THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2024 57 Pass-through entities such as S Corporations, LLCs, and sole proprietorships located in the U.S. can claim this deduction if they otherwise qualify. Business income earned outside the United States is not QBI—the income must be earned in a U.S. trade or business to qualify. Although “trade or business” is not specifically defined in the Internal Revenue Code (Code), tax courts have taken a facts and circumstances approach in deciding whether an activity is a trade or business. If a taxpayer is renting out their personal residence while overseas, it is generally not a trade or business for QBID purposes unless the taxpayer’s main source of income and/ or main employment activity is from renting and managing rental real estate. Some trusts and estates may be eligible for the QBID; however, income earned as an employee of a C Corporation does not qualify. The Code specifies that certain trades and businesses, such as law firms, accounting firms, and consulting businesses, do not qualify for the QBID unless the taxpayer’s taxable income is under certain thresholds ($364,200 for MFJ, $182,100 for MFS and all other returns). Other complicated limits and requirements may apply. Federal Estate and Gift Taxes In 2023, the first $12.92 million of a decedent’s aggregate estate (up to $25.84 million for a surviving spouse with a portability election on Form 1041) was exempt from the federal estate tax. The same amounts apply to (and are reduced by) lifetime gift-giving over the annual gift exclusion, which is $17,000 per donee ($34,000 for gifts split by married couples on Form 709) for 2023. Other limits apply to gifts to non-U.S. citizens or gifts between spouses where both spouses are not U.S. citizens. Those who contribute to 529 Education Savings Plans should note that such a contribution is considered a completed gift and is applied to that taxpayer’s annual gift exclusion for the donee. Taxpayers interested in front-loading a 529 plan to maximize their tax-free earnings can select a five-year contribution option allowing them to contribute during one tax year up to the annual gift tax exclusion ($17,000 for 2023) for up to five years ($85,000 maximum for 2023). Taxpayers choosing this five-year option must file a Form 709 Gift Tax Return, selecting the five-year election, and they cannot give additional amounts to the same donee during the tax years in which they have chosen to contribute the $17,000 per year maximum 529 plan contribution. Wage Overpayments Each year, many readers of this article receive an overpayment of wage income that they must repay in a future year. 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 overpaid 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 overpaid 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 deduction permitted for wage repayments of 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 of $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 “Repayments” 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. 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 2023 deduction for unreimbursed medical and dental expenses is possible only to the extent qualifying expenses exceed 7.5 percent of a taxpayer’s AGI. AFSA recommends that members claiming these deductions read IRS Publication 502, Tax Topic 502, and IRC Section 213.
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