The Foreign Service Journal, February 2011

58 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 1 justment to gross income. Mortgage interest is still, for themost part, fully deductible. In- terest on loans intended to finance invest- ments is deductible up to the amount of net income from investments. Interest on loans intended to finance a business is 100-percent deductible. Passive-investment interest on investments in which the taxpayer is an inac- tive participant (i.e., a limited partnership) can be deducted only from the income pro- duced by other“passive income.” Interest on loans that do not fall into the above cate- gories, such as money borrowed to buy tax- exempt securities, is not deductible. Home Leave Expenses Employee business expenses, such as home leave and representation,may be listed as miscellaneous itemized deductions and claimed on Form 2106. In addition to the 2- percent floor, only 50 percent for meals and entertainment may be claimed (100 percent for unreimbursed travel and lodging). Only the employee’s (not family members’) home leave expenses are deductible. AFSA recom- mends maintaining a travel log and retaining a copy of home leave orders, which will help if the IRS ever questions claimed expenses. It is important to save receipts: without receipts for food, a taxpayer may deduct only $45 to $58 a day (depending upon the fed- eral meals-and-incidentals per diem rate at the home leave address), nomatter how large the grocery or restaurant bill. Lodging is de- ductible, as long as it is not with friends or relatives, or in one’s own home. The IRS will disallow use of per diem rates and any ex- penses claimed for family members. If a hotel bill indicates double rates, the single- room rate should be claimed; and, if possi- ble, the hotel’s rate sheet should be saved for IRS scrutiny. Car rental, mileage and other unreim- bursed travel expenses, including parking fees and tolls,may be deducted. The rate for busi- ness miles driven is 51 cents per mile for 2010. Those who use this optional mileage method need not keep detailed records of ac- tual vehicle expenses. They must, however, keep a detailed odometer log to justify the business use of the vehicle and track the per- centage of business use. This optional mileage method applies to leased vehicles, as well. Official Residence Expenses Since Oct. 1, 1990, employees who receive official residence expenses have not been allowed to reduce their reportable in- come by 3.5 percent. The IRS ruling regarding ORE states that “usual ex- penses,” defined as 3.5 percent of salary, are not deductible. Therefore the only expenses that are de- ductible are those above the 3.5 percent paid out of pocket. Employees should save receipts for any out- of-pocket expenses associ- atedwith their representa- tional duties. These ex- penses can be deducted as miscellaneous business expenses. Home Ownership Individuals may deduct interest on up to $1 million of acquisition debt for loans se- cured by a first and/or second home. This also includes loans taken out for major home improvements. On home equity loans, in- terest is deductible on up to $100,000, no matter how much the home cost, unless the loan is used for home improvements. The $100,000 ceiling applies to the total of all home equity loans you may have. The same generally applies to refinancing a mortgage. Points paid to obtain a refinanced loan can- not be fully deducted the same year, but must be deducted over the life of the loan. It is ad- visable to save the settlement sheet (HUD-1 Form) for documentation in the event your tax return is selected by the IRS for audit. Qualified residences are defined as the taxpayer’s principal residence and one other residence. The second home can be a house, condo, co-op, mobile home or boat, as long as the structure includes basic living accommoda- tions, including sleeping, bathroomand cooking facil- ities. If the second home is a vacation property that you rent out for fewer than 15 days during the year, the in- come need not be reported. Rental expenses cannot be claimed either, but all prop- erty taxes and mortgage in- terest may be deducted. Rental of Home Taxpayers who are over- seas and rented their homes in 2010 can continue to deduct mortgage interest as a rental expense. Also deductible are property management fees, condo fees, depreciation costs, taxes and all other rental expenses. Losses up to $25,000 may be offset against other income, as long as the Adjusted Gross Income does not exceed $100,000 to $150,000 and the tax- payer is actively managing the property. Note: A taxpayer who retains a property manager does not lose this benefit, as this is still considered active management of the property. All passive losses that cannot be de- ducted currently are carried forward and de- ducted in the year the property is sold. Sale of a Principal Residence Current tax laws allow an exclusion of up to $500,000 for couples filing jointly and up to $250,000 for single taxpayers on the long- termgain from the sale of their principal res- idence. One need not purchase another residence to claim this exclusion. All depre- A F S A N E W S JOSH Motor Vehicle Tax If you bought a motor vehicle in 2009 after Feb. 16, and did not pay the sales tax until 2010, you may be able to deduct state or local sales tax. Credit for Energy-Saving Home Improvements If you installed newwindows, outside doors, insulation or other energy-savingmeas- ures in your home in 2009 or 2010, you may be able to take a credit. For more information on these and other provisions, go to www.irs.gov. Vehicle and Energy Provisions