The Foreign Service Journal, February 2010

of investments occurs. Actually, owners first sign a contract with an intermediary to sell their property, hold the cash pro- ceeds in escrow, identify in writing within 45 days the property they intend to ac- quire, and settle on the new property within 180 days, using the money held in escrow as part of the payment. It is important to emphasize that the exchange is fromone investment property to another investment property—the key factor in the IRS evaluation of an ex- change transaction is the intent of the in- vestor at the time the exchange was consummated. The IRS rules for these ex- changes are complex and specific, with a number of pitfalls that can nullify the transaction. An exchange should never be attempted without assistance from a tax lawyer specializing in this field. Calculating Your Adjusted Basis Many Foreign Service employees ask what items can be added to the cost basis of their homes when they are ready to sell. Money spent on fixing up the home for sale may be added to the basis. To qualify as legitimate fixing-up costs, the following conditions must be met: 1) the expenses must be for work performed during the 90-day period ending on the day onwhich the contract to sell the old residence was signed; 2) the expenses must be paid on or before the 30th day after sale of the house; and 3) the expenses must not be capital expenditures for permanent im- provements or replacements (these can be added to the basis of the property, the original purchase price, thereby reducing the amount of profit). A new roof and kitchen counters are not “fix-up” items. But painting the house, cleaning up the garden andmakingminor repairs qualify. State Tax Provisions Members of the Foreign Service are not treated as domiciled in their countries of assignment abroad. Every active-duty Foreign Service employee serving abroad must maintain a state of domicile in the United States, and the tax liability that the employee faces varies greatly from state to state. In addition, there are numerous reg- ulations concerning the taxability of For- eign Service pensions and annuities that vary by state. This state guide briefly reviews the laws regarding income tax and tax on annuities and pensions as they affect Foreign Serv- ice personnel. Please note that while AFSAmakes every attempt to provide the most up-to-date information, readers with specific questions should consult a tax expert in the state in question at the addresses given. We also encourage read- ers to visit the state’s tax Web site (also listed). Most Foreign Service employees have questions about their liability to pay state income taxes during periods when they are posted overseas or assigned to Wash- ington. There are many criteria used in determining which state is a citizen’s domicile. One of the strongest determi- nants is prolonged physical presence, a standard that Foreign Service personnel frequently cannot meet due to overseas service. In such cases, the states will make a de- termination of the individual’s income- tax status based on other factors, including where the individual has family ties, where he or she has been filing resi- dent tax returns, where he or she is regis- tered to vote or has a driver’s license, where he or she owns property, or where the person has bank accounts or other fi- nancial holdings. In the case of Foreign Service employees, the domicile might be the state fromwhich the person joined the Service, where his or her home leave ad- dress is, or where he or she intends to re- turn upon separation. For purposes of this article, the term “domicile” refers to legal residence; some states also define it as permanent residence. Residence refers to physical presence in the state. Foreign Service personnel must con- tinue to pay taxes to the state of domicile (or to the District of Columbia) while re- siding outside of the state, including dur- ing assignments abroad, unless the state of residence does not require it. A non-resident, according to most states’ definitions, is an individual who earns income sourced within the specific state but does not live there or is living there for only part of the year (usually, fewer than six months). Individuals are generally considered residents, and are thus fully liable for taxes, if they are domi- ciled in the state or if they are living in the state (usually at least six months of the year) but are not domiciled there. Foreign Service employees residing in the metropolitan Washington, D.C., area are required to pay income tax to the Dis- trict of Columbia, Maryland or Virginia, in addition to paying tax to the state of their domicile. However,most states allow a credit, so that the taxpayer pays the higher tax rate of the two states, with each state receiving a share. There are currently seven states with no state income tax: Alaska, Florida, Ne- vada, South Dakota, Texas, Washington and Wyoming. In addition, New Hamp- shire and Tennessee have no tax on per- sonal income but do tax profits from the sale of bonds and property. There are 10 states that, under certain conditions, do not tax income earned while the taxpayer is outside of the state: California, Connecticut, Idaho, Min- nesota, Missouri, New Jersey, New York, Oregon, Pennsylvania and West Virginia. The requirements for all except California, Idaho,Minnesota andOregon are that the individual not have a permanent“place of abode” in the state, have a permanent 62 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 1 0 Motor Vehicle Tax If you bought a motor vehicle after Feb. 16, 2009, you may be able to deduct state or local sales tax. Credit for Energy-Saving Home Improvements If you installed new windows, out- side doors, insulation or other energy- savingmeasures in your home in 2009, you may be able to take a credit. For more information on these and other provisions, go to www.irs.gov . Interesting New 2009 Provisions