Page 41 - Foreign Service Journal - February 2013

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Continued from page 37
for married couples, $35,351
for singles. The 25-percent
rate is for income up to
$142,701 for married couples,
$85,651 for singles. The
28-percent rate is for income
up to $217,451 for married
couples and up to $178,651
for singles. The 33-percent
rate is for income up to
$388,351 for married couples
and singles. Annual income
above $388,351 is taxed
at 35 percent. Long-term
capital gains are taxed at a
maximum rate of 15 percent
and are reported on Sched-
ule D. This rate is efective for
all sales in 2012, 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 defned as gain
from the sale of property
held for 12 months or longer.
Personal Exemption
For each taxpayer, spouse
and dependent the personal
exemption is $3,800. There
is no personal exemption
phase-out for 2012.
Foreign Earned
Income Exclusion
Many Foreign Service
spouses and dependents
work in the private sector
overseas and, thus, are eli-
gible for the Foreign Earned
Income Exclusion.
American citizens and
residents living and working
overseas are eligible for the
income exclusion, unless
they are employees of the
United States government.
The frst $95,100 earned
overseas as an employee
or as self-employed may be
exempt from income taxes
To receive the exemption,
the taxpayer must meet one
of two tests: 1) the Physical
Presence Test, which requires
that the taxpayer be pres-
ent in a foreign country for
at least 330 full (midnight
to midnight) days during
any 12-month period (the
period may be diferent from
the tax year); or 2) the Bona
Fide Residence Test, which
requires that the taxpayer
has been a bona fde resident
of a foreign country for an
uninterrupted period that
includes an entire tax year.
Most Foreign Service
spouses and dependents
qualify under the bona fde
residence test, but they must
wait until they have been
overseas for a full calendar
year before claiming it. Keep
in mind that self-employed
taxpayers must still pay self-
employment (Social Security
and Medicare) tax on their
foreign-earned 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-excluded
income was changed, begin-
ning in 2006, so as to result
in higher tax on the non-
excluded portion. (See the
box below for a full explana-
Extension for
Taxpayers Abroad
Taxpayers whose tax home
is outside the U.S. on April 15
are entitled to an automatic
extension until June 15 to
fle their returns. When fling
the return, these taxpay-
ers should write “Taxpayer
Abroad” at the top of the frst
page and attach a statement
of explanation. There are no
late fling or late payment
penalties for returns fled and
taxes paid by June 15, but the
IRS does charge interest on
any amount owed from April
15 until the date it receives
Standard Deduction
The standard deduction is
The Foreign Earned Income Exclusion allows U.S. citizens who are not United States
government employees and are living outside the U.S. to exclude up to $95,100 of their
2012 foreign-source income if they meet certain requirements. Beginning in 2006, the
IRS changed how the excluded amount must be calculated. This afects the tax liability
for couples with one member employed on the local economy overseas. Previously, you
subtracted your excluded income from your total income and paid tax on the remainder. The
change now requires that you take your total income and fgure 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 and their teacher spouse earns
Before 2006
: Tax on $110,000 minus $30,000 = tax on $80,000 = tax bill of $13,121.
Since 2006
: Tax on $110,000 = $20,615; tax on $30,000 = $3,749; total tax = $20,615
minus $3,749 = tax bill of $16,866.