THE FOREIGN SERVICE JOURNAL
2016 Federal and State
Tax Provisions for the
The American Foreign Service Association’s annual Tax Guide
is designed as an informational tool. Although this update
accurately summarizes the law, it is merely a starting point.
The language of the actual tax provisions is always more tech-
nical than what follows here. AFSA recommends that you use
this guide with caution and consult a tax adviser with specific
questions, as the IRS may impose penalties for understatingtax liabilities (please see the Circular 230 notice at the end of this article).
Gross income is the starting point for figuring state and
federal income tax. It includes “all income from whatever
source derived.” Adjustments to gross income, deductions
and tax credits are matters of legislative grace. Congress
passes, the IRS applies and the courts scrutinize the law and
its application. The result is federal tax law. State legislatures
may adopt the federal system or deviate from federal law,
sometimes requiring residents to add back amounts for a
higher taxable state income. Consequently, no tax benefit
should be claimed without knowing state and federal law.
This update begins with federal tax law, headlined by the
2016 tax brackets and rates. From there the personal exemp-
tion, foreign earned income exclusion, extension for taxpay-
ers abroad, and standard and itemized deduction rules are
presented. Special attention is devoted to the topics Foreign
Service employees most frequently ask AFSA about: moving,
interest, home leave and official residence expenses; home
ownership and sale of a principal residence.
This update concludes with each state’s domicile rules.
James Yorke (YorkeJ@state.
gov), who compiles the tax guide,
would like to thank Sam Schmitt of the EFM Law Company for
preparing the section on federal tax provisions.
20 16 FEDERAL TAX PROV I SONS
The table on page 63 summarizes the marginal income and
corresponding capital gains tax brackets.
Pe r sona l Exemp t i on :
For each taxpayer, spouse and each dependent, the per-
sonal exemption is $4,050. A personal exemption phase-out
is in place for 2016. Unmarried taxpayers who earn more
than $259,400 individually ($285,350 head of household,
$311,300 married filing jointly) should contact a tax profes-
sional to calculate the amount by which their personal exemp-
tion must be reduced.
Fo r e i gn Ea r ned I n come Exc l u s i on :
Americans living and working overseas may be eligible for this
exclusion, but not if they are employees of the U.S. govern-
ment. The first $101,300 earned overseas as an employee or
self-employed may be exempt from income taxes.
To receive this exclusion the taxpayer must:
(1) Establish a tax home in a foreign country, which is
the general area of the taxpayer’s “main place of business,
employment or post of duty.” In other words, where the tax-
payer is “permanently or indefinitely engaged to work as an
employee or self-employed individual”; and,
(2) Either (a) Meet 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 OR (b) Meet the “physical presence” test,
which requires the taxpayer to be present 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
Note: The method for calculating the tax on non-excluded
income in tax returns that include both excluded and non-
excluded income was changed, beginning in 2006, resulting inhigher tax on the non-excluded portion. (See the box on page 64 for a full explanation.)
This guidance applies to the 2016 tax year, for returns
due on April 18, 2017. While correct at time of publication,
bear in mind there may be changes to the tax code for the
2017 tax year. At present, we are not aware of any possible
changes that are likely to apply to 2016 returns.