The Foreign Service Journal, February 2008

The annual AFSA Tax Guide isdesignedas an informa- tional and reference tool. Although we try to be accurate, manyofthenewprovisionsofthe tax code and IRS implementing regulations have not been fully tested. Therefore, use caution and consultwitha taxadviser as soon as possible if you have spe- cific questions or an unusual or complex sit- uation. Federal Tax Provisions TheMilitary Families Tax Relief Act of 2003continues toprovidea significant ben- efit forForeignService familieswhosell their homes at a profit, but would 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 Internal Revenue Service’s “two- year occupancy within the five years pre- ceding thedateof sale” requirement due to postings outside theU.S. In relation to the sale of a principal residence after May 6, 1997, the 2003 law notes that the calcula- tion of the five-year period for measuring ownership is suspendedduring anyperiod that the eligible individual 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 extend- ed by more than 10 years. In other words, Foreign Service employeeswhoareoverseason assignment can extend the five-yearperiodup to15years, depending on the number of years they are posted away fromtheirhome. Notethatthe provision is retroactive, 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 new rule. There is, however, a three-year statute of limitations, after which one can- not obtain a refund. Foreign Service employees most fre- quently askAFSAabout home ownership, tax liabilityuponsaleof a residenceandstate of domicile. We have devoted special sec- tions to these issues. For 2007, the fivebasic tax rates for indi- viduals remainat 10, 15, 25, 28 and33per- cent, witha top rate of 35percent. The 10- percent rate is for taxable income up to $15,650 formarriedcouples, $7,825 for sin- gles. The 15-percent rate is for income up to$63,700 formarriedcouples, $31,850 for singles. The 25-percent rate is for income up to $128,500 for married couples, $77,100 for singles. The 28-percent rate is for incomeupto$195,850 formarriedcou- ples and incomeup to$160,850 for singles. The 33-percent rate is for income up to $349,701 for married couples and singles. Long-term capital gains are taxed at a maximumrateof15percentandarereport- ed on ScheduleD. This rate is effective for all sales in2007, except for thosepeoplewho fall within the 10- or 15-percent tax brack- et: their rate is 5 percent. Personal Exemption For each taxpayer, spouse and depen- dent, the personal exemption has been increased to $3,400. There is, however, a personal exemptionphase-out of 2percent for each $2,500 of AdjustedGross Income over $156,400 (joint, singles and head of household)and$78,200(married,filingsep- arately). For those taxpayers in the last cat- egory, the phase-out is 2 percent for each $1,250 of Adjusted Gross Income over $78,200. Foreign Earned Income Exclusion Many Foreign Service spouses and dependentswork in theprivate sectorover- seas and thus are eligible for the Foreign Earned Income Exclusion. American cit- izens andresidents livingandworkingover- seas are eligible for the income exclusion, unless they are employees of the United Statesgovernment. The first $85,700earned overseas as anemployeeor as self-employed may be exempt from income taxes. Note:Themethodfor calculating the tax onnon-excluded income intaxreturns that include both excluded and non-excluded income was changed, beginning in 2006, American Foreign Service Association • February 2008 AFSA NEWS F E B R U A R Y 2 0 0 8 / F OR E I GN S E R V I C E J OU R N A L 45 2007 TAX GUIDE Federal and State Tax Provisions for the Foreign Service