for a profit of more than $250,000 ($500,000 for MFJ) will owe capital gains tax on the excess. Additionally, capital gain attributed to periods of nonqualified use cannot be excluded under IRC Section 121. AFSA recommends Topic 701, Publication 523, IRC Sec. 121, and related regulations. Military Families Tax Relief Act of 2003 According to the Military Families Tax Relief Act of 2003 (which AFSA was instrumental in enacting), the five-year period to qualify for the exclusion under IRC Section 121 may be suspended for members of the Foreign Service for up to 10 years during which the taxpayer has been on a qualifying Foreign Service assignment. This act also excludes periods of “qualified official extended duty” from nonqualified use treatment. In addition to the recommended reading from the previous section, AFSA recommends IRC Sec. 121(d)(9) and 26 CFR Sec. 1.121-5. Selling a Property That Was Previously Rented— IRC Section 1250 Taxpayers who sell a property that was used as a rental property at any time during the taxpayer’s ownership must reduce the property’s adjusted basis by the mandatory depreciation required during the rental period of the property (even if the taxpayer did not properly claim depreciation deductions) before calculating the final net taxable capital gain from the property sale. The portion of the net capital gain created from the mandatory depreciation (whether or not claimed during the rental period[s]) is taxed as IRC Section 1250 unrecaptured gain and is not eligible for capital gain exclusion under IRC Section 121. The portion of the remaining net capital gain is eligible for exclusion under IRC Section 121 if all requirements are met. Due to the impact of IRC Section 1250 unrecaptured gain rules, taxpayers who sell a property that was previously rented often still have a tax bill due even if they qualify to exclude a portion of their net capital gain under IRC Section 121. AFSA recommends Topic 701, Publication 523, IRC Sec. 1250, and related regulations. Non-Rental Business Use of Home Although most Foreign Service families find themselves in government-funded housing overseas much of the time, some may own property in the United States that they both occupy for personal purposes and use to operate a private business on the side. To qualify for a deduction for business-related expenses for a portion of a residence used for a business, a taxpayer must use a portion of their home exclusively and 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 Related Child and Dependent Credits For all three credits related to children and dependents, qualifying child rules can quickly become complex, especially in the case of divorce or separation. Child Tax Credit. A qualifying child for purposes of 2024 tax returns is one who has not attained age 17 by Dec. 31, 2024. The child tax credit is up to $2,000 for each qualifying child. The qualifying income thresholds to claim the maximum 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 $1,700 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 requirements 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 Publication 972, the instructions for 2024 Schedule 8812, and IRC Sec. 24 for the Child Tax Credit and Other Dependent Credit. Child and Dependent Care Tax Credit. Qualifying taxpayers with a qualifying dependent may be separately eligible for a credit to help pay for 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 fulltime 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. The dollar limits for child and dependent care qualifying expenses for 2024 are $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. To claim this credit for foreign care providers who do not have a U.S. taxpayer identification number (either a Social AFSA NEWS 64 JANUARY-FEBRUARY 2025 | THE FOREIGN SERVICE JOURNAL
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