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Will Sales-Tax Deduction Live On?

Q: Is there any hope that Congress will extend the sales-tax deduction on our federal income tax returns for 2012 and on?

—B.W.B., Lake Worth, Fla.

A: Yes, there are good reasons to be hopeful that lawmakers will extend this provision beyond its scheduled expiration at the end of this year. This law has long been very popular, and Florida is an important state in this year’s elections.

“The sales tax deduction is likely to be extended” beyond 2012, says Tim Hanford, a consultant in Bethesda, Md., and a former tax staffer on the House Ways Means Committee. But he says Congress might not act this year until after the November elections.

Taxpayers who itemize their deductions can either deduct the general state and local sales taxes they paid or deduct state and local income taxes.

This law is particularly beneficial for people who live in Florida, Texas, Washington and other states that have no state income tax. But it also helps taxpayers who wind up owing very little in state and local income taxes.

Crunch the numbers both ways to see which works best for you. If you claim the standard deduction, this provision won’t apply.

The staff of Congress’s Joint Committee on Taxation (
) recently issued a publication listing tax provisions that are scheduled to expire through 2022. Look on the committee’s website for Publication JCX-1-12, dated Jan. 6, 2012.

Q:My wife and I are retired from Canada, living in Florida as U.S. citizens and collecting pensions from Canada and filing jointly. Are we eligible for the “foreign earned income exclusion” for 2011?

—P.B., Tampa, Fla.

A: No. The foreign earned income exclusion typically applies to American citizens who live and work abroad. It doesn’t apply to U.S. citizens who live in the U.S. and collect pensions from another country.

If you’re a U.S. citizen living and working abroad, you typically are subject to U.S. income tax on your world-wide income. But under the exclusion, you may be eligible to exclude up to a certain amount of foreign “earned income,” such as salary, commissions, fees and other forms of pay for personal services. It doesn’t apply to pensions, interest or dividends.

For 2012, the maximum exclusion amount is $95,100, up from $92,900 for 2011. The exclusion amount is subject to annual inflation adjustments.

As a result, many Americans living and working abroad wind up owing little or no U.S. income tax on their foreign pay. In addition, they may be eligible to exclude or deduct certain foreign housing amounts.

For more details, see Internal Revenue Service Publication 54 on the IRS site (

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