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Free 2010 Tax Amendment

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Free 2010 Tax Amendment

Free 2010 tax amendment 5. Free 2010 tax amendment   Exemptions, Deductions, and Credits Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Items Related to Excluded Income Exemptions Contributions to Foreign Charitable Organizations Moving ExpensesAllocation of Moving Expenses Forms To File Contributions to Individual Retirement Arrangements Taxes of Foreign Countries and U. Free 2010 tax amendment S. Free 2010 tax amendment PossessionsCredit for Foreign Income Taxes Deduction for Foreign Income Taxes Deduction for Other Foreign Taxes How To Report Deductions Topics - This chapter discusses: The rules concerning items related to excluded income, Exemptions, Contributions to foreign charitable organizations, Moving expenses, Contributions to individual retirement arrangements (IRAs), Taxes of foreign countries and U. Free 2010 tax amendment S. Free 2010 tax amendment possessions, and How to report deductions. Free 2010 tax amendment Useful Items - You may want to see: Publication 501 Exemptions, Standard Deduction, and Filing Information 514 Foreign Tax Credit for Individuals 521 Moving Expenses 523 Selling Your Home 590 Individual Retirement Arrangements (IRAs) 597 Information on the United States—Canada Income Tax Treaty Form (and Instructions) 1116 Foreign Tax Credit 2106 Employee Business Expenses 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion 3903 Moving Expenses Schedule A (Form 1040) Itemized Deductions Schedule C (Form 1040) Profit or Loss From Business SS-5 Application for a Social Security Card W-7 Application for IRS Individual Taxpayer Identification Number See chapter 7 for information about getting these publications and forms. Free 2010 tax amendment Items Related to Excluded Income U. Free 2010 tax amendment S. Free 2010 tax amendment citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States. Free 2010 tax amendment If you choose to exclude foreign earned income or housing amounts, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. Free 2010 tax amendment This includes any expenses, losses, and other normally deductible items that are allocable to the excluded income. Free 2010 tax amendment You can deduct only those expenses connected with earning includible income. Free 2010 tax amendment These rules apply only to items definitely related to the excluded earned income and they do not apply to other items that are not definitely related to any particular type of gross income. Free 2010 tax amendment These rules do not apply to items such as: Personal exemptions, Qualified retirement contributions, Alimony payments, Charitable contributions, Medical expenses, Mortgage interest, or Real estate taxes on your personal residence. Free 2010 tax amendment For purposes of these rules, your housing deduction is not treated as allocable to your excluded income, but the deduction for self- employment tax is. Free 2010 tax amendment If you receive foreign earned income in a tax year after the year in which you earned it, you may have to file an amended return for the earlier year to properly adjust the amounts of deductions, credits, or exclusions allocable to your foreign earned income and housing exclusions. Free 2010 tax amendment Example. Free 2010 tax amendment In 2012, you had $90,400 of foreign earned income and $9,500 of deductions allocable to your foreign earned income. Free 2010 tax amendment You did not have a housing exclusion. Free 2010 tax amendment Because you excluded all of your foreign earned income, you would not have been able to claim any of the deductions on your 2012 return. Free 2010 tax amendment In 2013, you received a $12,000 bonus for work you did abroad in 2012. Free 2010 tax amendment You can exclude $4,700 of the bonus because the limit on the foreign earned income exclusion for 2012 was $95,100 and you have already excluded $90,400. Free 2010 tax amendment Since you must include $7,300 of the bonus ($12,000 − $4,700) for work you did in 2012 in income, you can file an amended return for 2012 to claim $677 of the deductions. Free 2010 tax amendment This is the deductions allocable to the foreign earned income ($9,500) multiplied by the includible portion of the foreign earned income ($7,300) and divided by the total foreign earned income for 2012 ($102,400). Free 2010 tax amendment Exemptions You can claim an exemption for your nonresident alien spouse on your separate return, provided your spouse has no gross income for U. Free 2010 tax amendment S. Free 2010 tax amendment tax purposes and is not the dependent of another U. Free 2010 tax amendment S. Free 2010 tax amendment taxpayer. Free 2010 tax amendment You also can claim exemptions for individuals who qualify as your dependents. Free 2010 tax amendment To be your dependent, the individual must be a U. Free 2010 tax amendment S. Free 2010 tax amendment citizen, U. Free 2010 tax amendment S. Free 2010 tax amendment national, U. Free 2010 tax amendment S. Free 2010 tax amendment resident alien, or a resident of Canada or Mexico for some part of the calendar year in which your tax year begins. Free 2010 tax amendment Children. Free 2010 tax amendment   Children usually are citizens or residents of the same country as their parents. Free 2010 tax amendment If you were a U. Free 2010 tax amendment S. Free 2010 tax amendment citizen when your child was born, your child generally is a U. Free 2010 tax amendment S. Free 2010 tax amendment citizen. Free 2010 tax amendment This is true even if the child's other parent is a nonresident alien, the child was born in a foreign country, and the child lives abroad with the other parent. Free 2010 tax amendment   If you have a legally adopted child who is not a U. Free 2010 tax amendment S. Free 2010 tax amendment citizen, U. Free 2010 tax amendment S. Free 2010 tax amendment resident, or U. Free 2010 tax amendment S. Free 2010 tax amendment national, the child meets the citizen requirement if you are a U. Free 2010 tax amendment S. Free 2010 tax amendment citizen or U. Free 2010 tax amendment S. Free 2010 tax amendment national and the child lived with you as a member of your household all year. Free 2010 tax amendment Social security number. Free 2010 tax amendment   You must include on your return the social security number (SSN) of each dependent for whom you claim an exemption. Free 2010 tax amendment To get a social security number for a dependent, apply at a Social Security office or U. Free 2010 tax amendment S. Free 2010 tax amendment consulate. Free 2010 tax amendment You must provide original or certified copies of documents to verify the dependent's age, identity, and citizenship, and complete Form SS-5. Free 2010 tax amendment   If you do not have an SSN for a child who was born in 2013 and died in 2013, attach a copy of the child's birth certificate to your tax return. Free 2010 tax amendment Print “Died” in column (2) of line 6c of your Form 1040 or Form 1040A. Free 2010 tax amendment   If your dependent is a nonresident alien who is not eligible to get a social security number, you must list the dependent's individual taxpayer identification number (ITIN) instead of an SSN. Free 2010 tax amendment To apply for an ITIN, file Form W-7 with the IRS. Free 2010 tax amendment It usually takes 6 to 10 weeks to get an ITIN. Free 2010 tax amendment Enter your dependent's ITIN wherever an SSN is requested on your tax return. Free 2010 tax amendment More information. Free 2010 tax amendment   For more information about exemptions, see Publication 501. Free 2010 tax amendment Contributions to Foreign Charitable Organizations If you make contributions directly to a foreign church or other foreign charitable organization, you generally cannot deduct them. Free 2010 tax amendment Exceptions are explained under Canadian, Mexican, and Israeli charities, later. Free 2010 tax amendment You can deduct contributions to a U. Free 2010 tax amendment S. Free 2010 tax amendment organization that transfers funds to a charitable foreign organization if the U. Free 2010 tax amendment S. Free 2010 tax amendment organization controls the use of the funds by the foreign organization or if the foreign organization is just an administrative arm of the U. Free 2010 tax amendment S. Free 2010 tax amendment organization. Free 2010 tax amendment Canadian, Mexican, and Israeli charities. Free 2010 tax amendment   Under the income tax treaties with Canada, Mexico and Israel, you may be able to deduct contributions to certain Canadian, Mexican, and Israeli charitable organizations. Free 2010 tax amendment Generally, you must have income from sources in Canada, Mexico, or Israel, and the organization must meet certain requirements. Free 2010 tax amendment See Publication 597, Information on the United States-Canada Income Tax Treaty, and Publication 526, Charitable Contributions, for more information. Free 2010 tax amendment Moving Expenses If you moved to a new home in 2013 because of your job or business, you may be able to deduct the expenses of your move. Free 2010 tax amendment Generally, to be deductible, the moving expenses must have been paid or incurred in connection with starting work at a new job location. Free 2010 tax amendment See Publication 521 for a complete discussion of the deduction for moving expenses and information about moves within the United States. Free 2010 tax amendment Foreign moves. Free 2010 tax amendment   A foreign move is a move in connection with the start of work at a new job location outside the United States and its possessions. Free 2010 tax amendment A foreign move does not include a move back to the United States or its possessions. Free 2010 tax amendment Allocation of Moving Expenses When your new place of work is in a foreign country, your moving expenses are directly connected with the income earned in that foreign country. Free 2010 tax amendment If you exclude all or part of the income that you earn at the new location under the foreign earned income exclusion or the foreign housing exclusion, you cannot deduct the part of your moving expense that is allocable to the excluded income. Free 2010 tax amendment Also, you cannot deduct the part of the moving expense related to the excluded income for a move from a foreign country to the United States if you receive a reimbursement that you are able to treat as compensation for services performed in the foreign country. Free 2010 tax amendment Year to which expense is connected. Free 2010 tax amendment   The moving expense is connected with earning the income (including reimbursements, as discussed in chapter 4 under Reimbursement of moving expenses ) either entirely in the year of the move or in 2 years. Free 2010 tax amendment It is connected with earning the income entirely in the year of the move if you qualify for the foreign earned income exclusion under the bona fide residence test or physical presence test for at least 120 days during that tax year. Free 2010 tax amendment   If you do not qualify under either the bona fide residence test or the physical presence test for at least 120 days during the year of the move, the expense is connected with earning the income in 2 years. Free 2010 tax amendment The moving expense is connected with the year of the move and the following year if the move is from the United States to a foreign country. Free 2010 tax amendment The moving expense is connected with the year of the move and the preceding year if the move is from a foreign country to the United States. Free 2010 tax amendment Amount allocable to excluded income. Free 2010 tax amendment   To figure the amount of your moving expense that is allocable to your excluded foreign earned income (and not deductible), you must multiply your total moving expense deduction by a fraction. Free 2010 tax amendment The numerator (top number) of the fraction is the total of your excluded foreign earned income and housing amounts for both years and the denominator (bottom number) of the fraction is your total foreign earned income for both years. Free 2010 tax amendment Example. Free 2010 tax amendment On November 1, 2012, you transfer to Monaco. Free 2010 tax amendment Your tax home is in Monaco, and you are a bona fide resident of Monaco for the entire tax year 2013. Free 2010 tax amendment In 2012, you paid $6,000 for allowable moving expenses for your move from the United States to Monaco. Free 2010 tax amendment You were fully reimbursed (under a nonaccountable plan) for these expenses in the same year. Free 2010 tax amendment The reimbursement is included in your income. Free 2010 tax amendment Your only other income consists of $16,000 wages earned in 2012 after the date of your move, and $100,100 wages earned in Monaco for 2013. Free 2010 tax amendment Because you did not meet the bona fide residence test for at least 120 days during 2012, the year of the move, the moving expenses are for services you performed in both 2012 and the following year, 2013. Free 2010 tax amendment Your total foreign earned income for both years is $122,100, consisting of $16,000 wages for 2012, $100,100 wages for 2013, and $6,000 moving expense reimbursement for both years. Free 2010 tax amendment You have no housing exclusion. Free 2010 tax amendment The total amount you can exclude is $113,190, consisting of the $97,600 full-year exclusion for 2013 and a $15,590 part-year exclusion for 2012 ($95,100 times the fraction of 60 qualifying bona fide residence days over 366 total days in the year). Free 2010 tax amendment To find the part of your moving expenses that is not deductible, multiply your $6,000 total expenses by the fraction $113,190 over $122,100. Free 2010 tax amendment The result, $5,562, is your nondeductible amount. Free 2010 tax amendment    You must report the full amount of the moving expense reimbursement in the year in which you received the reimbursement. Free 2010 tax amendment In the preceding example, this year was 2012. Free 2010 tax amendment You attribute the reimbursement to both 2012 and 2013 only to figure the amount of foreign earned income eligible for exclusion for each year. Free 2010 tax amendment Move between foreign countries. Free 2010 tax amendment   If you move between foreign countries, your moving expense is allocable to income earned in the year of the move if you qualified under either the bona fide residence test or the physical presence test for a period that includes at least 120 days in the year of the move. Free 2010 tax amendment New place of work in U. Free 2010 tax amendment S. Free 2010 tax amendment   If your new place of work is in the United States, the deductible moving expenses are directly connected with the income earned in the United States. Free 2010 tax amendment If you treat a reimbursement from your employer as foreign earned income (see the discussion in chapter 4), you must allocate deductible moving expenses to foreign earned income. Free 2010 tax amendment Storage expenses. Free 2010 tax amendment   These expenses are attributable to work you do during the year in which you incur the storage expenses. Free 2010 tax amendment You cannot deduct the amount allocable to excluded income. Free 2010 tax amendment Moving Expense Attributable to Foreign Earnings in 2 Years If your moving expense deduction is attributable to your foreign earnings in 2 years (the year of the move and the following year), you should request an extension of time to file your return for the year of the move until after the end of the second year. Free 2010 tax amendment By then, you should have all the information needed to properly figure the moving expense deduction. Free 2010 tax amendment See Extensions under When To File and Pay in chapter 1. Free 2010 tax amendment If you do not request an extension, you should figure the part of the moving expense that you cannot deduct because it is allocable to the foreign earned income you are excluding. Free 2010 tax amendment You do this by multiplying the moving expense by a fraction, the numerator (top number) of which is your excluded foreign earned income for the year of the move, and the denominator (bottom number) of which is your total foreign earned income for the year of the move. Free 2010 tax amendment Once you know your foreign earnings and exclusion for the following year, you must either: Adjust the moving expense deduction by filing an amended return for the year of the move, or Recapture any additional unallowable amount as income on your return for the following year. Free 2010 tax amendment If, after you make the final computation, you have an additional amount of allowable moving expense deduction, you can claim this only on an amended return for the year of the move. Free 2010 tax amendment You cannot claim it on the return for the second year. Free 2010 tax amendment Forms To File Report your moving expenses on Form 3903. Free 2010 tax amendment Report your moving expense deduction on line 26 of Form 1040. Free 2010 tax amendment If you must reduce your moving expenses by the amount allocable to excluded income (as explained later under How To Report Deductions ), attach a statement to your return showing how you figured this amount. Free 2010 tax amendment For more information about figuring moving expenses, see Publication 521. Free 2010 tax amendment Contributions to Individual Retirement Arrangements Contributions to your individual retirement arrangements (IRAs) that are traditional IRAs or Roth IRAs are generally limited to the lesser of $5,500 ($6,500 if 50 or older) or your compensation that is includible in your gross income for the tax year. Free 2010 tax amendment In determining compensation for this purpose, do not take into account amounts you exclude under either the foreign earned income exclusion or the foreign housing exclusion. Free 2010 tax amendment Do not reduce your compensation by the foreign housing deduction. Free 2010 tax amendment If you are covered by an employer retirement plan at work, your deduction for your contributions to your traditional IRAs is generally limited based on your modified adjusted gross income. Free 2010 tax amendment This is your adjusted gross income figured without taking into account the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. Free 2010 tax amendment Other modifications are also required. Free 2010 tax amendment For more information on IRAs, see Publication 590. Free 2010 tax amendment Taxes of Foreign Countries and U. Free 2010 tax amendment S. Free 2010 tax amendment Possessions You can take either a credit or a deduction for income taxes paid to a foreign country or a U. Free 2010 tax amendment S. Free 2010 tax amendment possession. Free 2010 tax amendment Taken as a deduction, foreign income taxes reduce your taxable income. Free 2010 tax amendment Taken as a credit, foreign income taxes reduce your tax liability. Free 2010 tax amendment You must treat all foreign income taxes the same way. Free 2010 tax amendment If you take a credit for any foreign income taxes, you cannot deduct any foreign income taxes. Free 2010 tax amendment However, you may be able to deduct other foreign taxes. Free 2010 tax amendment See Deduction for Other Foreign Taxes, later. Free 2010 tax amendment There is no rule to determine whether it is to your advantage to take a deduction or a credit for foreign income taxes. Free 2010 tax amendment In most cases, it is to your advantage to take foreign income taxes as a tax credit, which you subtract directly from your U. Free 2010 tax amendment S. Free 2010 tax amendment tax liability, rather than as a deduction in figuring taxable income. Free 2010 tax amendment However, if foreign income taxes were imposed at a high rate and the proportion of foreign income to U. Free 2010 tax amendment S. Free 2010 tax amendment income is small, a lower final tax may result from deducting the foreign income taxes. Free 2010 tax amendment In any event, you should figure your tax liability both ways and then use the one that is better for you. Free 2010 tax amendment You can make or change your choice within 10 years from the due date for filing the tax return on which you are entitled to take either the deduction or the credit. Free 2010 tax amendment Foreign income taxes. Free 2010 tax amendment   These are generally income taxes you pay to any foreign country or possession of the United States. Free 2010 tax amendment Foreign income taxes on U. Free 2010 tax amendment S. Free 2010 tax amendment return. Free 2010 tax amendment   Foreign income taxes can only be taken as a credit on Form 1040, line 47, or as an itemized deduction on Schedule A. Free 2010 tax amendment These amounts cannot be included as withheld income taxes on Form 1040, line 62. Free 2010 tax amendment Foreign taxes paid on excluded income. Free 2010 tax amendment   You cannot take a credit or deduction for foreign income taxes paid on earnings you exclude from tax under any of the following. Free 2010 tax amendment Foreign earned income exclusion. Free 2010 tax amendment Foreign housing exclusion. Free 2010 tax amendment Possession exclusion. Free 2010 tax amendment If your wages are completely excluded, you cannot deduct or take a credit for any of the foreign taxes paid on your wages. Free 2010 tax amendment   If only part of your wages is excluded, you cannot deduct or take a credit for the foreign income taxes allocable to the excluded part. Free 2010 tax amendment You find the taxes allocable to your excluded wages by applying a fraction to the foreign taxes paid on foreign earned income received during the tax year. Free 2010 tax amendment The numerator (top number) of the fraction is your excluded foreign earned income received during the tax year minus deductible expenses allocable to that income (not including the foreign housing deduction). Free 2010 tax amendment The denominator (bottom number) of the fraction is your total foreign earned income received during the tax year minus all deductible expenses allocable to that income (including the foreign housing deduction). Free 2010 tax amendment   If foreign law taxes both earned income and some other type of income and the taxes on the other type cannot be separated, the denominator of the fraction is the total amount of income subject to foreign tax minus deductible expenses allocable to that income. Free 2010 tax amendment    If you take a foreign tax credit for tax on income you could have excluded under your choice to exclude foreign earned income or your choice to exclude foreign housing costs, one or both of the choices may be considered revoked. Free 2010 tax amendment Credit for Foreign Income Taxes If you take the foreign tax credit, you may have to file Form 1116 with Form 1040. Free 2010 tax amendment Form 1116 is used to figure the amount of foreign tax paid or accrued that can be claimed as a foreign tax credit. Free 2010 tax amendment Do not include the amount of foreign tax paid or accrued as withheld federal income taxes on Form 1040, line 62. Free 2010 tax amendment The foreign income tax for which you can claim a credit is the amount of legal and actual tax liability you pay or accrue during the year. Free 2010 tax amendment The amount for which you can claim a credit is not necessarily the amount withheld by the foreign country. Free 2010 tax amendment You cannot take a foreign tax credit for income tax you paid to a foreign country that would be refunded by the foreign country if you made a claim for refund. Free 2010 tax amendment Subsidies. Free 2010 tax amendment   If a foreign country returns your foreign tax payments to you in the form of a subsidy, you cannot claim a foreign tax credit based on these payments. Free 2010 tax amendment This rule applies to a subsidy provided by any means that is determined, directly or indirectly, by reference to the amount of tax, or to the base used to figure the tax. Free 2010 tax amendment   Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. Free 2010 tax amendment A credit is also not allowed if the subsidy is given to a person related to you, or persons who participated in a transaction or a related transaction with you. Free 2010 tax amendment Limit The foreign tax credit is limited to the part of your total U. Free 2010 tax amendment S. Free 2010 tax amendment tax that is in proportion to your taxable income from sources outside the United States compared to your total taxable income. Free 2010 tax amendment The allowable foreign tax credit cannot be more than your actual foreign tax liability. Free 2010 tax amendment Exemption from limit. Free 2010 tax amendment   You will not be subject to this limit and will not have to file Form 1116 if you meet all three of the following requirements. Free 2010 tax amendment Your only foreign source income for the year is passive income (dividends, interest, royalties, etc. Free 2010 tax amendment ) that is reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT). Free 2010 tax amendment Your foreign taxes for the year that qualify for the credit are not more than $300 ($600 if you are filing a joint return) and are reported on a payee statement. Free 2010 tax amendment You elect this procedure. Free 2010 tax amendment If you make this election, you cannot carry back or carry over any unused foreign tax to or from this year. Free 2010 tax amendment Separate limit. Free 2010 tax amendment   You must figure the limit on a separate basis with regard to “passive category income” and “general category income” (see the instructions for Form 1116). Free 2010 tax amendment Figuring the limit. Free 2010 tax amendment   In figuring taxable income in each category, you take into account only the amount that you must include in income on your federal tax return. Free 2010 tax amendment Do not take any excluded amount into account. Free 2010 tax amendment   To determine your taxable income in each category, deduct expenses and losses that are definitely related to that income. Free 2010 tax amendment   Other expenses (such as itemized deductions or the standard deduction) not definitely related to specific items of income must be apportioned to the foreign income in each category by multiplying them by a fraction. Free 2010 tax amendment The numerator (top number) of the fraction is your gross foreign income in the separate limit category. Free 2010 tax amendment The denominator (bottom number) of the fraction is your gross income from all sources. Free 2010 tax amendment For this purpose, gross income includes income that is excluded under the foreign earned income provisions but does not include any other exempt income. Free 2010 tax amendment You must use special rules for deducting interest expenses. Free 2010 tax amendment For more information on allocating and apportioning your deductions, see Publication 514. Free 2010 tax amendment Exemptions. Free 2010 tax amendment   Do not take the deduction for exemptions for yourself, your spouse, or your dependents in figuring taxable income for purposes of the limit. Free 2010 tax amendment Recapture of foreign losses. Free 2010 tax amendment   If you have an overall foreign loss and the loss reduces your U. Free 2010 tax amendment S. Free 2010 tax amendment source income (resulting in a reduction of your U. Free 2010 tax amendment S. Free 2010 tax amendment tax liability), you must recapture the loss in later years when you have taxable income from foreign sources. Free 2010 tax amendment This is done by treating a part of your taxable income from foreign sources in later years as U. Free 2010 tax amendment S. Free 2010 tax amendment source income. Free 2010 tax amendment This reduces the numerator of the limiting fraction and the resulting foreign tax credit limit. Free 2010 tax amendment Recapture of domestic losses. Free 2010 tax amendment   If you have an overall domestic loss (resulting in no U. Free 2010 tax amendment S. Free 2010 tax amendment tax liability), you cannot claim a foreign tax credit for taxes paid during that year. Free 2010 tax amendment You must recapture the loss in later years when you have U. Free 2010 tax amendment S. Free 2010 tax amendment source taxable income. Free 2010 tax amendment This is done by treating a part of your taxable income from U. Free 2010 tax amendment S. Free 2010 tax amendment sources in later years as foreign source income. Free 2010 tax amendment This increases the numerator of the limiting fraction and the resulting foreign tax credit limit. Free 2010 tax amendment Foreign tax credit carryback and carryover. Free 2010 tax amendment   The amount of foreign income tax not allowed as a credit because of the limit can be carried back 1 year and carried forward 10 years. Free 2010 tax amendment   More information on figuring the foreign tax credit can be found in Publication 514. Free 2010 tax amendment Deduction for Foreign Income Taxes Instead of taking the foreign tax credit, you can deduct foreign income taxes as an itemized deduction on Schedule A (Form 1040). Free 2010 tax amendment You can deduct only foreign income taxes paid on income that is subject to U. Free 2010 tax amendment S. Free 2010 tax amendment tax. Free 2010 tax amendment You cannot deduct foreign taxes paid on earnings you exclude from tax under any of the following. Free 2010 tax amendment Foreign earned income exclusion. Free 2010 tax amendment Foreign housing exclusion. Free 2010 tax amendment Possession exclusion. Free 2010 tax amendment Example. Free 2010 tax amendment You are a U. Free 2010 tax amendment S. Free 2010 tax amendment citizen and qualify to exclude your foreign earned income. Free 2010 tax amendment Your excluded wages in Country X are $70,000 on which you paid income tax of $10,000. Free 2010 tax amendment You received dividends from Country X of $2,000 on which you paid income tax of $600. Free 2010 tax amendment You can deduct the $600 tax payment because the dividends relating to it are subject to U. Free 2010 tax amendment S. Free 2010 tax amendment tax. Free 2010 tax amendment Because you exclude your wages, you cannot deduct the income tax of $10,000. Free 2010 tax amendment If you exclude only a part of your wages, see the earlier discussion under Foreign taxes paid on excluded income. Free 2010 tax amendment Deduction for Other Foreign Taxes You can deduct real property taxes you pay that are imposed on you by a foreign country. Free 2010 tax amendment You take this deduction on Schedule A (Form 1040). Free 2010 tax amendment You cannot deduct other foreign taxes, such as personal property taxes, unless you incurred the expenses in a trade or business or in the production of income. Free 2010 tax amendment On the other hand, you generally can deduct personal property taxes when you pay them to U. Free 2010 tax amendment S. Free 2010 tax amendment possessions. Free 2010 tax amendment But if you claim the possession exclusion, see Publication 570. Free 2010 tax amendment The deduction for foreign taxes other than foreign income taxes is not related to the foreign tax credit. Free 2010 tax amendment You can take deductions for these miscellaneous foreign taxes and also claim the foreign tax credit for income taxes imposed by a foreign country. Free 2010 tax amendment How To Report Deductions If you exclude foreign earned income or housing amounts, how you show your deductions on your tax return and how you figure the amount allocable to your excluded income depends on whether the expenses are used in figuring adjusted gross income (Form 1040, line 38) or are itemized deductions. Free 2010 tax amendment If you have deductions used in figuring adjusted gross income, enter the total amount for each of these items on the appropriate lines and schedules of Form 1040. Free 2010 tax amendment Generally, you figure the amount of a deduction related to the excluded income by multiplying the deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. Free 2010 tax amendment Enter the amount of the deduction(s) related to excluded income on line 44 of Form 2555. Free 2010 tax amendment If you have itemized deductions related to excluded income, enter on Schedule A (Form 1040) only the part not related to excluded income. Free 2010 tax amendment You figure that amount by subtracting from the total deduction the amount related to excluded income. Free 2010 tax amendment Generally, you figure the amount that is related to the excluded income by multiplying the total deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. Free 2010 tax amendment Attach a statement to your return showing how you figured the deductible amount. Free 2010 tax amendment Example 1. Free 2010 tax amendment You are a U. Free 2010 tax amendment S. Free 2010 tax amendment citizen employed as an accountant. Free 2010 tax amendment Your tax home is in Germany for the entire tax year. Free 2010 tax amendment You meet the physical presence test. Free 2010 tax amendment Your foreign earned income for the year was $122,000 and your investment income was $10,380. Free 2010 tax amendment After excluding $97,600, your AGI is $34,780. Free 2010 tax amendment You had unreimbursed business expenses of $2,500 for travel and entertainment in earning your foreign income, of which $500 was for meals and entertainment. Free 2010 tax amendment These expenses are deductible only as miscellaneous deductions on Schedule A (Form 1040). Free 2010 tax amendment You also have $500 of miscellaneous expenses that are not related to your foreign income that you enter on line 23 of Schedule A. Free 2010 tax amendment You must fill out Form 2106. Free 2010 tax amendment On that form, reduce your deductible meal and entertainment expenses by 50% ($250). Free 2010 tax amendment You must reduce the remaining $2,250 of travel and entertainment expenses by 80% ($1,800) because you excluded 80% ($97,600/$122,000) of your foreign earned income. Free 2010 tax amendment You carry the remaining total of $450 to line 21 of Schedule A. Free 2010 tax amendment Add the $450 to the $500 that you have on line 23 and enter the total ($950) on line 24. Free 2010 tax amendment On line 26 of Schedule A, enter $696, which is 2% of your adjusted gross income of $34,780 (line 38, Form 1040) and subtract it from the amount on line 24. Free 2010 tax amendment Enter $254 on line 27 of Schedule A. Free 2010 tax amendment Example 2. Free 2010 tax amendment You are a U. Free 2010 tax amendment S. Free 2010 tax amendment citizen, have a tax home in Spain, and meet the physical presence test. Free 2010 tax amendment You are self-employed and personal services produce the business income. Free 2010 tax amendment Your gross income was $116,931, business expenses $66,895, and net income (profit) $50,036. Free 2010 tax amendment You choose the foreign earned income exclusion and exclude $97,600 of your gross income. Free 2010 tax amendment Since your excluded income is 83. Free 2010 tax amendment 47% of your total income, 83. Free 2010 tax amendment 47% of your business expenses are not deductible. Free 2010 tax amendment Report your total income and expenses on Schedule C (Form 1040). Free 2010 tax amendment On Form 2555 you will show the following: Line 20a, $116,931, gross income, Lines 42 and 43, $97,600, foreign earned income exclusion, and Line 44, $55,837 (83. Free 2010 tax amendment 47% × $66,895) business expenses attributable to the exclusion. Free 2010 tax amendment In this situation (Example 2), you cannot use Form 2555-EZ since you had self-employment income and business expenses. Free 2010 tax amendment Example 3. Free 2010 tax amendment Assume in Example 2 that both capital and personal services combine to produce the business income. Free 2010 tax amendment No more than 30% of your net income, or $15,011, assuming that this amount is a reasonable allowance for your services, is considered earned and can be excluded. Free 2010 tax amendment Your exclusion of $15,011 is 12. Free 2010 tax amendment 84% of your gross income ($15,011 ÷ $116,931). Free 2010 tax amendment Because you excluded 12. Free 2010 tax amendment 84% of your total income, $8,589 (. Free 2010 tax amendment 1284 x $66,895) of your business expenses is attributable to the excluded income and is not deductible. Free 2010 tax amendment Example 4. Free 2010 tax amendment You are a U. Free 2010 tax amendment S. Free 2010 tax amendment citizen, have a tax home in Brazil, and meet the physical presence test. Free 2010 tax amendment You are self-employed and both capital and personal services combine to produce business income. Free 2010 tax amendment Your gross income was $146,000, business expenses were $172,000, and your net loss was $26,000. Free 2010 tax amendment A reasonable allowance for the services you performed for the business is $77,000. Free 2010 tax amendment Because you incurred a net loss, the earned income limit of 30% of your net profit does not apply. Free 2010 tax amendment The $77,000 is foreign earned income. Free 2010 tax amendment If you choose to exclude the $77,000, you exclude 52. Free 2010 tax amendment 74% of your gross income ($77,000 ÷ $146,000), and 52. Free 2010 tax amendment 74% of your business expenses ($90,713) is attributable to that income and is not deductible. Free 2010 tax amendment Show your total income and expenses on Schedule C (Form 1040). Free 2010 tax amendment On Form 2555, exclude $77,000 and show $90,713 on line 44. Free 2010 tax amendment Subtract line 44 from line 43, and enter the difference as a negative (in parentheses) on line 45. Free 2010 tax amendment Because this amount is negative, enter it as a positive (no parentheses) on line 21, Form 1040, and combine it with your other income to arrive at total income on line 22 of Form 1040. Free 2010 tax amendment In this situation (Example 4), you would probably not want to choose the foreign earned income exclusion if this was the first year you were eligible. Free 2010 tax amendment If you had chosen the exclusion in an earlier year, you might want to revoke the choice for this year. Free 2010 tax amendment To do so would mean that you could not claim the exclusion again for the next 5 tax years without IRS approval. Free 2010 tax amendment See Choosing the Exclusion in chapter 4. Free 2010 tax amendment Example 5. Free 2010 tax amendment You are a U. Free 2010 tax amendment S. Free 2010 tax amendment citizen, have a tax home in Panama, and meet the bona fide residence test. Free 2010 tax amendment You have been performing services for clients as a partner in a firm that provides services exclusively in Panama. Free 2010 tax amendment Capital investment is not material in producing the partnership's income. Free 2010 tax amendment Under the terms of the partnership agreement, you are to receive 50% of the net profits. Free 2010 tax amendment The partnership received gross income of $244,000 and incurred operating expenses of $98,250. Free 2010 tax amendment Of the net profits of $145,750, you received $72,875 as your distributive share. Free 2010 tax amendment You choose to exclude $97,600 of your share of the gross income. Free 2010 tax amendment Because you exclude 80% ($97,600 ÷ $122,000) of your share of the gross income, you cannot deduct $39,300, 80% of your share of the operating expenses (. Free 2010 tax amendment 80 × $49,125). Free 2010 tax amendment Report $72,875, your distributive share of the partnership net profit, on Schedule E (Form 1040), Supplemental Income and Loss. Free 2010 tax amendment On Form 2555, show $97,600 on line 42 and show $39,300 on line 44. Free 2010 tax amendment Your exclusion on Form 2555 is $58,300. Free 2010 tax amendment In this situation (Example 5), you cannot use Form 2555-EZ since you had earned income other than salaries and wages and you had business expenses. Free 2010 tax amendment Prev  Up  Next   Home   More Online Publications
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Many changes have taken, and are continuing to take place in the industry. Savvy consumers need to keep up with new rules, products, and services to make sure they are getting the best quality and taking advantage of the best offers.

Cable

You can start with a basic lineup of channels and go from there. The more channels you want, the more it will cost. You may want to consider video on demand so you can order movies and sports events and watch them when you like (usually within a 24-hour window). You can also buy a bundle of services that includes digital TV, digital phone and broadband Internet access at discounted rates. Bear in mind, however, that you may be asked to sign a contract for bundled services.

Satellite TV

This requires a dish that's mounted outside (service requires an unobstructed view of the satellite) and a receiver that's placed by your television. Satellite TV may offer more channels than cable TV, and you can add a digital video recorder to record shows for viewing later. One downside to satellite TV is occasional interference during periods of rain or snow. Check with your satellite TV provider for channel options and prices. Like cable TV, you may be asked to sign a contract for a package of services.

Internet TV

If you have a high-speed Internet connection, you're already able to watch thousands of videos on your computer. But movies and TV shows are also available and becoming more prevalent as large online companies start distributing TV programming.

The Free 2010 Tax Amendment

Free 2010 tax amendment 9. Free 2010 tax amendment   Depletion Table of Contents Introduction Topics - This chapter discusses: Who Can Claim Depletion? Mineral PropertyCost Depletion Percentage Depletion Oil and Gas Wells Mines and Geothermal Deposits Lessor's Gross Income TimberTimber units. Free 2010 tax amendment Depletion unit. Free 2010 tax amendment Introduction Depletion is the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. Free 2010 tax amendment The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. Free 2010 tax amendment There are two ways of figuring depletion: cost depletion and percentage depletion. Free 2010 tax amendment For mineral property, you generally must use the method that gives you the larger deduction. Free 2010 tax amendment For standing timber, you must use cost depletion. Free 2010 tax amendment Topics - This chapter discusses: Who can claim depletion Mineral property Timber Who Can Claim Depletion? If you have an economic interest in mineral property or standing timber, you can take a deduction for depletion. Free 2010 tax amendment More than one person can have an economic interest in the same mineral deposit or timber. Free 2010 tax amendment In the case of leased property, the depletion deduction is divided between the lessor and the lessee. Free 2010 tax amendment You have an economic interest if both the following apply. Free 2010 tax amendment You have acquired by investment any interest in mineral deposits or standing timber. Free 2010 tax amendment You have a legal right to income from the extraction of the mineral or cutting of the timber to which you must look for a return of your capital investment. Free 2010 tax amendment A contractual relationship that allows you an economic or monetary advantage from products of the mineral deposit or standing timber is not, in itself, an economic interest. Free 2010 tax amendment A production payment carved out of, or retained on the sale of, mineral property is not an economic interest. Free 2010 tax amendment Individuals, corporations, estates, and trusts who claim depletion deductions may be liable for alternative minimum tax. Free 2010 tax amendment Basis adjustment for depletion. Free 2010 tax amendment   You must reduce the basis of your property by the depletion allowed or allowable, whichever is greater. Free 2010 tax amendment Mineral Property Mineral property includes oil and gas wells, mines, and other natural deposits (including geothermal deposits). Free 2010 tax amendment For this purpose, the term “property” means each separate interest you own in each mineral deposit in each separate tract or parcel of land. Free 2010 tax amendment You can treat two or more separate interests as one property or as separate properties. Free 2010 tax amendment See section 614 of the Internal Revenue Code and the related regulations for rules on how to treat separate mineral interests. Free 2010 tax amendment There are two ways of figuring depletion on mineral property. Free 2010 tax amendment Cost depletion. Free 2010 tax amendment Percentage depletion. Free 2010 tax amendment Generally, you must use the method that gives you the larger deduction. Free 2010 tax amendment However, unless you are an independent producer or royalty owner, you generally cannot use percentage depletion for oil and gas wells. Free 2010 tax amendment See Oil and Gas Wells , later. Free 2010 tax amendment Cost Depletion To figure cost depletion you must first determine the following. Free 2010 tax amendment The property's basis for depletion. Free 2010 tax amendment The total recoverable units of mineral in the property's natural deposit. Free 2010 tax amendment The number of units of mineral sold during the tax year. Free 2010 tax amendment Basis for depletion. Free 2010 tax amendment   To figure the property's basis for depletion, subtract all the following from the property's adjusted basis. Free 2010 tax amendment Amounts recoverable through: Depreciation deductions, Deferred expenses (including deferred exploration and development costs), and Deductions other than depletion. Free 2010 tax amendment The residual value of land and improvements at the end of operations. Free 2010 tax amendment The cost or value of land acquired for purposes other than mineral production. Free 2010 tax amendment Adjusted basis. Free 2010 tax amendment   The adjusted basis of your property is your original cost or other basis, plus certain additions and improvements, and minus certain deductions such as depletion allowed or allowable and casualty losses. Free 2010 tax amendment Your adjusted basis can never be less than zero. Free 2010 tax amendment See Publication 551, Basis of Assets, for more information on adjusted basis. Free 2010 tax amendment Total recoverable units. Free 2010 tax amendment   The total recoverable units is the sum of the following. Free 2010 tax amendment The number of units of mineral remaining at the end of the year (including units recovered but not sold). Free 2010 tax amendment The number of units of mineral sold during the tax year (determined under your method of accounting, as explained next). Free 2010 tax amendment   You must estimate or determine recoverable units (tons, pounds, ounces, barrels, thousands of cubic feet, or other measure) of mineral products using the current industry method and the most accurate and reliable information you can obtain. Free 2010 tax amendment You must include ores and minerals that are developed, in sight, blocked out, or assured. Free 2010 tax amendment You must also include probable or prospective ores or minerals that are believed to exist based on good evidence. Free 2010 tax amendment But see Elective safe harbor for owners of oil and gas property , later. Free 2010 tax amendment Number of units sold. Free 2010 tax amendment   You determine the number of units sold during the tax year based on your method of accounting. Free 2010 tax amendment Use the following table to make this determination. Free 2010 tax amendment    IF you  use . Free 2010 tax amendment . Free 2010 tax amendment . Free 2010 tax amendment THEN the units sold during the year are . Free 2010 tax amendment . Free 2010 tax amendment . Free 2010 tax amendment The cash method of accounting The units sold for which you receive payment during the tax year (regardless of the year of sale). Free 2010 tax amendment An accrual method of accounting The units sold based on your inventories and method of accounting for inventory. Free 2010 tax amendment   The number of units sold during the tax year does not include any for which depletion deductions were allowed or allowable in earlier years. Free 2010 tax amendment Figuring the cost depletion deduction. Free 2010 tax amendment   Once you have figured your property's basis for depletion, the total recoverable units, and the number of units sold during the tax year, you can figure your cost depletion deduction by taking the following steps. Free 2010 tax amendment Step Action Result 1 Divide your property's basis for depletion by total recoverable units. Free 2010 tax amendment Rate per unit. Free 2010 tax amendment 2 Multiply the rate per unit by units sold during the tax year. Free 2010 tax amendment Cost depletion deduction. Free 2010 tax amendment You must keep accounts for the depletion of each property and adjust these accounts each year for units sold and depletion claimed. Free 2010 tax amendment Elective safe harbor for owners of oil and gas property. Free 2010 tax amendment   Instead of using the method described earlier to determine the total recoverable units, you can use an elective safe harbor. Free 2010 tax amendment If you choose the elective safe harbor, the total recoverable units equal 105% of a property's proven reserves (both developed and undeveloped). Free 2010 tax amendment For details, see Revenue Procedure 2004-19 on page 563 of Internal Revenue Bulletin 2004-10, available at www. Free 2010 tax amendment irs. Free 2010 tax amendment gov/pub/irs-irbs/irb04-10. Free 2010 tax amendment pdf. Free 2010 tax amendment   To make the election, attach a statement to your timely filed (including extensions) original return for the first tax year for which the safe harbor is elected. Free 2010 tax amendment The statement must indicate that you are electing the safe harbor provided by Revenue Procedure 2004-19. Free 2010 tax amendment The election, if made, is effective for the tax year in which it is made and all later years. Free 2010 tax amendment It cannot be revoked for the tax year in which it is elected, but may be revoked in a later year. Free 2010 tax amendment Once revoked, it cannot be re-elected for the next 5 years. Free 2010 tax amendment Percentage Depletion To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by your gross income from the property during the tax year. Free 2010 tax amendment The rates to be used and other rules for oil and gas wells are discussed later under Independent Producers and Royalty Owners and under Natural Gas Wells . Free 2010 tax amendment Rates and other rules for percentage depletion of other specific minerals are found later in Mines and Geothermal Deposits . Free 2010 tax amendment Gross income. Free 2010 tax amendment   When figuring percentage depletion, subtract from your gross income from the property the following amounts. Free 2010 tax amendment Any rents or royalties you paid or incurred for the property. Free 2010 tax amendment The part of any bonus you paid for a lease on the property allocable to the product sold (or that otherwise gives rise to gross income) for the tax year. Free 2010 tax amendment A bonus payment includes amounts you paid as a lessee to satisfy a production payment retained by the lessor. Free 2010 tax amendment   Use the following fraction to figure the part of the bonus you must subtract. Free 2010 tax amendment No. Free 2010 tax amendment of units sold in the tax year Recoverable units from the property × Bonus Payments For oil and gas wells and geothermal deposits, more information about the definition of gross income from the property is under Oil and Gas Wells , later. Free 2010 tax amendment For other property, more information about the definition of gross income from the property is under Mines and Geothermal Deposits , later. Free 2010 tax amendment Taxable income limit. Free 2010 tax amendment   The percentage depletion deduction generally cannot be more than 50% (100% for oil and gas property) of your taxable income from the property figured without the depletion deduction and the domestic production activities deduction. Free 2010 tax amendment   Taxable income from the property means gross income from the property minus all allowable deductions (except any deduction for depletion or domestic production activities) attributable to mining processes, including mining transportation. Free 2010 tax amendment These deductible items include, but are not limited to, the following. Free 2010 tax amendment Operating expenses. Free 2010 tax amendment Certain selling expenses. Free 2010 tax amendment Administrative and financial overhead. Free 2010 tax amendment Depreciation. Free 2010 tax amendment Intangible drilling and development costs. Free 2010 tax amendment Exploration and development expenditures. Free 2010 tax amendment Deductible taxes (see chapter 5), but not taxes that you capitalize or take as a credit. Free 2010 tax amendment Losses sustained. Free 2010 tax amendment   The following rules apply when figuring your taxable income from the property for purposes of the taxable income limit. Free 2010 tax amendment Do not deduct any net operating loss deduction from the gross income from the property. Free 2010 tax amendment Corporations do not deduct charitable contributions from the gross income from the property. Free 2010 tax amendment If, during the year, you dispose of an item of section 1245 property that was used in connection with mineral property, reduce any allowable deduction for mining expenses by the part of any gain you must report as ordinary income that is allocable to the mineral property. Free 2010 tax amendment See section 1. Free 2010 tax amendment 613-5(b)(1) of the regulations for information on how to figure the ordinary gain allocable to the property. Free 2010 tax amendment Oil and Gas Wells You cannot claim percentage depletion for an oil or gas well unless at least one of the following applies. Free 2010 tax amendment You are either an independent producer or a royalty owner. Free 2010 tax amendment The well produces natural gas that is either sold under a fixed contract or produced from geopressured brine. Free 2010 tax amendment If you are an independent producer or royalty owner, see Independent Producers and Royalty Owners , next. Free 2010 tax amendment For information on the depletion deduction for wells that produce natural gas that is either sold under a fixed contract or produced from geopressured brine, see Natural Gas Wells , later. Free 2010 tax amendment Independent Producers and Royalty Owners If you are an independent producer or royalty owner, you figure percentage depletion using a rate of 15% of the gross income from the property based on your average daily production of domestic crude oil or domestic natural gas up to your depletable oil or natural gas quantity. Free 2010 tax amendment However, certain refiners, as explained next, and certain retailers and transferees of proven oil and gas properties, as explained next, cannot claim percentage depletion. Free 2010 tax amendment For information on figuring the deduction, see Figuring percentage depletion , later. Free 2010 tax amendment Refiners who cannot claim percentage depletion. Free 2010 tax amendment   You cannot claim percentage depletion if you or a related person refine crude oil and you and the related person refined more than 75,000 barrels on any day during the tax year based on average (rather than actual) daily refinery runs for the tax year. Free 2010 tax amendment The average daily refinery run is computed by dividing total refinery runs for the tax year by the total number of days in the tax year. Free 2010 tax amendment Related person. Free 2010 tax amendment   You and another person are related persons if either of you holds a significant ownership interest in the other person or if a third person holds a significant ownership interest in both of you. Free 2010 tax amendment For example, a corporation, partnership, estate, or trust and anyone who holds a significant ownership interest in it are related persons. Free 2010 tax amendment A partnership and a trust are related persons if one person holds a significant ownership interest in each of them. Free 2010 tax amendment For purposes of the related person rules, significant ownership interest means direct or indirect ownership of 5% or more in any one of the following. Free 2010 tax amendment The value of the outstanding stock of a corporation. Free 2010 tax amendment The interest in the profits or capital of a partnership. Free 2010 tax amendment The beneficial interests in an estate or trust. Free 2010 tax amendment Any interest owned by or for a corporation, partnership, trust, or estate is considered to be owned directly both by itself and proportionately by its shareholders, partners, or beneficiaries. Free 2010 tax amendment Retailers who cannot claim percentage depletion. Free 2010 tax amendment   You cannot claim percentage depletion if both the following apply. Free 2010 tax amendment You sell oil or natural gas or their by-products directly or through a related person in any of the following situations. Free 2010 tax amendment Through a retail outlet operated by you or a related person. Free 2010 tax amendment To any person who is required under an agreement with you or a related person to use a trademark, trade name, or service mark or name owned by you or a related person in marketing or distributing oil, natural gas, or their by-products. Free 2010 tax amendment To any person given authority under an agreement with you or a related person to occupy any retail outlet owned, leased, or controlled by you or a related person. Free 2010 tax amendment The combined gross receipts from sales (not counting resales) of oil, natural gas, or their by-products by all retail outlets taken into account in (1) are more than $5 million for the tax year. Free 2010 tax amendment   For the purpose of determining if this rule applies, do not count the following. Free 2010 tax amendment Bulk sales (sales in very large quantities) of oil or natural gas to commercial or industrial users. Free 2010 tax amendment Bulk sales of aviation fuels to the Department of Defense. Free 2010 tax amendment Sales of oil or natural gas or their by-products outside the United States if none of your domestic production or that of a related person is exported during the tax year or the prior tax year. Free 2010 tax amendment Related person. Free 2010 tax amendment   To determine if you and another person are related persons, see Related person under Refiners who cannot claim percentage depletion, earlier. Free 2010 tax amendment Sales through a related person. Free 2010 tax amendment   You are considered to be selling through a related person if any sale by the related person produces gross income from which you may benefit because of your direct or indirect ownership interest in the person. Free 2010 tax amendment   You are not considered to be selling through a related person who is a retailer if all the following apply. Free 2010 tax amendment You do not have a significant ownership interest in the retailer. Free 2010 tax amendment You sell your production to persons who are not related to either you or the retailer. Free 2010 tax amendment The retailer does not buy oil or natural gas from your customers or persons related to your customers. Free 2010 tax amendment There are no arrangements for the retailer to acquire oil or natural gas you produced for resale or made available for purchase by the retailer. Free 2010 tax amendment Neither you nor the retailer knows of or controls the final disposition of the oil or natural gas you sold or the original source of the petroleum products the retailer acquired for resale. Free 2010 tax amendment Transferees who cannot claim percentage depletion. Free 2010 tax amendment   You cannot claim percentage depletion if you received your interest in a proven oil or gas property by transfer after 1974 and before October 12, 1990. Free 2010 tax amendment For a definition of the term “transfer,” see section 1. Free 2010 tax amendment 613A-7(n) of the regulations. Free 2010 tax amendment For a definition of the term “interest in proven oil or gas property,” see section 1. Free 2010 tax amendment 613A-7(p) of the regulations. Free 2010 tax amendment Figuring percentage depletion. Free 2010 tax amendment   Generally, as an independent producer or royalty owner, you figure your percentage depletion by computing your average daily production of domestic oil or gas and comparing it to your depletable oil or gas quantity. Free 2010 tax amendment If your average daily production does not exceed your depletable oil or gas quantity, you figure your percentage depletion by multiplying the gross income from the oil or gas property (defined later) by 15%. Free 2010 tax amendment If your average daily production of domestic oil or gas exceeds your depletable oil or gas quantity, you must make an allocation as explained later under Average daily production. Free 2010 tax amendment   In addition, there is a limit on the percentage depletion deduction. Free 2010 tax amendment See Taxable income limit , later. Free 2010 tax amendment Average daily production. Free 2010 tax amendment   Figure your average daily production by dividing your total domestic production of oil or gas for the tax year by the number of days in your tax year. Free 2010 tax amendment Partial interest. Free 2010 tax amendment   If you have a partial interest in the production from a property, figure your share of the production by multiplying total production from the property by your percentage of interest in the revenues from the property. Free 2010 tax amendment   You have a partial interest in the production from a property if you have a net profits interest in the property. Free 2010 tax amendment To figure the share of production for your net profits interest, you must first determine your percentage participation (as measured by the net profits) in the gross revenue from the property. Free 2010 tax amendment To figure this percentage, you divide the income you receive for your net profits interest by the gross revenue from the property. Free 2010 tax amendment Then multiply the total production from the property by your percentage participation to figure your share of the production. Free 2010 tax amendment Example. Free 2010 tax amendment Javier Robles owns oil property in which Pablo Olmos owns a 20% net profits interest. Free 2010 tax amendment During the year, the property produced 10,000 barrels of oil, which Javier sold for $200,000. Free 2010 tax amendment Javier had expenses of $90,000 attributable to the property. Free 2010 tax amendment The property generated a net profit of $110,000 ($200,000 − $90,000). Free 2010 tax amendment Pablo received income of $22,000 ($110,000 × . Free 2010 tax amendment 20) for his net profits interest. Free 2010 tax amendment Pablo determined his percentage participation to be 11% by dividing $22,000 (the income he received) by $200,000 (the gross revenue from the property). Free 2010 tax amendment Pablo determined his share of the oil production to be 1,100 barrels (10,000 barrels × 11%). Free 2010 tax amendment Depletable oil or natural gas quantity. Free 2010 tax amendment   Generally, your depletable oil quantity is 1,000 barrels. Free 2010 tax amendment Your depletable natural gas quantity is 6,000 cubic feet multiplied by the number of barrels of your depletable oil quantity that you choose to apply. Free 2010 tax amendment If you claim depletion on both oil and natural gas, you must reduce your depletable oil quantity (1,000 barrels) by the number of barrels you use to figure your depletable natural gas quantity. Free 2010 tax amendment Example. Free 2010 tax amendment You have both oil and natural gas production. Free 2010 tax amendment To figure your depletable natural gas quantity, you choose to apply 360 barrels of your 1000-barrel depletable oil quantity. Free 2010 tax amendment Your depletable natural gas quantity is 2. Free 2010 tax amendment 16 million cubic feet of gas (360 × 6000). Free 2010 tax amendment You must reduce your depletable oil quantity to 640 barrels (1000 − 360). Free 2010 tax amendment If you have production from marginal wells, see section 613A(c)(6) of the Internal Revenue Code to figure your depletable oil or natural gas quantity. Free 2010 tax amendment Also, see Notice 2012-50, available at www. Free 2010 tax amendment irs. Free 2010 tax amendment gov/irb/2012–31_IRB/index. Free 2010 tax amendment html. Free 2010 tax amendment Business entities and family members. Free 2010 tax amendment   You must allocate the depletable oil or gas quantity among the following related persons in proportion to each entity's or family member's production of domestic oil or gas for the year. Free 2010 tax amendment Corporations, trusts, and estates if 50% or more of the beneficial interest is owned by the same or related persons (considering only persons that own at least 5% of the beneficial interest). Free 2010 tax amendment You and your spouse and minor children. Free 2010 tax amendment A related person is anyone mentioned in the related persons discussion under Nondeductible loss in chapter 2 of Publication 544, except that for purposes of this allocation, item (1) in that discussion includes only an individual, his or her spouse, and minor children. Free 2010 tax amendment Controlled group of corporations. Free 2010 tax amendment   Members of the same controlled group of corporations are treated as one taxpayer when figuring the depletable oil or natural gas quantity. Free 2010 tax amendment They share the depletable quantity. Free 2010 tax amendment A controlled group of corporations is defined in section 1563(a) of the Internal Revenue Code, except that, for this purpose, the stock ownership requirement in that definition is “more than 50%” rather than “at least 80%. Free 2010 tax amendment ” Gross income from the property. Free 2010 tax amendment   For purposes of percentage depletion, gross income from the property (in the case of oil and gas wells) is the amount you receive from the sale of the oil or gas in the immediate vicinity of the well. Free 2010 tax amendment If you do not sell the oil or gas on the property, but manufacture or convert it into a refined product before sale or transport it before sale, the gross income from the property is the representative market or field price (RMFP) of the oil or gas, before conversion or transportation. Free 2010 tax amendment   If you sold gas after you removed it from the premises for a price that is lower than the RMFP, determine gross income from the property for percentage depletion purposes without regard to the RMFP. Free 2010 tax amendment   Gross income from the property does not include lease bonuses, advance royalties, or other amounts payable without regard to production from the property. Free 2010 tax amendment Average daily production exceeds depletable quantities. Free 2010 tax amendment   If your average daily production for the year is more than your depletable oil or natural gas quantity, figure your allowance for depletion for each domestic oil or natural gas property as follows. Free 2010 tax amendment Figure your average daily production of oil or natural gas for the year. Free 2010 tax amendment Figure your depletable oil or natural gas quantity for the year. Free 2010 tax amendment Figure depletion for all oil or natural gas produced from the property using a percentage depletion rate of 15%. Free 2010 tax amendment Multiply the result figured in (3) by a fraction, the numerator of which is the result figured in (2) and the denominator of which is the result figured in (1). Free 2010 tax amendment This is your depletion allowance for that property for the year. Free 2010 tax amendment Taxable income limit. Free 2010 tax amendment   If you are an independent producer or royalty owner of oil and gas, your deduction for percentage depletion is limited to the smaller of the following. Free 2010 tax amendment 100% of your taxable income from the property figured without the deduction for depletion and the deduction for domestic production activities under section 199 of the Internal Revenue Code. Free 2010 tax amendment For a definition of taxable income from the property, see Taxable income limit , earlier, under Mineral Property. Free 2010 tax amendment 65% of your taxable income from all sources, figured without the depletion allowance, the deduction for domestic production activities, any net operating loss carryback, and any capital loss carryback. Free 2010 tax amendment You can carry over to the following year any amount you cannot deduct because of the 65%-of-taxable-income limit. Free 2010 tax amendment Add it to your depletion allowance (before applying any limits) for the following year. Free 2010 tax amendment Partnerships and S Corporations Generally, each partner or S corporation shareholder, and not the partnership or S corporation, figures the depletion allowance separately. Free 2010 tax amendment (However, see Electing large partnerships must figure depletion allowance , later. Free 2010 tax amendment ) Each partner or shareholder must decide whether to use cost or percentage depletion. Free 2010 tax amendment If a partner or shareholder uses percentage depletion, he or she must apply the 65%-of-taxable-income limit using his or her taxable income from all sources. Free 2010 tax amendment Partner's or shareholder's adjusted basis. Free 2010 tax amendment   The partnership or S corporation must allocate to each partner or shareholder his or her share of the adjusted basis of each oil or gas property held by the partnership or S corporation. Free 2010 tax amendment The partnership or S corporation makes the allocation as of the date it acquires the oil or gas property. Free 2010 tax amendment   Each partner's share of the adjusted basis of the oil or gas property generally is figured according to that partner's interest in partnership capital. Free 2010 tax amendment However, in some cases, it is figured according to the partner's interest in partnership income. Free 2010 tax amendment   The partnership or S corporation adjusts the partner's or shareholder's share of the adjusted basis of the oil and gas property for any capital expenditures made for the property and for any change in partnership or S corporation interests. Free 2010 tax amendment Recordkeeping. Free 2010 tax amendment Each partner or shareholder must separately keep records of his or her share of the adjusted basis in each oil and gas property of the partnership or S corporation. Free 2010 tax amendment The partner or shareholder must reduce his or her adjusted basis by the depletion allowed or allowable on the property each year. Free 2010 tax amendment The partner or shareholder must use that reduced adjusted basis to figure cost depletion or his or her gain or loss if the partnership or S corporation disposes of the property. Free 2010 tax amendment Reporting the deduction. Free 2010 tax amendment   Information that you, as a partner or shareholder, use to figure your depletion deduction on oil and gas properties is reported by the partnership or S corporation on Schedule K-1 (Form 1065) or on Schedule K-1 (Form 1120S). Free 2010 tax amendment Deduct oil and gas depletion for your partnership or S corporation interest on Schedule E (Form 1040). Free 2010 tax amendment The depletion deducted on Schedule E is included in figuring income or loss from rental real estate or royalty properties. Free 2010 tax amendment The instructions for Schedule E explain where to report this income or loss and whether you need to file either of the following forms. Free 2010 tax amendment Form 6198, At-Risk Limitations. Free 2010 tax amendment Form 8582, Passive Activity Loss Limitations. Free 2010 tax amendment Electing large partnerships must figure depletion allowance. Free 2010 tax amendment   An electing large partnership, rather than each partner, generally must figure the depletion allowance. Free 2010 tax amendment The partnership figures the depletion allowance without taking into account the 65-percent-of-taxable-income limit and the depletable oil or natural gas quantity. Free 2010 tax amendment Also, the adjusted basis of a partner's interest in the partnership is not affected by the depletion allowance. Free 2010 tax amendment   An electing large partnership is one that meets both the following requirements. Free 2010 tax amendment The partnership had 100 or more partners in the preceding year. Free 2010 tax amendment The partnership chooses to be an electing large partnership. Free 2010 tax amendment Disqualified persons. Free 2010 tax amendment   An electing large partnership does not figure the depletion allowance of its partners that are disqualified persons. Free 2010 tax amendment Disqualified persons must figure it themselves, as explained earlier. Free 2010 tax amendment   All the following are disqualified persons. Free 2010 tax amendment Refiners who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). Free 2010 tax amendment Retailers who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). Free 2010 tax amendment Any partner whose average daily production of domestic crude oil and natural gas is more than 500 barrels during the tax year in which the partnership tax year ends. Free 2010 tax amendment Average daily production is discussed earlier. Free 2010 tax amendment Natural Gas Wells You can use percentage depletion for a well that produces natural gas that is either Sold under a fixed contract, or Produced from geopressured brine. Free 2010 tax amendment Natural gas sold under a fixed contract. Free 2010 tax amendment   Natural gas sold under a fixed contract qualifies for a percentage depletion rate of 22%. Free 2010 tax amendment This is domestic natural gas sold by the producer under a contract that does not provide for a price increase to reflect any increase in the seller's tax liability because of the repeal of percentage depletion for gas. Free 2010 tax amendment The contract must have been in effect from February 1, 1975, until the date of sale of the gas. Free 2010 tax amendment Price increases after February 1, 1975, are presumed to take the increase in tax liability into account unless demonstrated otherwise by clear and convincing evidence. Free 2010 tax amendment Natural gas from geopressured brine. Free 2010 tax amendment   Qualified natural gas from geopressured brine is eligible for a percentage depletion rate of 10%. Free 2010 tax amendment This is natural gas that is both the following. Free 2010 tax amendment Produced from a well you began to drill after September 1978 and before 1984. Free 2010 tax amendment Determined in accordance with section 503 of the Natural Gas Policy Act of 1978 to be produced from geopressured brine. Free 2010 tax amendment Mines and Geothermal Deposits Certain mines, wells, and other natural deposits, including geothermal deposits, qualify for percentage depletion. Free 2010 tax amendment Mines and other natural deposits. Free 2010 tax amendment   For a natural deposit, the percentage of your gross income from the property that you can deduct as depletion depends on the type of deposit. Free 2010 tax amendment   The following is a list of the percentage depletion rates for the more common minerals. Free 2010 tax amendment DEPOSITS RATE Sulphur, uranium, and, if from deposits in the United States, asbestos, lead ore, zinc ore, nickel ore, and mica 22% Gold, silver, copper, iron ore, and certain oil shale, if from deposits in the United States 15% Borax, granite, limestone, marble, mollusk shells, potash, slate, soapstone, and carbon dioxide produced from a well 14% Coal, lignite, and sodium chloride 10% Clay and shale used or sold for use in making sewer pipe or bricks or used or sold for use as sintered or burned lightweight aggregates 7½% Clay used or sold for use in making drainage and roofing tile, flower pots, and kindred products, and gravel, sand, and stone (other than stone used or sold for use by a mine owner or operator as dimension or ornamental stone) 5%   You can find a complete list of minerals and their percentage depletion rates in section 613(b) of the Internal Revenue Code. Free 2010 tax amendment Corporate deduction for iron ore and coal. Free 2010 tax amendment   The percentage depletion deduction of a corporation for iron ore and coal (including lignite) is reduced by 20% of: The percentage depletion deduction for the tax year (figured without this reduction), minus The adjusted basis of the property at the close of the tax year (figured without the depletion deduction for the tax year). Free 2010 tax amendment Gross income from the property. Free 2010 tax amendment   For property other than a geothermal deposit or an oil or gas well, gross income from the property means the gross income from mining. Free 2010 tax amendment Mining includes all the following. Free 2010 tax amendment Extracting ores or minerals from the ground. Free 2010 tax amendment Applying certain treatment processes described later. Free 2010 tax amendment Transporting ores or minerals (generally, not more than 50 miles) from the point of extraction to the plants or mills in which the treatment processes are applied. Free 2010 tax amendment Excise tax. Free 2010 tax amendment   Gross income from mining includes the separately stated excise tax received by a mine operator from the sale of coal to compensate the operator for the excise tax the mine operator must pay to finance black lung benefits. Free 2010 tax amendment Extraction. Free 2010 tax amendment   Extracting ores or minerals from the ground includes extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining. Free 2010 tax amendment This does not apply to extraction from waste or residue of prior mining by the purchaser of the waste or residue or the purchaser of the rights to extract ores or minerals from the waste or residue. Free 2010 tax amendment Treatment processes. Free 2010 tax amendment   The processes included as mining depend on the ore or mineral mined. Free 2010 tax amendment To qualify as mining, the treatment processes must be applied by the mine owner or operator. Free 2010 tax amendment For a listing of treatment processes considered as mining, see section 613(c)(4) of the Internal Revenue Code and the related regulations. Free 2010 tax amendment Transportation of more than 50 miles. Free 2010 tax amendment   If the IRS finds that the ore or mineral must be transported more than 50 miles to plants or mills to be treated because of physical and other requirements, the additional authorized transportation is considered mining and included in the computation of gross income from mining. Free 2010 tax amendment    If you wish to include transportation of more than 50 miles in the computation of gross income from mining, request an advance ruling from the IRS. Free 2010 tax amendment Include in the request the facts about the physical and other requirements that prevented the construction and operation of the plant within 50 miles of the point of extraction. Free 2010 tax amendment For more information about requesting an advance ruling, see Revenue Procedure 2013-1, available at www. Free 2010 tax amendment irs. Free 2010 tax amendment gov/irb/2013-01_IRB/ar11. Free 2010 tax amendment html. Free 2010 tax amendment Disposal of coal or iron ore. Free 2010 tax amendment   You cannot take a depletion deduction for coal (including lignite) or iron ore mined in the United States if both the following apply. Free 2010 tax amendment You disposed of it after holding it for more than 1 year. Free 2010 tax amendment You disposed of it under a contract under which you retain an economic interest in the coal or iron ore. Free 2010 tax amendment Treat any gain on the disposition as a capital gain. Free 2010 tax amendment Disposal to related person. Free 2010 tax amendment   This rule does not apply if you dispose of the coal or iron ore to one of the following persons. Free 2010 tax amendment A related person (as listed in chapter 2 of Publication 544). Free 2010 tax amendment A person owned or controlled by the same interests that own or control you. Free 2010 tax amendment Geothermal deposits. Free 2010 tax amendment   Geothermal deposits located in the United States or its possessions qualify for a percentage depletion rate of 15%. Free 2010 tax amendment A geothermal deposit is a geothermal reservoir of natural heat stored in rocks or in a watery liquid or vapor. Free 2010 tax amendment For percentage depletion purposes, a geothermal deposit is not considered a gas well. Free 2010 tax amendment   Figure gross income from the property for a geothermal steam well in the same way as for oil and gas wells. Free 2010 tax amendment See Gross income from the property , earlier, under Oil and Gas Wells. Free 2010 tax amendment Percentage depletion on a geothermal deposit cannot be more than 50% of your taxable income from the property. Free 2010 tax amendment Lessor's Gross Income In the case of leased property, the depletion deduction is divided between the lessor and the lessee. Free 2010 tax amendment A lessor's gross income from the property that qualifies for percentage depletion usually is the total of the royalties received from the lease. Free 2010 tax amendment Bonuses and advanced royalties. Free 2010 tax amendment   Bonuses and advanced royalties are payments a lessee makes before production to a lessor for the grant of rights in a lease or for minerals, gas, or oil to be extracted from leased property. Free 2010 tax amendment If you are the lessor, your income from bonuses and advanced royalties received is subject to an allowance for depletion, as explained in the next two paragraphs. Free 2010 tax amendment Figuring cost depletion. Free 2010 tax amendment   To figure cost depletion on a bonus, multiply your adjusted basis in the property by a fraction, the numerator of which is the bonus and the denominator of which is the total bonus and royalties expected to be received. Free 2010 tax amendment To figure cost depletion on advanced royalties, use the computation explained earlier under Cost Depletion , treating the number of units for which the advanced royalty is received as the number of units sold. Free 2010 tax amendment Figuring percentage depletion. Free 2010 tax amendment   In the case of mines, wells, and other natural deposits other than gas, oil, or geothermal property, you may use the percentage rates discussed earlier under Mines and Geothermal Deposits . Free 2010 tax amendment Any bonus or advanced royalty payments are generally part of the gross income from the property to which the rates are applied in making the calculation. Free 2010 tax amendment However, for oil, gas, or geothermal property, gross income does not include lease bonuses, advanced royalties, or other amounts payable without regard to production from the property. Free 2010 tax amendment Ending the lease. Free 2010 tax amendment   If you receive a bonus on a lease that ends or is abandoned before you derive any income from mineral extraction, include in income the depletion deduction you took. Free 2010 tax amendment Do this for the year the lease ends or is abandoned. Free 2010 tax amendment Also increase your adjusted basis in the property to restore the depletion deduction you previously subtracted. Free 2010 tax amendment   For advanced royalties, include in income the depletion claimed on minerals for which the advanced royalties were paid if the minerals were not produced before the lease ended. Free 2010 tax amendment Include this amount in income for the year the lease ends. Free 2010 tax amendment Increase your adjusted basis in the property by the amount you include in income. Free 2010 tax amendment Delay rentals. Free 2010 tax amendment   These are payments for deferring development of the property. Free 2010 tax amendment Since delay rentals are ordinary rent, they are ordinary income that is not subject to depletion. Free 2010 tax amendment These rentals can be avoided by either abandoning the lease, beginning development operations, or obtaining production. Free 2010 tax amendment Timber You can figure timber depletion only by the cost method. Free 2010 tax amendment Percentage depletion does not apply to timber. Free 2010 tax amendment Base your depletion on your cost or other basis in the timber. Free 2010 tax amendment Your cost does not include the cost of land or any amounts recoverable through depreciation. Free 2010 tax amendment Depletion takes place when you cut standing timber. Free 2010 tax amendment You can figure your depletion deduction when the quantity of cut timber is first accurately measured in the process of exploitation. Free 2010 tax amendment Figuring cost depletion. Free 2010 tax amendment   To figure your cost depletion allowance, you multiply the number of timber units cut by your depletion unit. Free 2010 tax amendment Timber units. Free 2010 tax amendment   When you acquire timber property, you must make an estimate of the quantity of marketable timber that exists on the property. Free 2010 tax amendment You measure the timber using board feet, log scale, cords, or other units. Free 2010 tax amendment If you later determine that you have more or less units of timber, you must adjust the original estimate. Free 2010 tax amendment   The term “timber property” means your economic interest in standing timber in each tract or block representing a separate timber account. Free 2010 tax amendment Depletion unit. Free 2010 tax amendment   You figure your depletion unit each year by taking the following steps. Free 2010 tax amendment Determine your cost or adjusted basis of the timber on hand at the beginning of the year. Free 2010 tax amendment Adjusted basis is defined under Cost Depletion in the discussion on Mineral Property. Free 2010 tax amendment Add to the amount determined in (1) the cost of any timber units acquired during the year and any additions to capital. Free 2010 tax amendment Figure the number of timber units to take into account by adding the number of timber units acquired during the year to the number of timber units on hand in the account at the beginning of the year and then adding (or subtracting) any correction to the estimate of the number of timber units remaining in the account. Free 2010 tax amendment Divide the result of (2) by the result of (3). Free 2010 tax amendment This is your depletion unit. Free 2010 tax amendment Example. Free 2010 tax amendment You bought a timber tract for $160,000 and the land was worth as much as the timber. Free 2010 tax amendment Your basis for the timber is $80,000. Free 2010 tax amendment Based on an estimated one million board feet (1,000 MBF) of standing timber, you figure your depletion unit to be $80 per MBF ($80,000 ÷ 1,000). Free 2010 tax amendment If you cut 500 MBF of timber, your depletion allowance would be $40,000 (500 MBF × $80). Free 2010 tax amendment When to claim depletion. Free 2010 tax amendment   Claim your depletion allowance as a deduction in the year of sale or other disposition of the products cut from the timber, unless you choose to treat the cutting of timber as a sale or exchange (explained below). Free 2010 tax amendment Include allowable depletion for timber products not sold during the tax year the timber is cut as a cost item in the closing inventory of timber products for the year. Free 2010 tax amendment The inventory is your basis for determining gain or loss in the tax year you sell the timber products. Free 2010 tax amendment Example. Free 2010 tax amendment The facts are the same as in the previous example except that you sold only half of the timber products in the cutting year. Free 2010 tax amendment You would deduct $20,000 of the $40,000 depletion that year. Free 2010 tax amendment You would add the remaining $20,000 depletion to your closing inventory of timber products. Free 2010 tax amendment Electing to treat the cutting of timber as a sale or exchange. Free 2010 tax amendment   You can elect, under certain circumstances, to treat the cutting of timber held for more than 1 year as a sale or exchange. Free 2010 tax amendment You must make the election on your income tax return for the tax year to which it applies. Free 2010 tax amendment If you make this election, subtract the adjusted basis for depletion from the fair market value of the timber on the first day of the tax year in which you cut it to figure the gain or loss on the cutting. Free 2010 tax amendment You generally report the gain as long-term capital gain. Free 2010 tax amendment The fair market value then becomes your basis for figuring your ordinary gain or loss on the sale or other disposition of the products cut from the timber. Free 2010 tax amendment For more information, see Timber in chapter 2 of Publication 544, Sales and Other Dispositions of Assets. Free 2010 tax amendment   You may revoke an election to treat the cutting of timber as a sale or exchange without IRS's consent. Free 2010 tax amendment The prior election (and revocation) is disregarded for purposes of making a subsequent election. Free 2010 tax amendment See Form T (Timber), Forest Activities Schedule, for more information. Free 2010 tax amendment Form T. Free 2010 tax amendment   Complete and attach Form T (Timber) to your income tax return if you claim a deduction for timber depletion, choose to treat the cutting of timber as a sale or exchange, or make an outright sale of timber. Free 2010 tax amendment Prev  Up  Next   Home   More Online Publications