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64

JANUARY-FEBRUARY 2017

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THE FOREIGN SERVICE JOURNAL

AFSA NEWS

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

foreign country.

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.