The Foreign Service Journal, February 2009

44 F O R E I G N S E R V I C E J O U R N A L / F E B R U A R Y 2 0 0 9 Extension for Taxpayers Abroad Taxpayers whose tax home is outside the U.S. on April 15 are entitled to an au- tomatic extension until June 15 to file their returns. When filing the return, these tax- payers should write “Taxpayer Abroad” at the top of the first page and attach a state- ment of explanation. There are no late fil- ing or late payment penalties for returns filed and taxes paid by June 15, but the IRS does charge interest on any amount owed fromApril 15 until the date it receives pay- ment. Standard Deduction The standard deduction is given to non-itemizers. For couples, the deduction is now $10,900 and for singles, $5,450. Married couples filing separately get a standard deduction of $5,450 and head-of- household filers receive an $8,000 deduc- tion. An additional amount is allowed for taxpayers over age 65 and for those who are blind. Most unreimbursed employee business expenses must be reported as miscella- neous itemized deductions, which are sub- ject to a threshold of 2 percent of Adjusted Gross Income. These include professional dues and subscriptions to publications; employment and educational expenses; home office, legal, accounting, custodial and tax preparation fees; home leave, rep- resentational and other employee business expenses; and contributions toAFSA’s Leg- islativeAction Fund. Unreimbursedmov- ing expenses are an adjustment to income, which means that you may deduct them even if you are taking the standard deduc- tion. However, the deduction includes only the unreimbursed costs of moving your possessions and yourself and your family to the new location. Medical expenses (including health and 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. This means that to be 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 re- duction of itemized deductions (excluding Schedule A deductions for medical ex- penses, losses from casualties and theft, and investment-interest losses) if the AGI exceeds $159,950. Note that this 3 percent is applied to the AGI over $159,950 and not to the total of itemized deductions on Schedule A. The maximum loss for de- ductions 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 U.S.-based charities for most taxpayers. Donations to the AFSA Scholarship Fund are fully de- ductible as charitable contributions, as are donations toAFSA via the Combined Fed- eral Campaign. Individuals may also dis- pose of any profit from the sale of personal property abroad in this manner. For 2008 tax returns, any interest paid on auto or personal loans, credit cards, de- partment stores and other personal inter- est will not be allowed as itemized de- ductions. If such debts are consolidated, however, and paid with a home equity loan, interest on the home equity loan is allowable. Interest on educational loans will be allowed as an adjustment to gross income. Mortgage interest is still, for the most part, fully deductible. Interest on loans intended to finance investments is deductible up to the amount of net income from investments. Interest on loans in- tended to finance a business is 100-percent deductible. Passive-investment interest on investments inwhich the taxpayer is an in- active participant (i.e., a limited partnership) can be deducted only from the in- come produced by other “passive income.” Interest on loans that do not fall into the above categories, such as money borrowed to buy tax-exempt securities, is not deductible. Home Leave Expenses Employee business ex- penses, such as home leave and representation, may be listed as miscellaneous itemized deductions and claimed on Form 2106. In addition to the 2-percent floor, only 50 percent for meals and entertainment may be claimed (100 percent for unreimbursed travel and lodg- ing). Only the employee’s (not family members’) home leave expenses are de- ductible. AFSA recommends maintaining a travel log and retaining a copy of home leave orders, which will help if the IRS ever questions claimed expenses. It is important to save receipts: without receipts for food, a taxpayer may deduct only $39 to $64 a day (depending upon the federal meals-and-incidentals 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 or relatives, or in one’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 should be saved for IRS scrutiny. Car rental, mileage and other unreim- bursed travel expenses, including parking fees and tolls, may be deducted. The rate for business miles driven is 50.5 cents per mile for the first half of 2008, and 58.5 cents for the second half. Those who use this optional mileage method need not keep detailed records of actual vehicle ex- penses. However, they must keep a de- tailed odometer log to justify the business use of the vehicle and track the percentage of business use. This optional mileage method applies to leased vehicles as well. Official Residence Expenses Since Oct. 1, 1990, em- ployees who receive official residence expenses have not been allowed to reduce their reportable income by 3.5 percent. The IRS ruling re- garding ORE states that “usual expenses,”defined as 3.5 percent of salary, are not deductible. Therefore the only expenses that are de- ductible are those above the 3.5 percent paid out of pocket. Employees should save receipts for any out-of- pocket expenses associated with their representational duties. These expenses can be deducted as miscellaneous business expenses. Home Ownership Individuals may deduct interest on up to $1 million of acquisition debt for loans A F S A N E W S JOSH