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F E B R U A R Y 2 0 1 2 / F O R E I G N S E R V I C E J O U R N A L
able income up to $17,001 for married
couples, $8,501 for singles. The 15-per-
cent rate is for income up to $69,001 for
married couples, $34,501 for singles.
The 25-percent rate is for income up to
$139,351 for married couples, $83,601
for singles. The 28-percent rate is for in-
come up to $212,301 for married cou-
ples and up to $174,401 for singles. The
33-percent rate is for income up to
$379,151 for married couples and sin-
gles. Annual income above $379,151 is
taxed at 35 percent. Long-term capital
gains are taxed at a maximum rate of 15
percent and are reported on Schedule D.
This rate is effective for all sales in 2011,
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
Personal Exemption
For each taxpayer, spouse and de-
pendent the personal exemption re-
mains at $3,700. There is no personal
exemption phase-out for 2011.
Foreign Earned Income Exclusion
Many Foreign Service spouses and
dependents work in the private sector
overseas and, thus, are eligible for the
Foreign Earned Income Exclusion.
American citizens and residents living
and working overseas are eligible for the
income exclusion, unless they are em-
ployees of the United States govern-
ment. The first $92,900 earned overseas
as an employee or as self-employed may
be exempt from income taxes.
To receive the exemption, the tax-
payer must meet one of two tests: 1) the
Physical Presence Test, which 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 periodmay be different from
the tax year); or 2) the Bona Fide Resi-
dence Test, which requires that the tax-
payer has been a bona fide resident of a
foreign country for an uninterrupted pe-
riod that includes an entire tax year.
Most Foreign Service spouses and de-
pendents qualify under the bona fide
residence test, but they must wait until
they have been overseas for a full calen-
dar year before claiming it. Keep in
mind that self-employed taxpayers must
still pay self-employment (Social Secu-
rity and Medicare) tax on their 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-ex-
cluded income was changed, beginning in
2006, so as to result in higher tax on the
non-excluded portion. (See the box on this
page for a full explanation.)
Extension for Taxpayers Abroad
Taxpayers whose tax home is outside
the U.S. onApril 15 are entitled to an au-
tomatic extension until June 15 to file
their returns. When filing the return,
these taxpayers 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 penal-
ties for returns filed and taxes paid by
June 15, but the IRS does charge interest
on any amount owed fromApril 15 until
the date it receives payment.
Standard Deduction
The standard deduction is given to
non-itemizers. For couples, the deduc-
tion is now $11,600, and for singles,
$5,800. Married couples filing separately
get a standard deduction of $5,800 each,
and head-of-household filers receive
an $8,500 deduction. An additional
amount is allowed for taxpayers over age
65 and for those who are blind.
Most unreimbursed employee busi-
ness expenses must be reported as mis-
cellaneous itemized deductions, which
are subject to a threshold of 2 percent of
Adjusted Gross Income. These include
professional dues and subscriptions to
publications; employment and educa-
tional expenses; home office, legal, ac-
counting, custodial and tax preparation
fees; home leave, representational and
other employee business expenses; and
contributions to AFSA’s Legislative Ac-
tion Fund. Unreimbursed moving ex-
penses are an adjustment to income,
whichmeans that youmay deduct them
even if you are taking the standard de-
The Foreign Earned Income Exclusion allows U.S. citizens who are not U.S. govern-
ment employees and are living outside the U.S. to exclude up to $92,900 of their 2011
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 econ-
omy overseas. Previously, you subtracted your excluded income fromyour 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.
A spouse working as a teacher earns $30,000.
Before 2006: Tax on $110,000 minus $30,000 = tax on $80,000 = tax bill of $13,121.
Now (2006 and later): Tax on $110,000 = $20,615; tax on $30,000 = $3,749; total tax
= $20,615 minus $3,749 = tax bill of $16,866.
Foreign Earned Income — Important Note