The Foreign Service Journal, February 2011

F E B R U A R Y 2 0 1 1 / F O R E I G N S E R V I C E J O U R N A L 55 American Foreign Service Association • February 2011 AFSA NEWS T he annual AFSA Tax Guide is designed as an informational and reference tool. Although we try to be accurate, many of the new provisions of the tax code and the im- plications of Internal Revenue Service regula- tions 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 frequently ask AFSA about home ownership, tax liability upon sale of a residence and state of domicile. We have devoted special sections to these is- sues. James Yorke (, wh o com- piles the tax guide, would like to thank M. Bruce Hirshorn, Foreign Service tax counsel, for his help in its preparation. Federal Tax Provisions The Military Families Tax Relief Act of 2003 continues to provide a significant ben- efit 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 be- cause they did not meet the In- ternal Revenue Service’s “two- year occupancy within the five years preceding the date of sale” requirement due to postings out- side the U.S. In relation to the sale of a principal residence after May 6, 1997, the 2003 law provides that the calcu- lation of the five-year period for measuring ownership is suspended during any period that the eligible individual or his or her spouse is serving away from the area on qual- ified official extended duty as a member of the uniformed services, the Foreign Service or the intelligence community. The five-year period can- not be extended by more than 10 years. In other words, For- eign Service employees who are overseas on assignment can extend the five-year pe- riod up to 15 years, depending on the number of years they are posted away from their home. Note that the provision 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 2010, the six tax rates for individuals remain at 10, 15, 25, 28, 33 and 35 percent. The 10-percent rate is for taxable income up to $16,751 for married couples, $8,376 for singles. The 15-percent rate is for income up to $68,001 for married couples, $34,001 for singles. The 25-percent rate is for income up to $137,301 for married couples, $82,401 for singles. The 28-percent rate is for income up to $209,251 for married couples and up to $171,851 for singles. The 33-percent rate is 2010 TAX GUIDE Federal and State Tax Provisions for the Foreign Service New for 2009 and 2010 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, taxpayers must reduce the capital-gain exclusion in proportion to the rental period’s ratio to the residence pe- riod. JOSH