The Foreign Service Journal, January-February 2022

AFSA NEWS 66 JANUARY-FEBRUARY 2022 | THE FOREIGN SERVICE JOURNAL who elect the FEIE can make a spousal Roth or Traditional IRA contribution as permitted by income thresholds. Taxpayers with modified AGI above the permitted Roth contribution threshold may want to consider a back-door Roth contribution strategy. However, please note that Congress is currently considering legislation (not yet finalized as of press time) that may eliminate back-door Roth contributions and Roth conversions. Itemized Deductions Still Allowed via Schedule A Although the TCJA 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 updates on a few often-used itemized deductions. 1) Medical and Dental: Deduct for Expenses Over 7.5 Percent of AGI The 2021 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 threshold is set to expire after 2020, but Congress permanently extended it under the COVID relief legislation in December 2020. 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 taxes to $10,000 ($5,000 for married filing separately). How- ever, please note that Congress is considering legislation (not yet finalized as of press time) that may significantly change the deduction limitation. 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 and 170(c). 3) Charitable Contributions The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR) extended the increased charitable deduction for cash contributions to 100 percent of a taxpayer’s income base for 2021. 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 checks 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 contributions require a receipt regardless of the value of the 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 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. 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 TCDTR, taxpayers who do not itemize may take a below-the-line deduction to reduce taxable income for up to a $300 cash donation ($600 in the case of a MFJ return) made in 2021 to a qualified charitable organization, except for donations to a donor-advised fund or to a 509(a)(3) charity. Taxpayers should refer to the TCDTR or their tax adviser for requirements. Economic Impact Payments (EIP) As part of Congress’s COVID relief, the IRS issued three EIPs to eligible taxpayers during 2020 and 2021. The third and final EIP was issued to eligible taxpayers during 2021 and must be accounted for on taxpayers’ 2021 tax returns. For the third EIP, eligible taxpayers are entitled to a refundable income tax credit of $1,400 ($2,800 for eligible married couples filing a joint return). A $1,400 credit is also allowed for each qualifying dependent of the eligible taxpayer. The credit is phased out based on AGI and eliminated for taxpayers with AGI exceeding $80,000 for single and MFS; $160,000 for MFJ; and $120,000 for HOH. The IRS issued the third EIP based on taxpayer eligibility from 2019 and 2020 tax returns; however, taxpayers’ actual eligibility will be recalculated on the 2021 tax return. If a taxpayer qualifies for a higher payment (e.g., because 2021 taxable income was lower than prior year taxable income), they will receive the additional credit on their 2021 return. If, based on 2021 income, the taxpayer was not eligible for part or all of the third previously received EIP, the taxpayer will not be required to return the payment. Conclusion Minor changes were made to Form 1040 and the numbered schedules for 2021. The legislation resulting from COVID-19 offers a few tax incentives that must be addressed on the 2021 Form 1040; but for the most part, few significant tax law changes will affect 2021 returns, pending any legislation passed after the writing of this article. We encourage readers to monitor significant tax law changes that may be finalized in the coming months and retroactively applied to 2021 tax returns. While AFSA encourages its members to continue their tax education by reading the Internal Revenue Code, IRS regulations and referenced IRS publications, 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 2021 tax returns. n