The Foreign Service Journal - January/February 2018
THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2018 73 AFSA NEWS 2017 Federal and State Tax Provisions for the Foreign Service The American Foreign Service Association’s annual Tax Guide is intended 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 technical than what follows here. AFSA therefore recommends that you use this guide with caution and consult a tax adviser with specific questions, as the IRS may impose penalties for understating tax liabilities (please see the Circular 230 notice on page 79). Although tax reform has been a hot topic in Washington, D.C., this year, gross income remains the starting point for figuring state and federal income tax. It includes “all income from whatever source derived” and, barring major reform, that includes foreign income from outside the United States. Adjustments to gross income, deductions and tax credits are mat- ters of legislative grace. Congress passes, the IRS applies and the courts scrutinize the law and its application. The result is fed- eral 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. Conse- quently, no tax benefit should be claimed without knowing state and federal law. This update begins with federal tax law, headlined by the 2017 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; and home ownership and sale of a principal residence. New this year is a section about gifts, retirement and estate tax planning. This update concludes with each state’s domicile rules. AFSA Senior Labor Management Advisor James Yorke (YorkeJ@state. gov), who compiles the tax guide, would like to thank Sam Schmitt, Esq., for preparing the section on federal tax provisions. 20 1 7 Fede r a l Ta x Pr ov i s i on s The table on page 74 summarizes the marginal income and corre- sponding capital gains tax brack- ets. Pe r sona l Exemp t i on For each taxpayer, spouse and dependent, the personal exemption remains $4,050. A personal exemp- tion phase-out is in place for 2017. Unmarried taxpayers who earn more than $261,500 individually ($287,650 for head of household, $313,800 for those married filing jointly) should contact a tax professional to calculate the amount by which their personal exemption 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. gov- ernment. The first $102,100 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, IMPORTANT NOTE This guidance applies to the 2017 tax year only , for individual income tax returns due on Tuesday, April 17, 2018. Any major changes to the tax code for 2018 will be covered in next year’s guide. By filing Form 4868, the automatically granted exten- sion of six months extends the deadline to Monday, Oct. 15. Although the 2017 AFSATax Guide is correct at publication, bear in mind that there will likely be changes to the tax code for the 2018 tax year. At present, however, we are not aware that any possible such changes will apply to 2017 tax returns.