The Foreign Service Journal, February 2004

FEBRUARY 2004 • AFSA NEWS 3 AFSA’sTaxGuide is designedas an infor- mational and reference tool. Althoughwe try to be accurate,many of the newprovisions of the tax code and IRS implementing regula- tions havenot been fully tested. Therefore, use cautionand consultwitha taxadviser as soon as possible if youhave specific questions or an unusual or complex situation. FEDERAL TAX PROVISIONS TheMilitary Families Tax Relief Act of 2003 was signed by the president on Nov. 11, 2003. The new law provides a signifi- cantbenefit forForeignService familieswho sell their homes at a profit, but have been unabletoavailthemselvesofthecapitalgains exclusion (up to $250,000 for an individ- ual/$500,000 for a couple) fromthe sale of a principal residence because they did not meet the IRS “two-year occupancy within the five years preceding the date of sale” requirementduetopostingsoutsidetheU.S. Under the new law, in relation to the sale of a principal residence after May 6, 1997, the calculation of the five-year period for measuringownership is suspendedduring any period that the eligible individual or his/her spouse is serving on qualified offi- cial extendedduty as amember of theuni- formed services or the Foreign Service. The five-year period cannot be extend- ed bymore than 10 years. In other words, ForeignServiceemployeeswhoareoverseas onassignment canextend the fiveyearperi- od to 15 years, depending on the number of years they are posted away from their home. Note that the provision is retroac- tive, so that anyone who has already paid the taxon the saleof a residence thatwould have qualified under the new lawmay file anamended return toget thebenefit of the newrule. There is aone-yearwindow(end- ing Nov. 11, 2004) to file an amended tax return. Foreign Service employees most fre- quently askAFSAabout home ownership, taxliabilityuponsaleofaresidence,andstate of domicile. We have devoted special sec- tions to these issues. For 2003, the fivebasic tax rates for indi- viduals are slightly lower at 10, 15, 25, 28 and 33 percent, with a top rate of 35 per- cent. The 10-percent rate is for taxable incomeup to$14,000 formarriedcouples, $7,000 for singles. The 15-percent rate is for incomeup to$56,800 formarriedcou- ples, $28,400 for singles. The 25-percent rate is for income up to $114,650 formar- ried couples, $68,800 for singles. The 28- percent rate is for income up to $174,700 for married couples and income up to $143,500 for singles. The 33-percent rate is for income up to $311,900 for married couples and singles. In addition, there is a 10-percent surtax for certain high-income taxpayers. It is computed by applying the 35-percent rate to taxable income over $311,950 for singles and married couples and for married couples filing separately whose income isover$155,975. Long-term capital gains are taxed at a maximum rate of 20 percent if sold by May 6, 2003, and 15 percent if sold after that date and are reported on ScheduleD. This rate is effec- tiveforallsalesin2003,exceptforthosepeo- plewho fallwithin the10-or 15-percent tax bracket: their rate is 5 percent. Long-term capital gain is defined as gain fromthe 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 $3,050. There is, however, a personal exemption phaseout of 2 percent for each $2,500 of adjusted gross income (AGI) over $139,500 (singles), $174,4000 (head of household), $209,250 (joint) and $104,625 (married, filing separately). For those taxpayers in the last category, the phaseout is 2 percent for each $1,250 of adjustedgross incomeover $104,625. Extension for Taxpayers Abroad Taxpayers whose tax home isoutside theU.S. on April 15 get an automatic extension until June 15 to file their returns. When fil- ing the return, these taxpayers shouldwrite “Taxpayer Abroad” on the first page and attacha statementof explanation. Thereare no late filing or late payment penalties for returns filed by June 15, but the IRS will charge interest on any amount owed from April 15until thedate they receivepayment. Standard Deduction The standarddeduction is giventonon- itemizers. It has been steadily increasing since 1987, but there has been a big jump formarried couples filing jointly. For cou- plesthedeductionisnow$9,500andforsin- gles, $4,750. Married couples filing sepa- ratelygetastandarddeductionof$4,750and head-of-household filers receive a $7,000 AFSA 2003 TAX GUIDE Federal and State Tax Provisions for the Foreign Service JOSH