The Foreign Service Journal, February 2003

6 AFSA NEWS • FEBRUARY 2003 fully deductible for itemizers, as are char- itable contributions (toAmerican charities only) formost taxpayers. Donations to the AFSAScholarshipFundare fullydeductible as charitable contributions. Donations to AFSAvia theCombinedFederalCampaign are also fully deductible. Individuals may also dispose of any profit from the sale of personal property abroad in this manner. For 2002 tax returns, any interest paid on auto or personal loans, credit cards, department stores andotherpersonal inter- estwill not beallowedas an itemizeddeduc- tion. Interest on educational loans will be allowed as an adjustment to gross income. If the above debts are consol- idated, however, andpaidwithahome equity loan, interest on thehome equi- ty loan is allowable. Mortgage interest is, for themost part, still fullydeductible. Interest on loans intended to finance investments is deductible up to the amount of net income from invest- ments. Interest for loans intended to finance a business is 100 percent deductible. Passive-investment interest on loans in which the taxpayer is an inactive participant — i.e., a limited part- nership—can be deducted only fromthe income produced by other “passive income.” Interest on loans that do not fall into the above categories, such as borrow- ingmoney tobuy tax-exempt securities, is not deductible. Home Leave Expenses Employee business expenses, such as home leave and representation, may be deducted as a miscellaneous itemized deduction and claimed on Form 2106. In addition to the 2-percent floor, only50per- cent for meals and entertainment may be claimed (100 percent for unreimbursed travel and lodging). Only the employee’s (not familymembers’) home leave expens- es are deductible. Maintaining a travel log and retaining a copy of home leave orders will be helpful, should the IRS ever ques- tion claimed expenses. It is important to save receipts: without receipts for food, a taxpayermay deduct only $30 to$46 a day (depending upon the per diem rate at the home leave address), nomatter how large the grocery or restaurant bill. Lodging is deductible, as long as it is not with friends, relatives, or in one’s own home. The IRS will disallowuse of per diemrates and any expenses claimed for familymembers. If a hotel bill indicates double rates, the single room rate should be claimed, and, if pos- sible, the hotel’s rate sheet shouldbe saved for IRS scrutiny. Car rental, mileage and otherunreimbursed travel expenses, includ- ing parking fees and tolls, may be deduct- ed. The rate for businessmiles driven is 36.5 cents for miles driven during 2002. Those whouse this optionalmileagemethodneed not keep detailed records of actual vehicle expenses. The only thing necessary will be a detailedodometer log to justify the busi- ness use of the vehicle and percentage of business use. From 1998, this optional mileagemethod applies to leased vehicles. Official Residence Expenses Since Oct. 1, 1990, employees who receive official residence expenses have not been allowed to reduce their reportable incomeby5percent. The IRS ruling regard- ing ORE states that “usual expenses,” defined as 5 percent of salary, are not deductible. Therefore theonly expenses that are deductible are those above the 5 per- cent paidout of pocket. Employees should save receipts for anyout-of-pocket expens- es associated with their representational duties. These expenses can be deducted as miscellaneous business expenses. Home Ownership Employees may deduct interest on up to $1 million of acquisition debt for loans securedby a first and/or secondhome. This also includes loans taken out for major home improvements. On home equity loans, interest is deductible on up to $100,000, nomatter howmuch the home cost or what the loan is used for. The $100,000 ceiling applies to the total of all home equity loans youmayhave. The same generally applies to refinancing a mort- gage. Points paid to obtain a refinanced loan cannot fully be deducted the same year, but must be deducted over the life of the loan. It is advisable to save the set- tlement sheet (HUD-1 Form) for docu- mentation in the event your tax return is selected by the IRS for audit. Qualified residences are defined as the taxpayer’s principal residence and one other residence. The second home can be a house, condo, co-op, mobile home or boat, as long as the structure includes basic living accom- modations, including sleeping, bath- room, and cooking facilities. If the sec- ond home is a vacation property that you rent out for fewer than 15 days during the year, the income need not be reported. Rental expenses cannot be claimed either, but all property taxes and mortgage interest may be deducted. Rental of Home Taxpayers who are overseas and rent- ed their homes in 2002 can continue to deduct mortgage interest as a rental expense. Also deductible are property management fees, condo fees, deprecia- tion costs, taxes, and all other rental expenses. Losses up to $25,000may be off- set against other income, as long as the AGI does not exceed $100,000 and the tax- payer is actively managing the property. Retaining a property manager does not mean losing this benefit. Sale of a Principal Residence The current capital-gains exclusion on the sale of a principal residence on or after May 7, 1997, applies to all homeowners, regardless of their age. Previously, qualified individuals whowere age 55 or older were allowed a one-time capital-gains exclusion of $125,000.Also, underprevious law, if you had a gainwhen you sold your home, you