The Foreign Service Journal, February 2003

Federal Tax Provisions Under theTaxAct of 2001, thereare sev- eral tax relief segments that may apply to Foreign Service employees and their fam- ilies. Foreign Service employees most fre- quently askAFSAabout home ownership, tax liability upon sale of a residence, and state of domicile. We have devoted spe- cial sections to these issues. AFSA’s annual Tax Guide is designed as an informational and reference tool. It doesnot presume tobe anymore than that. Although we try to be accurate, many of the new provisions of the tax code and implementing IRS regulations have not been fully tested. Therefore, use cautionand consult with a tax adviser as soon as pos- sible if you have specific questions or an unusual or complex situation. For 2002, the fivebasic tax rates for indi- viduals are slightly lower: 10, 15, 27, 30 and 35 percent, and a top rate of 38.6 percent. The 10-percent rate is for taxable income up to $12,000 formarried couples, $6,000 for singles.The15-percent rate is for income up to$46,700 formarried couples, $27,970 for singles.The27-percent rate is for income up to $112,850 for married couples, $67,700 for singles. The 30-percent rate is for incomeup to$171,950 formarriedcou- ples and incomeup to$141,250 for singles. The 35-percent rate is for income up to $307,050 for married couples and singles. Inaddition, there is a 10-percent surtax for certain high-income taxpayers. It is com- puted by applying the 38.6-percent rate to taxable income over $307,050 for singles andmarried couples and formarried cou- ples filing separatelywhose income is over $153,525. Long-termcapital gains are taxed at a maximum rate of 20 percent and are reported on ScheduleD. This rate is effec- tive for all sales in2002, unless you fallwith- in the 10-percent bracket, when the rate becomes 8percent for assetsheldmore than five years but remains 10percent for assets held less than five years. Long-term capi- tal gain is defined as gain from the sale of property held for 12 months or more. Personal Exemption For each taxpayer, spouse, and depen- dent the personal exemption has been increased to $3,000. There is, however, a personal exemptionphaseout of 2 percent for each $2,500 of adjusted gross income (AGI) over $137,300 (singles), $171,650 (headof household), $206,000 (joint) and $103,000 (married, filing separately). For those taxpayers in the last category, the phaseout is 2 percent for each $1,250 of adjusted gross income over $103,000. Extension for Taxpayers Abroad Taxpayerswhose taxhome isoutside the U.S. on April 15 get an automatic exten- sionuntil June15 to file their returns. When filing the return, these taxpayers should write “Taxpayer Abroad” on the first page and attach a statement of explanation. There are no late filing or late payment penalties for returns filed by June 15, but the IRSwill charge interest on any amount owed from April 15 until the date they receive payment. Standard Deduction The standarddeduction is given tonon- itemizers. It has been steadily increasing since 1987. For couples it is $7,850; for sin- gles the deduction is $4,700.Married cou- ples filing separately get a standarddeduc- tion of $3,925 and head-of-household fil- ers receive a $6,900 deduction. An addi- tional amount is allowed for taxpayers over age 65 or blind. Most unreimbursedemployee business expensesmust be reportedasmiscellaneous itemized deductions, which are subject to a deduction of 2 percent of adjusted gross income (AGI). This includes professional dues and publications, employment and educational expenses, home office, legal, accounting, custodial and tax preparation fees, home leave, representational andother employee business expenses, and contri- butions toAFSA’s LegislativeActionFund. Unreimbursed moving expenses are no longer an itemized deduction. As of Jan. 1, 1994, moving expenses are anadjustment to income, which means that you get to deduct them even if you are tak- ing the standarddeduction. However, the deduction has been narrowed to include only the unreim- bursed costs of moving your possessions and yourself and your family to your new location. Medical expenses (including health insurance) are subject toadeductionequal- ing 7.5 percent of adjusted gross income. Thismeans that anydeductiblemedical cost would have to exceed $2,250 for a taxpay- erwitha$30,000AGI. There is alsoanaddi- tional 3-percent reduction of itemized deductions (excluding medical, casualty, theft and investment interest) if the AGI exceeds $137,300. This 3percent is applied to the AGI over $137,300 and not to the total of itemized deductions on Schedule A. The maximum loss of deductions is capped at 80 percent. State and local income taxes and real estate and personal property taxes remain FEBRUARY 2003 • AFSA NEWS 5 AFSA 2002 TAX GUIDE Federal and State Tax Provisions for the Foreign Service JOSH