The Foreign Service Journal, January-February 2022
AFSA NEWS 56 JANUARY-FEBRUARY 2022 | THE FOREIGN SERVICE JOURNAL 2021 Federal and State Tax Provisions for the Foreign Service The American Foreign Service Association is pleased to present the 2021 Tax Guide, your first step to self-help for filing 2021 tax returns. This annual guide summarizes many of the tax laws that members of the Foreign Service community will find relevant, including changes mandated by new legislation. Although we try to be accurate, this article reviews complex tax issues affecting many individuals differently. Readers should always follow up with IRS product pages for each form and pub- lication mentioned, which are designed as extensions of the PDF versions and instructions. Always check the applicability and “last reviewed” dates of these resources. Even then, statutes and case law are the only completely authoritative sources. Many credits, deductions or other calculations (e.g., depreciation, foreign asset reporting or 1031 exchanges) are best done by a competent professional. Consultation with a tax professional for complete answers to specific questions is recommended; readers cannot rely on this article or the IRS website as a justification for their position on a tax return. In addition to highlights of new 2021 tax legislation affecting individuals, we also provide readers with information on tax issues affecting investments in real estate, capital gains, alimony, the Foreign Earned Income Exclusion (FEIE), filings related to foreign assets and income, and other important topics relevant for 2021 tax returns. When this article was finalized for early 2022 publication, Congress was still debating the Build Back Better Act, which may include significant changes to tax law affecting 2021 tax returns. Readers should review the provisions contained in any tax legislation signed into law between November 2021 and the day they file their tax returns in 2022 for changes that might bear on the information provided in this article. Following the federal section is the state-by-state guide, which includes information on state domicile, income tax rates and retirement incentives. AFSA Senior Labor Management Adviser James Yorke (YorkeJ@state.gov ), who compiles the Tax Guide, would like to thank Christine Elsea Mandojana, CPA, CFP® of CEM Global Tax Planning, LLC, and her team for preparing the section on federal tax provisions. Thanks also to Hallie Aronson, Esq., and Shannon Smith, Esq., of Withers Bergman, LLP, for their contributions, particularly regarding foreign accounts and asset reporting. Filing Deadlines & Extensions The deadline for filing 2021 individual income tax returns is April 15, 2022. U.S. citizens and resident aliens living outside the United States are allowed an automatic two-month exten- sion for filing and paying federal taxes to June 15, 2022. To qualify for the June 15 automatic extension, a taxpayer must meet the following requirements: (1) on the regular tax return due date, the taxpayer is living outside of, and their main place of business or post is outside of, the United States and Puerto Rico (or the taxpayer is in the military or naval service on duty outside the United States or Puerto Rico); and (2) the tax- payer attaches a statement to the tax return specifying their qualifications for this automatic exten- sion. Taxpayers claiming the extension should also write “taxpayer abroad” at the top of Form 1040. An additional extension to Oct. 17, 2022, may be obtained by filing Form 4868. Certain taxpayers claiming the Foreign Earned Income Exclusion (FEIE) on their federal tax return may qualify to extend their return beyond the Oct. 17 deadline using Form 2350 (instead of Form 4868). An extension to Dec. 15 may be available to certain overseas taxpayers who filed a Form 4868, but are unable to meet the Oct. 17 deadline due to certain qualifying circumstances. We recommend that you consult with a qualified tax professional before availing of these additional extensions. Taxpayers who take advantage of a federal extension must also check their state filing deadlines to avoid inadvertently missing them, because many states do not conform to the same federal extensions or extension deadlines. Although the IRS should not charge interest or late pay- ment penalties for returns filed under the June 15 automatic deadline, it often does. The taxpayer generally must call the IRS to have the interest or late penalties removed. For returns extended beyond June 15, however, the extension granted to the taxpayer is an extension to file but not an extension to pay. As such, the IRS will charge late payment penalties and inter- est for payments made after the April 15 deadline. Most states will likewise charge late payment penalties and interest for tax payments made after the state’s initial tax filing deadline.