. 2) Taxes, Including State and Local Property The TCJA limits itemized deductions for state and local prop- erty taxes to $10,000 ($5,000 for married filing separately). For more on these provisions, refer to IRS Notice 2019-12, Treasury Decision 98-64, 26 CFR Section 1-170A-1(h)(3), Tax Topic 503 and IRC Sections 164, 170(c). 3) Charitable Contributions The Coronavirus Aid, Relief and Economic Security (CARES) Act increased the charitable contribution deduction to 100 percent (from 60 percent) of a taxpayer’s income base for 2020. Contributions must be made to a qualified organiza- tion (e.g., a Section 501(c)(3) nonprofit organized in the U.S.). Taxpayers are required to retain documentary evidence (e.g., canceled check or written communication from the charity) for all cash contributions. Additionally, an official tax receipt is required for any single cash contribution of $250 or more to a qualifying tax-exempt organization. Non-cash contribu- tions require a receipt regardless of the value of the non-cash contribution. For non-cash contributions of $250 or more, the charity must provide a receipt along with an additional acknowledgment stating whether any goods or services were given in return for the donation. For non-cash contributions totaling in excess of $500, the taxpayer must complete Form 8283 (Non-cash Charitable Contributions) and attach it to their Form 1040. Contributions over $5,000 require a written appraisal.