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 59 rate is for income up to $67,901 for mar- ried couples, $33,951 for singles. The 25- percent rate is for income up to $137,051 for married couples, $82,251 for singles. The 28-percent rate is for income up to $208,851 for married couples and up to $171,551 for singles. The 33-percent rate is for income up to $372,951 for married couples and singles. Annual income above $372,951 is taxed at 35 percent. Long-term capital gains are taxed at a maximum rate of 15 percent and are re- ported on Schedule D. This rate is effec- tive for all sales in 2009, except for those people who fall within the 10- or 15-per- cent tax bracket: their rate is either 0 or 5 percent. Long-term capital gain is de- fined as gain from the sale of property held for 12 months or more. Personal Exemption For each taxpayer, spouse and depend- ent the personal exemption has been in- creased to $3,650. There is, however, a personal exemption phase-out of 2 per- cent for each $2,500 of AdjustedGross In- come over $250,200 (married, filing jointly) or $166,800 (single). For those taxpayers who file under the category “married filing separately,” the phase-out is 2 percent for each $1,250 of Adjusted Gross Income over $125,100. Foreign Earned Income Exclusion Many Foreign Service spouses and de- pendents work in the private sector over- seas and thus are eligible for the Foreign Earned Income Exclusion. American cit- izens and residents living and working overseas are eligible for the income exclu- sion, unless they are employees of the United States government. The first $91,400 earned overseas as an employee or as self-employed may be exempt from income taxes. To receive the exemption, the taxpayer must meet one of two tests: 1) the Physi- cal Presence Test, which requires that the taxpayer be present in a foreign country for at least 330 full (12 midnight to 12 midnight) days during any 12-month pe- riod (the periodmay be different from the tax year); or 2) the Bona Fide Residence Test, which requires that the taxpayer has been a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. Most Foreign Service spouses and dependents qualify under the bona fide residence test, but they must wait until they have been over- seas for a full calendar year before claim- ing it. Keep in mind that self-employed taxpayers must still pay self-employment (Social Security and Medicare) tax on their income. Only the income tax is ex- cluded. Note: The method for calculating the tax on non-excluded income in tax re- turns that include both excluded and non- excluded income was changed, beginning in 2006, so as to result in higher tax on the non-excluded portion. (See the box on page 60 for a full explanation.) 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 taxpayers should write “Taxpayer Abroad”at the top of the first page and at- tach a statement of explanation. There are no late filing 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 payment. Standard Deduction The standard deduction is given to non-itemizers. For couples, the deduction is now $11,400 and for singles, $5,700. Married couples filing separately get a standard deduction of $5,700 and head- of-household filers receive an $8,350 de- duction. An additional amount is allowed for taxpayers over age 65 and for those who are blind. Most unreimbursed employee busi- ness expenses must be reported as miscel- laneous itemized deductions, which are subject to a threshold of 2 percent of Ad- justed Gross Income. These include pro- fessional dues and subscriptions to publications; employment and educa- tional expenses; home office, legal, ac- counting, custodial and tax preparation fees; home leave, representational and other employee business expenses; and contributions toAFSA’s LegislativeAction Fund. Unreimbursed moving expenses are an adjustment to income, which means that you may deduct them even if you are taking the standard deduction. However, the deduction includes only the unreimbursed costs of moving your pos- sessions (and yourself and your family) to the new location; it does not include meals. Medical expenses (including health and long-term care insurance, but not health insurance premiums deducted from government salaries) are subject to a threshold of 7.5 percent of Adjusted Gross Income. This means that to be de- ductible, the medical cost would have to exceed $2,250 for a taxpayer with a $30,000 AGI. There is also an additional 3-percent reduction of itemized deductions (exclud- ing ScheduleAdeductions formedical ex- penses, losses from casualties and theft, and investment-interest losses) if the AGI exceeds $166,800. Note that this 3 percent is applied to the AGI over $166,800 and not to the total of itemized deductions on Schedule A. The maximum loss for de- ductions is capped at 80 percent. For 2009, a taxpayer only loses one-third of the amount the taxpayer would normally lose under these rules. State and local income taxes and real estate and personal property taxes remain fully deductible for itemizers, as are char- itable contributions to U.S.-based chari- ties for most taxpayers. Donations to the AFSA Scholarship Fund are fully de- ductible as charitable contributions, as are donations to AFSA via the Combined Federal Campaign. Individuals may also dispose of any profit from the sale of per- sonal property abroad in this manner. For 2009 tax returns, any interest paid on auto or personal loans, credit cards, de- partment store and other personal interest 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 in- A F S A N E W S Tax Guide • Continued from page 57