The Foreign Service Journal, January-February 2022

THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2022 63 Deductions for Moving for a New Job & Retiring from Overseas Are No Longer Available The personal costs incurred to move to a new job (IRC Sec. 217(j)) and for moving back to the United States after retir- ing from overseas are not deductible following amendments included in the 2017 Tax Cuts and Jobs Act (TCJA). Only active- duty members of the armed forces should use Form 3903 to calculate and deduct their moving expenses from their military moves. Visit the IRS web page “Moving Expenses to and from the United States,” read Publication 521, and contact a profes- sional to discuss future planning opportunities on these issues for 2026—the tax year many provisions of the TCJA 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 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. Charles- ton General Financial Services secured advice from the IRS to this effect, which is consistent with IRS guidance issued in April 2018. None of these reimbursements appear 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 deter- mine what relocation expenses may now be taxable. Personally Incurred Expenses for Home Leave & R&R Personal expenses paid by a direct-hire employee while on R&R are not tax deductible. Prior to the 2017 TCJA, lodging, food and transportation expenses paid by the employee on official home leave were deductible on Schedule A as unre- imbursed employee business expenses. The TCJA eliminated the tax deduction for most unreimbursed employee business expenses, so these expenses cannot be deducted until 2026 (filed April 2027). The Schedule A line 16 “other itemized deduc- tions” section is not appropriate for deducting these expenses. Representational & Official Residence Expenses Certain Foreign Service employees receive a nontaxable allow- ance for representation expenses. If the actual expenses exceed the allowance, the excess expenses are not deductible under cur- rent tax law. Further, other Foreign Service employees incurring expenses related to their job may not deduct such expenses. Alimony for Divorces, Settlements & Modifications Alimony paid pursuant to agreements and orders entered into before Jan. 1, 2019, is deductible by the payer 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 payer or taxed as income to the payee. Any modifications after Dec. 31, 2018, to agreements finalized before Jan. 1, 2019, must explicitly state that the repeal of the alimony and maintenance rules will apply to the modifica- tion; otherwise, the pre-2019 rules apply. Taxpayers should read Form 1040 Schedule 1, the Form 1040 Instructions, and Tax Topic 452. Note TCJA 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 2021, the first $108,700 of gross taxable income earned overseas as a non-U.S. government employee or self- employed person may be excluded from federal income taxes but not from self-employment taxes. To qualify to claim 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 maintaining distinct U.S. and foreign households. Increasing ties to the for- eign country by personally paying for a foreign household, pay- ing 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 country, 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 at least one full tax year (Jan. 1 through Dec. 31). 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.