Negotiating the tax maze

It’s tax time! The Stuttgart Tax Center opens Feb. 1. Last year, the tax center assisted 2,391 tax filers at no charge, saving them over $430,000 in preparation and filing fees, and generating over $6 million in refunds. And, they’re ready to help again this year.

 What are the major tax law changes for 2011?

Just to name a few:

— This year’s deadline for filing tax returns is extended to April 17.

— Capital gains and losses. In most cases, you must report your capital gains and losses on new Form 8949 and report the total on Schedule D.  If you sold a covered security in 2011, your broker will send you a Form 1099-S (or substitute statement) that shows your basis. This will help you complete Form 8949. Generally, a covered security is a security acquired after 2010.

— First-time homebuyer credit. To claim the first-time homebuyer credit for 2011, you (or your spouse if married) must have been a member of the uniformed services or Foreign Service or an employee of the intelligence community on qualified official extended duty outside the U.S. for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010. 

What‘s the difference between a tax deduction and a tax credit?

A tax deduction is an amount which reduces the income used to compute tax. A tax deduction only saves you the percentage of the deduction equal to the tax rate. For example, if you are taxed at a rate of 30 percent and you have a deduction of $100 then you save $30. While deductions reduce tax liability, they are not directly refundable. A tax credit reduces tax liability after it has already been computed. One dollar of tax credit actually saves you one dollar. Nonrefundable tax credits can only reduce your tax liability to zero. Refundable tax credits can result in payment to the taxpayer from the federal government.

Should I itemize my deductions?

The standard deduction rates were raised for all filing statuses this year. To reap the benefits of itemizing deductions, the taxpayer must have significant expenses in the categories eligible for itemized deductions. Generally speaking, without significant out-of-pocket medical expenses, interest payments on an eligible home mortgage or very large contributions to eligible charities, taxpayers are better off taking the standard deduction. For an individualized determination of the advantages to itemizing deductions, consult with your community tax assistance center.

The 2011 standard deduction are:

$5,800 for unmarried taxpayers or married taxpayers filing separately,

$11,600 for married taxpayers filing jointly, and

$8,500 for taxpayers filing as head of household.

The additional standard deduction allowed for blind taxpayers and taxpayers age 65 or older at the end of the tax year will be $1,150 if married filing jointly and $1,450 if single.

Which tax credits might I be eligible for?

Earned Income Credit — a refundable credit for taxpayers below adjusted gross income threshold. For 2011, earned income and AGI must be less than:

$43,998 ($49,078 married filing jointly) with 3 or more qualifying children

$40,964 ($46,044 married filing jointly) with 2 qualifying children;

$36,052 ($41,132 married filing jointly) with 1 qualifying child; or

$13,660 ($18,740 married filing jointly) with no qualifying children.

Child Tax Credit (Reduced) — In 2011, the child tax credit will be cut in half to $500 per child and may not even be applicable to all taxpayers. For those filing jointly, the tax credit begins to phase out at $110,000 (AGI) and for taxpayers completing a single tax return at $75,000.

Home Buyer Tax Credit for Military or Veterans — If you purchased a home and closed on that home before June 30, 2011, you may be entitled to this credit. 

Additional Child Tax Credit — refundable tax credit for individuals unable to utilize the full benefit of their nonrefundable child tax credit.

Child and Dependent Care Credit — nonrefundable tax credit which reduces tax liability by a portion of child and dependent care expenses. Lifetime Learning Tax Credit— nonrefundable tax credit up to $2,000 per tax return for 20 percent of the first $10,000 of eligible education expenses paid for the taxpayer, spouse, or dependent.

Government Retiree Credit — refundable credit of $250 per taxpayer ($500 if both taxpayer and spouse are eligible government retirees) for certain federal, state, and local government retirees who receive a government pension or annuity from work not covered by social security.

Retirement Savings Contributions Credit — nonrefundable credit for taxpayers with modified adjusted gross income below certain thresholds depending on filing status who make a contribution to a qualified retirement plan.

Does the Foreign Earned Income Exclusion apply to service members and employees of the U.S. government stationed in Europe?

No, that exclusion does not apply to U.S. service members and other employees of the U.S. government. They must pay U.S. income tax, even if stationed overseas. 

My spouse works on the local economy and pays taxes to the host nation. Do I need to report my spouses income on our return?

If your spouse is a U.S. citizen or resident and you are filing a joint return, you will need to report your spouse’s income on your tax return.  If you are filing separately, she would only need to file if she earned more than $3,700. If she must file, you then may be able to exclude up to $92,900 of that income from your taxable income under the Foreign Earned Income Exclusion. 

If your spouse is not a U.S. citizen or resident, she does not need to report her income. It maybe to your advantage, however, to elect to treat your spouse as a U.S. resident so you can file a joint return. Consult your tax center for an individualized discussion of these issues.

Do I need to pay state income tax if I live in Europe?

States can require their residents and/or domiciliaries to pay income tax. A state has the authority to tax domiciliaries of that state, even if the domiciliary does not currently live in that state any longer due to military assignment. 

Each state’s law is different, so to be sure you are complying with applicable state law, stop by your community tax center and inquire about the rules for your state of domicile.

Do I need to report any money I have in my       foreign bank account? 

Maybe. Any U.S. person who has a financial interest in or signature authority or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year.

This report is called an FBAR, and stands for a Report of Foreign Bank and Financial Accounts. The form number is TD F 90-22.1. If you currently have or have had over $10,000 in any foreign bank account during 2011, you must report this to the IRS. 

What do I do if my spouse is not available to sign the tax return?

If you are married and filing a joint return but your spouse is unavailable to sign the return, you need to get a power of attorney which explicitly grants authority for tax filing. IRS Form 2848 can be found at This power of attorney must have the notarized signature of your spouse. If your spouse is deployed, the IRS grants an extension of 180 days from the spouse‘s return from deployment to file taxes. For more information regarding deployed spouses and extensions on filing deadlines, consult your community tax center.

What resources are available for people who want to prepare their own tax returns?

The IRS offers taxpayers free help on federal tax questions and with filing a return. Assistance is available at any time on the IRS website at Help is also available by telephone and in person.

A few publications that are especially useful for U.S. Army Europe community members:

• Publication 17, “Your Federal Income Tax”

• Publication 3, “Armed Forces’ Guide”

• Publication 54, “Tax Guide for U.S. Citizens and Resident Aliens Abroad”

If you require additional assistance, contact the Stuttgart Tax Center.  In addition to assisting community members with filing taxes, the tax center can assist eligible community members with tax advice and understanding the tax code.