The Foreign Service Journal, February 2010

F E B R U A R Y 2 0 1 0 / F O R E I G N S E R V I C E J O U R N A L 57 American Foreign Service Association • February 2010 AFSA NEWS The annual AFSA Tax Guide is designed as an infor- mational and reference tool. Although we try to be accurate, many of the new provisions of the tax code and the implica- tions of Internal Revenue Service regulations have not been fully tested. Therefore, use caution and consult with a tax adviser as soon as possible if you have specific questions or an unusual or complex situation. Foreign Service employees most fre- quently ask AFSA about home ownership, tax liability upon sale of a residence and state of domicile. We have devoted special sections to these issues. James Yorke (yorkej@state.gov) , who compiles the tax guide, would like to thank M. Bruce Hirshorn, Foreign Service tax counsel, for his help in its preparation. Federal Tax Provisions TheMilitary Families Tax Relief Act of 2003 continues to provide a significant benefit for Foreign Service families who sell their homes at a profit, but would have been unable to avail themselves of the capital gains exclusion (up to $250,000 for an individual/$500,000 for a couple) from the sale of a principal residence because they did not meet the Internal Revenue Service’s “two-year occupancy within the five years preceding the date of sale” re- quirement due to postings outside the U.S. In relation to the sale of a principal resi- dence after May 6, 1997, the 2003 law notes that the cal- culation of the five-year pe- riod for measuring owner- ship is suspended during any period that the eligible indi- vidual, or his or her spouse, is serving away from the area on qualified official extended duty as a member of the uniformed serv- ices, the Foreign Service or the intelligence community. The five-year period cannot be ex- tended by more than 10 years. In other words, Foreign Service employees who are overseas on assignment can extend the five-year period up to 15 years, depending on the number of years they are posted away from their home. Note that the pro- vision is retroactive, so that anyone who has already paid the tax on the sale of a residence that would have qualified under the new law may file an amended return to get the benefit of the new rule. There is, however, a three-year statute of limitations on this provision, after which one cannot obtain a refund. For 2009, the six tax rates for individ- uals remain at 10, 15, 25, 28, 33 and 35 percent. The 10-percent rate is for taxable income up to $16,401 for married cou- ples, $8,357 for singles. The 15-percent 2009 TAX GUIDE Federal and State Tax Provisions for the Foreign Service New for 2009 C ongress has extended the first-time homebuyer tax credit and added special pro- visions for members of the uniformed services, members of the Foreign Service and employees of the intelligence community. These groups have an extra year to buy a principal residence in the U.S. and still qualify for the credit. An eligible taxpayer must buy or enter into a binding contract to buy a home by April 30, 2011, and settle on the purchase by June 30, 2011. In addition, these employees are not subject to the recapture provisions if the property ceases to be their principal residence because they have been assigned out of the area on U.S. government orders. Congress has also added a limitation on the $500,000 exclusion of capital gain re- sulting from the sale of a taxpayer’s principal residence. For properties purchased after Jan. 1, 2009, and not initially occupied as a principal residence, taxpayersmust reduce the capital-gain exclusion in proportion to the rental period’s ratio to the residence period. Continued on page 59 JOSH