The Foreign Service Journal, February 2003

8 AFSA NEWS • FEBRUARY 2003 Calculating Your Adjusted Basis Many Foreign Service employees ask what items can be added to the cost basis of their homes when they are ready to sell. Money spent on “fixing up” the home for salemay be deducted from the sales price. To qualify as legitimate “fixing-up costs,” the following conditions must be met: 1) the expenses must be for work performed during the 90-day period ending on the day on which the contract to sell the old residence wasmade; 2) the expensesmust be paid on or before the 30th day after sale of the house; and 3) the expenses must not be capital expenditures for per- manent improvements or replacements (these can be added to the basis of the property, original purchase price, there- by reducing the amount of profit). A new roof and kitchen counters are not “fix- up” items. But painting the house, cleaning up the garden, and making minor repairs all qualify as “fixing-up costs.” State Tax Provisions Every active Foreign Service employ- ee serving abroad must maintain a state of domicile in the United States, and the tax liability that the employee faces varies greatly from state to state. In addition, there are numerous regulations con- cerning the taxability of Foreign Service pensions and annuities, as each state has its own rules about the conditions under which individuals are liable for taxes on such income. The following state guide briefly reviews the laws regarding income tax and tax on annuities and pensions as they affect Foreign Service personnel. Please note that while AFSA makes every attempt to provide the most up-to-date information, readers with specific ques- tions should consult a tax expert in the state in question at the addresses given. Information is also available on the states’ Web sites listed below. Most Foreign Service employees have questions about their liability to pay state income taxes during periods posted over- seas or assigned to Washington. It is a fundamental rule of law that all U.S. cit- izens must have a domicile somewhere. There are many criteria used in deter- mining which state is a citizen’s domi- cile. One of the strongest determinants is prolonged physical presence, a standard that Foreign Service personnel fre- quently cannot meet, due to overseas ser- vice. In such cases, the states will make a determination of the individual’s income tax status based on other factors, includ- ing where the individual has family ties, where he or she has been filing resident tax returns, where he or she is registered to vote or has a driver’s license, where he or she owns property, or where the per- son has bank accounts or other financial holdings. In the case of Foreign Service employees, the domicile might be the state from which the person joined the Service, where his or her home leave address is, or where he or she intends to return upon separation. For purposes of this article, the term domicile refers to legal residence; some states also define it as permanent residence. Residence refers to physical presence in the state. Foreign Service personnel must con- tinue to pay taxes to the state of domi- cile (or to the District of Columbia) while residing outside of the state, including during assignments abroad, unless the state of residence does not require it. A non-resident, according to most states’ definitions, is an individual who earns income sourced within the specif- ic state but does not live there or is liv- ing there for only part of the year (usu- ally, less than sixmonths). Individuals are generally considered residents and are thus fully liable for taxes, if they are domi- ciled in the state or if they are living in the state (usually at least six months of the year) but are not domiciled there. Foreign Service employees residing in the metropolitan Washington area are required to pay income tax to the District, Maryland or Virginia in addi- tion to paying tax to the state of their domicile. However, most states allow a credit, so that the taxpayer pays the high- er tax rate of the two states, with each state receiving a share. There are currently seven states with no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washing- ton and Wyoming. In addition, New Hampshire and Tennessee have no tax on personal income but do tax profits from the sale of bonds and property. There are also six states which, under certain conditions, do not tax income earnedwhile the taxpayer is outside of the state: Connecticut, Missouri, New Jersey, New York, Pennsylvania and West Virginia. The requirements are that the individual not have a permanent “place of abode” in the state, have a permanent “place of abode” outside the state, and not spendmore than 30 days in the state dur- ing the tax year. Also, please note that these six states require the filing of non- resident returns for all income earned from in-state sources. Pennsylvania holds that “quarters pro- vided by the government at no cost to petitioner cannot be considered as main- taining a permanent place of abode.” Thus, members of the Foreign Service domiciled in Pennsylvania who occupy government housing overseas must pay income tax to Pennsylvania. If they rent their own home overseas, however, they will be exempt fromthese taxes. AFSAhas not heard of a similar ruling in any of the other five states but Foreign Service employees should be aware that states could challenge the status of government housing in the future. California, Oregon and Minnesota also have rules excusing their domiciliaries from filing a resident tax return while living outside the state. The following list gives a state-by-state overview of the latest information avail- able on tax liability, with addresses pro- vided to write for further information or tax forms. Tax rates are provided where possible. For further information, please contact AFSA’s Labor/Management Office or the individual state tax author- ities. As always, members are advised to double-check with states’ tax authorities. James Yorke, who compiled the tax guide, would like to thank M. Bruce Hirshorn, Foreign Service Tax Counsel, for his help in preparing this article.