The Foreign Service Journal, February 2007

58 F OR E I GN S E R V I C E J OU R N A L / F E B R U A R Y 2 0 0 7 nation. There are no late filing or late pay- ment penalties for returns filedby June 15, but the IRS will charge interest on any amount owed fromApril 15until the date it receives payment. Standard Deduction The standarddeduction is given tonon- itemizers. For couples, thededuction isnow $10,300 and for singles, $5,150. Married couples filing separately get a standard deductionof $5,150andhead-of-household filers receive a $7,550deduction. An addi- tional amount is allowed for taxpayers over age 65 or blind. Most unreimbursedemployee business expensesmust be reportedasmiscellaneous itemized deductions, which are subject to a thresholdof 2 percent of AdjustedGross Income. This includes professional dues andpublications, employment and educa- tional expenses, homeoffice, legal, account- ing, custodial and tax preparation fees, home leave, representational and other employeebusiness expenses, andcontribu- tions to AFSA’s Legislative Action Fund. Unreimbursed moving expenses are an adjustment to income, which means that youget todeduct themeven if you are tak- ing the standarddeduction. However, the deduction includes only the unreim- bursed costs of moving your possessions and yourself and your family to the new location. Medical expenses (includinghealthand long-term care insurance, but not health insurance premiums deducted from gov- ernment salaries) are subject to a thresh- old of 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- ing Schedule A deductions for medical expenses, losses from casualties and theft, and investment-interest losses) if the AGI exceeds $150,500. Note that this 3percent is applied to theAGI over $150,500andnot to the total of itemized deductions on ScheduleA. Themaximumloss for deduc- tions is capped at 80 percent. State and local income taxes and real estate and personal property taxes remain fully deductible for itemizers, as are char- itable contributions toU.S.-based charities formost taxpayers. Donations to theAFSA Scholarship Fund are fully deductible 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 2006 tax returns, any interest paid on auto or personal loans, credit cards, department stores andotherpersonal inter- est will not be allowed as itemized deduc- tions. Interest on educational loanswill be allowed as an adjustment to gross income. If the above debts are consolidated, how- ever, and paid with a home equity loan, interest on the home equity loan is allow- able. Mortgage interest is still, for themost part, fully deductible. Interest on loans intended to finance investments is deduc- tible up to the amount of net income from investments. Interest on loans intended to finance abusiness is 100-percent deductible. Passive-investment interest on loans in which the taxpayer is an inactiveparticipant (i.e., a limitedpartnership) canbe deduct- edonly fromthe incomeproducedbyother “passive income.” Interest on loans that do not fall into the above categories, such as borrowing money to buy tax-exempt securities, is not deductible. Home Leave Expenses Employee business expenses, such as home leave and representation,maybe list- ed as miscellaneous itemized deductions and claimed on Form 2106. In addition to the 2-percent floor, only 50 percent formeals and entertain- mentmay be claimed (100 per- cent forunreimbursed travel and lodging). Only the employee’s (not family members’) home leave expenses are deductible. AFSArecommendsmaintaining a travel log and retaining a copy of home leave orders, whichwill help if the IRS ever questions claimed expenses. It is impor- tant to save receipts: without receipts for food, a taxpayermay deduct only $39 to $64-a-day (depending upon the federalmeals-and-incidentalsper- diem rate at the home leave address), no matter how large the grocery or restaurant bill. Lodging is deductible, as long as it is notwith friends or relatives, or inone’s own home. The IRS will disallow use of per- diem rates and any expenses claimed for family members. If a hotel bill indicates double rates, the single-room rate should be claimed; and, if possible, the hotel’s rate sheet shouldbe saved for IRS scrutiny. Car rental, mileage and other unreimbursed travel expenses, including parking fees and tolls, may be deducted. The rate for busi- ness miles driven is 44.5 cents per mile. Those who use this optional mileage method need not keep detailed records of actual vehicle expenses. However, they must keep a detailed odometer log to jus- tify the business useof the vehicle and track thepercentageof businessuse. Thisoption- al mileage method applies to leased vehi- cles as well. Official Residence Expenses Since Oct. 1, 1990, employees who receive official residence expenses have not been allowed to reduce their reportable income by 3.5 percent. The IRS ruling regarding ORE states that “usual expens- es,” defined as 3.5percent of salary, are not deductible. Therefore theonlyexpenses that are deductible are those above the 3.5 per- cent paidout of pocket. Employees should save receipts for anyout-of-pocket expens- es associated with their representational duties. These expenses canbe deducted as miscellaneous business expenses. Home Ownership Individuals may de- duct interest on up to $1 million of acquisition debt for loans securedby 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, no mat- ter howmuch the home A F S A N E W S JOSH