THE FOREIGN SERVICE JOURNAL
Cha r i t ab l e Con t r i bu t i on s :
Only contributions to “qualified organizations” may be
deducted, and then only to the extent the tax code permits.
For example, the AFSA Fund for American Diplomacy qualifies
as a public charity. Contributions to it, and any public charity,
can be deducted; but a taxpayer’s deduction for charitable
contributions is limited to 50 percent of AGI. The IRS provides
an “Exempt Organizations” online check tool to determine
whether a charity qualifies. Payments to individuals are never
deductible. A taxpayer must itemize to claim this deduction.
I n t e r es t Ex pen s es :
Itemizers may deduct interest (Schedule A) on investments
(to the extent of income from those investments) and quali-
fied mortgage interest (discussed below). Business loan
interest and interest incurred to produce rents or royalties are
other forms of deductible interest (limits may apply). Inter-
est on loans that do not fall into the above categories, even
money borrowed to buy tax-exempt securities, is not deduct-
ible. However, non-deductible debts can be consolidated and
paid with deductible home equity loan interest (discussed
below). Passive investment interest on investments in which
the taxpayer is an inactive participant can be deducted only
from the income produced by passive activities.
Home Leave and Un r e imbu r s ed
Rep r es en t a t i ona l Ex pen s es :
These generally qualify as unreimbursed employee business
expenses. They may be deducted as miscellaneous itemized
deductions and claimed on Form 2106, subject to a 2 percent
floor and a 50-percent limit for meals and entertainment. All
unreimbursed travel and lodging exceeding 2-percent of AGI
may be deducted here. However, 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, because without
receipts for food, a taxpayer may deduct only the federal meals-
and-incidentals per diem rate at the home leave address—no
matter how large the actual bill is. Lodging is deductible as long
as it is not with friends, relatives or in one’s home.
The IRS will deny per diem and expenses claimed for family
members. If a hotel bill indicates double rates, the single room
rate should be claimed. Taxpayers should save the hotel’s rate
sheet, if possible. Car rental, mileage and other unreimbursed
travel expenses, including parking fees and tolls, may be
deducted. The 2016 rate for business miles driven has dropped
to 54 cents. Those who use this optional mileage method need
not keep detailed records of actual vehicle expenses. They must,
however, keep a detailed odometer log to justify the business
use of the vehicle and track the percentage of business use. This
optional mileage method also applies to leased vehicles.
Of f i c i a l Res i den c e Ex pen s es :
ORE reimbursements defray the “unusual” expenses from the
operation of an official residence while extending official hospi-
tality, receiving foreign dignitaries and holding official ceremo-
nies. Conversely, a principal representative is expected to bear
FOREIGN EARNED INCOME EXEMPTION DENIALS
Some AFSA members report having difficulty claiming the foreign earned income exemption (FEIE). To receive this exemp-
tion, the taxpayer must meet one of two tests:
1) The physical presence test requires that the taxpayer 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 year); or
2) The bona fide residence test requires that the taxpayer has been a bona fide resident of a foreign country for an unin-
terrupted period that includes an entire tax year.
We understand that IRS auditors have been denying the FEIE for Foreign Service spouses and dependents under the
bona fide residence test, on the grounds that diplomatic status overseas does not constitute “bona fide residence” in a
In this context, note that if you work for a company or organization on the local economy you generally have to pay local
taxes, and your “tax home” is technically in the foreign country. You will have relinquished your diplomatic status in any
matters related to your job, although of course for matters outside your job you would retain the diplomatic status that you
derive from your FS employee spouse or parent.
However, members report that they have successfully used the physical presence test. They have also used this in
appealing a denial of the bona fide residence test. This test requires that you spend 330 full days during a calendar year
actually in a foreign country, not just outside the United States. Time spent traveling to and from a country does not count.
If using this test, you are advised to record all your travel carefully and to keep copies of visas and tickets, so that you can
substantiate the 330 days in case of an audit.