The Foreign Service Journal, January-February 2023

AFSA NEWS Wage Overpayments Each year, many readers of this article receive an overpay- ment of wage income that they must repay in a future year. With the roll-out of the new Charleston payroll system, even more readers of this article have been affected by inaccurate pay, including wage overpayments. If you are overpaid wages in a tax year and you repay the full overpayment in the same tax year, then there is generally no action required on that year’s tax return. Your employer should have already accounted for the repayment of over- paid wages in your W2 for the tax year without further action required by you. If you are overpaid wages and you repay the overpayment in a later tax year, then you must determine if you can recoup any of the taxes you paid on the repaid wages. Wage Repayments Less Than $3,000. If you were over- paid less than $3,000 and you repaid the overpayment in a later tax year, then you will not be able to recoup any of the federal income taxes you originally paid on the repaid wages. The TCJA eliminated most miscellaneous itemized deductions subject to a 2-percent AGI floor, including the itemized deduc- tion permitted for wage repayments less than $3,000. Please note that you cannot file a Form 1040X (amended return) for the year of overpayment to reduce your taxable wages for wage amounts repaid in a later tax year. Wage Repayments $3,000 or More. If you were overpaid $3,000 or more, and you repaid the overpayment in a later tax year, you can file an IRC 1341 claim of right credit for the federal income taxes you paid in the year you received the overpayment on the tax return for the year you repay the wages. IRS Publication 525 provides detailed examples of how to calculate the credit for your tax return under the “Repay- ments” section of the publication. Repaid Social Security and Medicare Taxes You can recoup repaid social security and Medicare taxes paid on wage overpayments by filing a claim for refund using Form 843. If you repaid wages subject to the additional Medicare tax, you must file a Form 1040X for the year in which you received the overpaid wages to claim a refund of overpaid additional Medicare taxes. However, you cannot recoup the federal income taxes from a wage repayment on the Form 1040X. Retirement Savings in TSP, 401(k)s, and IRAs Individuals may contribute up to $20,500 to 401(k) plans, the Thrift Savings Plan, and 403(b) plans in 2022. Taxpayers age 50 and older may make additional catch-up contributions of $6,500 to their qualified employer workplace retirement plan. The 2022 Traditional IRA and Roth contribution limits (in total) are still $6,000 for those under age 50 and $7,000 for those age 50 and older. The 2022 tax year deadline for contributing to a Roth IRA or Traditional IRA is April 18, 2023. The IRS charges a penalty for Roth or IRA contributions over the allowed limits. Over-contributions for the tax year being filed, however, may be removed without penalty by the filing due date (with extensions) of the tax return. Contributions to a 401(k), TSP, or 403(b) plan may be made only via payroll deductions, the last of which is possible during the last pay period paid by Dec. 31, 2022. MFJ self-employed spouses working outside the United States who elect the FEIE can make a spousal Roth or Traditional IRA contribution as per- mitted by income thresholds. Taxpayers with modified AGI above the permitted Roth contribution threshold may want to consider a back-door Roth contribution strategy. In 2022, Congress considered legislation to eliminate back-door Roth contributions and Roth conversions. While this proposed legislation appears to have stalled in Congress, it could be reconsidered in future legislation. 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 2022 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 thresh- old was set to expire after 2020, but Congress permanently extended it under the COVID-19 relief legislation in Decem- ber 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). For more on these provisions, refer to IRS Notice 2019-12, Trea- sury 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) extension of the increased charitable deduc- tion for cash contributions to 100 percent of a taxpayer’s income base for 2021 was not extended for 2022 as of the writing of this article. As such, the limit reverts to 60 percent for cash contributions. Contributions must be made to a 68 JANUARY-FEBRUARY 2023 | THE FOREIGN SERVICE JOURNAL