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File tax 3. File tax   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. File tax Other income (nonpassive income). File tax Expenses. File tax Additional information. File tax Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. File tax Basis. File tax How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. File tax Including mutual fund or REMIC expenses in income. File tax Nondeductible ExpensesUsed as collateral. File tax Short-sale expenses. File tax Expenses for both tax-exempt and taxable income. File tax State income taxes. File tax Nondeductible amount. File tax Basis adjustment. File tax How To Report Investment Expenses When To Report Investment Expenses Topics - This chapter discusses: Limits on Deductions , Interest Expenses , Bond Premium Amortization , Expenses of Producing Income , Nondeductible Expenses , How To Report Investment Expenses , and When To Report Investment Expenses . File tax Useful Items - You may want to see: Publication 535 Business Expenses 925 Passive Activity and At-Risk Rules 929 Tax Rules for Children and Dependents Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 4952 Investment Interest Expense Deduction See chapter 5, How To Get Tax Help , for information about getting these publications and forms. File tax Limits on Deductions Your deductions for investment expenses may be limited by: The at-risk rules, The passive activity loss limits, The limit on investment interest, or The 2% limit on certain miscellaneous itemized deductions. File tax The at-risk rules and passive activity rules are explained briefly in this section. File tax The limit on investment interest is explained later in this chapter under Interest Expenses . File tax The 2% limit is explained later in this chapter under Expenses of Producing Income . File tax At-risk rules. File tax   Special at-risk rules apply to most income-producing activities. File tax These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. File tax Generally, this is the cash and the adjusted basis of property you contribute to the activity. File tax It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. File tax For more information, see Publication 925. File tax Passive activity losses and credits. File tax   The amount of losses and tax credits you can claim from passive activities is limited. File tax Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. File tax Also, you can use credits from passive activities only against tax on the income from passive activities. File tax There are exceptions for certain activities, such as rental real estate activities. File tax Passive activity. File tax   A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. File tax However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. File tax More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate. File tax You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. File tax  The term “trade or business” generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. File tax However, it does not include rental activities or certain activities treated as incidental to holding property for investment. File tax   You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. File tax Other income (nonpassive income). File tax    Generally, you can use losses from passive activities only to offset income from passive activities. File tax You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. File tax Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. File tax It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. File tax This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. File tax   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. File tax Expenses. File tax   Do not include in the computation of your passive activity income or loss: Expenses (other than interest) that are clearly and directly allocable to your portfolio income, or Interest expense properly allocable to portfolio income. File tax However, this interest and other expenses may be subject to other limits. File tax These limits are explained in the rest of this chapter. File tax Additional information. File tax   For more information about determining and reporting income and losses from passive activities, see Publication 925. File tax Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. File tax For information on business interest, see chapter 4 of Publication 535. File tax You cannot deduct personal interest expenses other than qualified home mortgage interest, as explained in Publication 936, Home Mortgage Interest Deduction, and interest on certain student loans, as explained in Publication 970. File tax Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. File tax You can deduct investment interest subject to the limit discussed later. File tax However, you cannot deduct interest you incurred to produce tax-exempt income. File tax See Tax-exempt income under Nondeductible Expenses, later. File tax You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. File tax Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. File tax Investment property. File tax   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. File tax It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). File tax Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). File tax Partners, shareholders, and beneficiaries. File tax   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. File tax Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. File tax Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. File tax The allocation is not affected by the use of property that secures the debt. File tax Example 1. File tax You borrow $10,000 and use $8,000 to buy stock. File tax You use the other $2,000 to buy items for your home. File tax Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. File tax The other 20% is nondeductible personal interest. File tax Debt proceeds received in cash. File tax   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. File tax Debt proceeds deposited in account. File tax   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. File tax But, if you withdraw the funds and use them for another purpose, you must reallocate the debt to determine the amount considered to be for investment purposes. File tax Example 2. File tax Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. File tax You did not buy the household items until June 1. File tax You had deposited the $2,000 in the bank. File tax You had no other transactions on the bank account until June. File tax You did not sell the stock, and you made no principal payments on the debt. File tax You paid interest from another account. File tax The $8,000 is treated as being used for an investment purpose. File tax The $2,000 is treated as being used for an investment purpose for the 3-month period. File tax Your total interest expense for 3 months on this debt is investment interest. File tax In June, when you spend the $2,000 for household items, you must begin to allocate 80% of the debt and the interest expense to investment purposes and 20% to personal purposes. File tax Amounts paid within 30 days. File tax   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. File tax This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. File tax   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. File tax Payments on debt may require new allocation. File tax   As you repay a debt used for more than one purpose, you must reallocate the balance. File tax You must first reduce the amount allocated to personal purposes by the repayment. File tax You then reallocate the rest of the debt to find what part is for investment purposes. File tax Example 3. File tax If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. File tax The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. File tax Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. File tax Pass-through entities. File tax   If you use borrowed funds to buy an interest in a partnership or S corporation, then the interest on those funds must be allocated based on the assets of the entity. File tax If you contribute to the capital of the entity, you can make the allocation using any reasonable method. File tax Additional allocation rules. File tax   For more information about allocating interest expense, see chapter 4 of Publication 535. File tax When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. File tax If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. File tax For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. File tax Example. File tax You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. File tax On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. File tax If you use the cash method of accounting, you cannot deduct any part of the $30 interest on your return for 2013 because you did not actually pay it. File tax If you use an accrual method, you may be able to deduct a portion of the interest on the loans through December 31, 2013, on your return for 2013. File tax Interest paid in advance. File tax   Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. File tax You can deduct in each year only the interest for that year. File tax Interest on margin accounts. File tax   If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. File tax You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. File tax Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. File tax   You cannot deduct any interest on money borrowed for personal reasons. File tax Limit on interest deduction for market discount bonds. File tax   The amount you can deduct for interest expense you paid or accrued during the year to buy or carry a market discount bond may be limited. File tax This limit does not apply if you accrue the market discount and include it in your income currently. File tax   Under this limit, the interest is deductible only to the extent it is more than: The total interest and OID includible in gross income for the bond for the year, plus The market discount for the number of days you held the bond during the year. File tax Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . File tax Interest not deducted due to limit. File tax   In the year you dispose of the bond, you can deduct any interest expense you were not allowed to deduct in earlier years because of the limit. File tax Choosing to deduct disallowed interest expense before the year of disposition. File tax   You can choose to deduct disallowed interest expense in any year before the year you dispose of the bond, up to your net interest income from the bond during the year. File tax The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. File tax Net interest income. File tax   This is the interest income (including OID) from the bond that you include in income for the year, minus the interest expense paid or accrued during the year to purchase or carry the bond. File tax Limit on interest deduction for short-term obligations. File tax   If the current income inclusion rules discussed in chapter 1 under Discount on Short-Term Obligations do not apply to you, the amount you can deduct for interest expense you paid or accrued during the year to buy or carry a short-term obligation is limited. File tax   The interest is deductible only to the extent it is more than: The amount of acquisition discount or OID on the obligation for the tax year, plus The amount of any interest payable on the obligation for the year that is not included in income because of your accounting method (other than interest taken into account in determining the amount of acquisition discount or OID). File tax The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . File tax Interest not deducted due to limit. File tax   In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit. File tax Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. File tax Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. File tax You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. File tax The interest carried over is treated as investment interest paid or accrued in that next year. File tax You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. File tax Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. File tax Investment income. File tax   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). File tax Investment income does not include Alaska Permanent Fund dividends. File tax It also does not include qualified dividends or net capital gain unless you choose to include them. File tax Choosing to include qualified dividends. File tax   Investment income generally does not include qualified dividends, discussed in chapter 1. File tax However, you can choose to include all or part of your qualified dividends in investment income. File tax   You make this choice by completing Form 4952, line 4g, according to its instructions. File tax   If you choose to include any of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. File tax Choosing to include net capital gain. File tax    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). File tax However, you can choose to include all or part of your net capital gain in investment income. File tax   You make this choice by completing Form 4952, line 4g, according to its instructions. File tax   If you choose to include any of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. File tax   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. File tax    Before making either choice, consider the overall effect on your tax liability. File tax Compare your tax if you make one or both of these choices with your tax if you do not. File tax Investment income of child reported on parent's return. File tax   Investment income includes the part of your child's interest and dividend income you choose to report on your return. File tax If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814. File tax Include it on line 4a of Form 4952. File tax Example. File tax Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. File tax You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. File tax Also enter $200 on Form 1040, line 21. File tax Your investment income includes this $200. File tax Child's qualified dividends. File tax   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. File tax However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. File tax   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). File tax Child's Alaska Permanent Fund dividends. File tax   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. File tax To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. File tax Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. File tax Subtract the result from the amount on Form 8814, line 12. File tax Example. File tax Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. File tax You choose to report this on your return. File tax You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. File tax You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. File tax You figure the amount of your child's income that you can consider your investment income as follows: $4,000 − ($4,000 × ($2,000 ÷ $6,000)) = $2,667 You include the result, $2,667, on Form 4952, line 4a. File tax Child's capital gain distributions. File tax   If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13, or Form 1040, line 13) generally does not count as investment income. File tax However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. File tax   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). File tax Investment expenses. File tax   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. File tax Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. File tax Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A (Form 1040), line 27. File tax See Expenses of Producing Income , later, for a discussion of the 2% limit. File tax Losses from passive activities. File tax   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). File tax See Publication 925 for information about passive activities. File tax Example. File tax Ted is a partner in a partnership that operates a business. File tax However, he does not materially participate in the partnership's business. File tax Ted's interest in the partnership is considered a passive activity. File tax Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. File tax His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. File tax His investment interest expense is $8,000. File tax Ted also has income from the partnership of $2,000. File tax Ted figures his net investment income and the limit on his investment interest expense deduction in the following way: Total investment income $10,000 Minus: Investment expenses (other than interest) 3,200 Net investment income $6,800 Deductible investment interest expense for the year $6,800 The $2,000 of income from the passive activity is not used in determining Ted's net investment income. File tax His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. File tax Form 4952 Use Form 4952 to figure your deduction for investment interest. File tax See Form 4952 for more information. File tax Exception to use of Form 4952. File tax   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. File tax Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. File tax You do not have any other deductible investment expenses. File tax You have no carryover of investment interest expense from 2012. File tax   If you meet all of these tests, you can deduct all of your investment interest. File tax    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. File tax If the bond yields taxable interest, you can choose to amortize the premium. File tax This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. File tax If you make this choice, you must reduce your basis in the bond by the amortization for the year. File tax If the bond yields tax-exempt interest, you must amortize the premium. File tax This amortized amount is not deductible in determining taxable income. File tax However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year. File tax Bond premium. File tax   Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). File tax For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. File tax Special rules to determine amounts payable on a bond. File tax   For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. File tax 171-3. File tax Basis. File tax   In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. File tax However, you may need to use a different basis for: Convertible bonds, Bonds you got in a trade, and Bonds whose basis has to be determined using the basis of the person who transferred the bond to you. File tax See Regulations section 1. File tax 171-1(e). File tax Dealers. File tax   A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium. File tax   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. File tax How To Figure Amortization For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond's yield to maturity, determined by using the bond's basis and compounding at the close of each accrual period. File tax Constant yield method. File tax   Figure the bond premium amortization for each accrual period as follows. File tax Step 1: Determine your yield. File tax   Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including payments of qualified stated interest), produces an amount equal to your basis in the bond. File tax Figure the yield as of the date you got the bond. File tax It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage. File tax   If you do not know the yield, consult your broker or tax advisor. File tax Databases available to them are likely to show the yield at the date of purchase. File tax Step 2: Determine the accrual periods. File tax   You can choose the accrual periods to use. File tax They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. File tax The computation is simplest if accrual periods are the same as the intervals between interest payment dates. File tax Step 3: Determine the bond premium for the accrual period. File tax   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. File tax Then subtract the result from the qualified stated interest for the period. File tax   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. File tax After that, it is your basis decreased by the amount of bond premium amortized for earlier periods and the amount of any payment previously made on the bond other than a payment of qualified stated interest. File tax Example. File tax On February 1, 2012, you bought a taxable bond for $110,000. File tax The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2019, making your premium $10,000 ($110,000 − $100,000). File tax The bond pays qualified stated interest of $10,000 on February 1 of each year. File tax Your yield is 8. File tax 07439% compounded annually. File tax You choose to use annual accrual periods ending on February 1 of each year. File tax To find your bond premium amortization for the accrual period ending on February 1, 2013, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. File tax When you subtract the result ($8,881. File tax 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. File tax 17. File tax Special rules to figure amortization. File tax   For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. File tax 171-3. File tax Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. File tax Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. File tax Straight-line method. File tax   Under this method, the amount of your bond premium amortization is the same each month. File tax Divide the number of months you held the bond during the year by the number of months from the beginning of the tax year (or, if later, the date of acquisition) to the date of maturity or earlier call date. File tax Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). File tax This gives you your bond premium amortization for the year. File tax Revenue Ruling 82-10 method. File tax   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. File tax This method is explained in Revenue Ruling 82-10, 1982-1 C. File tax B. File tax 46. File tax Choosing To Amortize You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. File tax You should attach a statement to your return that you are making this choice under section 171. File tax See How To Report Amortization, next. File tax This choice is binding for the year you make it and for later tax years. File tax It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. File tax You can change your decision to amortize bond premium only with the written approval of the IRS. File tax To request approval, use Form 3115. File tax For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. File tax You can find Revenue Procedure 2011-14 at www. File tax irs. File tax gov/irb/2011-04_IRB/ar08. File tax html. File tax How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. File tax Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. File tax Under your last entry on line 1, put a subtotal of all interest listed on line 1. File tax Below this subtotal, print “ABP Adjustment,” and the total interest you received. File tax Subtract this amount from the subtotal, and enter the result on line 2. File tax Bond premium amortization more than interest. File tax   If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28. File tax    But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. File tax Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. File tax Pre-1998 election to amortize bond premium. File tax   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. File tax Bonds acquired before October 23, 1986. File tax   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. File tax Bonds acquired after October 22, 1986, but before 1988. File tax    The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond. File tax Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). File tax To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: To produce or collect income, or To manage property held for producing income. File tax The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. File tax The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. File tax The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. File tax For information on how to report expenses of producing income, see How To Report Investment Expenses , later. File tax Attorney or accounting fees. File tax   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. File tax However, in some cases, attorney or accounting fees are part of the basis of property. File tax See Basis of Investment Property in chapter 4. File tax Automatic investment service and dividend reinvestment plans. File tax   A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. File tax Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. File tax Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. File tax   A corporation in which you own stock also may have a dividend reinvestment plan. File tax This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. File tax   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. File tax If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. File tax Deduct the charges in the year you pay them. File tax Clerical help and office rent. File tax   You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments. File tax Cost of replacing missing securities. File tax   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. File tax You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. File tax   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. File tax Under certain types of insurance policies, you can recover some of the expenses. File tax   If you receive the refund in the tax year you pay the amounts, you can deduct only the difference between the expenses paid and the amount refunded. File tax If the refund is made in a later tax year, you must include the refund in income in the year you received it, but only to the extent that the expenses decreased your tax in the year you deducted them. File tax Fees to collect income. File tax   You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock. File tax Fees to buy or sell. File tax   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. File tax You must add the fee to the cost of the property. File tax See Basis of Investment Property in chapter 4. File tax    You cannot deduct any broker's fees, commissions, or option premiums you pay (or that were netted out) in connection with the sale of investment property. File tax They can be used only to figure gain or loss from the sale. File tax See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. File tax Investment counsel and advice. File tax   You can deduct fees you pay for counsel and advice about investments that produce taxable income. File tax This includes amounts you pay for investment advisory services. File tax Safe deposit box rent. File tax   You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents. File tax If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. File tax See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. File tax State and local transfer taxes. File tax   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. File tax If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. File tax If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. File tax Trustee's commissions for revocable trust. File tax   If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust to the extent it is to produce or collect taxable income or to manage property. File tax However, you cannot deduct any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income. File tax   If you are a cash-basis taxpayer and pay the commissions for several years in advance, you must deduct a part of the commission each year. File tax You cannot deduct the entire amount in the year you pay it. File tax Investment expenses from pass-through entities. File tax   If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses. File tax A partnership or S corporation will show your share of these expenses on your Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S). File tax A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). File tax Publicly-offered mutual funds are discussed later. File tax   If you hold an interest in a REMIC, any expenses relating to your residual interest investment will be shown on Schedule Q (Form 1066), line 3b. File tax Any expenses relating to your regular interest investment will appear in box 5 of Form 1099-INT (or substitute statement) or box 9 of Form 1099-OID (or substitute statement). File tax   Report your share of these investment expenses on Schedule A (Form 1040), subject to the 2% limit, in the same manner as your other investment expenses. File tax Including mutual fund or REMIC expenses in income. File tax   Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, are considered to be indirect deductions through that pass-through entity. File tax You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. File tax If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV (or substitute statement). File tax If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. File tax If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. File tax Publicly-offered mutual funds. File tax   Most mutual funds are publicly offered. File tax These mutual funds, generally, are traded on an established securities exchange. File tax These funds do not pass investment expenses through to you. File tax Instead, the dividend income they report to you in box 1a of Form 1099-DIV (or substitute statement) is already reduced by your share of investment expenses. File tax As a result, you cannot deduct the expenses on your return. File tax   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. File tax    A publicly offered mutual fund is one that: Is continuously offered pursuant to a public offering, Is regularly traded on an established securities market, and Is held by or for no fewer than 500 persons at any time during the year. File tax Contact your mutual fund if you are not sure whether it is publicly offered. File tax Nondeductible Expenses Some expenses that you incur as an investor are not deductible. File tax Stockholders' meetings. File tax   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. File tax This is true even if your purpose in attending is to get information that would be useful in making further investments. File tax Investment-related seminar. File tax   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. File tax Single-premium life insurance, endowment, and annuity contracts. File tax   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. File tax Used as collateral. File tax   If you use a single premium annuity contract as collateral to obtain or continue a mortgage loan, you cannot deduct any interest on the loan that is collateralized by the annuity contract. File tax Figure the amount of interest expense disallowed by multiplying the current interest rate on the mortgage loan by the lesser of the amount of the annuity contract used as collateral or the amount of the loan. File tax Borrowing on insurance. File tax   Generally, you cannot deduct interest on money you borrow to buy or carry a life insurance, endowment, or annuity contract if you plan to systematically borrow part or all of the increases in the cash value of the contract. File tax This rule applies to the interest on the total amount borrowed to buy or carry the contract, not just the interest on the borrowed increases in the cash value. File tax Tax-exempt income. File tax   You cannot deduct expenses you incur to produce tax-exempt income. File tax Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. File tax Short-sale expenses. File tax   The rule disallowing a deduction for interest expenses on tax-exempt securities applies to amounts you pay in connection with personal property used in a short sale or amounts paid by others for the use of any collateral in connection with the short sale. File tax However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale. File tax Short sales are discussed in Short Sales in chapter 4. File tax Expenses for both tax-exempt and taxable income. File tax   You may have expenses that are for both tax-exempt and taxable income. File tax If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. File tax You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income. File tax   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. File tax If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. File tax To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result. File tax Example. File tax You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. File tax In earning this income, you had $500 of expenses. File tax You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. File tax 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. File tax You cannot deduct $400 (80% of $500) of the expenses. File tax You can deduct $100 (the rest of the expenses) because they are for the taxable interest. File tax State income taxes. File tax   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. File tax But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. File tax Interest expense and carrying charges on straddles. File tax   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. File tax The nondeductible interest and carrying charges are added to the basis of the straddle property. File tax However, this treatment does not apply if: All the offsetting positions making up the straddle either consist of one or more qualified covered call options and the optioned stock, or consist of section 1256 contracts (and the straddle is not part of a larger straddle); or The straddle is a hedging transaction. File tax  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. File tax   Interest includes any amount you pay or incur in connection with personal property used in a short sale. File tax However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. File tax   To determine the interest on market discount bonds and short-term obligations that are part of a straddle, you must first apply the rules discussed under Limit on interest deduction for market discount bonds and Limit on interest deduction for short-term obligations (both under Interest Expenses, earlier). File tax Nondeductible amount. File tax   Figure the nondeductible interest and carrying charges on straddle property as follows. File tax Add: Interest on indebtedness incurred or continued to buy or carry the personal property, and All other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property. File tax Subtract from the amount in (1): Interest (including OID) includible in gross income for the year on the personal property, Any income from the personal property treated as ordinary income on the disposition of short-term government obligations or as ordinary income under the market discount and short-term bond provisions — see Discount on Debt Instruments in chapter 1, The dividends includible in gross income for the year from the personal property, and Any payment on a loan of the personal property for use in a short sale that is includible in gross income. File tax Basis adjustment. File tax   Add the nondeductible amount to the basis of your straddle property. File tax How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). File tax Enter your deductible investment interest expense on Schedule A (Form1040), line 14. File tax Include any deductible short sale expenses. File tax (See Short Sales in chapter 4 for information on these expenses. File tax ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. File tax Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. File tax List the type and amount of each expense on the dotted lines next to line 23. File tax (If necessary, you can show the required information on an attached statement. File tax ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. File tax When To Report Investment Expenses If you use the cash method to report income and expenses, you generally deduct your expenses, except for certain prepaid interest, in the year you pay them. File tax If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. File tax Also see When To Deduct Investment Interest , earlier in this chapter. File tax Unpaid expenses owed to related party. File tax   If you use an accrual method, you cannot deduct interest and other expenses owed to a related cash-basis person until payment is made and the amount is includible in the gross income of that person. File tax The relationship, for purposes of this rule, is determined as of the end of the tax year for which the interest or expense would otherwise be deductible. File tax If a deduction is denied under this rule, this rule will continue to apply even if your relationship with the person ceases to exist before the amount is includible in the gross income of that person. File tax   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . File tax It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. File tax   The postponement of deductions for unpaid expenses and interest under the related party rule does not apply to OID, regardless of when payment is made. File tax This rule also does not apply to loans with below-market interest rates or to certain payments for the use of property and services when the lender or recipient has to include payments periodically in income, even if a payment has not been made. File tax Prev  Up  Next   Home   More Online Publications
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The File Tax

File tax 1. File tax   Bona Fide Residence Table of Contents Presence TestDays of Presence in the United States or Relevant Possession Significant Connection Tax HomeExceptions Closer ConnectionException for Year of Move Special Rules in the Year of a MoveYear of Moving to a Possession Year of Moving From a Possession Reporting a Change in Bona Fide ResidenceWho Must File Penalty for Not Filing Form 8898 In order to qualify for certain tax benefits (see chapter 3), you must be a bona fide resident of American Samoa, the CNMI, Guam, Puerto Rico, or the USVI for the entire tax year. File tax Generally, you are a bona fide resident of one of these possessions (the relevant possession) if, during the tax year, you: Meet the presence test, Do not have a tax home outside the relevant possession, and Do not have a closer connection to the United States or to a foreign country than to the relevant possession. File tax Special rule for members of the U. File tax S. File tax Armed Forces. File tax   If you are a member of the U. File tax S. File tax Armed Forces who qualified as a bona fide resident of the relevant possession in an earlier tax year, your absence from that possession during the current tax year in compliance with military orders will not affect your status as a bona fide resident. File tax Likewise, being in a possession solely in compliance with military orders will not qualify you for bona fide residency. File tax Also see the special income source rule for members of the U. File tax S. File tax Armed Forces in chapter 2, under Compensation for Labor or Personal Services . File tax Special rule for civilian spouse of active duty member of the U. File tax S. File tax Armed Forces. File tax   If you are the civilian spouse of an active duty servicemember, under Military Spouses Residency Relief Act (MSRRA) you can choose to keep your prior residence or domicile for tax purposes (tax residence) when accompanying the servicemember spouse, who is relocating under military orders, to a new military duty station in one of the 50 states, the District of Columbia, or a U. File tax S. File tax possession. File tax Before relocating, you and your spouse must have the same tax residence. File tax If you are a civilian spouse and choose to keep your prior tax residence after such relocation, the source of income for services performed (for example, wages, salaries, tips, or self-employment) by you is considered to be (the jurisdiction of) the prior tax residence. File tax As a result, the amount of income tax withholding (from Form(s) W-2, Wage and Tax Statement) that you are able to claim on your federal return, as well as the need to file a state or U. File tax S. File tax possession return, may be affected. File tax For more information, consult with state, local, or U. File tax S. File tax possession tax authorities regarding your tax obligations under MSRRA. File tax Presence Test If you are a U. File tax S. File tax citizen or resident alien, you will satisfy the presence test for the entire tax year if you meet one of the following conditions. File tax You were present in the relevant possession for at least 183 days during the tax year. File tax You were present in the relevant possession for at least 549 days during the 3-year period that includes the current tax year and the 2 immediately preceding tax years. File tax During each year of the 3-year period, you must be present in the relevant possession for at least 60 days. File tax You were present in the United States for no more than 90 days during the tax year. File tax You had earned income in the United States of no more than a total of $3,000 and were present for more days in the relevant possession than in the United States during the tax year. File tax Earned income is pay for personal services performed, such as wages, salaries, or professional fees. File tax You had no significant connection to the United States during the tax year. File tax Special rule for nonresident aliens. File tax   Conditions (1) through (5) above do not apply to nonresident aliens of the United States. File tax Instead, nonresident aliens must meet the substantial presence test discussed in chapter 1 of Publication 519. File tax In that discussion, substitute the name of the possession for “United States” and “U. File tax S. File tax ” wherever they appear. File tax Disregard the discussion in that chapter about a Closer Connection to a Foreign Country. File tax Days of Presence in the United States or Relevant Possession Generally, you are treated as being present in the United States or in the relevant possession on any day that you are physically present in that location at any time during the day. File tax Days of presence in a possession. File tax   You are considered to be present in the relevant possession on any of the following days. File tax Any day you are physically present in that possession at any time during the day. File tax Any day you are outside of the relevant possession in order to receive, or to accompany any of the following family members to receive, qualifying medical treatment (see Qualifying Medical Treatment , later). File tax Your parent. File tax Your spouse. File tax Your child, who is your son, daughter, stepson, or stepdaughter. File tax This includes an adopted child or child lawfully placed with you for legal adoption. File tax This also includes a foster child who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. File tax Any day you are outside the relevant possession because you leave or are unable to return to the relevant possession during any: 14-day period within which a major disaster occurs in the relevant possession for which a Federal Emergency Management Agency (FEMA) notice of a federal declaration of a major disaster is issued in the Federal Register, or Period for which a mandatory evacuation order is in effect for the geographic area in the relevant possession in which your main home is located. File tax   If, during a single day, you are physically present: In the United States and in the relevant possession, that day is considered a day of presence in the relevant possession; or In two possessions, that day is considered a day of presence in the possession where your tax home is located (see Tax Home , later). File tax Days of presence in the United States. File tax   You are considered to be present in the United States on any day that you are physically present in the United States at any time during the day. File tax However, do not count the following days as days of presence in the United States. File tax Any day you are temporarily present in the United States in order to receive, or to accompany a parent, spouse, or child who is receiving, qualifying medical treatment. File tax “Child” is defined under item 2c earlier. File tax “Qualifying medical treatment” is defined later. File tax Any day you are temporarily present in the United States because you leave or are unable to return to the relevant possession during any: 14-day period within which a major disaster occurs in the relevant possession for which a Federal Emergency Management Agency (FEMA) notice of a federal declaration of a major disaster is issued in the Federal Register, or Period for which a mandatory evacuation order is in effect for the geographic area in the relevant possession in which your main home is located. File tax Any day you are in the United States for less than 24 hours when you are traveling between two places outside the United States. File tax Any day you are temporarily present in the United States as a professional athlete to compete in a charitable sports event (defined later). File tax Any day you are temporarily in the United States as a student (defined later). File tax Any day you are in the United States serving as an elected representative of the relevant possession, or serving full time as an elected or appointed official or employee of the government of that possession (or any of its political subdivisions). File tax Qualifying Medical Treatment Such treatment is generally provided by (or under the supervision of) a physician for an illness, injury, impairment, or physical or mental condition. File tax The treatment generally involves: Any period of inpatient care that requires an overnight stay in a hospital or hospice, and any period immediately before or after that inpatient care to the extent it is medically necessary, or Any temporary period of inpatient care in a residential medical care facility for medically necessary rehabilitation services. File tax With respect to each qualifying medical treatment, you must prepare (or obtain) and maintain documentation supporting your claim that such treatment meets the criteria to be considered days of presence in the relevant possession. File tax You must be able to produce this documentation within 30 days if requested by the IRS or tax administrator for the relevant possession. File tax You must keep the following documentation. File tax Records that provide: The patient's name and relationship to you (if the medical treatment is provided to a person you accompany); The name and address of the hospital, hospice, or residential medical care facility where the medical treatment was provided; The name, address, and telephone number of the physician who provided the medical treatment; The date(s) on which the medical treatment was provided; and Receipt(s) of payment for the medical treatment. File tax Signed certification by the providing or supervising physician that the medical treatment met the requirements for being qualified medical treatment, and setting forth: The patient's name, A reasonably detailed description of the medical treatment provided by (or under the supervision of) the physician, The dates on which the medical treatment was provided, and The medical facts that support the physician's certification and determination that the treatment was medically necessary. File tax Charitable Sports Event A charitable sports event is one that meets all of the following conditions. File tax The main purpose is to benefit a qualified charitable organization. File tax The entire net proceeds go to charity. File tax Volunteers perform substantially all the work. File tax In figuring the days of presence in the United States, you can exclude only the days on which you actually competed in the charitable sports event. File tax You cannot exclude the days on which you were in the United States to practice for the event, to perform promotional or other activities related to the event, or to travel between events. File tax Student To qualify as a student, you must be, during some part of each of any 5 calendar months during the calendar year: A full-time student at a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or A student taking a full-time, on-farm training course given by a school described in (1) above or by a state, county, or local government agency. File tax The 5 calendar months do not have to be consecutive. File tax Full-time student. File tax   A full-time student is a person who is enrolled for the number of hours or courses the school considers to be full-time attendance. File tax However, school attendance exclusively at night is not considered full-time attendance. File tax School. File tax   The term “school” includes elementary schools, middle schools, junior and senior high schools, colleges, universities, and technical, trade, and mechanical schools. File tax It does not include on-the-job training courses, correspondence schools, and schools offering courses only through the Internet. File tax Significant Connection One way in which you can meet the presence test is to have no significant connection to the United States during the tax year. File tax This section looks at the factors that determine if a significant connection exists. File tax You are treated as having a significant connection to the United States if you: Have a permanent home in the United States, Are currently registered to vote in any political subdivision of the United States, or Have a spouse or child (see item 2c under Days of presence in a possession , earlier) who is under age 18 whose main home is in the United States, other than: A child who is in the United States because he or she is the child of divorced or legally separated parents and is living with a custodial parent under a custodial decree or multiple support agreement, or A child who is in the United States as a student. File tax For the purpose of determining if you have a significant connection to the United States, the term “spouse” does not include a spouse from whom you are legally separated under a decree of divorce or separate maintenance. File tax Permanent home. File tax   A permanent home generally includes an accommodation such as a house, an apartment, or a furnished room that is either owned or rented by you or your spouse. File tax The dwelling unit must be available at all times, continuously, not only for short stays. File tax Exception for rental property. File tax   If you or your spouse own the dwelling unit and at any time during the tax year it is rented to someone else at fair rental value, it will be considered your permanent home only if you or your spouse use that property for personal purposes for more than the greater of: 14 days, or 10% of the number of days during that tax year that the property is rented to others at a fair rental value. File tax   You are treated as using rental property for personal purposes on any day the property is not being rented to someone else at fair rental value for the entire day. File tax   A day of personal use of a dwelling unit is also any day that the unit is used by any of the following persons. File tax You or any other person who has an interest in it, unless you rent it to another owner as his or her main home under a shared equity financing agreement. File tax A member of your family or a member of the family of any other person who has an interest in it, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. File tax Family includes only brothers and sisters, half-brothers and half-sisters, spouses, ancestors (parents, grandparents, etc. File tax ), and lineal descendants (children, grandchildren, etc. File tax ). File tax Anyone under an arrangement that lets you use some other dwelling unit. File tax Anyone at less than a fair rental price. File tax   However, any day you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. File tax Whether your property is used mainly for this purpose is determined in light of all the facts and circumstances, such as: The amount of time you devote to repair and maintenance work, How often during the tax year you perform repair and maintenance work on this property, and The presence and activities of companions. File tax   See Publication 527, Residential Rental Property, for more information about personal use of a dwelling unit. File tax Example—significant connection. File tax Ann Green, a U. File tax S. File tax citizen, is a sales representative for a company based in Guam. File tax Ann lives with her spouse and young children in their house in Guam, where she is also registered to vote. File tax Her business travel requires her to spend 120 days in the United States and another 120 days in foreign countries. File tax When traveling on business, Ann generally stays at hotels but sometimes stays with her brother, who lives in the United States. File tax Ann's stays are always of short duration and she asks her brother's permission to stay with him. File tax Her brother's house is not her permanent home, nor does she have any other accommodations in the United States that would be considered her permanent home. File tax Ann satisfies the presence test because she has no significant connection to the United States. File tax Example—presence test. File tax Eric and Wanda Brown live for part of the year in a condominium, which they own, in the CNMI. File tax They also own a house in Maine where they live for 120 days every year to be near their grown children and grandchildren. File tax The Browns are retired and their only income is from pension payments, dividends, interest, and social security benefits. File tax In 2013, they spent only 175 days in the CNMI because of a 70-day vacation to Europe and Asia. File tax Thus, in 2013, the Browns were not present in the CNMI for at least 183 days, were present in the United States for more than 90 days, and had a significant connection to the United States because of their permanent home. File tax However, the Browns still satisfied the presence test with respect to the CNMI because they had no earned income in the United States and were physically present for more days in the CNMI than in the United States. File tax Tax Home You will have met the tax home test if you did not have a tax home outside the relevant possession during any part of the tax year. File tax Your tax home is your regular or main place of business, employment, or post of duty regardless of where you maintain your family home. File tax If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. File tax If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work. File tax Exceptions There are some special rules regarding tax home that provide exceptions to the general rule stated above. File tax Students and Government Officials Disregard the following days when determining whether you have a tax home outside the relevant possession. File tax Days you were temporarily in the United States as a student (see Student under Days of Presence in the United States or Relevant Possession, earlier). File tax Days you were in the United States serving as an elected representative of the relevant possession, or serving full time as an elected or appointed official or employee of the government of that possession (or any of its political subdivisions). File tax Seafarers You will not be considered to have a tax home outside the relevant possession solely because you are employed on a ship or other seafaring vessel that is predominantly used in local and international waters. File tax For this purpose, a vessel is considered to be predominantly used in local and international waters if, during the tax year, the total amount of time it is used in international waters and in the waters within 3 miles of the relevant possession exceeds the total amount of time it is used in the territorial waters of the United States, another possession, or any foreign country. File tax Example. File tax In 2013, Sean Silverman, a U. File tax S. File tax citizen, was employed by a fishery and spent 250 days at sea on a fishing vessel. File tax When not at sea, Sean lived with his spouse at a house they own in American Samoa. File tax The fishing vessel on which Sean works departs and arrives at various ports in American Samoa, other possessions, and foreign countries, but was in international or American Samoa's local waters for 225 days. File tax For purposes of determining bona fide residency of American Samoa, Sean will not be considered to have a tax home outside that possession solely because of his employment on board the fishing vessel. File tax Year of Move If you are moving to or from a possession during the year, you may still be able to meet the tax home test for that year. File tax See Special Rules in the Year of a Move , later in this chapter. File tax Closer Connection You will have met the closer connection test if, during any part of the tax year, you do not have a closer connection to the United States or a foreign country than to the relevant U. File tax S. File tax possession. File tax You will be considered to have a closer connection to a possession than to the United States or to a foreign country if you have maintained more significant contacts with the possession(s) than with the United States or foreign country. File tax In determining if you have maintained more significant contacts with the relevant possession, the facts and circumstances to be considered include, but are not limited to, the following. File tax The location of your permanent home. File tax The location of your family. File tax The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by you and your family. File tax The location of social, political, cultural, professional, or religious organizations with which you have a current relationship. File tax The location where you conduct your routine personal banking activities. File tax The location where you conduct business activities (other than those that go into determining your tax home). File tax The location of the jurisdiction in which you hold a driver's license. File tax The location of the jurisdiction in which you vote. File tax The location of charitable organizations to which you contribute. File tax The country of residence you designate on forms and documents. File tax The types of official forms and documents you file, such as Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), or Form W-9, Request for Taxpayer Identification Number and Certification. File tax Your connections to the relevant possession will be compared to the total of your connections with the United States and foreign countries. File tax Your answers to the questions on Form 8898, Part III, will help establish the jurisdiction to which you have a closer connection. File tax Example—closer connection to the United States. File tax Marcos Reyes, a U. File tax S. File tax citizen, moved to Puerto Rico in 2013 to start an investment consulting and venture capital business. File tax His spouse and two teenage children remained in California to allow the children to complete high school. File tax He traveled back to the United States regularly to see his spouse and children, to engage in business activities, and to take vacations. File tax Marcos had an apartment available for his full-time use in Puerto Rico, but remained a joint owner of the residence in California where his spouse and children lived. File tax Marcos and his family had automobiles and personal belongings such as furniture, clothing, and jewelry located at both residences. File tax Although Marcos was a member of the Puerto Rico Chamber of Commerce, he also belonged to and had current relationships with social, political, cultural, and religious organizations in California. File tax Marcos received mail in California, including bank and brokerage statements and credit card bills. File tax He conducted his personal banking activities in California. File tax He held a California driver's license and was also registered to vote there. File tax Based on all of the particular facts and circumstances pertaining to Marcos, he was not a bona fide resident of Puerto Rico in 2013 because he had a closer connection to the United States than to Puerto Rico. File tax Closer connection to another possession. File tax   Generally, possessions are not treated as foreign countries. File tax Therefore, a closer connection to a possession other than the relevant possession will not be treated as a closer connection to a foreign country. File tax Example—tax home and closer connection to possession. File tax Pearl Blackmon, a U. File tax S. File tax citizen, is a permanent employee of a hotel in Guam, but works only during the tourist season. File tax For the remainder of each year, Pearl lives with her spouse and children in the CNMI, where she has no outside employment. File tax Most of Pearl's personal belongings, including her automobile, are located in the CNMI. File tax She is registered to vote in, and has a driver's license issued by, the CNMI. File tax She does her personal banking in the CNMI and routinely lists her CNMI address as her permanent address on forms and documents. File tax Pearl satisfies the presence test with respect to both Guam and the CNMI. File tax She satisfies the tax home test with respect to Guam, because her regular place of business is in Guam. File tax Pearl satisfies the closer connection test with respect to both Guam and the CNMI, because she does not have a closer connection to the United States or to any foreign country. File tax Pearl is considered a bona fide resident of Guam, the location of her tax home. File tax Exception for Year of Move If you are moving to or from a possession during the year, you may still be able to meet the closer connection test for that year. File tax See Special Rules in the Year of a Move , next. File tax Special Rules in the Year of a Move If you are moving to or from a possession during the year, you may still be able to meet the tax home and closer connection tests for that year. File tax Year of Moving to a Possession You will satisfy the tax home and closer connection tests in the tax year of changing your residence to the relevant possession if you meet all of the following. File tax You have not been a bona fide resident of the relevant possession in any of the 3 tax years immediately preceding your move. File tax In the year of the move, you do not have a tax home outside the relevant possession or a closer connection to the United States or a foreign country than to the relevant possession during any of the last 183 days of the tax year. File tax You are a bona fide resident of the relevant possession for each of the 3 tax years immediately following your move. File tax Example. File tax Dwight Wood, a U. File tax S. File tax citizen, files returns on a calendar year basis. File tax He lived in the United States from January 2007 through May 2013. File tax In June 2013 he moved to the USVI, purchased a house, and accepted a permanent job with a local employer. File tax From July 1 through December 31, 2013 (more than 183 days), Dwight's principal place of business was in the USVI and, during that time, he did not have a closer connection to the United States or a foreign country than to the USVI. File tax If he is a bona fide resident of the USVI during all of 2014 through 2016, he will satisfy the tax home and closer connection tests for 2013. File tax If Dwight also satisfies the presence test in 2013, he will be considered a bona fide resident of the USVI for the entire 2013 tax year. File tax Year of Moving From a Possession In the year you cease to be a bona fide resident of American Samoa, the CNMI, Guam, or the USVI, you will satisfy the tax home and closer connection tests with respect to the relevant possession if you meet all of the following. File tax You have been a bona fide resident of the relevant possession for each of the 3 tax years immediately preceding your change of residence. File tax In the year of the move, you do not have a tax home outside the relevant possession or a closer connection to the United States or a foreign country than to the relevant possession during any of the first 183 days of the tax year. File tax You are not a bona fide resident of the relevant possession for any of the 3 tax years immediately following your move. File tax Example. File tax Jean Aspen, a U. File tax S. File tax citizen, files returns on a calendar year basis. File tax From January 2010 through December 2012, Jean was a bona fide resident of American Samoa. File tax Jean continued to live there until September 6, 2013, when she accepted new employment and moved to Hawaii. File tax Jean's principal place of business from January 1 through September 5, 2013 (more than 183 days), was in American Samoa, and during that period Jean did not have a closer connection to the United States or a foreign country than to American Samoa. File tax If Jean continues to live and work in Hawaii for the rest of 2013 and throughout years 2014 through 2016, she will satisfy the tax home and closer connection tests for 2013 with respect to American Samoa. File tax If Jean also satisfies the presence test in 2013, she will be considered a bona fide resident for the entire 2013 tax year. File tax Puerto Rico You will be considered a bona fide resident of Puerto Rico for the part of the tax year preceding the date on which you move if you: Are a U. File tax S. File tax citizen, Are a bona fide resident of Puerto Rico for at least 2 tax years immediately preceding the tax year of the move, Cease to be a bona fide resident of Puerto Rico during the tax year, Cease to have a tax home in Puerto Rico during the tax year, and Have a closer connection to Puerto Rico than to the United States or a foreign country throughout the part of the tax year preceding the date on which you cease to have a tax home in Puerto Rico. File tax Example. File tax Randy White, a U. File tax S. File tax citizen, files returns on a calendar year basis. File tax For all of 2011 and 2012, Randy was a bona fide resident of Puerto Rico. File tax From January through April 2013, Randy continued to reside and maintain his principal place of business in and closer connection to Puerto Rico. File tax On May 5, 2013, Randy moved and changed his tax home to Nevada. File tax Later that year he established a closer connection to the United States than to Puerto Rico. File tax Randy did not satisfy the presence test for 2013 with respect to Puerto Rico, nor the tax home or closer connection tests. File tax However, because Randy was a bona fide resident of Puerto Rico for at least 2 tax years before he moved to Nevada in 2013, he was a bona fide resident of Puerto Rico from January 1 through May 4, 2013. File tax Reporting a Change in Bona Fide Residence If you became or ceased to be a bona fide resident of a U. File tax S. File tax possession, you may need to file Form 8898. File tax This applies to the U. File tax S. File tax possessions of American Samoa, the CNMI, Guam, Puerto Rico, and the USVI. File tax Who Must File You must file Form 8898 for the tax year in which you meet both of the following conditions. File tax Your worldwide gross income (defined below) in that tax year is more than $75,000. File tax You meet one of the following. File tax You take a position for U. File tax S. File tax tax purposes that you became a bona fide resident of a U. File tax S. File tax possession after a tax year for which you filed a U. File tax S. File tax income tax return as a citizen or resident alien of the United States but not as a bona fide resident of the possession. File tax You are a citizen or resident alien of the United States who takes the position for U. File tax S. File tax tax purposes that you ceased to be a bona fide resident of a U. File tax S. File tax possession after a tax year for which you filed an income tax return (with the IRS, the possession tax authority, or both) as a bona fide resident of the possession. File tax You take the position for U. File tax S. File tax tax purposes that you became a bona fide resident of Puerto Rico or American Samoa after a tax year for which you were required to file an income tax return as a bona fide resident of the CNMI, Guam, or the USVI. File tax Worldwide gross income. File tax   Worldwide gross income means all income you received in the form of money, goods, property, and services, including any income from sources outside the United States (even if you can exclude part or all of it) and before any deductions, credits, or rebates. File tax Example. File tax You are a U. File tax S. File tax citizen who moved to the CNMI in December 2012, but did not become a bona fide resident of that possession until the 2013 tax year. File tax You must file Form 8898 for the 2013 tax year if your worldwide gross income for that year was more than $75,000. File tax Penalty for Not Filing Form 8898 If you are required to file Form 8898 for any tax year and you fail to file it, you may owe a penalty of $1,000. File tax You may also owe this penalty if you do not include all the information required by the form or the form includes incorrect information. File tax In either case, you will not owe this penalty if you can show that such failure is due to reasonable cause and not willful neglect. File tax This is in addition to any criminal penalty that may be imposed. File tax Prev  Up  Next   Home   More Online Publications