The Foreign Service Journal, February 2013

THE FOREIGN SERVICE JOURNAL | FEBRUARY 2013 41 AFSA NEWS Continued from page 37 for married couples, $35,351 for singles. The 25-percent rate is for income up to $142,701 for married couples, $85,651 for singles. The 28-percent rate is for income up to $217,451 for married couples and up to $178,651 for singles. The 33-percent rate is for income up to $388,351 for married couples and singles. Annual income above $388,351 is taxed at 35 percent. Long-term capital gains are taxed at a maximum rate of 15 percent and are reported on Sched- ule D. This rate is effective for all sales in 2012, except 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 defined as gain from the sale of property held for 12 months or longer. Personal Exemption For each taxpayer, spouse and dependent the personal exemption is $3,800. There is no personal exemption phase-out for 2012. Foreign Earned Income Exclusion Many Foreign Service spouses and dependents work in the private sector overseas and, thus, are eli- gible for the Foreign Earned Income Exclusion. American citizens and residents living and working overseas are eligible for the income exclusion, unless they are employees of the United States government. The first $95,100 earned overseas as an employee or as self-employed may be exempt from income taxes To receive the exemption, the taxpayer must meet one of two tests: 1) the Physical Presence Test, which requires that the taxpayer be pres- ent in a foreign country for at least 330 full (midnight to midnight) days during any 12-month period (the period may be different from the tax year); or 2) the Bona Fide Residence Test, which requires that the taxpayer has been a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. Most Foreign Service spouses and dependents qualify under the bona fide residence test, but they must wait until they have been overseas for a full calendar year before claiming it. Keep in mind that self-employed taxpayers must still pay self- employment (Social Security and Medicare) tax on their foreign-earned 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 income was changed, begin- ning in 2006, so as to result in higher tax on the non- excluded portion. (See the box below for a full explana- tion.) 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 taxpay- ers should write “Taxpayer Abroad” at the top of the first page and attach a statement of explanation. There are no late filing or late payment penalties for returns filed and taxes paid by June 15, but the IRS does charge interest on any amount owed from April 15 until the date it receives payment. Standard Deduction The standard deduction is 2012 TAX GUIDE IMPORTANT NOTE: FOREIGN EARNED INCOME 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 $95,100 of their 2012 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 economy overseas. Previously, you subtracted your excluded income from your 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 and their teacher spouse earns $30,000. Before 2006 : Tax on $110,000 minus $30,000 = tax on $80,000 = tax bill of $13,121. Since 2006 : Tax on $110,000 = $20,615; tax on $30,000 = $3,749; total tax = $20,615 minus $3,749 = tax bill of $16,866.