The Foreign Service Journal, February 2011

A F S A N E W S riod ending on the day onwhich the contract to sell the old residence was signed; 2) the ex- penses must be paid on or before the 30th day after sale of the house; and 3) the ex- penses must not be capital expenditures for permanent improvements or replacements (these can be added to the basis of the prop- erty, the original purchase price, thereby re- ducing the amount of profit). A new roof and kitchen counters are not “fix-up” items. But painting the house, cleaning up the gar- den and making minor repairs qualify. State Tax Provisions Most Foreign Service employees have questions about their liability to pay state income taxes during periods when they are posted overseas or assigned toWash- ington. Members of the Foreign Service are not treated as domiciled in their coun- tries of assignment abroad. Every active- duty Foreign Service employee serving abroad must maintain a state of domi- cile in the United States, and the tax lia- bility that the employee faces varies greatly from state to state. In addition, there are numerous regulations con- cerning the taxability of Foreign Service pen- sions 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 Service personnel. Please note that while AFSA makes every attempt to provide themost 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 readers to visit the state’s tax Web site (also listed). There are many criteria used in deter- mining which state is a citizen’s domicile. One of the strongest determinants is pro- longed physical presence, a standard that For- eign 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 resident tax returns, where he or she is registered to vote or has a driver’s license, where he or she owns prop- erty, or where the person has bank accounts or other financial holdings. In the case of Foreign Service employees, the domicile might be the state from which the person joined the Service, where his or her home leave address is, or where he or she intends to return 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 residing outside of the state, including during assign- ments abroad, unless the state of residence does not require it. A non-resident, according to most states’ definitions, is an individual who earns in- come 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 consid- ered residents, and are thus fully liable for taxes, if they are domiciled 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 re- quired to pay income tax to the District of Columbia,Maryland orVirginia, in addition to paying tax to the state of their domicile. Most states allow a credit, however, 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, Nevada, South Dakota, Texas, Washington and Wyoming. In addition, NewHampshire and Tennessee have no tax on personal 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: Califor- nia, Connecticut, Idaho, Minnesota, Mis- souri, New Jersey, New York, Oregon, Pennsylvania and West Virginia. The re- quirements for all except California, Idaho, Minnesota and Oregon are that the individ- ual not have a permanent“place of abode”in the state, have a permanent “place of abode” outside the state, and not be physically pres- ent for more than 30 days during the tax year. California allows up to 45 days in the state during a tax year. These 10 states require the filing of non-resident returns for all income earned from in-state sources. Foreign Service employees should keep in mind that states could challenge the status of government housing in the future. The following list gives a state-by- state overview of the latest information available on tax liability, with addresses provided to get further information or tax forms. Tax rates are provided where possible. For further information, please contact AFSA’s Labor Management Of- fice or the individual state tax authorities. As always, members are advised to dou- ble-check with their state’s tax authorities. To assist you in connecting with your state tax office, we provide the Web site ad- dress for each in the state-by-state guide, and an e-mail address or link where available. Some states do not offer e-mail customer service. The Federation of Tax Administra- tors’ Web site, www.taxadmin.org, als o pro- vides much useful information on individual state income taxes. State Overviews ALABAMA: Individuals domiciled inAl- abama are considered residents and are sub- ject to tax on their entire income regardless of their physical presence in the state. Alabama’s individual income tax rates range from2 to 5 percent on gross income over $4,000 for sin- gle taxpayers or $10,500 for married filing jointly. Write: Alabama Department of Rev- enue, 50 N. Ripley, Montgomery AL 36132. Phone: (334) 242-1170. E-mail: Link through the Web site,“About Us” then “Contacts.” Web site: www.ador.state.al.us 60 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