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1040ez Booklet

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1040ez Booklet

1040ez booklet 10. 1040ez booklet   Education Savings Bond Program Table of Contents Introduction Who Can Cash In Bonds Tax FreeAdjusted qualified education expenses. 1040ez booklet Eligible educational institution. 1040ez booklet Dependent for whom you claim an exemption. 1040ez booklet MAGI when using Form 1040A. 1040ez booklet MAGI when using Form 1040. 1040ez booklet Figuring the Tax-Free AmountEffect of the Amount of Your Income on the Amount of Your Exclusion Claiming the Exclusion Introduction Generally, you must pay tax on the interest earned on U. 1040ez booklet S. 1040ez booklet savings bonds. 1040ez booklet If you do not include the interest in income in the years it is earned, you must include it in your income in the year in which you cash in the bonds. 1040ez booklet However, when you cash in certain savings bonds under an education savings bond program, you may be able to exclude the interest from income. 1040ez booklet Who Can Cash In Bonds Tax Free You may be able to cash in qualified U. 1040ez booklet S. 1040ez booklet savings bonds without having to include in your income some or all of the interest earned on the bonds if you meet the following conditions. 1040ez booklet You pay qualified education expenses for yourself, your spouse, or a dependent for whom you claim an exemption on your return. 1040ez booklet Your modified adjusted gross income (MAGI) is less than the amount specified for your filing status. 1040ez booklet Your filing status is not married filing separately. 1040ez booklet Qualified U. 1040ez booklet S. 1040ez booklet savings bonds. 1040ez booklet   A qualified U. 1040ez booklet S. 1040ez booklet savings bond is a series EE bond issued after 1989 or a series I bond. 1040ez booklet The bond must be issued either in your name (as the sole owner) or in the name of both you and your spouse (as co-owners). 1040ez booklet   The owner must be at least 24 years old before the bond's issue date. 1040ez booklet The issue date is printed on the front of the savings bond. 1040ez booklet    The issue date is not necessarily the date of purchase—it will be the first day of the month in which the bond is purchased (or posted, if bought electronically). 1040ez booklet Qualified education expenses. 1040ez booklet   These include the following items you pay for either yourself, your spouse, or a dependent for whom you claim an exemption. 1040ez booklet Tuition and fees required to enroll at or attend an eligible educational institution. 1040ez booklet Qualified education expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. 1040ez booklet Contributions to a qualified tuition program (QTP) (see How Much Can You Contribute in chapter 8, Qualified Tuition Program). 1040ez booklet Contributions to a Coverdell education savings account (ESA) (see Contributions in chapter 7, Coverdell Education Savings Account). 1040ez booklet Adjusted qualified education expenses. 1040ez booklet   You must reduce your qualified education expenses by all of the following tax-free benefits. 1040ez booklet Tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions). 1040ez booklet Expenses used to figure the tax-free portion of distributions from a Coverdell ESA (see Qualified Education Expenses in chapter 7, Coverdell Education Savings Account). 1040ez booklet Expenses used to figure the tax-free portion of distributions from a QTP (see Qualified education expenses in chapter 8, Qualified Tuition Program). 1040ez booklet Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as: Veterans' educational assistance benefits (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Qualified tuition reductions (see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), or Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ). 1040ez booklet Any expenses used in figuring the American opportunity and lifetime learning credits. 1040ez booklet See What Expenses Qualify in chapter 2, American Opportunity Credit, and What Expenses Qualify in chapter 3, Lifetime Learning Credit, for more information. 1040ez booklet Eligible educational institution. 1040ez booklet   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. 1040ez booklet S. 1040ez booklet Department of Education. 1040ez booklet It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. 1040ez booklet The educational institution should be able to tell you if it is an eligible educational institution. 1040ez booklet   Certain educational institutions located outside the United States also participate in the U. 1040ez booklet S. 1040ez booklet Department of Education's Federal Student Aid (FSA) programs. 1040ez booklet Dependent for whom you claim an exemption. 1040ez booklet   You claim an exemption for a person if you list his or her name and other required information on Form 1040 (or Form 1040A), line 6c. 1040ez booklet Modified adjusted gross income (MAGI). 1040ez booklet   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return without taking into account this interest exclusion. 1040ez booklet However, as discussed below, there may be other modifications. 1040ez booklet MAGI when using Form 1040A. 1040ez booklet   If you file Form 1040A, your MAGI is the AGI on line 22 of that form figured without taking into account any savings bond interest exclusion and modified by adding back any amount on line 18 (student loan interest deduction) and line 19 (tuition and fees deduction). 1040ez booklet MAGI when using Form 1040. 1040ez booklet   If you file Form 1040, your MAGI is the AGI on line 38 of that form figured without taking into account any savings bond interest exclusion and modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, Exclusion of income by bona fide residents of Puerto Rico, Exclusion for adoption benefits received under an employer's adoption assistance program, Deduction for student loan interest, Deduction for tuition and fees, and Deduction for domestic production activities. 1040ez booklet    Use the worksheet in the instructions for line 9 of Form 8815 to figure your MAGI. 1040ez booklet If you claim any of the exclusion or deduction items (1)–(6) listed above, add the amount of the exclusion or deduction to the amount on line 5 of the worksheet. 1040ez booklet Do not add in the deduction for (7) student loan interest, and (8) tuition and fees, or (9) domestic production activities because line 4 of the worksheet already includes these amounts. 1040ez booklet Enter the total on Form 8815, line 9, as your modified adjusted gross income (MAGI). 1040ez booklet    Because the deduction for interest expenses attributable to royalties and other investments is limited to your net investment income, you cannot figure the deduction until you have figured this interest exclusion. 1040ez booklet Therefore, if you had interest expenses attributable to royalties and deductible on Schedule E (Form 1040), Supplemental Income and Loss, you must make a special computation of your deductible interest without regard to this exclusion to figure the net royalty income included in your MAGI. 1040ez booklet See Royalties included in MAGI under Education Savings Bond Program in Publication 550, chapter 1. 1040ez booklet Figuring the Tax-Free Amount If the total you receive when you cash in the bonds is not more than the adjusted qualified education expenses for the year, all of the interest on the bonds may be tax free. 1040ez booklet However, if the total you receive when you cash in the bonds is more than the adjusted expenses, only part of the interest may be tax free. 1040ez booklet To determine the tax-free amount, multiply the interest part of the proceeds by a fraction. 1040ez booklet The numerator (top part) of the fraction is the adjusted qualified education expenses (AQEE) you paid during the year. 1040ez booklet The denominator (bottom part) of the fraction is the total proceeds you received during the year. 1040ez booklet Example. 1040ez booklet In February 2013, Mark and Joan Washington, a married couple, cashed a qualified series EE U. 1040ez booklet S. 1040ez booklet savings bond. 1040ez booklet They received proceeds of $9,000, representing principal of $6,000 and interest of $3,000. 1040ez booklet In 2013, they paid $7,650 of their daughter's college tuition. 1040ez booklet They are not claiming an American opportunity or lifetime learning credit for those expenses, and their daughter does not have any tax-free educational assistance. 1040ez booklet Their MAGI for 2013 was $80,000. 1040ez booklet   $3,000 interest × $7,650 AQEE  $9,000 proceeds = $2,550 tax-free interest   They can exclude $2,550 of interest in 2013. 1040ez booklet They must pay tax on the remaining $450 ($3,000 − $2,550) interest. 1040ez booklet Effect of the Amount of Your Income on the Amount of Your Exclusion The amount of your interest exclusion is gradually reduced (phased out) based on your MAGI and filing status. 1040ez booklet Claiming the Exclusion Use Form 8815 to figure your education savings bond interest exclusion. 1040ez booklet Enter your exclusion on line 3 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. 1040ez booklet Attach Form 8815 to your tax return. 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The 1040ez Booklet

1040ez booklet 5. 1040ez booklet   Exemptions, Deductions, and Credits Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Items Related to Excluded Income Exemptions Contributions to Foreign Charitable Organizations Moving ExpensesAllocation of Moving Expenses Forms To File Contributions to Individual Retirement Arrangements Taxes of Foreign Countries and U. 1040ez booklet S. 1040ez booklet PossessionsCredit for Foreign Income Taxes Deduction for Foreign Income Taxes Deduction for Other Foreign Taxes How To Report Deductions Topics - This chapter discusses: The rules concerning items related to excluded income, Exemptions, Contributions to foreign charitable organizations, Moving expenses, Contributions to individual retirement arrangements (IRAs), Taxes of foreign countries and U. 1040ez booklet S. 1040ez booklet possessions, and How to report deductions. 1040ez booklet Useful Items - You may want to see: Publication 501 Exemptions, Standard Deduction, and Filing Information 514 Foreign Tax Credit for Individuals 521 Moving Expenses 523 Selling Your Home 590 Individual Retirement Arrangements (IRAs) 597 Information on the United States—Canada Income Tax Treaty Form (and Instructions) 1116 Foreign Tax Credit 2106 Employee Business Expenses 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion 3903 Moving Expenses Schedule A (Form 1040) Itemized Deductions Schedule C (Form 1040) Profit or Loss From Business SS-5 Application for a Social Security Card W-7 Application for IRS Individual Taxpayer Identification Number See chapter 7 for information about getting these publications and forms. 1040ez booklet Items Related to Excluded Income U. 1040ez booklet S. 1040ez booklet citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States. 1040ez booklet If you choose to exclude foreign earned income or housing amounts, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. 1040ez booklet This includes any expenses, losses, and other normally deductible items that are allocable to the excluded income. 1040ez booklet You can deduct only those expenses connected with earning includible income. 1040ez booklet These rules apply only to items definitely related to the excluded earned income and they do not apply to other items that are not definitely related to any particular type of gross income. 1040ez booklet These rules do not apply to items such as: Personal exemptions, Qualified retirement contributions, Alimony payments, Charitable contributions, Medical expenses, Mortgage interest, or Real estate taxes on your personal residence. 1040ez booklet For purposes of these rules, your housing deduction is not treated as allocable to your excluded income, but the deduction for self- employment tax is. 1040ez booklet If you receive foreign earned income in a tax year after the year in which you earned it, you may have to file an amended return for the earlier year to properly adjust the amounts of deductions, credits, or exclusions allocable to your foreign earned income and housing exclusions. 1040ez booklet Example. 1040ez booklet In 2012, you had $90,400 of foreign earned income and $9,500 of deductions allocable to your foreign earned income. 1040ez booklet You did not have a housing exclusion. 1040ez booklet Because you excluded all of your foreign earned income, you would not have been able to claim any of the deductions on your 2012 return. 1040ez booklet In 2013, you received a $12,000 bonus for work you did abroad in 2012. 1040ez booklet You can exclude $4,700 of the bonus because the limit on the foreign earned income exclusion for 2012 was $95,100 and you have already excluded $90,400. 1040ez booklet Since you must include $7,300 of the bonus ($12,000 − $4,700) for work you did in 2012 in income, you can file an amended return for 2012 to claim $677 of the deductions. 1040ez booklet This is the deductions allocable to the foreign earned income ($9,500) multiplied by the includible portion of the foreign earned income ($7,300) and divided by the total foreign earned income for 2012 ($102,400). 1040ez booklet Exemptions You can claim an exemption for your nonresident alien spouse on your separate return, provided your spouse has no gross income for U. 1040ez booklet S. 1040ez booklet tax purposes and is not the dependent of another U. 1040ez booklet S. 1040ez booklet taxpayer. 1040ez booklet You also can claim exemptions for individuals who qualify as your dependents. 1040ez booklet To be your dependent, the individual must be a U. 1040ez booklet S. 1040ez booklet citizen, U. 1040ez booklet S. 1040ez booklet national, U. 1040ez booklet S. 1040ez booklet resident alien, or a resident of Canada or Mexico for some part of the calendar year in which your tax year begins. 1040ez booklet Children. 1040ez booklet   Children usually are citizens or residents of the same country as their parents. 1040ez booklet If you were a U. 1040ez booklet S. 1040ez booklet citizen when your child was born, your child generally is a U. 1040ez booklet S. 1040ez booklet citizen. 1040ez booklet This is true even if the child's other parent is a nonresident alien, the child was born in a foreign country, and the child lives abroad with the other parent. 1040ez booklet   If you have a legally adopted child who is not a U. 1040ez booklet S. 1040ez booklet citizen, U. 1040ez booklet S. 1040ez booklet resident, or U. 1040ez booklet S. 1040ez booklet national, the child meets the citizen requirement if you are a U. 1040ez booklet S. 1040ez booklet citizen or U. 1040ez booklet S. 1040ez booklet national and the child lived with you as a member of your household all year. 1040ez booklet Social security number. 1040ez booklet   You must include on your return the social security number (SSN) of each dependent for whom you claim an exemption. 1040ez booklet To get a social security number for a dependent, apply at a Social Security office or U. 1040ez booklet S. 1040ez booklet consulate. 1040ez booklet You must provide original or certified copies of documents to verify the dependent's age, identity, and citizenship, and complete Form SS-5. 1040ez booklet   If you do not have an SSN for a child who was born in 2013 and died in 2013, attach a copy of the child's birth certificate to your tax return. 1040ez booklet Print “Died” in column (2) of line 6c of your Form 1040 or Form 1040A. 1040ez booklet   If your dependent is a nonresident alien who is not eligible to get a social security number, you must list the dependent's individual taxpayer identification number (ITIN) instead of an SSN. 1040ez booklet To apply for an ITIN, file Form W-7 with the IRS. 1040ez booklet It usually takes 6 to 10 weeks to get an ITIN. 1040ez booklet Enter your dependent's ITIN wherever an SSN is requested on your tax return. 1040ez booklet More information. 1040ez booklet   For more information about exemptions, see Publication 501. 1040ez booklet Contributions to Foreign Charitable Organizations If you make contributions directly to a foreign church or other foreign charitable organization, you generally cannot deduct them. 1040ez booklet Exceptions are explained under Canadian, Mexican, and Israeli charities, later. 1040ez booklet You can deduct contributions to a U. 1040ez booklet S. 1040ez booklet organization that transfers funds to a charitable foreign organization if the U. 1040ez booklet S. 1040ez booklet organization controls the use of the funds by the foreign organization or if the foreign organization is just an administrative arm of the U. 1040ez booklet S. 1040ez booklet organization. 1040ez booklet Canadian, Mexican, and Israeli charities. 1040ez booklet   Under the income tax treaties with Canada, Mexico and Israel, you may be able to deduct contributions to certain Canadian, Mexican, and Israeli charitable organizations. 1040ez booklet Generally, you must have income from sources in Canada, Mexico, or Israel, and the organization must meet certain requirements. 1040ez booklet See Publication 597, Information on the United States-Canada Income Tax Treaty, and Publication 526, Charitable Contributions, for more information. 1040ez booklet Moving Expenses If you moved to a new home in 2013 because of your job or business, you may be able to deduct the expenses of your move. 1040ez booklet Generally, to be deductible, the moving expenses must have been paid or incurred in connection with starting work at a new job location. 1040ez booklet See Publication 521 for a complete discussion of the deduction for moving expenses and information about moves within the United States. 1040ez booklet Foreign moves. 1040ez booklet   A foreign move is a move in connection with the start of work at a new job location outside the United States and its possessions. 1040ez booklet A foreign move does not include a move back to the United States or its possessions. 1040ez booklet Allocation of Moving Expenses When your new place of work is in a foreign country, your moving expenses are directly connected with the income earned in that foreign country. 1040ez booklet If you exclude all or part of the income that you earn at the new location under the foreign earned income exclusion or the foreign housing exclusion, you cannot deduct the part of your moving expense that is allocable to the excluded income. 1040ez booklet Also, you cannot deduct the part of the moving expense related to the excluded income for a move from a foreign country to the United States if you receive a reimbursement that you are able to treat as compensation for services performed in the foreign country. 1040ez booklet Year to which expense is connected. 1040ez booklet   The moving expense is connected with earning the income (including reimbursements, as discussed in chapter 4 under Reimbursement of moving expenses ) either entirely in the year of the move or in 2 years. 1040ez booklet It is connected with earning the income entirely in the year of the move if you qualify for the foreign earned income exclusion under the bona fide residence test or physical presence test for at least 120 days during that tax year. 1040ez booklet   If you do not qualify under either the bona fide residence test or the physical presence test for at least 120 days during the year of the move, the expense is connected with earning the income in 2 years. 1040ez booklet The moving expense is connected with the year of the move and the following year if the move is from the United States to a foreign country. 1040ez booklet The moving expense is connected with the year of the move and the preceding year if the move is from a foreign country to the United States. 1040ez booklet Amount allocable to excluded income. 1040ez booklet   To figure the amount of your moving expense that is allocable to your excluded foreign earned income (and not deductible), you must multiply your total moving expense deduction by a fraction. 1040ez booklet The numerator (top number) of the fraction is the total of your excluded foreign earned income and housing amounts for both years and the denominator (bottom number) of the fraction is your total foreign earned income for both years. 1040ez booklet Example. 1040ez booklet On November 1, 2012, you transfer to Monaco. 1040ez booklet Your tax home is in Monaco, and you are a bona fide resident of Monaco for the entire tax year 2013. 1040ez booklet In 2012, you paid $6,000 for allowable moving expenses for your move from the United States to Monaco. 1040ez booklet You were fully reimbursed (under a nonaccountable plan) for these expenses in the same year. 1040ez booklet The reimbursement is included in your income. 1040ez booklet Your only other income consists of $16,000 wages earned in 2012 after the date of your move, and $100,100 wages earned in Monaco for 2013. 1040ez booklet Because you did not meet the bona fide residence test for at least 120 days during 2012, the year of the move, the moving expenses are for services you performed in both 2012 and the following year, 2013. 1040ez booklet Your total foreign earned income for both years is $122,100, consisting of $16,000 wages for 2012, $100,100 wages for 2013, and $6,000 moving expense reimbursement for both years. 1040ez booklet You have no housing exclusion. 1040ez booklet The total amount you can exclude is $113,190, consisting of the $97,600 full-year exclusion for 2013 and a $15,590 part-year exclusion for 2012 ($95,100 times the fraction of 60 qualifying bona fide residence days over 366 total days in the year). 1040ez booklet To find the part of your moving expenses that is not deductible, multiply your $6,000 total expenses by the fraction $113,190 over $122,100. 1040ez booklet The result, $5,562, is your nondeductible amount. 1040ez booklet    You must report the full amount of the moving expense reimbursement in the year in which you received the reimbursement. 1040ez booklet In the preceding example, this year was 2012. 1040ez booklet You attribute the reimbursement to both 2012 and 2013 only to figure the amount of foreign earned income eligible for exclusion for each year. 1040ez booklet Move between foreign countries. 1040ez booklet   If you move between foreign countries, your moving expense is allocable to income earned in the year of the move if you qualified under either the bona fide residence test or the physical presence test for a period that includes at least 120 days in the year of the move. 1040ez booklet New place of work in U. 1040ez booklet S. 1040ez booklet   If your new place of work is in the United States, the deductible moving expenses are directly connected with the income earned in the United States. 1040ez booklet If you treat a reimbursement from your employer as foreign earned income (see the discussion in chapter 4), you must allocate deductible moving expenses to foreign earned income. 1040ez booklet Storage expenses. 1040ez booklet   These expenses are attributable to work you do during the year in which you incur the storage expenses. 1040ez booklet You cannot deduct the amount allocable to excluded income. 1040ez booklet Moving Expense Attributable to Foreign Earnings in 2 Years If your moving expense deduction is attributable to your foreign earnings in 2 years (the year of the move and the following year), you should request an extension of time to file your return for the year of the move until after the end of the second year. 1040ez booklet By then, you should have all the information needed to properly figure the moving expense deduction. 1040ez booklet See Extensions under When To File and Pay in chapter 1. 1040ez booklet If you do not request an extension, you should figure the part of the moving expense that you cannot deduct because it is allocable to the foreign earned income you are excluding. 1040ez booklet You do this by multiplying the moving expense by a fraction, the numerator (top number) of which is your excluded foreign earned income for the year of the move, and the denominator (bottom number) of which is your total foreign earned income for the year of the move. 1040ez booklet Once you know your foreign earnings and exclusion for the following year, you must either: Adjust the moving expense deduction by filing an amended return for the year of the move, or Recapture any additional unallowable amount as income on your return for the following year. 1040ez booklet If, after you make the final computation, you have an additional amount of allowable moving expense deduction, you can claim this only on an amended return for the year of the move. 1040ez booklet You cannot claim it on the return for the second year. 1040ez booklet Forms To File Report your moving expenses on Form 3903. 1040ez booklet Report your moving expense deduction on line 26 of Form 1040. 1040ez booklet If you must reduce your moving expenses by the amount allocable to excluded income (as explained later under How To Report Deductions ), attach a statement to your return showing how you figured this amount. 1040ez booklet For more information about figuring moving expenses, see Publication 521. 1040ez booklet Contributions to Individual Retirement Arrangements Contributions to your individual retirement arrangements (IRAs) that are traditional IRAs or Roth IRAs are generally limited to the lesser of $5,500 ($6,500 if 50 or older) or your compensation that is includible in your gross income for the tax year. 1040ez booklet In determining compensation for this purpose, do not take into account amounts you exclude under either the foreign earned income exclusion or the foreign housing exclusion. 1040ez booklet Do not reduce your compensation by the foreign housing deduction. 1040ez booklet If you are covered by an employer retirement plan at work, your deduction for your contributions to your traditional IRAs is generally limited based on your modified adjusted gross income. 1040ez booklet This is your adjusted gross income figured without taking into account the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. 1040ez booklet Other modifications are also required. 1040ez booklet For more information on IRAs, see Publication 590. 1040ez booklet Taxes of Foreign Countries and U. 1040ez booklet S. 1040ez booklet Possessions You can take either a credit or a deduction for income taxes paid to a foreign country or a U. 1040ez booklet S. 1040ez booklet possession. 1040ez booklet Taken as a deduction, foreign income taxes reduce your taxable income. 1040ez booklet Taken as a credit, foreign income taxes reduce your tax liability. 1040ez booklet You must treat all foreign income taxes the same way. 1040ez booklet If you take a credit for any foreign income taxes, you cannot deduct any foreign income taxes. 1040ez booklet However, you may be able to deduct other foreign taxes. 1040ez booklet See Deduction for Other Foreign Taxes, later. 1040ez booklet There is no rule to determine whether it is to your advantage to take a deduction or a credit for foreign income taxes. 1040ez booklet In most cases, it is to your advantage to take foreign income taxes as a tax credit, which you subtract directly from your U. 1040ez booklet S. 1040ez booklet tax liability, rather than as a deduction in figuring taxable income. 1040ez booklet However, if foreign income taxes were imposed at a high rate and the proportion of foreign income to U. 1040ez booklet S. 1040ez booklet income is small, a lower final tax may result from deducting the foreign income taxes. 1040ez booklet In any event, you should figure your tax liability both ways and then use the one that is better for you. 1040ez booklet You can make or change your choice within 10 years from the due date for filing the tax return on which you are entitled to take either the deduction or the credit. 1040ez booklet Foreign income taxes. 1040ez booklet   These are generally income taxes you pay to any foreign country or possession of the United States. 1040ez booklet Foreign income taxes on U. 1040ez booklet S. 1040ez booklet return. 1040ez booklet   Foreign income taxes can only be taken as a credit on Form 1040, line 47, or as an itemized deduction on Schedule A. 1040ez booklet These amounts cannot be included as withheld income taxes on Form 1040, line 62. 1040ez booklet Foreign taxes paid on excluded income. 1040ez booklet   You cannot take a credit or deduction for foreign income taxes paid on earnings you exclude from tax under any of the following. 1040ez booklet Foreign earned income exclusion. 1040ez booklet Foreign housing exclusion. 1040ez booklet Possession exclusion. 1040ez booklet If your wages are completely excluded, you cannot deduct or take a credit for any of the foreign taxes paid on your wages. 1040ez booklet   If only part of your wages is excluded, you cannot deduct or take a credit for the foreign income taxes allocable to the excluded part. 1040ez booklet You find the taxes allocable to your excluded wages by applying a fraction to the foreign taxes paid on foreign earned income received during the tax year. 1040ez booklet The numerator (top number) of the fraction is your excluded foreign earned income received during the tax year minus deductible expenses allocable to that income (not including the foreign housing deduction). 1040ez booklet The denominator (bottom number) of the fraction is your total foreign earned income received during the tax year minus all deductible expenses allocable to that income (including the foreign housing deduction). 1040ez booklet   If foreign law taxes both earned income and some other type of income and the taxes on the other type cannot be separated, the denominator of the fraction is the total amount of income subject to foreign tax minus deductible expenses allocable to that income. 1040ez booklet    If you take a foreign tax credit for tax on income you could have excluded under your choice to exclude foreign earned income or your choice to exclude foreign housing costs, one or both of the choices may be considered revoked. 1040ez booklet Credit for Foreign Income Taxes If you take the foreign tax credit, you may have to file Form 1116 with Form 1040. 1040ez booklet Form 1116 is used to figure the amount of foreign tax paid or accrued that can be claimed as a foreign tax credit. 1040ez booklet Do not include the amount of foreign tax paid or accrued as withheld federal income taxes on Form 1040, line 62. 1040ez booklet The foreign income tax for which you can claim a credit is the amount of legal and actual tax liability you pay or accrue during the year. 1040ez booklet The amount for which you can claim a credit is not necessarily the amount withheld by the foreign country. 1040ez booklet You cannot take a foreign tax credit for income tax you paid to a foreign country that would be refunded by the foreign country if you made a claim for refund. 1040ez booklet Subsidies. 1040ez booklet   If a foreign country returns your foreign tax payments to you in the form of a subsidy, you cannot claim a foreign tax credit based on these payments. 1040ez booklet This rule applies to a subsidy provided by any means that is determined, directly or indirectly, by reference to the amount of tax, or to the base used to figure the tax. 1040ez booklet   Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. 1040ez booklet A credit is also not allowed if the subsidy is given to a person related to you, or persons who participated in a transaction or a related transaction with you. 1040ez booklet Limit The foreign tax credit is limited to the part of your total U. 1040ez booklet S. 1040ez booklet tax that is in proportion to your taxable income from sources outside the United States compared to your total taxable income. 1040ez booklet The allowable foreign tax credit cannot be more than your actual foreign tax liability. 1040ez booklet Exemption from limit. 1040ez booklet   You will not be subject to this limit and will not have to file Form 1116 if you meet all three of the following requirements. 1040ez booklet Your only foreign source income for the year is passive income (dividends, interest, royalties, etc. 1040ez booklet ) that is reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT). 1040ez booklet Your foreign taxes for the year that qualify for the credit are not more than $300 ($600 if you are filing a joint return) and are reported on a payee statement. 1040ez booklet You elect this procedure. 1040ez booklet If you make this election, you cannot carry back or carry over any unused foreign tax to or from this year. 1040ez booklet Separate limit. 1040ez booklet   You must figure the limit on a separate basis with regard to “passive category income” and “general category income” (see the instructions for Form 1116). 1040ez booklet Figuring the limit. 1040ez booklet   In figuring taxable income in each category, you take into account only the amount that you must include in income on your federal tax return. 1040ez booklet Do not take any excluded amount into account. 1040ez booklet   To determine your taxable income in each category, deduct expenses and losses that are definitely related to that income. 1040ez booklet   Other expenses (such as itemized deductions or the standard deduction) not definitely related to specific items of income must be apportioned to the foreign income in each category by multiplying them by a fraction. 1040ez booklet The numerator (top number) of the fraction is your gross foreign income in the separate limit category. 1040ez booklet The denominator (bottom number) of the fraction is your gross income from all sources. 1040ez booklet For this purpose, gross income includes income that is excluded under the foreign earned income provisions but does not include any other exempt income. 1040ez booklet You must use special rules for deducting interest expenses. 1040ez booklet For more information on allocating and apportioning your deductions, see Publication 514. 1040ez booklet Exemptions. 1040ez booklet   Do not take the deduction for exemptions for yourself, your spouse, or your dependents in figuring taxable income for purposes of the limit. 1040ez booklet Recapture of foreign losses. 1040ez booklet   If you have an overall foreign loss and the loss reduces your U. 1040ez booklet S. 1040ez booklet source income (resulting in a reduction of your U. 1040ez booklet S. 1040ez booklet tax liability), you must recapture the loss in later years when you have taxable income from foreign sources. 1040ez booklet This is done by treating a part of your taxable income from foreign sources in later years as U. 1040ez booklet S. 1040ez booklet source income. 1040ez booklet This reduces the numerator of the limiting fraction and the resulting foreign tax credit limit. 1040ez booklet Recapture of domestic losses. 1040ez booklet   If you have an overall domestic loss (resulting in no U. 1040ez booklet S. 1040ez booklet tax liability), you cannot claim a foreign tax credit for taxes paid during that year. 1040ez booklet You must recapture the loss in later years when you have U. 1040ez booklet S. 1040ez booklet source taxable income. 1040ez booklet This is done by treating a part of your taxable income from U. 1040ez booklet S. 1040ez booklet sources in later years as foreign source income. 1040ez booklet This increases the numerator of the limiting fraction and the resulting foreign tax credit limit. 1040ez booklet Foreign tax credit carryback and carryover. 1040ez booklet   The amount of foreign income tax not allowed as a credit because of the limit can be carried back 1 year and carried forward 10 years. 1040ez booklet   More information on figuring the foreign tax credit can be found in Publication 514. 1040ez booklet Deduction for Foreign Income Taxes Instead of taking the foreign tax credit, you can deduct foreign income taxes as an itemized deduction on Schedule A (Form 1040). 1040ez booklet You can deduct only foreign income taxes paid on income that is subject to U. 1040ez booklet S. 1040ez booklet tax. 1040ez booklet You cannot deduct foreign taxes paid on earnings you exclude from tax under any of the following. 1040ez booklet Foreign earned income exclusion. 1040ez booklet Foreign housing exclusion. 1040ez booklet Possession exclusion. 1040ez booklet Example. 1040ez booklet You are a U. 1040ez booklet S. 1040ez booklet citizen and qualify to exclude your foreign earned income. 1040ez booklet Your excluded wages in Country X are $70,000 on which you paid income tax of $10,000. 1040ez booklet You received dividends from Country X of $2,000 on which you paid income tax of $600. 1040ez booklet You can deduct the $600 tax payment because the dividends relating to it are subject to U. 1040ez booklet S. 1040ez booklet tax. 1040ez booklet Because you exclude your wages, you cannot deduct the income tax of $10,000. 1040ez booklet If you exclude only a part of your wages, see the earlier discussion under Foreign taxes paid on excluded income. 1040ez booklet Deduction for Other Foreign Taxes You can deduct real property taxes you pay that are imposed on you by a foreign country. 1040ez booklet You take this deduction on Schedule A (Form 1040). 1040ez booklet You cannot deduct other foreign taxes, such as personal property taxes, unless you incurred the expenses in a trade or business or in the production of income. 1040ez booklet On the other hand, you generally can deduct personal property taxes when you pay them to U. 1040ez booklet S. 1040ez booklet possessions. 1040ez booklet But if you claim the possession exclusion, see Publication 570. 1040ez booklet The deduction for foreign taxes other than foreign income taxes is not related to the foreign tax credit. 1040ez booklet You can take deductions for these miscellaneous foreign taxes and also claim the foreign tax credit for income taxes imposed by a foreign country. 1040ez booklet How To Report Deductions If you exclude foreign earned income or housing amounts, how you show your deductions on your tax return and how you figure the amount allocable to your excluded income depends on whether the expenses are used in figuring adjusted gross income (Form 1040, line 38) or are itemized deductions. 1040ez booklet If you have deductions used in figuring adjusted gross income, enter the total amount for each of these items on the appropriate lines and schedules of Form 1040. 1040ez booklet Generally, you figure the amount of a deduction related to the excluded income by multiplying the deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 1040ez booklet Enter the amount of the deduction(s) related to excluded income on line 44 of Form 2555. 1040ez booklet If you have itemized deductions related to excluded income, enter on Schedule A (Form 1040) only the part not related to excluded income. 1040ez booklet You figure that amount by subtracting from the total deduction the amount related to excluded income. 1040ez booklet Generally, you figure the amount that is related to the excluded income by multiplying the total deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 1040ez booklet Attach a statement to your return showing how you figured the deductible amount. 1040ez booklet Example 1. 1040ez booklet You are a U. 1040ez booklet S. 1040ez booklet citizen employed as an accountant. 1040ez booklet Your tax home is in Germany for the entire tax year. 1040ez booklet You meet the physical presence test. 1040ez booklet Your foreign earned income for the year was $122,000 and your investment income was $10,380. 1040ez booklet After excluding $97,600, your AGI is $34,780. 1040ez booklet You had unreimbursed business expenses of $2,500 for travel and entertainment in earning your foreign income, of which $500 was for meals and entertainment. 1040ez booklet These expenses are deductible only as miscellaneous deductions on Schedule A (Form 1040). 1040ez booklet You also have $500 of miscellaneous expenses that are not related to your foreign income that you enter on line 23 of Schedule A. 1040ez booklet You must fill out Form 2106. 1040ez booklet On that form, reduce your deductible meal and entertainment expenses by 50% ($250). 1040ez booklet You must reduce the remaining $2,250 of travel and entertainment expenses by 80% ($1,800) because you excluded 80% ($97,600/$122,000) of your foreign earned income. 1040ez booklet You carry the remaining total of $450 to line 21 of Schedule A. 1040ez booklet Add the $450 to the $500 that you have on line 23 and enter the total ($950) on line 24. 1040ez booklet On line 26 of Schedule A, enter $696, which is 2% of your adjusted gross income of $34,780 (line 38, Form 1040) and subtract it from the amount on line 24. 1040ez booklet Enter $254 on line 27 of Schedule A. 1040ez booklet Example 2. 1040ez booklet You are a U. 1040ez booklet S. 1040ez booklet citizen, have a tax home in Spain, and meet the physical presence test. 1040ez booklet You are self-employed and personal services produce the business income. 1040ez booklet Your gross income was $116,931, business expenses $66,895, and net income (profit) $50,036. 1040ez booklet You choose the foreign earned income exclusion and exclude $97,600 of your gross income. 1040ez booklet Since your excluded income is 83. 1040ez booklet 47% of your total income, 83. 1040ez booklet 47% of your business expenses are not deductible. 1040ez booklet Report your total income and expenses on Schedule C (Form 1040). 1040ez booklet On Form 2555 you will show the following: Line 20a, $116,931, gross income, Lines 42 and 43, $97,600, foreign earned income exclusion, and Line 44, $55,837 (83. 1040ez booklet 47% × $66,895) business expenses attributable to the exclusion. 1040ez booklet In this situation (Example 2), you cannot use Form 2555-EZ since you had self-employment income and business expenses. 1040ez booklet Example 3. 1040ez booklet Assume in Example 2 that both capital and personal services combine to produce the business income. 1040ez booklet No more than 30% of your net income, or $15,011, assuming that this amount is a reasonable allowance for your services, is considered earned and can be excluded. 1040ez booklet Your exclusion of $15,011 is 12. 1040ez booklet 84% of your gross income ($15,011 ÷ $116,931). 1040ez booklet Because you excluded 12. 1040ez booklet 84% of your total income, $8,589 (. 1040ez booklet 1284 x $66,895) of your business expenses is attributable to the excluded income and is not deductible. 1040ez booklet Example 4. 1040ez booklet You are a U. 1040ez booklet S. 1040ez booklet citizen, have a tax home in Brazil, and meet the physical presence test. 1040ez booklet You are self-employed and both capital and personal services combine to produce business income. 1040ez booklet Your gross income was $146,000, business expenses were $172,000, and your net loss was $26,000. 1040ez booklet A reasonable allowance for the services you performed for the business is $77,000. 1040ez booklet Because you incurred a net loss, the earned income limit of 30% of your net profit does not apply. 1040ez booklet The $77,000 is foreign earned income. 1040ez booklet If you choose to exclude the $77,000, you exclude 52. 1040ez booklet 74% of your gross income ($77,000 ÷ $146,000), and 52. 1040ez booklet 74% of your business expenses ($90,713) is attributable to that income and is not deductible. 1040ez booklet Show your total income and expenses on Schedule C (Form 1040). 1040ez booklet On Form 2555, exclude $77,000 and show $90,713 on line 44. 1040ez booklet Subtract line 44 from line 43, and enter the difference as a negative (in parentheses) on line 45. 1040ez booklet Because this amount is negative, enter it as a positive (no parentheses) on line 21, Form 1040, and combine it with your other income to arrive at total income on line 22 of Form 1040. 1040ez booklet In this situation (Example 4), you would probably not want to choose the foreign earned income exclusion if this was the first year you were eligible. 1040ez booklet If you had chosen the exclusion in an earlier year, you might want to revoke the choice for this year. 1040ez booklet To do so would mean that you could not claim the exclusion again for the next 5 tax years without IRS approval. 1040ez booklet See Choosing the Exclusion in chapter 4. 1040ez booklet Example 5. 1040ez booklet You are a U. 1040ez booklet S. 1040ez booklet citizen, have a tax home in Panama, and meet the bona fide residence test. 1040ez booklet You have been performing services for clients as a partner in a firm that provides services exclusively in Panama. 1040ez booklet Capital investment is not material in producing the partnership's income. 1040ez booklet Under the terms of the partnership agreement, you are to receive 50% of the net profits. 1040ez booklet The partnership received gross income of $244,000 and incurred operating expenses of $98,250. 1040ez booklet Of the net profits of $145,750, you received $72,875 as your distributive share. 1040ez booklet You choose to exclude $97,600 of your share of the gross income. 1040ez booklet Because you exclude 80% ($97,600 ÷ $122,000) of your share of the gross income, you cannot deduct $39,300, 80% of your share of the operating expenses (. 1040ez booklet 80 × $49,125). 1040ez booklet Report $72,875, your distributive share of the partnership net profit, on Schedule E (Form 1040), Supplemental Income and Loss. 1040ez booklet On Form 2555, show $97,600 on line 42 and show $39,300 on line 44. 1040ez booklet Your exclusion on Form 2555 is $58,300. 1040ez booklet In this situation (Example 5), you cannot use Form 2555-EZ since you had earned income other than salaries and wages and you had business expenses. 1040ez booklet Prev  Up  Next   Home   More Online Publications