The Foreign Service Journal, January-February 2023

AFSA NEWS 64 JANUARY-FEBRUARY 2023 | THE FOREIGN SERVICE JOURNAL regularly as a principal place of business (and file a Schedule C to report the business activity). A taxpayer who meets that threshold must then either calculate the actual expenses of the home office—e.g., cost of a business phone/internet line and the business use portion of state and local property taxes, utilities, mortgage interest, and depreciation—or use the IRS’ simplified method based on a flat rate for the square footage used for business (up to a maximum of 300 square feet). For more information, contact a professional and follow up with IRS Topic 509, Publication 587, the instructions for Form 8829, 1040 Schedule C, and IRC Sections 162, 212, and associated regulations. Three Separate but Related Child and Dependent Credits Child Tax Credit. The American Rescue Plan Act (ARPA) signed into law on March 11, 2021, made significant changes to the child tax credit that were only effective on 2021 tax returns. As of the writing of this article, Congress has not extended these changes past 2021, though it is possible Congress could do so before the start of the 2023 tax filing season for 2022 tax returns. However, unless the 2021 law is extended, a qualifying child for purposes of 2022 tax returns is once again one who has not attained age 17 by Dec. 31, 2022. Further, the child tax credit reverts to $2,000 for each qualifying child. The qualifying income thresholds to claim a child tax credit are as follows: modified adjusted gross income up to $400,000 if MFJ, or up to $200,000 for all other filing statuses for the maximum $2,000 per qualifying child. The child tax credit is fully refundable up to $1,500 per child. Other Dependent Credit. A separate but related Other Dependent Credit of up to $500 is available, often for those who do not meet the qualifying child requirement or for other dependent relatives. Calculate both the child tax credit and the other dependent credit on the Child Tax Credit and Credit for Other Dependents Worksheet. The worksheet and a flow chart for determining “Who Qualifies as Your Dependent?” are in the Form 1040 instructions. AFSA also recommends IRS Publication 5307, Publication 972, the instructions for 2022 Schedule 8812, and IRC Sec. 24 for the Child Tax Credit and Other Dependent Credit. Child and Dependent Care Tax Credit. Qualifying taxpay- ers with a qualifying dependent may be separately eligible for a credit for part of their child and dependent care expenses. A qualifying taxpayer is a taxpayer who earned income (not excluded under FEIE), looked for work and received earned income by the end of the tax year, or was a qualifying full- time student during the tax year. Most MFS taxpayers will not qualify. In the case of married taxpayers, both taxpayers must meet at least one of these requirements. Changes made by ARPA for 2021 as it relates to this credit have not been extended after 2021 as of the writing of this article. As such, for 2022, the dollar limit for child and dependent care qualify- ing expenses reverts to the pre-2021 limit of $3,000 for one qualifying individual and $6,000 for two or more qualifying individuals. Taxpayers who utilize a Dependent Care FSAFEDS (DCFSA) account to pay for qualifying dependent care expenses must still file Form 2441 to report that they used the funds for qualifying dependent care. In addition, the rule enacted by ARPA making the child and dependent care credit refundable was also applicable only to 2021 and has not been extended as of the writing of this article. To claim this credit for foreign care providers who do not have a U.S. taxpayer identification number (either a Social Security Number or Employer Identification Number), enter “LAFCP” (Living Abroad Foreign Care Provider) on Form 2441 in the space for the care provider’s taxpayer identification number. AFSA recommends IRS Tax Topic 602, Form 2441 and instructions, as well as Form 1040 Schedule 3 and cor- responding Form 1040 instructions. For all three credits related to children and dependents, qualifying child rules can quickly become complex, especially in the case of divorce or separation. Health Care Savings Account (HSA) and Flexible Savings Account (FSA) In 2022, taxpayers covered by a self-only high-deductible insur- ance plan may contribute up to $3,650 to an HSA. Individuals with family high-deductible insurance coverage may contribute up to $7,300 for 2022. HSA 2022 contributions are due by the 2022 individual tax filing deadline (currently April 18, 2023). 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 (as in the case of the Health Care FSAFEDS account) or to pay for qualifying dependent care (as in the case of the DCFSA account). The Consolidation Appropriation Act (CAA) signed by Congress on Dec. 27, 2020, permits FSA administrators to allow certain carryover and grace periods for FSA accounts. FSAFEDS has adopted many of these provisions. Health Care FSAFEDS (HCFSA) allows re-enrolled participants for the 2022 plan year to carry over $570 of unspent HCFSA funds to the next year. As of this article’s writing, the Dependent Care FSA limit for 2022 tax returns reverts to $5,000, because the ARPA 2021 temporary increase has not been extended. Readers should take note that masks, hand sanitizers, and sanitizing wipes used to prevent the spread of COVID- 19 are now qualifying expenses for HCFSA funds (per IRS