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 57 for income up to $373,651 for married cou- ples and singles. Annual income above $373,651 is taxed at 35 percent. Long-term capital gains are taxed at a maximum rate of 15 percent and are reported on Schedule D. This rate is effective for all sales in 2010, ex- cept for those people who fall within the 10- or 15-percent 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 longer. Personal Exemption For each taxpayer, spouse and dependent the personal exemption remains at $3,650. There is no personal exemption phase-out for 2010. Foreign Earned Income Exclusion Many Foreign Service spouses and de- pendents work in the private sector overseas and thus are eligible for the Foreign Earned Income Exclusion. American citizens and residents living and working overseas are el- igible for the income exclusion, unless they are employees of the United States govern- ment. The first $91,500 earned overseas as an employee or as self-employed may be ex- empt from income taxes. To receive the exemption, the taxpayer must meet one of two tests: 1) the Physical Presence Test, which requires that the tax- payer be present in a foreign country for at least 330 full (12 midnight to 12 midnight) days during any 12-month period (the pe- riodmay be different from the tax year); or 2) the Bona Fide Residence Test, which requires that the taxpayer has been a bona fide resi- dent of a foreign country for an uninter- rupted period that includes an entire tax year. Most Foreign Service spouses and depend- ents qualify under the bona fide residence test, but they must wait until they have been overseas for a full calendar year before claim- ing it. Keep in mind that self-employed tax- payers must still pay self-employment (Social Security and Medicare) tax on their income. Only the income tax is excluded. Note: The method for calculating the tax on non-excluded income in tax returns that include both excluded and non-excluded in- come was changed, beginning in 2006, so as to result in higher tax on the non-excluded portion. (See the box on this page for a full explanation.) Extension for Taxpayers Abroad Taxpayers whose tax home is outside the U.S. on April 15 are entitled to an automatic 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 attach a statement of ex- planation. There are no late filing or late pay- ment penalties for returns filed and taxes paid by June 15, but the IRS does charge in- terest on any amount owed from April 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 de- duction of $5,700 each, and head-of-house- hold filers receive an $8,400 deduction. 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 miscellaneous itemized deductions, which are subject to a threshold of 2 percent of Adjusted Gross In- come. These include professional dues and subscriptions to publications; employment and educational expenses; home office, legal, accounting, custodial and tax preparation fees; home leave, representational and other employee business expenses; and contribu- tions toAFSA’s Legislative Action Fund. Un- reimbursed moving expenses are an adjustment to income, whichmeans that you may deduct them even if you are taking the standard deduction. However, the deduction includes only the unreimbursed costs of moving your possessions 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 in- surance premiums deducted from govern- ment salaries) are subject to a threshold of 7.5 percent of Adjusted Gross Income. This means that to be deductible, themedical cost would have to exceed $2,250 for a taxpayer with a $30,000AGI. There is no reduction of itemized deductions for higher income tax- payers for 2010. State and local income taxes and real es- tate and personal property taxes remain fully deductible for itemizers, as are charitable contributions to U.S.-based charities for most taxpayers. Donations to the AFSA Scholarship Fund are fully deductible as charitable contributions, as are donations to AFSA via the Combined Federal Campaign. Individuals may also dispose of any profit from the sale of personal property abroad in this manner. For 2010 tax returns, any interest paid on auto or personal loans, credit cards, depart- ment stores and other personal interest will not be allowed as itemized deductions. 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 ad- A F S A N E W S The Foreign Earned Income Exclusion allows U.S. citizens who are not United States government employees and are living outside the U.S. to exclude up to $91,400 of their 2010 foreign-source income if they meet certain requirements. Beginning in 2006, the IRS changed how the excluded amount must be calculated. This affects the tax liability for couples with one member employed on the local econ- omy overseas. Previously, you subtracted your excluded income fromyour total income and paid tax on the remainder. The change now requires that you take your total income and figure what your tax would be, then deduct the tax that you would have paid on the excludable income. For example: A Foreign Service employee earns $80,000. Teacher spouse earns $30,000. Before 2006: Tax on $110,000 minus $30,000 = tax on $80,000 = tax bill of $13,121. Now (2006 and later): Tax on $110,000 = $20,615; tax on $30,000 = $3,749; total tax = $20,615 minus $3,749 = tax bill of $16,866. Foreign Earned Income — Important Note