The Foreign Service Journal, February 2004

4 AFSA NEWS • FEBRUARY 2004 deduction. An additional amount is allowed for taxpayers over age 65 or blind. Most unreimbursedemployeebusiness expensesmust be reportedasmiscellaneous itemized deductions, which are subject to a threshold of 2 percent of adjusted gross income. Thisincludesprofessionalduesand publications, employment and education- al expenses, home office, legal, accounting, custodial and tax preparation fees, home leave, representational and other employ- ee business expenses, and contributions to AFSA’s Legislative Action Fund. Unreim- bursed moving expenses are no longer an itemizeddeduction. SinceJan.1,1994,mov- ing expenses have been an adjustment to income,whichmeansthatyougettodeduct them even if you are taking the standard deduction. However, the deduction has been narrowed to include only the unre- imbursedcosts ofmovingyourpossessions and yourself and your family to the new location. Medical expenses (including health andlong-termcareinsurance,butnothealth insurance premiums deducted from gov- ernment salaries) are subject toadeduction equaling 7.5 percent of adjusted gross income. Thismeans that tobe deductible, the medical cost would have to exceed $2,250 for a taxpayer with a $30,000 AGI. There is also an additional 3-percent reductionof itemizeddeductions (exclud- ingmedical, casualty, theft, and investment interest) if theAGI exceeds $139,500. This 3percentisappliedtotheAGIover$139,500 andnot to the total of itemizeddeductions 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 fully deductible for itemizers, as are chari- table contributions (to American charities only) formost taxpayers. Donations to the AFSAscholarship fundare 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 2003 tax returns, any interest paid on auto or personal loans, credit cards, department stores and other personal interest will not be allowed as itemized deductions. Interest on educational loans will be allowed as an adjustment to gross income. If the above debts are consolidat- ed, however, and paid with a home equity loan, interest on the home equity loan is allowable. Mortgage interest is, for themost part, still fullydeductible. Interest on loans intendedtofinanceinvestmentsisdeductible up to the amount of net income from investments. Interest on loans intended to financeabusiness is100-percentdeductible. Passive-investment interest on loans in which the taxpayer is an inactiveparticipant (i.e. a limited partnership) can be deduct- edonly fromthe incomeproducedbyother “passive income.” Interest on loans that do notfallintotheabovecategories,suchasbor- rowing money to buy tax-exempt securi- ties, is not deductible. Home Leave Expenses Employee business expenses, such as home leave andrepresentation,maybe list- edasmiscellaneousitemizeddeductionsand claimed on Form2106. In addition to the 2-percent floor, only 50 percent for meals andentertainmentmaybeclaimed(100per- cent for unreimbursed travel and lodging). Only theemployee’s (not familymembers’) home leave expenses are deductible. Maintainingatravellogandretainingacopy of home leaveorderswill behelpful, should the IRS ever question claimed expenses. It is important to save receipts: without receiptsforfood,ataxpayermaydeductonly $35 to $45 a day (depending upon the per diem rate at the home leave address), no matter 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. TheIRSwilldisallowuseofperdiem rates and any expenses claimed for family members. If a hotel bill indicates double rates,thesingleroomrateshouldbeclaimed, and, if possible, thehotel’s rate sheet should be saved for IRS scrutiny. Car rental, mileage, and other unreimbursed travel expenses, including parking fees and tolls, may be deducted. The rate for business miles driven is 36.5 cents for miles driven during 2003. Those who use this option- al mileage method need not keep detailed recordsofactualvehicleexpenses. However, they should keep a detailed odometer log to justify thebusiness useof the vehicle and track thepercentageof business use. From 1998, this optionalmileagemethodapplies to leased vehicles. Official Residence Expenses Since Oct. 1, 1990, employees who receive official residence expenses (ORE) have not been allowed to reduce their reportable income by 5 percent. The IRS ruling regarding ORE states that “usual expenses,”definedas 5percent of salary, are not deductible. Therefore theonly expens- es that are deductible are those above the 5 percent paid out of pocket. Employees should save receipts for any out-of-pocket expenses associated with their representa- tionalduties. Theseexpensescanbededuct- ed as miscellaneous business expenses. Home Ownership Employees may deduct interest on up to $1million of acquisition debt for loans secured by a first and/or second home. This also includes loans takenout formajor home improvements. On home equity loans, interest is deductible on up to $100,000, nomatter howmuch the home cost, unless the loan is used for home improvements. The $100,000 ceiling applies to the total of all home equity loans youmay have. The same generally applies to refinancing amortgage. Points paid to obtain a refinanced loan cannot be fully deducted the same year, but must be deducted over the life of the loan. It is advisable to save the settlement sheet (HUD-1 Form) for documentation in the event your tax return is selectedby 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 accommodations, including sleeping, bathroom, and cooking facili- ties. If the second 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