The Foreign Service Journal, January-February 2021

68 JANUARY-FEBRUARY 2021 | THE FOREIGN SERVICE JOURNAL AFSA NEWS For more information, AFSA recommends Tax Topic 506, Publication 526, Publication 1771, the Schedule A and Form 1040 instructions and IRC Section 170. Under the CARES Act, taxpayers who do not itemize may take an above-the-line deduction to reduce taxable income for up to a $300 cash donation made in 2020 to a qualified chari- table organization, except for donations to a donor-advised fund or to a 509(a)(3) charity. Taxpayers should refer to the CARES Act or their tax adviser for the specific requirements. Health Care Savings Account (HSA) and Flexible Savings Account (FSA) In 2020, Foreign Service employees covered by a self-only high-deductible insurance plan may contribute up to $3,550 to an HSA. Individuals with family high-deductible insurance coverage may contribute up to $7,100 for 2020. Distinct from an HSA, an FSA is a tax-advantaged account allowing an employee to contribute pre-tax wages to pay for qualifying medical expenses. The maximum pre-tax salary contribution to an FSA for 2020 is $2,750. Withdrawals used to pay qualifying medical expenses are not taxed, and limited unused amounts can be rolled over from year to year with a proper election. The CARES Act expanded the definition of qualifying medical expenses to include feminine hygiene products and over-the-counter medications purchased after Dec. 31, 2019. This expanded definition allows taxpayers to withdraw funds from HSAs or FSAs (such as the FSAFEDS for health care) to pay for these expenses. AFSA recommends Publi- cation 969, the Form 8889 instructions and the FSA Feds website. Summary of COVID-19 Specific Law Changes The various pieces of legislation passed by Congress in response to COVID-19 are extensive and voluminous. Below is a short summary of tax legislation most likely to have an impact on members of the Foreign Service. (1) Economic impact payment: Taxpayers who are U.S. citizens or resident aliens (and who have a valid Social Security number) are entitled to a refundable income tax credit of $1,200 ($2,400 for married couples filing a joint return). A $500 credit is also allowed for each qualifying child of the taxpayer. The credit is phased out based on AGI and eliminated for taxpayers with AGI exceeding $75,000 ($150,000 for joint returns). Many eligible taxpayers have already received this impact payment. Their eligibility for the payment was based on their 2019 tax return or, if not yet filed, their 2018 tax return. It is important to note that actual eligibility will be recalculated on the 2020 tax return. If a taxpayer qualifies for a higher payment (e.g., because 2020 taxable income was lower than prior year taxable income), they will receive the additional credit on their 2020 return. If, based on 2020 income, the taxpayer was not eligible for part or all of a previously received stimulus payment, the taxpayer will not be required to return the payment. (2) Retirement fund distributions: The 10-percent early withdrawal penalty for early qualified retirement plan with- drawals such as those from the TSP, a 401(k) or other simi- lar plan is waived for COVID-19 related distributions up to $100,000 made in 2020. The legislation provides for repay- ment of the COVID-19 distribution or allows taxpayers to pay the tax on the withdrawal ratably over three years. Readers should refer to the CARES Act or consult a tax professional as the tax treatment of repayments depends on the type of retirement fund and the nature of the repayment. (3) Payroll tax deferrals: An August 2020 presidential memorandum directed the U.S. Treasury to allow employers to defer withholding, deposit and payment of certain payroll taxes. According to IRS Notice 2020-65, employers have the option to defer the withholding of the employee’s share of payroll taxes on wages paid during the period between Sept. 1, 2020, and Dec. 31, 2020. The deferral is only for those employees meeting the wage threshold of net wage income less than $4,000 for a biweekly pay period (or an equiva- lent amount if paid on a different pay period). The net wage threshold determination is made separately for each pay period and only applies for the pay period the net wages are less than $4,000. Any employer opting to use this deferral will be required to withhold the deferred payroll taxes on a ratable basis from the employee’s wages paid between Jan. 1, 2021, and April 30, 2021. Conclusion Minor changes were made to Form 1040 and the numbered schedules for 2020. The legislation resulting from COVID-19 offers a few tax incentives that must be addressed on the 2020 Form 1040; but for the most part, few significant tax law changes will affect 2020 returns. While AFSA encourages its members to continue their tax education by reading the Inter- nal Revenue Code, IRS regulations and referenced IRS publi- cations, there is no substitute for professional help for specific questions, particularly for complex international income and assets issues. Though not comprehensive, we hope this guide provides a useful summary of the significant tax laws and updates that may have an impact on your 2020 tax returns. Best wishes as you prepare your 2020 returns, and here’s to a less eventful 2021! n