The Foreign Service Journal, February 2005

A FSA’s annual Tax Guide is designed as an informational and reference tool. Althoughwe try to be accurate,many of the newprovisions of the tax code and IRS implementing regulations have not been fully tested. Therefore, use cautionandconsultwith a tax adviser as soon as possible if you have specific questions or an unusual or complex situation. FEDERAL TAX PROVISIONS TheMilitary Families Tax Relief Act of 2003continues toprovide a significant ben- efit forForeignService familieswhosell their homes at a profit, but would have been unable to avail themselves of the capital gains exclusion (up to$250,000 for an indi- vidual/$500,000 for a couple) fromthe sale of aprincipal residencebecause theydidnot meet the IRS “two-year occupancy within the five years preceding the date of sale” requirement due to postings outside the U.S. Under the new law, in relation to the sale of a principal residence after May 6, 1997, the calculationof the five- year period formeasuringown- ership is suspendedduring any period that the eligible individ- ual or his/her spouse is serving on qualified official extended duty as a member of the uni- formed services or the Foreign Service. The five-year period cannot be extended by more than 10 years. In other words, Foreign Service employeeswhoareoverseas onassignment can extend the five-year period to 15 years, dependingon thenumber of years they are posted away from their home. Note that the provision is retroactive, so that anyone who has already paid the tax on the sale of a residence thatwouldhavequalifiedunder the new law may file an amended return to get the benefit of the new rule. There is, however, a three-year statute of limita- tions, after which one cannot obtain a refund. Foreign Service employees most fre- quently askAFSAabout home ownership, tax liability upon sale of a residence, and state of domicile. We have devoted special sections to these issues. For 2004, the fivebasic tax rates for indi- viduals remain at 10, 15, 25, 28 and33per- cent, with a top rate of 35percent. The 10- percent rate is for taxable income up to $14,301 formarriedcouples, $7,151 for sin- gles. The 15-percent rate is for income up to $58,101 for married cou- ples, $29,051 for singles. The 25-percent rate is for income up to $117,251 for married couples, $70,351 for singles. The 28-percent rate is for income up to $178,651 for married couples and income up to $146,751 for singles. The 33-percent rate is for income up to $319,101 for married couples and singles. Long-term capital gains are taxed at a maximum rate of 15percent andare reportedonSchedule D. This rate is effective for all sales in2004, except for those peoplewho fall within the 10- or 15-percent tax bracket: their rate is 5percent. Long-termcapital 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 is $3,100. There is, however, a personal exemption phaseout of 2 percent for each $2,500 of adjustedgross income (AGI) over $142,700 (singles), $178,350 (head of household), $214,050 (joint) and$107,025 (married, fil- ing separately). For those taxpayers in the last category, the phaseout is 2 percent for each $1,250 of adjusted gross income over $107,025. 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. American Foreign Service Association • February 2005 AFSA NEWS JOSH AFSA 2004 TAX GUIDE Federal and State Tax Provisions for the Foreign Service