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2007 Tax Forms

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2007 Tax Forms

2007 tax forms 1. 2007 tax forms   Deducting Business Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: What Can I Deduct?Cost of Goods Sold Capital Expenses Capital versus Deductible Expenses Personal versus Business Expenses How Much Can I Deduct?Not-for-profit limits. 2007 tax forms At-risk limits. 2007 tax forms Passive activities. 2007 tax forms Net operating loss. 2007 tax forms When Can I Deduct an Expense?Economic performance. 2007 tax forms Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. 2007 tax forms  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. 2007 tax forms See Optional safe harbor method under Business use of your home , later. 2007 tax forms Introduction This chapter covers the general rules for deducting business expenses. 2007 tax forms Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit. 2007 tax forms Topics - This chapter discusses: What you can deduct How much you can deduct When you can deduct Not-for-profit activities Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 542 Corporations 547 Casualties, Disasters, and Thefts 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction 946 How To Depreciate Property Form (and Instructions) Sch A (Form 1040) Itemized Deductions 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit See chapter 12 for information about getting publications and forms. 2007 tax forms What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. 2007 tax forms An ordinary expense is one that is common and accepted in your industry. 2007 tax forms A necessary expense is one that is helpful and appropriate for your trade or business. 2007 tax forms An expense does not have to be indispensable to be considered necessary. 2007 tax forms Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. 2007 tax forms In some cases you may not be allowed to deduct the expense at all. 2007 tax forms Therefore, it is important to distinguish usual business expenses from expenses that include the following. 2007 tax forms The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. 2007 tax forms Cost of Goods Sold If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. 2007 tax forms Some of your business expenses may be included in figuring cost of goods sold. 2007 tax forms Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. 2007 tax forms If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. 2007 tax forms The following are types of expenses that go into figuring cost of goods sold. 2007 tax forms The cost of products or raw materials, including freight. 2007 tax forms Storage. 2007 tax forms Direct labor (including contributions to pension or annuity plans) for workers who produce the products. 2007 tax forms Factory overhead. 2007 tax forms Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. 2007 tax forms Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. 2007 tax forms This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million. 2007 tax forms For more information, see the following sources. 2007 tax forms Cost of goods sold—chapter 6 of Publication 334. 2007 tax forms Inventories—Publication 538. 2007 tax forms Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. 2007 tax forms Capital Expenses You must capitalize, rather than deduct, some costs. 2007 tax forms These costs are a part of your investment in your business and are called “capital expenses. 2007 tax forms ” Capital expenses are considered assets in your business. 2007 tax forms In general, you capitalize three types of costs. 2007 tax forms Business start-up costs (See Tip below). 2007 tax forms Business assets. 2007 tax forms Improvements. 2007 tax forms You can elect to deduct or amortize certain business start-up costs. 2007 tax forms See chapters 7 and 8. 2007 tax forms Cost recovery. 2007 tax forms   Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. 2007 tax forms These recovery methods allow you to deduct part of your cost each year. 2007 tax forms In this way, you are able to recover your capital expense. 2007 tax forms See Amortization (chapter 8) and Depletion (chapter 9) in this publication. 2007 tax forms A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. 2007 tax forms A greater portion of these costs can be deducted if the property is qualified disaster assistance property. 2007 tax forms See Publication 946 for details. 2007 tax forms Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. 2007 tax forms These costs may include expenses for advertising, travel, or wages for training employees. 2007 tax forms If you go into business. 2007 tax forms   When you go into business, treat all costs you had to get your business started as capital expenses. 2007 tax forms   Usually you recover costs for a particular asset through depreciation. 2007 tax forms Generally, you cannot recover other costs until you sell the business or otherwise go out of business. 2007 tax forms However, you can choose to amortize certain costs for setting up your business. 2007 tax forms See Starting a Business in chapter 8 for more information on business start-up costs. 2007 tax forms If your attempt to go into business is unsuccessful. 2007 tax forms   If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories. 2007 tax forms The costs you had before making a decision to acquire or begin a specific business. 2007 tax forms These costs are personal and nondeductible. 2007 tax forms They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. 2007 tax forms The costs you had in your attempt to acquire or begin a specific business. 2007 tax forms These costs are capital expenses and you can deduct them as a capital loss. 2007 tax forms   If you are a corporation and your attempt to go into a new trade or business is not successful, you may be able to deduct all investigatory costs as a loss. 2007 tax forms   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. 2007 tax forms You cannot take a deduction for these costs. 2007 tax forms You will recover the costs of these assets when you dispose of them. 2007 tax forms Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. 2007 tax forms You must fully capitalize the cost of these assets, including freight and installation charges. 2007 tax forms Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. 2007 tax forms See Regulations section 1. 2007 tax forms 263A-2 for information on these rules. 2007 tax forms Improvements Improvements are generally major expenditures. 2007 tax forms Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. 2007 tax forms The costs of making improvements to a business asset are capital expenses if the improvements add to the value of the asset, appreciably lengthen the time you can use it, or adapt it to a different use. 2007 tax forms Beginning in 2014, you must capitalize as improvements costs that are for the betterment of a unit of property, restore the unit of property, or adapt the unit of property to a new or different use. 2007 tax forms Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. 2007 tax forms However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. 2007 tax forms Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. 2007 tax forms Restoration plan. 2007 tax forms   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. 2007 tax forms This applies even if some of the work would by itself be classified as repairs. 2007 tax forms Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. 2007 tax forms Motor vehicles. 2007 tax forms   You usually capitalize the cost of a motor vehicle you use in your business. 2007 tax forms You can recover its cost through annual deductions for depreciation. 2007 tax forms   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. 2007 tax forms See Publication 463. 2007 tax forms   Generally, repairs you make to your business vehicle are currently deductible. 2007 tax forms However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. 2007 tax forms Roads and driveways. 2007 tax forms    The cost of building a private road on your business property and the cost of replacing a gravel driveway with a concrete one are capital expenses you may be able to depreciate. 2007 tax forms The cost of maintaining a private road on your business property is a deductible expense. 2007 tax forms Tools. 2007 tax forms   Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor. 2007 tax forms Machinery parts. 2007 tax forms   Unless the uniform capitalization rules apply, the cost of replacing short-lived parts of a machine to keep it in good working condition, but not add to its life, is a deductible expense. 2007 tax forms Heating equipment. 2007 tax forms   The cost of changing from one heating system to another is a capital expense. 2007 tax forms Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. 2007 tax forms However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. 2007 tax forms You can deduct the business part. 2007 tax forms For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. 2007 tax forms The remaining 30% is personal interest and generally is not deductible. 2007 tax forms See chapter 4 for information on deducting interest and the allocation rules. 2007 tax forms Business use of your home. 2007 tax forms   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. 2007 tax forms These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. 2007 tax forms   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. 2007 tax forms The business part of your home must be used exclusively and regularly for your trade or business. 2007 tax forms The business part of your home must be: Your principal place of business, or A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) used in connection with your trade or business. 2007 tax forms   You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility. 2007 tax forms   Your home office qualifies as your principal place of business if you meet the following requirements. 2007 tax forms You use the office exclusively and regularly for administrative or management activities of your trade or business. 2007 tax forms You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. 2007 tax forms   If you have more than one business location, determine your principal place of business based on the following factors. 2007 tax forms The relative importance of the activities performed at each location. 2007 tax forms If the relative importance factor does not determine your principal place of business, consider the time spent at each location. 2007 tax forms Optional safe harbor method. 2007 tax forms   Beginning in 2013, individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. 2007 tax forms This method is an alternative to the calculation, allocation, and substantiation of actual expenses. 2007 tax forms   The deduction under the optional method is limited to $1,500 per year based on $5 a square foot for up to 300 square feet. 2007 tax forms Under this method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A (Form 1040). 2007 tax forms You are not required to allocate these deductions between personal and business use, as is required under the regular method. 2007 tax forms If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. 2007 tax forms   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. 2007 tax forms All of the requirements discussed earlier under Business use of your home still apply. 2007 tax forms   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. 2007 tax forms    If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain from the sale of your home that equals any depreciation you deducted (or could have deducted) for periods after May 6, 1997. 2007 tax forms Business use of your car. 2007 tax forms   If you use your car exclusively in your business, you can deduct car expenses. 2007 tax forms If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. 2007 tax forms Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. 2007 tax forms   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. 2007 tax forms Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. 2007 tax forms Beginning in 2013, the standard mileage rate is 56. 2007 tax forms 5 cents per mile. 2007 tax forms   If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. 2007 tax forms   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. 2007 tax forms How Much Can I Deduct? Generally, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense. 2007 tax forms Recovery of amount deducted (tax benefit rule). 2007 tax forms   If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. 2007 tax forms If you have a recovery in a later year, include the recovered amount in income in that year. 2007 tax forms However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. 2007 tax forms   For more information on recoveries and the tax benefit rule, see Publication 525. 2007 tax forms Payments in kind. 2007 tax forms   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. 2007 tax forms You cannot deduct the cost of your own labor. 2007 tax forms   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. 2007 tax forms If these costs are included in the cost of goods sold, do not deduct them again as a business expense. 2007 tax forms Limits on losses. 2007 tax forms   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. 2007 tax forms There may be limits on how much of the loss you can deduct. 2007 tax forms Not-for-profit limits. 2007 tax forms   If you carry on your business activity without the intention of making a profit, you cannot use a loss from it to offset other income. 2007 tax forms See Not-for-Profit Activities , later. 2007 tax forms At-risk limits. 2007 tax forms   Generally, a deductible loss from a trade or business or other income-producing activity is limited to the investment you have “at risk” in the activity. 2007 tax forms You are at risk in any activity for the following. 2007 tax forms The money and adjusted basis of property you contribute to the activity. 2007 tax forms Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. 2007 tax forms For more information, see Publication 925. 2007 tax forms Passive activities. 2007 tax forms   Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate, or a rental activity. 2007 tax forms In general, deductions for losses from passive activities only offset income from passive activities. 2007 tax forms You cannot use any excess deductions to offset other income. 2007 tax forms In addition, passive activity credits can only offset the tax on net passive income. 2007 tax forms Any excess loss or credits are carried over to later years. 2007 tax forms Suspended passive losses are fully deductible in the year you completely dispose of the activity. 2007 tax forms For more information, see Publication 925. 2007 tax forms Net operating loss. 2007 tax forms   If your deductions are more than your income for the year, you may have a “net operating loss. 2007 tax forms ” You can use a net operating loss to lower your taxes in other years. 2007 tax forms See Publication 536 for more information. 2007 tax forms   See Publication 542 for information about net operating losses of corporations. 2007 tax forms When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. 2007 tax forms An accounting method is a set of rules used to determine when and how income and expenses are reported. 2007 tax forms The two basic methods are the cash method and the accrual method. 2007 tax forms Whichever method you choose must clearly reflect income. 2007 tax forms For more information on accounting methods, see Publication 538. 2007 tax forms Cash method. 2007 tax forms   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. 2007 tax forms Accrual method. 2007 tax forms   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. 2007 tax forms The all-events test has been met. 2007 tax forms The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. 2007 tax forms Economic performance has occurred. 2007 tax forms Economic performance. 2007 tax forms   You generally cannot deduct or capitalize a business expense until economic performance occurs. 2007 tax forms If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided, or the property is used. 2007 tax forms If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. 2007 tax forms Example. 2007 tax forms Your tax year is the calendar year. 2007 tax forms In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. 2007 tax forms You paid it by check in January 2014. 2007 tax forms If you use the accrual method of accounting, deduct the $600 on your tax return for 2013 because all events have occurred to “fix” the fact of liability (in this case the work was completed), the liability can be determined, and economic performance occurred in that year. 2007 tax forms If you use the cash method of accounting, deduct the expense on your 2014 return. 2007 tax forms Prepayment. 2007 tax forms   You generally cannot deduct expenses in advance, even if you pay them in advance. 2007 tax forms This rule applies to both the cash and accrual methods. 2007 tax forms It applies to prepaid interest, prepaid insurance premiums, and any other expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. 2007 tax forms Example. 2007 tax forms In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. 2007 tax forms Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. 2007 tax forms You can deduct the rent for 2014 and 2015 on your tax returns for those years. 2007 tax forms Contested liability. 2007 tax forms   Under the cash method, you can deduct a contested liability only in the year you pay the liability. 2007 tax forms Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. 2007 tax forms S. 2007 tax forms possession income, war profits, and excess profits taxes) either in the tax year you pay the liability (or transfer money or other property to satisfy the obligation) or in the tax year you settle the contest. 2007 tax forms However, to take the deduction in the year of payment or transfer, you must meet certain conditions. 2007 tax forms See Regulations section 1. 2007 tax forms 461-2. 2007 tax forms Related person. 2007 tax forms   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. 2007 tax forms However, if you and the person you owe are related and that person uses the cash method of accounting, you must pay the expense before you can deduct it. 2007 tax forms Your deduction is allowed when the amount is includible in income by the related cash method payee. 2007 tax forms See Related Persons in Publication 538. 2007 tax forms Not-for-Profit Activities If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. 2007 tax forms Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. 2007 tax forms The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. 2007 tax forms It does not apply to corporations other than S corporations. 2007 tax forms In determining whether you are carrying on an activity for profit, several factors are taken into account. 2007 tax forms No one factor alone is decisive. 2007 tax forms Among the factors to consider are whether: You carry on the activity in a businesslike manner, The time and effort you put into the activity indicate you intend to make it profitable, You depend on the income for your livelihood, Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), You change your methods of operation in an attempt to improve profitability, You (or your advisors) have the knowledge needed to carry on the activity as a successful business, You were successful in making a profit in similar activities in the past, The activity makes a profit in some years, and You can expect to make a future profit from the appreciation of the assets used in the activity. 2007 tax forms Presumption of profit. 2007 tax forms   An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. 2007 tax forms Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. 2007 tax forms The activity must be substantially the same for each year within this period. 2007 tax forms You have a profit when the gross income from an activity exceeds the deductions. 2007 tax forms   If a taxpayer dies before the end of the 5-year (or 7-year) period, the “test” period ends on the date of the taxpayer's death. 2007 tax forms   If your business or investment activity passes this 3- (or 2-) years-of-profit test, the IRS will presume it is carried on for profit. 2007 tax forms This means the limits discussed here will not apply. 2007 tax forms You can take all your business deductions from the activity, even for the years that you have a loss. 2007 tax forms You can rely on this presumption unless the IRS later shows it to be invalid. 2007 tax forms Using the presumption later. 2007 tax forms   If you are starting an activity and do not have 3 (or 2) years showing a profit, you can elect to have the presumption made after you have the 5 (or 7) years of experience allowed by the test. 2007 tax forms   You can elect to do this by filing Form 5213. 2007 tax forms Filing this form postpones any determination that your activity is not carried on for profit until 5 (or 7) years have passed since you started the activity. 2007 tax forms   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. 2007 tax forms Accordingly, it will not restrict your deductions. 2007 tax forms Rather, you will gain time to earn a profit in the required number of years. 2007 tax forms If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. 2007 tax forms If you do not have 3 (or 2) years of profit, the limit can be applied retroactively to any year with a loss in the 5-year (or 7-year) period. 2007 tax forms   Filing Form 5213 automatically extends the period of limitations on any year in the 5-year (or 7-year) period to 2 years after the due date of the return for the last year of the period. 2007 tax forms The period is extended only for deductions of the activity and any related deductions that might be affected. 2007 tax forms    You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. 2007 tax forms Gross Income Gross income from a not-for-profit activity includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from the activity. 2007 tax forms Gross income from the activity also includes capital gains and rents received for the use of property which is held in connection with the activity. 2007 tax forms You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. 2007 tax forms However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting. 2007 tax forms Limit on Deductions If your activity is not carried on for profit, take deductions in the following order and only to the extent stated in the three categories. 2007 tax forms If you are an individual, these deductions may be taken only if you itemize. 2007 tax forms These deductions may be taken on Schedule A (Form 1040). 2007 tax forms Category 1. 2007 tax forms   Deductions you can take for personal as well as for business activities are allowed in full. 2007 tax forms For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. 2007 tax forms Deduct them on the appropriate lines of Schedule A (Form 1040). 2007 tax forms For tax years beginning after December 31, 2008, you can deduct a casualty loss on property you own for personal use only to the extent it is more than $500 and exceeds 10% of your adjusted gross income (AGI). 2007 tax forms The 10% AGI limitation does not apply to net disaster losses resulting from federally declared disasters in 2008 and 2009, and individuals are allowed to claim the net disaster losses even if they do not itemize their deductions. 2007 tax forms The reduction amount returns to $100 for tax years beginning after December 31, 2009. 2007 tax forms See Publication 547 for more information on casualty losses. 2007 tax forms For the limits that apply to home mortgage interest, see Publication 936. 2007 tax forms Category 2. 2007 tax forms   Deductions that do not result in an adjustment to the basis of property are allowed next, but only to the extent your gross income from the activity is more than your deductions under the first category. 2007 tax forms Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. 2007 tax forms Category 3. 2007 tax forms   Business deductions that decrease the basis of property are allowed last, but only to the extent the gross income from the activity exceeds the deductions you take under the first two categories. 2007 tax forms Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. 2007 tax forms Where more than one asset is involved, allocate depreciation and these other deductions proportionally. 2007 tax forms    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). 2007 tax forms They are subject to the 2%-of-adjusted-gross-income limit. 2007 tax forms See Publication 529 for information on this limit. 2007 tax forms Example. 2007 tax forms Adriana is engaged in a not-for-profit activity. 2007 tax forms The income and expenses of the activity are as follows. 2007 tax forms Gross income $3,200 Subtract:     Real estate taxes $700   Home mortgage interest 900   Insurance 400   Utilities 700   Maintenance 200   Depreciation on an automobile 600   Depreciation on a machine 200 3,700 Loss $(500)   Adriana must limit her deductions to $3,200, the gross income she earned from the activity. 2007 tax forms The limit is reached in category (3), as follows. 2007 tax forms Limit on deduction $3,200 Category 1: Taxes and interest $1,600   Category 2: Insurance, utilities, and maintenance 1,300 2,900 Available for Category 3 $ 300   The $800 of depreciation is allocated between the automobile and machine as follows. 2007 tax forms $600 $800 x $300 = $225 depreciation for the automobile             $200 $800 x $300 = $75 depreciation for the machine The basis of each asset is reduced accordingly. 2007 tax forms Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. 2007 tax forms The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). 2007 tax forms Adriana deducts the remaining $1,600 ($1,300 for category (2) and $300 for category (3)) as other miscellaneous deductions on Schedule A (Form 1040) subject to the 2%-of-adjusted-gross-income limit. 2007 tax forms Partnerships and S corporations. 2007 tax forms   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. 2007 tax forms They are reflected in the individual shareholder's or partner's distributive shares. 2007 tax forms More than one activity. 2007 tax forms   If you have several undertakings, each may be a separate activity or several undertakings may be combined. 2007 tax forms The following are the most significant facts and circumstances in making this determination. 2007 tax forms The degree of organizational and economic interrelationship of various undertakings. 2007 tax forms The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. 2007 tax forms The similarity of the undertakings. 2007 tax forms   The IRS will generally accept your characterization if it is supported by facts and circumstances. 2007 tax forms    If you are carrying on two or more different activities, keep the deductions and income from each one separate. 2007 tax forms Figure separately whether each is a not-for-profit activity. 2007 tax forms Then figure the limit on deductions and losses separately for each activity that is not for profit. 2007 tax forms Prev  Up  Next   Home   More Online Publications
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The 2007 Tax Forms

2007 tax forms 4. 2007 tax forms   Foreign Earned Income and Housing: Exclusion – Deduction Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Who Qualifies for the Exclusions and the Deduction? RequirementsTax Home in Foreign Country Bona Fide Residence Test Physical Presence Test Waiver of Time Requirements U. 2007 tax forms S. 2007 tax forms Travel Restrictions Foreign Earned Income Foreign Earned Income ExclusionLimit on Excludable Amount Choosing the Exclusion Foreign Housing Exclusion and DeductionHousing Amount Foreign Housing Exclusion Foreign Housing Deduction Married Couples Form 2555 and Form 2555-EZForm 2555-EZ Form 2555 Topics - This chapter discusses: Who qualifies for the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, The requirements that must be met to claim either exclusion or the deduction, How to figure the foreign earned income exclusion, and How to figure the foreign housing exclusion and the foreign housing deduction. 2007 tax forms Useful Items - You may want to see: Publication 519 U. 2007 tax forms S. 2007 tax forms Tax Guide for Aliens 570 Tax Guide for Individuals With Income from U. 2007 tax forms S. 2007 tax forms Possessions 596 Earned Income Credit (EIC) Form (and Instructions) 1040X Amended U. 2007 tax forms S. 2007 tax forms Individual Income Tax Return 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion See chapter 7 for information about getting these publications and forms. 2007 tax forms Who Qualifies for the Exclusions and the Deduction? If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction. 2007 tax forms If you are a U. 2007 tax forms S. 2007 tax forms citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. 2007 tax forms However, you may qualify to exclude from income up to $97,600 of your foreign earnings. 2007 tax forms In addition, you can exclude or deduct certain foreign housing amounts. 2007 tax forms See Foreign Earned Income Exclusion and Foreign Housing Exclusion and Deduction, later. 2007 tax forms You also may be entitled to exclude from income the value of meals and lodging provided to you by your employer. 2007 tax forms See Exclusion of Meals and Lodging, later. 2007 tax forms Requirements To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must meet all three of the following requirements. 2007 tax forms Your tax home must be in a foreign country. 2007 tax forms You must have foreign earned income. 2007 tax forms You must be one of the following. 2007 tax forms A U. 2007 tax forms S. 2007 tax forms citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. 2007 tax forms A U. 2007 tax forms S. 2007 tax forms resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. 2007 tax forms A U. 2007 tax forms S. 2007 tax forms citizen or a U. 2007 tax forms S. 2007 tax forms resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. 2007 tax forms See Publication 519 to find out if you are a U. 2007 tax forms S. 2007 tax forms resident alien for tax purposes and whether you keep that alien status when you temporarily work abroad. 2007 tax forms If you are a nonresident alien married to a U. 2007 tax forms S. 2007 tax forms citizen or resident alien, and both you and your spouse choose to treat you as a resident alien, you are a resident alien for tax purposes. 2007 tax forms For information on making the choice, see the discussion in chapter 1 under Nonresident Alien Spouse Treated as a Resident . 2007 tax forms Waiver of minimum time requirements. 2007 tax forms   The minimum time requirements for bona fide residence and physical presence can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. 2007 tax forms This is fully explained under Waiver of Time Requirements , later. 2007 tax forms   See Figure 4-A and information in this chapter to determine if you are eligible to claim either exclusion or the deduction. 2007 tax forms Tax Home in Foreign Country To qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, your tax home must be in a foreign country throughout your period of bona fide residence or physical presence abroad. 2007 tax forms Bona fide residence and physical presence are explained later. 2007 tax forms Tax Home Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. 2007 tax forms Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. 2007 tax forms Having a “tax home” in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes. 2007 tax forms If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live. 2007 tax forms If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work. 2007 tax forms You are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. 2007 tax forms However, your abode is not necessarily in the United States while you are temporarily in the United States. 2007 tax forms Your abode is also not necessarily in the United States merely because you maintain a dwelling in the United States, whether or not your spouse or dependents use the dwelling. 2007 tax forms “Abode” has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. 2007 tax forms It does not mean your principal place of business. 2007 tax forms “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home. 2007 tax forms ” The location of your abode often will depend on where you maintain your economic, family, and personal ties. 2007 tax forms Example 1. 2007 tax forms You are employed on an offshore oil rig in the territorial waters of a foreign country and work a 28-day on/28-day off schedule. 2007 tax forms You return to your family residence in the United States during your off periods. 2007 tax forms You are considered to have an abode in the United States and do not satisfy the tax home test in the foreign country. 2007 tax forms You cannot claim either of the exclusions or the housing deduction. 2007 tax forms Example 2. 2007 tax forms For several years, you were a marketing executive with a producer of machine tools in Toledo, Ohio. 2007 tax forms In November of last year, your employer transferred you to London, England, for a minimum of 18 months to set up a sales operation for Europe. 2007 tax forms Before you left, you distributed business cards showing your business and home addresses in London. 2007 tax forms You kept ownership of your home in Toledo but rented it to another family. 2007 tax forms You placed your car in storage. 2007 tax forms In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London. 2007 tax forms Shortly after moving, you leased a car and you and your spouse got British driving licenses. 2007 tax forms Your entire family got library cards for the local public library. 2007 tax forms You and your spouse opened bank accounts with a London bank and secured consumer credit. 2007 tax forms You joined a local business league and both you and your spouse became active in the neighborhood civic association and worked with a local charity. 2007 tax forms Your abode is in London for the time you live there. 2007 tax forms You satisfy the tax home test in the foreign country. 2007 tax forms Please click here for the text description of the image. 2007 tax forms Figure 4–A Can I Claim the Exclusion or Deduction? Temporary or Indefinite Assignment The location of your tax home often depends on whether your assignment is temporary or indefinite. 2007 tax forms If you are temporarily absent from your tax home in the United States on business, you may be able to deduct your away-from-home expenses (for travel, meals, and lodging), but you would not qualify for the foreign earned income exclusion. 2007 tax forms If your new work assignment is for an indefinite period, your new place of employment becomes your tax home and you would not be able to deduct any of the related expenses that you have in the general area of this new work assignment. 2007 tax forms If your new tax home is in a foreign country and you meet the other requirements, your earnings may qualify for the foreign earned income exclusion. 2007 tax forms If you expect your employment away from home in a single location to last, and it does last, for 1 year or less, it is temporary unless facts and circumstances indicate otherwise. 2007 tax forms If you expect it to last for more than 1 year, it is indefinite. 2007 tax forms If you expect it to last for 1 year or less, but at some later date you expect it to last longer than 1 year, it is temporary (in the absence of facts and circumstances indicating otherwise) until your expectation changes. 2007 tax forms Once your expectation changes, it is indefinite. 2007 tax forms Foreign Country To meet the bona fide residence test or the physical presence test, you must live in or be present in a foreign country. 2007 tax forms A foreign country includes any territory under the sovereignty of a government other than that of the United States. 2007 tax forms The term “foreign country” includes the country's airspace and territorial waters, but not international waters and the airspace above them. 2007 tax forms It also includes the seabed and subsoil of those submarine areas adjacent to the country's territorial waters over which it has exclusive rights under international law to explore and exploit the natural resources. 2007 tax forms The term “foreign country” does not include Antarctica or U. 2007 tax forms S. 2007 tax forms possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U. 2007 tax forms S. 2007 tax forms Virgin Islands, and Johnston Island. 2007 tax forms For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, the terms “foreign,” “abroad,” and “overseas” refer to areas outside the United States and those areas listed or described in the previous sentence. 2007 tax forms American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands Residence or presence in a U. 2007 tax forms S. 2007 tax forms possession does not qualify you for the foreign earned income exclusion. 2007 tax forms You may, however, qualify for an exclusion of your possession income on your U. 2007 tax forms S. 2007 tax forms return. 2007 tax forms American Samoa. 2007 tax forms   There is a possession exclusion available to individuals who are bona fide residents of American Samoa for the entire tax year. 2007 tax forms Gross income from sources within American Samoa may be eligible for this exclusion. 2007 tax forms Income that is effectively connected with the conduct of a trade or business within American Samoa also may be eligible for this exclusion. 2007 tax forms Use Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, to figure the exclusion. 2007 tax forms Guam and the Commonwealth of the Northern Mariana Islands. 2007 tax forms   An exclusion will be available to residents of Guam and the Commonwealth of the Northern Mariana Islands if, and when, new implementation agreements take effect between the United States and those possessions. 2007 tax forms   For more information, see Publication 570. 2007 tax forms Puerto Rico and U. 2007 tax forms S. 2007 tax forms Virgin Islands Residents of Puerto Rico and the U. 2007 tax forms S. 2007 tax forms Virgin Islands cannot claim the foreign earned income exclusion or the foreign housing exclusion. 2007 tax forms Puerto Rico. 2007 tax forms   Generally, if you are a U. 2007 tax forms S. 2007 tax forms citizen who is a bona fide resident of Puerto Rico for the entire tax year, you are not subject to U. 2007 tax forms S. 2007 tax forms tax on income from Puerto Rican sources. 2007 tax forms This does not include amounts paid for services performed as an employee of the United States. 2007 tax forms However, you are subject to U. 2007 tax forms S. 2007 tax forms tax on your income from sources outside Puerto Rico. 2007 tax forms In figuring your U. 2007 tax forms S. 2007 tax forms tax, you cannot deduct expenses allocable to income not subject to tax. 2007 tax forms Bona Fide Residence Test You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. 2007 tax forms You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either: A U. 2007 tax forms S. 2007 tax forms citizen, or A U. 2007 tax forms S. 2007 tax forms resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect. 2007 tax forms You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year. 2007 tax forms If you go to a foreign country to work on a particular job for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country even though you work there for 1 tax year or longer. 2007 tax forms The length of your stay and the nature of your job are only two of the factors to be considered in determining whether you meet the bona fide residence test. 2007 tax forms Bona fide residence. 2007 tax forms   To meet the bona fide residence test, you must have established a bona fide residence in a foreign country. 2007 tax forms   Your bona fide residence is not necessarily the same as your domicile. 2007 tax forms Your domicile is your permanent home, the place to which you always return or intend to return. 2007 tax forms Example. 2007 tax forms You could have your domicile in Cleveland, Ohio, and a bona fide residence in Edinburgh, Scotland, if you intend to return eventually to Cleveland. 2007 tax forms The fact that you go to Scotland does not automatically make Scotland your bona fide residence. 2007 tax forms If you go there as a tourist, or on a short business trip, and return to the United States, you have not established bona fide residence in Scotland. 2007 tax forms But if you go to Scotland to work for an indefinite or extended period and you set up permanent quarters there for yourself and your family, you probably have established a bona fide residence in a foreign country, even though you intend to return eventually to the United States. 2007 tax forms You are clearly not a resident of Scotland in the first instance. 2007 tax forms However, in the second, you are a resident because your stay in Scotland appears to be permanent. 2007 tax forms If your residency is not as clearly defined as either of these illustrations, it may be more difficult to decide whether you have established a bona fide residence. 2007 tax forms Determination. 2007 tax forms   Questions of bona fide residence are determined according to each individual case, taking into account factors such as your intention, the purpose of your trip, and the nature and length of your stay abroad. 2007 tax forms   To meet the bona fide residence test, you must show the Internal Revenue Service (IRS) that you have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. 2007 tax forms The IRS decides whether you are a bona fide resident of a foreign country largely on the basis of facts you report on Form 2555. 2007 tax forms IRS cannot make this determination until you file Form 2555. 2007 tax forms Statement to foreign authorities. 2007 tax forms   You are not considered a bona fide resident of a foreign country if you make a statement to the authorities of that country that you are not a resident of that country, and the authorities: Hold that you are not subject to their income tax laws as a resident, or Have not made a final decision on your status. 2007 tax forms Special agreements and treaties. 2007 tax forms   An income tax exemption provided in a treaty or other international agreement will not in itself prevent you from being a bona fide resident of a foreign country. 2007 tax forms Whether a treaty prevents you from becoming a bona fide resident of a foreign country is determined under all provisions of the treaty, including specific provisions relating to residence or privileges and immunities. 2007 tax forms Example 1. 2007 tax forms You are a U. 2007 tax forms S. 2007 tax forms citizen employed in the United Kingdom by a U. 2007 tax forms S. 2007 tax forms employer under contract with the U. 2007 tax forms S. 2007 tax forms Armed Forces. 2007 tax forms You are not subject to the North Atlantic Treaty Status of Forces Agreement. 2007 tax forms You may be a bona fide resident of the United Kingdom. 2007 tax forms Example 2. 2007 tax forms You are a U. 2007 tax forms S. 2007 tax forms citizen in the United Kingdom who qualifies as an “employee” of an armed service or as a member of a “civilian component” under the North Atlantic Treaty Status of Forces Agreement. 2007 tax forms You are not a bona fide resident of the United Kingdom. 2007 tax forms Example 3. 2007 tax forms You are a U. 2007 tax forms S. 2007 tax forms citizen employed in Japan by a U. 2007 tax forms S. 2007 tax forms employer under contract with the U. 2007 tax forms S. 2007 tax forms Armed Forces. 2007 tax forms You are subject to the agreement of the Treaty of Mutual Cooperation and Security between the United States and Japan. 2007 tax forms Being subject to the agreement does not make you a bona fide resident of Japan. 2007 tax forms Example 4. 2007 tax forms You are a U. 2007 tax forms S. 2007 tax forms citizen employed as an “official” by the United Nations in Switzerland. 2007 tax forms You are exempt from Swiss taxation on the salary or wages paid to you by the United Nations. 2007 tax forms This does not prevent you from being a bona fide resident of Switzerland. 2007 tax forms Effect of voting by absentee ballot. 2007 tax forms   If you are a U. 2007 tax forms S. 2007 tax forms citizen living abroad, you can vote by absentee ballot in any election held in the United States without risking your status as a bona fide resident of a foreign country. 2007 tax forms   However, if you give information to the local election officials about the nature and length of your stay abroad that does not match the information you give for the bona fide residence test, the information given in connection with absentee voting will be considered in determining your status, but will not necessarily be conclusive. 2007 tax forms Uninterrupted period including entire tax year. 2007 tax forms   To meet the bona fide residence test, you must reside in a foreign country or countries for an uninterrupted period that includes an entire tax year. 2007 tax forms An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis. 2007 tax forms   During the period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the United States or elsewhere for vacation or business. 2007 tax forms To keep your status as a bona fide resident of a foreign country, you must have a clear intention of returning from such trips, without unreasonable delay, to your foreign residence or to a new bona fide residence in another foreign country. 2007 tax forms Example 1. 2007 tax forms You arrived with your family in Lisbon, Portugal, on November 1, 2011. 2007 tax forms Your assignment is indefinite, and you intend to live there with your family until your company sends you to a new post. 2007 tax forms You immediately established residence there. 2007 tax forms You spent April of 2012 at a business conference in the United States. 2007 tax forms Your family stayed in Lisbon. 2007 tax forms Immediately following the conference, you returned to Lisbon and continued living there. 2007 tax forms On January 1, 2013, you completed an uninterrupted period of residence for a full tax year (2012), and you meet the bona fide residence test. 2007 tax forms Example 2. 2007 tax forms Assume the same facts as in Example 1, except that you transferred back to the United States on December 13, 2012. 2007 tax forms You would not meet the bona fide residence test because your bona fide residence in the foreign country, although it lasted more than a year, did not include a full tax year. 2007 tax forms You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test (discussed later). 2007 tax forms Bona fide resident for part of a year. 2007 tax forms   Once you have established bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year, you are a bona fide resident of that country for the period starting with the date you actually began the residence and ending with the date you abandon the foreign residence. 2007 tax forms Your period of bona fide residence can include an entire tax year plus parts of 2 other tax years. 2007 tax forms Example. 2007 tax forms You were a bona fide resident of Singapore from March 1, 2011, through September 14, 2013. 2007 tax forms On September 15, 2013, you returned to the United States. 2007 tax forms Since you were a bona fide resident of a foreign country for all of 2012, you were also a bona fide resident of a foreign country from March 1, 2011, through the end of 2011 and from January 1, 2013, through September 14, 2013. 2007 tax forms Reassignment. 2007 tax forms   If you are assigned from one foreign post to another, you may or may not have a break in foreign residence between your assignments, depending on the circumstances. 2007 tax forms Example 1. 2007 tax forms You were a resident of Pakistan from October 1, 2012, through November 30, 2013. 2007 tax forms On December 1, 2013, you and your family returned to the United States to wait for an assignment to another foreign country. 2007 tax forms Your household goods also were returned to the United States. 2007 tax forms Your foreign residence ended on November 30, 2013, and did not begin again until after you were assigned to another foreign country and physically entered that country. 2007 tax forms Since you were not a bona fide resident of a foreign country for the entire tax year of 2012 or 2013 you do not meet the bona fide residence test in either year. 2007 tax forms You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test, discussed later. 2007 tax forms Example 2. 2007 tax forms Assume the same facts as in Example 1, except that upon completion of your assignment in Pakistan you were given a new assignment to Turkey. 2007 tax forms On December 1, 2013, you and your family returned to the United States for a month's vacation. 2007 tax forms On January 2, 2014, you arrived in Turkey for your new assignment. 2007 tax forms Because you did not interrupt your bona fide residence abroad, you meet the bona fide residence test. 2007 tax forms Physical Presence Test You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. 2007 tax forms The 330 days do not have to be consecutive. 2007 tax forms Any U. 2007 tax forms S. 2007 tax forms citizen or resident alien can use the physical presence test to qualify for the exclusions and the deduction. 2007 tax forms The physical presence test is based only on how long you stay in a foreign country or countries. 2007 tax forms This test does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad. 2007 tax forms 330 full days. 2007 tax forms   Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during a 12-month period. 2007 tax forms You can count days you spent abroad for any reason. 2007 tax forms You do not have to be in a foreign country only for employment purposes. 2007 tax forms You can be on vacation. 2007 tax forms   You do not meet the physical presence test if illness, family problems, a vacation, or your employer's orders cause you to be present for less than the required amount of time. 2007 tax forms Exception. 2007 tax forms   You can be physically present in a foreign country or countries for less than 330 full days and still meet the physical presence test if you are required to leave a country because of war or civil unrest. 2007 tax forms See Waiver of Time Requirements, later. 2007 tax forms Full day. 2007 tax forms   A full day is a period of 24 consecutive hours, beginning at midnight. 2007 tax forms Travel. 2007 tax forms    When you leave the United States to go directly to a foreign country or when you return directly to the United States from a foreign country, the time you spend on or over international waters does not count toward the 330-day total. 2007 tax forms Example. 2007 tax forms You leave the United States for France by air on June 10. 2007 tax forms You arrive in France at 9:00 a. 2007 tax forms m. 2007 tax forms on June 11. 2007 tax forms Your first full day of physical presence in France is June 12. 2007 tax forms Passing over foreign country. 2007 tax forms   If, in traveling from the United States to a foreign country, you pass over a foreign country before midnight of the day you leave, the first day you can count toward the 330-day total is the day following the day you leave the United States. 2007 tax forms Example. 2007 tax forms You leave the United States by air at 9:30 a. 2007 tax forms m. 2007 tax forms on June 10 to travel to Kenya. 2007 tax forms You pass over western Africa at 11:00 p. 2007 tax forms m. 2007 tax forms on June 10 and arrive in Kenya at 12:30 a. 2007 tax forms m. 2007 tax forms on June 11. 2007 tax forms Your first full day in a foreign country is June 11. 2007 tax forms Change of location. 2007 tax forms   You can move about from one place to another in a foreign country or to another foreign country without losing full days. 2007 tax forms If any part of your travel is not within any foreign country and takes less than 24 hours, you are considered to be in a foreign country during that part of travel. 2007 tax forms Example 1. 2007 tax forms You leave Ireland by air at 11:00 p. 2007 tax forms m. 2007 tax forms on July 6 and arrive in Sweden at 5:00 a. 2007 tax forms m. 2007 tax forms on July 7. 2007 tax forms Your trip takes less than 24 hours and you lose no full days. 2007 tax forms Example 2. 2007 tax forms You leave Norway by ship at 10:00 p. 2007 tax forms m. 2007 tax forms on July 6 and arrive in Portugal at 6:00 a. 2007 tax forms m. 2007 tax forms on July 8. 2007 tax forms Since your travel is not within a foreign country or countries and the trip takes more than 24 hours, you lose as full days July 6, 7, and 8. 2007 tax forms If you remain in Portugal, your next full day in a foreign country is July 9. 2007 tax forms In United States while in transit. 2007 tax forms   If you are in transit between two points outside the United States and are physically present in the United States for less than 24 hours, you are not treated as present in the United States during the transit. 2007 tax forms You are treated as traveling over areas not within any foreign country. 2007 tax forms    Please click here for the text description of the image. 2007 tax forms Figure 4-B How to figure the 12-month period. 2007 tax forms   There are four rules you should know when figuring the 12-month period. 2007 tax forms Your 12-month period can begin with any day of the month. 2007 tax forms It ends the day before the same calendar day, 12 months later. 2007 tax forms Your 12-month period must be made up of consecutive months. 2007 tax forms Any 12-month period can be used if the 330 days in a foreign country fall within that period. 2007 tax forms You do not have to begin your 12-month period with your first full day in a foreign country or end it with the day you leave. 2007 tax forms You can choose the 12-month period that gives you the greatest exclusion. 2007 tax forms In determining whether the 12-month period falls within a longer stay in the foreign country, 12-month periods can overlap one another. 2007 tax forms Example 1. 2007 tax forms You are a construction worker who works on and off in a foreign country over a 20-month period. 2007 tax forms You might pick up the 330 full days in a 12-month period only during the middle months of the time you work in the foreign country because the first few and last few months of the 20-month period are broken up by long visits to the United States. 2007 tax forms Example 2. 2007 tax forms You work in New Zealand for a 20-month period from January 1, 2012, through August 31, 2013, except that you spend 28 days in February 2012 and 28 days in February 2013 on vacation in the United States. 2007 tax forms You are present in New Zealand for at least 330 full days during each of the following two 12-month periods: January 1, 2012 – December 31, 2012 and September 1, 2012 – August 31, 2013. 2007 tax forms By overlapping the 12-month periods in this way, you meet the physical presence test for the whole 20-month period. 2007 tax forms See Figure 4-B, on the previous page. 2007 tax forms Waiver of Time Requirements Both the bona fide residence test and the physical presence test contain minimum time requirements. 2007 tax forms The minimum time requirements can be waived, however, if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. 2007 tax forms You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. 2007 tax forms To qualify for the waiver, you must actually have your tax home in the foreign country and be a bona fide resident of, or be physically present in, the foreign country on or before the beginning date of the waiver. 2007 tax forms Early in 2014, the IRS will publish in the Internal Revenue Bulletin a list of the only countries that qualify for the waiver for 2013 and the effective dates. 2007 tax forms If you left one of the countries on or after the date listed for each country, you can meet the bona fide residence test or physical presence test for 2013 without meeting the minimum time requirement. 2007 tax forms However, in figuring your exclusion, the number of your qualifying days of bona fide residence or physical presence includes only days of actual residence or presence within the country. 2007 tax forms U. 2007 tax forms S. 2007 tax forms Travel Restrictions If you are present in a foreign country in violation of U. 2007 tax forms S. 2007 tax forms law, you will not be treated as a bona fide resident of a foreign country or as physically present in a foreign country while you are in violation of the law. 2007 tax forms Income that you earn from sources within such a country for services performed during a period of violation does not qualify as foreign earned income. 2007 tax forms Your housing expenses within that country (or outside that country for housing your spouse or dependents) while you are in violation of the law cannot be included in figuring your foreign housing amount. 2007 tax forms For 2013, the only country to which travel restrictions applied was Cuba. 2007 tax forms The restrictions applied for the entire year. 2007 tax forms However, individuals working at the U. 2007 tax forms S. 2007 tax forms Naval Base at Guantanamo Bay in Cuba are not in violation of U. 2007 tax forms S. 2007 tax forms law. 2007 tax forms Personal service income earned by individuals at the base is eligible for the foreign earned income exclusion provided the other requirements are met. 2007 tax forms Foreign Earned Income To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income. 2007 tax forms Foreign earned income generally is income you receive for services you perform during a period in which you meet both of the following requirements. 2007 tax forms Your tax home is in a foreign country. 2007 tax forms You meet either the bona fide residence test or the physical presence test. 2007 tax forms To determine whether your tax home is in a foreign country, see Tax Home in Foreign Country, earlier. 2007 tax forms To determine whether you meet either the bona fide residence test or the physical presence test, see Bona Fide Residence Test and Physical Presence Test, earlier. 2007 tax forms Foreign earned income does not include the following amounts. 2007 tax forms The value of meals and lodging that you exclude from your income because the meals and lodging were furnished for the convenience of your employer. 2007 tax forms Pension or annuity payments you receive, including social security benefits (see Pensions and annuities, later). 2007 tax forms Pay you receive as an employee of the U. 2007 tax forms S. 2007 tax forms Government. 2007 tax forms (See U. 2007 tax forms S. 2007 tax forms Government Employees, later. 2007 tax forms ) Amounts you include in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract. 2007 tax forms Any unallowable moving expense deduction that you choose to recapture as explained under Moving Expense Attributable to Foreign Earnings in 2 Years in chapter 5. 2007 tax forms Payments you receive after the end of the tax year following the tax year in which you performed the services that earned the income. 2007 tax forms Earned income. 2007 tax forms   This is pay for personal services performed, such as wages, salaries, or professional fees. 2007 tax forms The list that follows classifies many types of income into three categories. 2007 tax forms The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both. 2007 tax forms For more information on earned and unearned income, see Earned and Unearned Income, later. 2007 tax forms Earned Income Unearned Income Variable Income Salaries and wages Dividends Business profits Commissions Interest Royalties Bonuses Capital gains Rents Professional fees Gambling winnings Scholarships and fellowships Tips Alimony     Social security benefits     Pensions     Annuities     In addition to the types of earned income listed, certain noncash income and allowances or reimbursements are considered earned income. 2007 tax forms Noncash income. 2007 tax forms   The fair market value of property or facilities provided to you by your employer in the form of lodging, meals, or use of a car is earned income. 2007 tax forms Allowances or reimbursements. 2007 tax forms   Earned income includes allowances or reimbursements you receive, such as the following amounts. 2007 tax forms    Cost-of-living allowances. 2007 tax forms Overseas differential. 2007 tax forms Family allowance. 2007 tax forms Reimbursement for education or education allowance. 2007 tax forms Home leave allowance. 2007 tax forms Quarters allowance. 2007 tax forms Reimbursement for moving or moving allowance (unless excluded from income as discussed later in Reimbursement of employee expenses under Earned and Unearned Income). 2007 tax forms Source of Earned Income The source of your earned income is the place where you perform the services for which you received the income. 2007 tax forms Foreign earned income is income you receive for working in a foreign country. 2007 tax forms Where or how you are paid has no effect on the source of the income. 2007 tax forms For example, income you receive for work done in Austria is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City. 2007 tax forms Example. 2007 tax forms You are a U. 2007 tax forms S. 2007 tax forms citizen, a bona fide resident of Canada, and working as a mining engineer. 2007 tax forms Your salary is $76,800 per year. 2007 tax forms You also receive a $6,000 cost-of-living allowance, and a $6,000 education allowance. 2007 tax forms Your employment contract did not indicate that you were entitled to these allowances only while outside the United States. 2007 tax forms Your total income is $88,800. 2007 tax forms You work a 5-day week, Monday through Friday. 2007 tax forms After subtracting your vacation, you have a total of 240 workdays in the year. 2007 tax forms You worked in the United States during the year for 6 weeks (30 workdays). 2007 tax forms The following shows how to figure the part of your income that is for work done in Canada during the year. 2007 tax forms   Number of days worked in Canada during the year (210) × Total income ($88,800) = $77,700     Number of days of work during the year for which payment was made (240)   Your foreign source earned income is $77,700. 2007 tax forms Earned and Unearned Income Earned income was defined earlier as pay for personal services performed. 2007 tax forms Some types of income are not easily identified as earned or unearned income. 2007 tax forms Some of these types of income are further explained here. 2007 tax forms Income from a sole proprietorship or partnership. 2007 tax forms   Income from a business in which capital investment is an important part of producing the income may be unearned income. 2007 tax forms If you are a sole proprietor or partner and your personal services are also an important part of producing the income, the part of the income that represents the value of your personal services will be treated as earned income. 2007 tax forms Capital a factor. 2007 tax forms   If capital investment is an important part of producing income, no more than 30% of your share of the net profits of the business is earned income. 2007 tax forms   If you have no net profits, the part of your gross profit that represents a reasonable allowance for personal services actually performed is considered earned income. 2007 tax forms Because you do not have a net profit, the 30% limit does not apply. 2007 tax forms Example 1. 2007 tax forms You are a U. 2007 tax forms S. 2007 tax forms citizen and meet the bona fide residence test. 2007 tax forms You invest in a partnership based in Cameroon that is engaged solely in selling merchandise outside the United States. 2007 tax forms You perform no services for the partnership. 2007 tax forms At the end of the tax year, your share of the net profits is $80,000. 2007 tax forms The entire $80,000 is unearned income. 2007 tax forms Example 2. 2007 tax forms Assume that in Example 1 you spend time operating the business. 2007 tax forms Your share of the net profits is $80,000; 30% of your share of the profits is $24,000. 2007 tax forms If the value of your services for the year is $15,000, your earned income is limited to the value of your services, $15,000. 2007 tax forms Capital not a factor. 2007 tax forms   If capital is not an income-producing factor and personal services produce the business income, the 30% rule does not apply. 2007 tax forms The entire amount of business income is earned income. 2007 tax forms Example. 2007 tax forms You and Lou Green are management consultants and operate as equal partners in performing services outside the United States. 2007 tax forms Because capital is not an income- producing factor, all the income from the partnership is considered earned income. 2007 tax forms Income from a corporation. 2007 tax forms   The salary you receive from a corporation is earned income only if it represents a reasonable allowance as compensation for work you do for the corporation. 2007 tax forms Any amount over what is considered a reasonable salary is unearned income. 2007 tax forms Example 1. 2007 tax forms You are a U. 2007 tax forms S. 2007 tax forms citizen and an officer and stockholder of a corporation in Honduras. 2007 tax forms You perform no work or service of any kind for the corporation. 2007 tax forms During the tax year you receive a $10,000 “salary” from the corporation. 2007 tax forms The $10,000 clearly is not for personal services and is unearned income. 2007 tax forms Example 2. 2007 tax forms You are a U. 2007 tax forms S. 2007 tax forms citizen and work full time as secretary-treasurer of your corporation. 2007 tax forms During the tax year you receive $100,000 as salary from the corporation. 2007 tax forms If $80,000 is a reasonable allowance as pay for the work you did, then $80,000 is earned income. 2007 tax forms Stock options. 2007 tax forms   You may have earned income if you disposed of stock that you got by exercising a stock option granted to you under an employee stock purchase plan. 2007 tax forms   If your gain on the disposition of stock you got by exercising an option is treated as capital gain, your gain is unearned income. 2007 tax forms   However, if you disposed of the stock less than 2 years after you were granted the option or less than 1 year after you got the stock, part of the gain on the disposition may be earned income. 2007 tax forms It is considered received in the year you disposed of the stock and earned in the year you performed the services for which you were granted the option. 2007 tax forms Any part of the earned income that is due to work you did outside the United States is foreign earned income. 2007 tax forms   See Publication 525, Taxable and Nontaxable Income, for a discussion of the treatment of stock options. 2007 tax forms Pensions and annuities. 2007 tax forms    For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, amounts received as pensions or annuities are unearned income. 2007 tax forms Royalties. 2007 tax forms   Royalties from the leasing of oil and mineral lands and patents generally are a form of rent or dividends and are unearned income. 2007 tax forms   Royalties received by a writer are earned income if they are received: For the transfer of property rights of the writer in the writer's product, or Under a contract to write a book or series of articles. 2007 tax forms Rental income. 2007 tax forms   Generally, rental income is unearned income. 2007 tax forms If you perform personal services in connection with the production of rent, up to 30% of your net rental income can be considered earned income. 2007 tax forms Example. 2007 tax forms Larry Smith, a U. 2007 tax forms S. 2007 tax forms citizen living in Australia, owns and operates a rooming house in Sydney. 2007 tax forms If he is operating the rooming house as a business that requires capital and personal services, he can consider up to 30% of net rental income as earned income. 2007 tax forms On the other hand, if he just owns the rooming house and performs no personal services connected with its operation, except perhaps making minor repairs and collecting rents, none of his net income from the house is considered earned income. 2007 tax forms It is all unearned income. 2007 tax forms Professional fees. 2007 tax forms   If you are engaged in a professional occupation (such as a doctor or lawyer), all fees received in the performance of these services are earned income. 2007 tax forms Income of an artist. 2007 tax forms   Income you receive from the sale of paintings you created is earned income. 2007 tax forms Scholarships and fellowships. 2007 tax forms   Any portion of a scholarship or fellowship grant that is paid to you for teaching, research or other services is considered earned income if you must include it in your gross income. 2007 tax forms If the payer of the grant is required to provide you with a Form W-2, Wage and Tax Statement, these amounts will be listed as wages. 2007 tax forms    Certain scholarship and fellowship income may be exempt under other provisions. 2007 tax forms See Publication 970, Tax Benefits for Education, chapter 1. 2007 tax forms Use of employer's property or facilities. 2007 tax forms   If you receive fringe benefits in the form of the right to use your employer's property or facilities, the fair market value of that right is earned income. 2007 tax forms Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being required to buy or sell, and both having reasonable knowledge of all the necessary facts. 2007 tax forms Example. 2007 tax forms You are privately employed and live in Japan all year. 2007 tax forms You are paid a salary of $6,000 a month. 2007 tax forms You live rent-free in a house provided by your employer that has a fair rental value of $3,000 a month. 2007 tax forms The house is not provided for your employer's convenience. 2007 tax forms You report on the calendar-year, cash basis. 2007 tax forms You received $72,000 salary from foreign sources plus $36,000 fair rental value of the house, or a total of $108,000 of earned income. 2007 tax forms Reimbursement of employee expenses. 2007 tax forms   If you are reimbursed under an accountable plan (defined below) for expenses you incur on your employer's behalf and you have adequately accounted to your employer for the expenses, do not include the reimbursement for those expenses in your earned income. 2007 tax forms   The expenses for which you are reimbursed are not considered allocable (related) to your earned income. 2007 tax forms If expenses and reimbursement are equal, there is nothing to allocate to excluded income. 2007 tax forms If expenses are more than the reimbursement, the unreimbursed expenses are considered to have been incurred in producing earned income and must be divided between your excluded and included income in determining the amount of unreimbursed expenses you can deduct. 2007 tax forms (See chapter 5. 2007 tax forms ) If the reimbursement is more than the expenses, no expenses remain to be divided between excluded and included income and the excess reimbursement must be included in earned income. 2007 tax forms   These rules do not apply to the following individuals. 2007 tax forms Straight-commission salespersons. 2007 tax forms Employees who have arrangements with their employers under which taxes are not withheld on a percentage of the commissions because the employers consider that percentage to be attributable to the employees' expenses. 2007 tax forms Accountable plan. 2007 tax forms   An accountable plan is a reimbursement or allowance arrangement that includes all three of the following rules. 2007 tax forms The expenses covered under the plan must have a business connection. 2007 tax forms The employee must adequately account to the employer for these expenses within a reasonable period of time. 2007 tax forms The employee must return any excess reimbursement or allowance within a reasonable period of time. 2007 tax forms Reimbursement of moving expenses. 2007 tax forms   Reimbursement of moving expenses may be earned income. 2007 tax forms You must include as earned income: Any reimbursements of, or payments for, nondeductible moving expenses, Reimbursements that are more than your deductible expenses and that you do not return to your employer, Any reimbursements made (or treated as made) under a nonaccountable plan (any plan that does not meet the rules listed above for an accountable plan), even if they are for deductible expenses, and Any reimbursement of moving expenses you deducted in an earlier year. 2007 tax forms This section discusses reimbursements that must be included in earned income. 2007 tax forms Publication 521, Moving Expenses, discusses additional rules that apply to moving expense deductions and reimbursements. 2007 tax forms   The rules for determining when the reimbursement is considered earned or where the reimbursement is considered earned may differ somewhat from the general rules previously discussed. 2007 tax forms   Although you receive the reimbursement in one tax year, it may be considered earned for services performed, or to be performed, in another tax year. 2007 tax forms You must report the reimbursement as income on your return in the year you receive it, even if it is considered earned during a different year. 2007 tax forms Move from U. 2007 tax forms S. 2007 tax forms to foreign country. 2007 tax forms   If you move from the United States to a foreign country, your moving expense reimbursement is generally considered pay for future services to be performed at the new location. 2007 tax forms The reimbursement is considered earned solely in the year of the move if you qualify for the exclusion for a period that includes at least 120 days during that tax year. 2007 tax forms   If you are neither a bona fide resident of nor physically present in a foreign country or countries for a period that includes 120 days during the year of the move, a portion of the reimbursement is considered earned in the year of the move and a portion is considered earned in the year following the year of the move. 2007 tax forms To figure the amount earned in the year of the move, multiply the reimbursement by a fraction. 2007 tax forms The numerator (top number) is the number of days in your qualifying period that fall within the year of the move, and the denominator (bottom number) is the total number of days in the year of the move. 2007 tax forms   The difference between the total reimbursement and the amount considered earned in the year of the move is the amount considered earned in the year following the year of the move. 2007 tax forms The part earned in each year is figured as shown in the following example. 2007 tax forms Example. 2007 tax forms You are a U. 2007 tax forms S. 2007 tax forms citizen working in the United States. 2007 tax forms You were told in October 2012 that you were being transferred to a foreign country. 2007 tax forms You arrived in the foreign country on December 15, 2012, and you are a bona fide resident for the remainder of 2012 and all of 2013. 2007 tax forms Your employer reimbursed you $2,000 in January 2013 for the part of the moving expense that you were not allowed to deduct. 2007 tax forms Because you did not qualify for the exclusion under the bona fide residence test for at least 120 days in 2012 (the year of the move), the reimbursement is considered pay for services performed in the foreign country for both 2012 and 2013. 2007 tax forms You figure the part of the reimbursement for services performed in the foreign country in 2012 by multiplying the total reimbursement by a fraction. 2007 tax forms The fraction is the number of days during which you were a bona fide resident in 2012 (the year of the move) divided by 366. 2007 tax forms The remaining part of the reimbursement is for services performed in the foreign country in 2013. 2007 tax forms This computation is used only to determine when the reimbursement is considered earned. 2007 tax forms You would include the amount of the reimbursement in income in 2013, the year you received it. 2007 tax forms Move between foreign countries. 2007 tax forms   If you move between foreign countries, any moving expense reimbursement that you must include in income will be considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days in the year of the move. 2007 tax forms Move to U. 2007 tax forms S. 2007 tax forms   If you move to the United States, the moving expense reimbursement that you must include in income is generally considered to be U. 2007 tax forms S. 2007 tax forms source income. 2007 tax forms   However, if under either an agreement between you and your employer or a statement of company policy that is reduced to writing before your move to the foreign country, your employer will reimburse you for your move back to the United States regardless of whether you continue to work for the employer, the includible reimbursement is considered compensation for past services performed in the foreign country. 2007 tax forms The includible reimbursement is considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days during that year. 2007 tax forms Otherwise, you treat the includible reimbursement as received for services performed in the foreign country in the year of the move and the year immediately before the year of the move. 2007 tax forms   See the discussion under Move from U. 2007 tax forms S. 2007 tax forms to foreign country , earlier, to figure the amount of the includible reimbursement considered earned in the year of the move. 2007 tax forms The amount earned in the year before the year of the move is the difference between the total includible reimbursement and the amount earned in the year of the move. 2007 tax forms Example. 2007 tax forms You are a U. 2007 tax forms S. 2007 tax forms citizen employed in a foreign country. 2007 tax forms You retired from employment with your employer on March 31, 2013, and returned to the United States after having been a bona fide resident of the foreign country for several years. 2007 tax forms A written agreement with your employer entered into before you went abroad provided that you would be reimbursed for your move back to the United States. 2007 tax forms In April 2013, your former employer reimbursed you $4,000 for the part of the cost of your move back to the United States that you were not allowed to deduct. 2007 tax forms Because you were not a bona fide resident of a foreign country or countries for a period that included at least 120 days in 2013 (the year of the move), the includible reimbursement is considered pay for services performed in the foreign country for both 2013 and 2012. 2007 tax forms You figure the part of the moving expense reimbursement for services performed in the foreign country for 2013 by multiplying the total includible reimbursement by a fraction. 2007 tax forms The fraction is the number of days of foreign residence during the year (90) divided by the number of days in the year (365). 2007 tax forms The remaining part of the includible reimbursement is for services performed in the foreign country in 2012. 2007 tax forms You report the amount of the includible reimbursement in 2013, the year you received it. 2007 tax forms    In this example, if you met the physical presence test for a period that included at least 120 days in 2013, the moving expense reimbursement would be considered earned entirely in the year of the move. 2007 tax forms Storage expense reimbursements. 2007 tax forms   If you are reimbursed for storage expenses, the reimbursement is for services you perform during the period of time for which the storage expenses are incurred. 2007 tax forms U. 2007 tax forms S. 2007 tax forms Government Employees For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, foreign earned income does not include any amounts paid by the United States or any of its agencies to its employees. 2007 tax forms This includes amounts paid from both appropriated and nonappropriated funds. 2007 tax forms The following organizations (and other organizations similarly organized and operated under United States Army, Navy, or Air Force regulations) are integral parts of the Armed Forces, agencies, or instrumentalities of the United States. 2007 tax forms United States Armed Forces exchanges. 2007 tax forms Commissioned and noncommissioned officers' messes. 2007 tax forms Armed Forces motion picture services. 2007 tax forms Kindergartens on foreign Armed Forces installations. 2007 tax forms Amounts paid by the United States or its agencies to persons who are not their employees may qualify for exclusion or deduction. 2007 tax forms If you are a U. 2007 tax forms S. 2007 tax forms Government employee paid by a U. 2007 tax forms S. 2007 tax forms agency that assigned you to a foreign government to perform specific services for which the agency is reimbursed by the foreign government, your pay is from the U. 2007 tax forms S. 2007 tax forms Government and does not qualify for exclusion or deduction. 2007 tax forms If you have questions about whether you are an employee or an independent contractor, get Publication 15-A, Employer's Supplemental Tax Guide. 2007 tax forms American Institute in Taiwan. 2007 tax forms   Amounts paid by the American Institute in Taiwan are not foreign earned income for purposes of the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. 2007 tax forms If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U. 2007 tax forms S. 2007 tax forms tax up to the amount that equals tax-exempt allowances received by civilian employees of the U. 2007 tax forms S. 2007 tax forms Government. 2007 tax forms Allowances. 2007 tax forms   Cost-of-living and foreign-area allowances paid under certain acts of Congress to U. 2007 tax forms S. 2007 tax forms civilian officers and employees stationed in Alaska and Hawaii or elsewhere outside the 48 contiguous states and the District of Columbia can be excluded from gross income. 2007 tax forms Post differentials are wages that must be included in gross income, regardless of the act of Congress under which they are paid. 2007 tax forms More information. 2007 tax forms   Publication 516, U. 2007 tax forms S. 2007 tax forms Government Civilian Employees Stationed Abroad, has more information for U. 2007 tax forms S. 2007 tax forms Government employees abroad. 2007 tax forms Exclusion of Meals and Lodging You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met. 2007 tax forms The meals are furnished: On the business premises of your employer, and For the convenience of your employer. 2007 tax forms The lodging is furnished: On the business premises of your employer, For the convenience of your employer, and As a condition of your employment. 2007 tax forms If these conditions are met, do not include the value of the meals or lodging in your income, even if a law or your employment contract says that they are provided as compensation. 2007 tax forms Amounts you do not include in income because of these rules are not foreign earned income. 2007 tax forms If you receive a Form W-2, excludable amounts should not be included in the total reported in box 1 as wages. 2007 tax forms Family. 2007 tax forms   Your family, for this purpose, includes only your spouse and your dependents. 2007 tax forms Lodging. 2007 tax forms   The value of lodging includes the cost of heat, electricity, gas, water, sewer service, and similar items needed to make the lodging fit to live in. 2007 tax forms Business premises of employer. 2007 tax forms   Generally, the business premises of your employer is wherever you work. 2007 tax forms For example, if you work as a housekeeper, meals and lodging provided in your employer's home are provided on the business premises of your employer. 2007 tax forms Similarly, meals provided to cowhands while herding cattle on land leased or owned by their employer are considered provided on the premises of their employer. 2007 tax forms Convenience of employer. 2007 tax forms   Whether meals or lodging are provided for your employer's convenience must be determined from all the facts and circumstances. 2007 tax forms Meals furnished at no charge are considered provided for your employer's convenience if there is a good business reason for providing them, other than to give you more pay. 2007 tax forms   On the other hand, if your employer provides meals to you or your family as a means of giving you more pay, and there is no other business reason for providing them, their value is extra income to you because they are not furnished for the convenience of your employer. 2007 tax forms Condition of employment. 2007 tax forms   Lodging is provided as a condition of employment if you must accept the lodging to properly carry out the duties of your job. 2007 tax forms You must accept lodging to properly carry out your duties if, for example, you must be available for duty at all times or you could not perform your duties if the lodging was not furnished. 2007 tax forms Foreign camps. 2007 tax forms   If the lodging is in a camp located in a foreign country, the camp is considered part of your employer's business premises. 2007 tax forms The camp must be: Provided for your employer's convenience because the place where you work is in a remote area where satisfactory housing is not available to you on the open market within a reasonable commuting distance, Located as close as reasonably possible in the area where you work, and Provided in a common area or enclave that is not available to the general public for lodging or accommodations and that normally houses at least ten employees. 2007 tax forms Foreign Earned Income Exclusion If your tax home is in a foreign country and you meet the bona fide residence test or the physical presence test, you can choose to exclude from your income a limited amount of your foreign earned income. 2007 tax forms Foreign earned income was defined earlier in this chapter. 2007 tax forms You also can choose to exclude from your income a foreign housing amount. 2007 tax forms This is explained later under Foreign Housing Exclusion. 2007 tax forms If you choose to exclude a foreign housing amount, you must figure the foreign housing exclusion before you figure the foreign earned income exclusion. 2007 tax forms Your foreign earned income exclusion is limited to your foreign earned income minus your foreign housing exclusion. 2007 tax forms If you choose to exclude foreign earned income, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. 2007 tax forms This includes any expenses, losses, and other normally deductible items allocable to the excluded income. 2007 tax forms For more information about deductions and credits, see chapter 5 . 2007 tax forms Limit on Excludable Amount You may be able to exclude up to $97,600 of your foreign earned income in 2013. 2007 tax forms You cannot exclude more than the smaller of: $97,600, or Your foreign earned income (discussed earlier) for the tax year minus your foreign housing exclusion (discussed later). 2007 tax forms If both you and your spouse work abroad and each of you meets either the bona fide residence test or the physical presence test, you can each choose the foreign earned income exclusion. 2007 tax forms You do not both need to meet the same test. 2007 tax forms Together, you and your spouse can exclude as much as $195,200. 2007 tax forms Paid in year following work. 2007 tax forms   Generally, you are considered to have earned income in the year in which you do the work for which you receive the income, even if you work in one year but are not paid until the following year. 2007 tax forms If you report your income on a cash basis, you report the income on your return for the year you receive it. 2007 tax forms If you work one year, but are not paid for that work until the next year, the amount you can exclude in the year you are paid is the amount you could have excluded in the year you did the work if you had been paid in that year. 2007 tax forms For an exception to this general rule, see Year-end payroll period, later. 2007 tax forms Example. 2007 tax forms You were a bona fide resident of Brazil for all of 2012 and 2013. 2007 tax forms You report your income on the cash basis. 2007 tax forms In 2012, you were paid $84,200 for work you did in Brazil during that year. 2007 tax forms You excluded all of the $84,200 from your income in 2012. 2007 tax forms In 2013, you were paid $117,300 for your work in Brazil. 2007 tax forms $18,800 was for work you did in 2012 and $98,500 was for work you did in 2013. 2007 tax forms You can exclude $10,900 of the $18,800 from your income in 2013. 2007 tax forms This is the $95,100 maximum exclusion in 2012 minus the $84,200 actually excluded that year. 2007 tax forms You must include the remaining $7,900 in income in 2013 because you could not have excluded that income in 2012 if you had received it that year. 2007 tax forms You can exclude $97,600 of the $98,500 you were paid for work you did in 2013 from your 2013 income. 2007 tax forms Your total foreign earned income exclusion for 2013 is $108,500 ($10,900 for work you did in 2012 and $97,600 for work you did in 2013). 2007 tax forms You would include in your 2013 income $8,800 ($7,900 for the work you did in 2012 and $900 for the work you did in 2013). 2007 tax forms Year-end payroll period. 2007 tax forms   There is an exception to the general rule that income is considered earned in the year you do the work for which you receive the income. 2007 tax forms If you are a cash-basis taxpayer, any salary or wage payment you receive after the end of the year in which you do the work for which you receive the pay is considered earned entirely in the year you receive it if all four of the following apply. 2007 tax forms The period for which the payment is made is a normal payroll period of your employer that regularly applies to you. 2007 tax forms The payroll period includes the last day of your tax year (December 31 if you figure your taxes on a calendar-year basis). 2007 tax forms The payroll period is not longer than 16 days. 2007 tax forms The payday comes at the same time in relation to the payroll period that it would normally come and it comes before the end of the next payroll period. 2007 tax forms Example. 2007 tax forms You are paid twice a month. 2007 tax forms For the normal payroll period that begins on the first of the month and ends on the fifteenth of the month, you are paid on the sixteenth day of the month. 2007 tax forms For the normal payroll period that begins on the sixteenth of the month and ends on the last day of the month, you are paid on the first day of the following month. 2007 tax forms Because all of the above conditions are met, the pay you received on January 1, 2013, is considered earned in 2013. 2007 tax forms Income earned over more than 1 year. 2007 tax forms   Regardless of when you actually receive income, you must apply it to the year in which you earned it in figuring your excludable amount for that year. 2007 tax forms For example, a bonus may be based on work you did over several years. 2007 tax forms You determine the amount of the bonus that is considered earned in a particular year in two steps. 2007 tax forms Divide the bonus by the number of calendar months in the period when you did the work that resulted in the bonus. 2007 tax forms Multiply the result of (1) by the number of months you did the work during the year. 2007 tax forms This is the amount that is subject to the exclusion limit for that tax year. 2007 tax forms Income received more than 1 year after it was earned. 2007 tax forms   You cannot exclude income you receive after the end of the year following the year you do the work to earn it. 2007 tax forms Example. 2007 tax forms   You were a bona fide resident of Sweden for 2011, 2012, and 2013. 2007 tax forms You report your income on the cash basis. 2007 tax forms In 2011, you were paid $69,000 for work you did in Sweden that year and in 2012 you were paid $74,000 for that year's work in Sweden. 2007 tax forms You excluded all the income on your 2011 and 2012 returns. 2007 tax forms   In 2013, you were paid $92,000; $82,000 for your work in Sweden during 2013, and $10,000 for work you did in Sweden in 2011. 2007 tax forms You cannot exclude any of the $10,000 for work done in 2011 because you received it after the end of the year following the year in which you earned it. 2007 tax forms You must include the $10,000 in income. 2007 tax forms You can exclude all of the $82,000 received for work you did in 2013. 2007 tax forms Community income. 2007 tax forms   The maximum exclusion applies separately to the earnings of spouses. 2007 tax forms Ignore any community property laws when you figure your limit on the foreign earned income exclusion. 2007 tax forms Part-year exclusion. 2007 tax forms   If the period for which you qualify for the foreign earned income exclusion includes only part of the year, you must adjust the maximum limit based on the number of qualifying days in the year. 2007 tax forms The number of qualifying days is the number of days in the year within the period on which you both: Have your tax home in a foreign country, and Meet either the bona fide residence test or the physical presence test. 2007 tax forms   For this purpose, you can count as qualifying days all days within a period of 12 consecutive months once you are physically present and have your tax home in a foreign country for 330 full days. 2007 tax forms To figure your maximum exclusion, multiply the maximum excludable amount for the year by the number of your qualifying days in the year, and then divide the result by the number of days in the year. 2007 tax forms Example. 2007 tax forms You report your income on the calendar-year basis and you qualified for the foreign earned income exclusion under the bona fide residence test for 75 days in 2013. 2007 tax forms You can exclude a maximum of 75/365 of $97,600, or $20,055, of your foreign earned income for 2013. 2007 tax forms If you qualify under the bona fide residence test for all of 2014, you can exclude your foreign earned income up to the 2014 limit. 2007 tax forms Physical presence test. 2007 tax forms   Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. 2007 tax forms If you qualify for the foreign earned income exclusion under the physical presence test for part of a year, it is important to carefully choose the 12-month period that will allow the maximum exclusion for that year. 2007 tax forms Example. 2007 tax forms You are physically present and have your tax home in a foreign country for a 16-month period from June 1, 2012, through September 30, 2013, except for 16 days in December 2012 when you were on vacation in the United States. 2007 tax forms You figure the maximum exclusion for 2012 as follows. 2007 tax forms Beginning with June 1, 2012, count forward 330 full days. 2007 tax forms Do not count the 16 days you spent in the United States. 2007 tax forms The 330th day, May 12, 2013, is the last day of a 12-month period. 2007 tax forms Count backward 12 months from May 11, 2013, to find the first day of this 12-month period, May 12, 2012. 2007 tax forms This 12-month period runs from May 12, 2012, through May 11, 2013. 2007 tax forms Count the total days during 2012 that fall within this 12-month period. 2007 tax forms This is 234 days (May 12, 2012 – December 31, 2012). 2007 tax forms Multiply $95,100 (the maximum exclusion for 2012) by the fraction 234/366 to find your maximum exclusion for 2012 ($60,802). 2007 tax forms You figure the maximum exclusion for 2013 in the opposite manner. 2007 tax forms Beginning with your last full day, September 30, 2013, count backward 330 full days. 2007 tax forms Do not count the 16 days you spent in the United States. 2007 tax forms That day, October 20, 2012, is the first day of a 12-month period. 2007 tax forms Count forward 12 months from October 20, 2012, to find the last day of this 12-month period, October 19, 2013. 2007 tax forms This 12-month period runs from October 20, 2012, through October 19, 2013. 2007 tax forms Count the total days during 2013 that fall within this 12-month period. 2007 tax forms This is 292 days (January 1, 2013 – October 19, 2013). 2007 tax forms Multiply $97,600, the maximum limit, by the fraction 292/365 to find your maximum exclusion for 2013 ($78,080). 2007 tax forms Choosing the Exclusion The foreign earned income exclusion is voluntary. 2007 tax forms You can choose the exclusion by completing the appropriate parts of Form 2555. 2007 tax forms When You Can Choose the Exclusion Your initial choice of the exclusion on Form 2555 or Form 2555-EZ generally must be made with one of the following returns. 2007 tax forms A return filed by the due date (including any extensions). 2007 tax forms A return amending a timely-filed return. 2007 tax forms Amended returns generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid. 2007 tax forms A return filed within 1 year from the original due date of the return (determined without regard to any extensions). 2007 tax forms Filing after the above periods. 2007 tax forms   You can choose the exclusion on a return filed after the periods described above if you owe no federal income tax after taking into account the exclusion. 2007 tax forms If you owe federal income tax after taking into account the exclusion, you can choose the exclusion on a return filed after the periods described earlier if you file before the IRS discovers that you failed to choose the exclusion. 2007 tax forms Whether or not you owe federal income tax after taking the exclusion into account, if you file your return after the periods described earlier, you must type or legibly print at the top of the first page of the Form 1040 “Filed pursuant to section 1. 2007 tax forms 911-7(a)(2)(i)(D). 2007 tax forms ” If you owe federal income tax after taking into account the foreign earned income exclusion and the IRS discovered that you failed to choose the exclusion, you may still be able to choose the exclusion. 2007 tax forms You must request a private letter ruling under Income Tax Regulation 301. 2007 tax forms 9100-3 and Revenue Procedure 2013-1, 2013-1 I. 2007 tax forms R. 2007 tax forms B. 2007 tax forms 1, available at www. 2007 tax forms irs. 2007 tax forms gov/irb/2013-01_IRB/ar06. 2007 tax forms html. 2007 tax forms Effect of Choosing the Exclusion Once you choose to exclude your foreign earned income, that choice remains in effect for that year and all later years unless you revoke it. 2007 tax forms Foreign tax credit or deduction. 2007 tax forms