Publication 516 - U.s. Government Civilian Employees Stationed Abroad (Page 7 of 10) in pdf

Real estate tax and home mortgage interest.

liability or deduct them as an itemized deduction

1040). You cannot deduct other foreign taxes,

If you receive a tax-free housing allowance, your

when figuring your taxable income.

such as personal property taxes, unless you

itemized deductions for real estate taxes and

incurred the expenses in a trade or business or

Do not include the foreign taxes paid or

home mortgage interest are limited. You must

in the production of income.

accrued as withheld income taxes in

reduce the amount of each deduction that would

the Payments section of Form 1040.

CAUTION

otherwise be allowable by the amount of each

More information. The foreign tax credit and

expense that is related to the tax-free allowance.

Foreign tax credit. Your foreign tax credit is

deduction, their limits, and carryback and carry-

subject to a limit based on your taxable income

over provisions are discussed in detail in Publi-

Example. Adam is an IRS employee work-

from foreign sources. If you choose to figure a

cation 514.

ing overseas who receives a $6,300 tax-free

credit against your U.S. tax liability for the for-

housing and utility allowance. During the year,

eign taxes, you generally must complete Form

Adam used the allowance, with other funds, to

1116 and attach it to your U.S. income tax re-

provide a home for himself. His expenses for this

turn.

Local (Foreign)

home totaled $8,400 and consisted of mortgage

You cannot claim a credit for foreign taxes

principal ($500), insurance ($400), real estate

Tax Return

paid on amounts excluded from gross income

taxes ($1,400), mortgage interest ($4,000), and

under the foreign earned income or housing

utility costs ($2,100). Adam did not have any

exclusions. If all your foreign income is exempt

other expenses related to providing a home for

As a U.S. Government employee, you are ex-

from U.S. tax, you will not be able to claim a

himself.

pected to observe and fulfill all tax obligations

foreign tax credit.

imposed by the host country government. Check

Adam must reduce his deductions for home

If, because of the limit on the credit, you

with local tax authorities to determine whether

mortgage interest and real estate taxes. He

cannot use the full amount of qualified foreign

you are considered a tax resident of your host

figures a reasonable way to reduce them is to

taxes paid or accrued in the tax year, you are

country, whether you are required to file a host

multiply them by a fraction: its numerator is

allowed to carry the excess back 1 year and then

country tax return and whether you owe taxes to

$6,300 (the total housing and utility allowance)

forward 10 years.

the host country.

and its denominator is $8,400 (the total of all

Exemption from limit. You can elect to not

payments to which the housing and utility allow-

Tax Treaty Benefits

be subject to the foreign tax limit if you meet all

ance applies). The result is

. Adam reduces

the following conditions.

his otherwise allowable home mortgage interest

Most income tax treaties contain an article relat-

deduction by $3,000 (the $4,000 he paid ×

•

)

Your only foreign income is passive in-

ing to remuneration from government services.

and his otherwise allowable real estate tax de-

come, such as interest, dividends, and

Review the treaty text carefully to determine

duction by $1,050 (the $1,400 he paid ×

). He

royalties.

whether your U.S. Government remuneration is

can deduct $1,000 of his mortgage interest

•

taxable in the host country.

The total of all your foreign taxes is not

($4,000 − $3,000) and $350 of his real estate

more than $300 ($600 for joint tax re-

taxes ($1,400 − $1,050) when he itemizes his

If you or your spouse receives income from a

turns).

deductions.

private employer or self-employment, review the

•

tax treaty rules relating to income from personal

The foreign income and taxes are reported

Exception to the reduction. If you receive

services to determine whether that income is

to you on a payee statement, such as

a tax-free housing allowance as a member of the

taxable in the host country.

Form 1099-DIV, Dividends and Distribu-

military or the clergy, you do not have to reduce

tions, or 1099-INT, Interest Income.

your deductions for real estate tax and home

If you pay or accrue taxes to both the host

mortgage interest expenses you are otherwise

country and the United States, you may be able

If you make the election, you can claim a foreign

to relieve double taxation with a foreign tax

entitled to deduct.

tax credit without filing Form 1116. However,

credit. Most income tax treaties contain an arti-

you cannot carry back or carry over any unused

Required statement. If you receive a

cle providing relief from double taxation. Many

foreign tax to or from this year. See the instruc-

tax-free housing allowance and have real estate

treaties contain special foreign tax credit rules

tions for the appropriate line in the Tax and

tax or home mortgage interest expenses, attach

for U.S. citizens who are residents of a treaty

Credits section of Form 1040.

a statement to your tax return. The statement

country. For more information about the foreign

must contain all of the following information.

tax credit, see Foreign Taxes, earlier

Foreign tax deduction. If you choose to de-

•

The amount of each type of tax-free in-

duct all foreign income taxes on your U.S. in-

Other Agreements

come you received, such as a tax-free

come tax return, itemize the deduction on

housing allowance or tax-free representa-

Schedule A (Form 1040). You cannot deduct

tion allowance.

The United States may be a party to agreements

foreign taxes paid on income you exclude under

other than income tax treaties that may affect

the foreign earned income or housing exclu-

•

The amount of otherwise deductible ex-

sions.

your tax obligations to the host country. For

penses attributable to each type of

example, consular employees may be exempt

tax-free income.

Example. Dennis and Christina are married

from host country tax under the Vienna Conven-

•

The amount attributable to each type of

and live and work in Country X. Dennis works for

tion on Consular Relations or bilateral consular

tax-free income that was not directly attrib-

the U.S. Government and Christina is employed

agreements. Similarly, certain diplomatic staff

utable to that type of tax-free income.

by a private company. They pay income tax to

may be exempt from host country tax under the

Country X on Christina’s income only.

Vienna Convention on Diplomatic Relations.

•

An explanation of how you determined the

Check with the appropriate U.S. Embassy for

Dennis and Christina file a joint tax return

amounts not directly attributable to each

more information.

and exclude all of Christina’s income. They can-

type of tax-free income.

not claim a foreign tax credit or take a deduction

Double Withholding

for the taxes paid to Country X.

The statement must also indicate that none of

the amounts deducted on your return are in any

Deduction for other foreign taxes. The

If your U.S. government pay is subject to with-

way attributable to tax-free income.

deduction for foreign taxes other than foreign

holding in both the United States and the foreign

income taxes is not related to the foreign tax

country, you may reduce the amount of U.S. tax

credit. You can take deductions for these mis-

that is withheld from your pay if you expect to be

cellaneous foreign taxes and also claim the for-

entitled to a foreign tax credit on your U.S. in-

Foreign Taxes

eign tax credit for income taxes paid to a foreign

come tax return on this income. Complete Work-

country.

sheet 1-6 in Publication 505, Tax Withholding

If you pay or accrue taxes to a foreign govern-

You can deduct real property taxes you pay

and Estimated Tax, to determine how to revise

ment, you generally can choose to either claim

that are imposed on you by a foreign country.

Form W-4, Employee’s Withholding Allowance

them as a credit against your U.S. income tax

You take this deduction on Schedule A (Form

Certificate.

Publication 516 (April 2012)

Page 7

Publication 516 - U.s. Government Civilian Employees Stationed Abroad Page 7

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