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1040 4. 1040   How Income of Aliens Is Taxed Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Resident Aliens Nonresident AliensTrade or Business in the United States Effectively Connected Income The 30% Tax Income From Real Property Transportation Tax Interrupted Period of Residence Expatriation TaxExpatriation Before June 4, 2004 Expatriation After June 3, 2004, and Before June 17, 2008 Expatriation After June 16, 2008 Introduction Resident and nonresident aliens are taxed in different ways. 1040 Resident aliens are generally taxed in the same way as U. 1040 S. 1040 citizens. 1040 Nonresident aliens are taxed based on the source of their income and whether or not their income is effectively connected with a U. 1040 S. 1040 trade or business. 1040 The following discussions will help you determine if income you receive during the tax year is effectively connected with a U. 1040 S. 1040 trade or business and how it is taxed. 1040 Topics - This chapter discusses: Income that is effectively connected with a U. 1040 S. 1040 trade or business. 1040 Income that is not effectively connected with a U. 1040 S. 1040 trade or business. 1040 Interrupted period of residence. 1040 Expatriation tax. 1040 Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 1212 List of Original Issue Discount Instruments Form (and Instructions) 6251 Alternative Minimum Tax—Individuals Schedule D (Form 1040) Capital Gains and Losses See chapter 12 for information about getting these publications and forms. 1040 Resident Aliens Resident aliens are generally taxed in the same way as U. 1040 S. 1040 citizens. 1040 This means that their worldwide income is subject to U. 1040 S. 1040 tax and must be reported on their U. 1040 S. 1040 tax return. 1040 Income of resident aliens is subject to the graduated tax rates that apply to U. 1040 S. 1040 citizens. 1040 Resident aliens use the Tax Table or Tax Computation Worksheets located in the Form 1040 instructions, which apply to U. 1040 S. 1040 citizens. 1040 Nonresident Aliens A nonresident alien's income that is subject to U. 1040 S. 1040 income tax must be divided into two categories: Income that is effectively connected with a trade or business in the United States, and Income that is not effectively connected with a trade or business in the United States (discussed under The 30% Tax, later). 1040 The difference between these two categories is that effectively connected income, after allowable deductions, is taxed at graduated rates. 1040 These are the same rates that apply to U. 1040 S. 1040 citizens and residents. 1040 Income that is not effectively connected is taxed at a flat 30% (or lower treaty) rate. 1040 If you were formerly a U. 1040 S. 1040 citizen or resident alien, these rules may not apply. 1040 See Expatriation Tax, later, in this chapter. 1040 Trade or Business in the United States Generally, you must be engaged in a trade or business during the tax year to be able to treat income received in that year as effectively connected with that trade or business. 1040 Whether you are engaged in a trade or business in the United States depends on the nature of your activities. 1040 The discussions that follow will help you determine whether you are engaged in a trade or business in the United States. 1040 Personal Services If you perform personal services in the United States at any time during the tax year, you usually are considered engaged in a trade or business in the United States. 1040 Certain compensation paid to a nonresident alien by a foreign employer is not included in gross income. 1040 For more information, see Services Performed for Foreign Employer in chapter 3. 1040 Other Trade or Business Activities Other examples of being engaged in a trade or business in the United States follow. 1040 Students and trainees. 1040   You are considered engaged in a trade or business in the United States if you are temporarily present in the United States as a nonimmigrant under an “F,” “J,” “M,” or “Q” visa. 1040 A nonresident alien temporarily present in the United States under a “J” visa includes a nonresident alien individual admitted to the United States as an exchange visitor under the Mutual Educational and Cultural Exchange Act of 1961. 1040 The taxable part of any scholarship or fellowship grant that is U. 1040 S. 1040 source income is treated as effectively connected with a trade or business in the United States. 1040 Business operations. 1040   If you own and operate a business in the United States selling services, products, or merchandise, you are, with certain exceptions, engaged in a trade or business in the United States. 1040 Partnerships. 1040   If you are a member of a partnership that at any time during the tax year is engaged in a trade or business in the United States, you are considered to be engaged in a trade or business in the United States. 1040 Beneficiary of an estate or trust. 1040   If you are the beneficiary of an estate or trust that is engaged in a trade or business in the United States, you are treated as being engaged in the same trade or business. 1040 Trading in stocks, securities, and commodities. 1040   If your only U. 1040 S. 1040 business activity is trading in stocks, securities, or commodities (including hedging transactions) through a U. 1040 S. 1040 resident broker or other agent, you are not engaged in a trade or business in the United States. 1040   For transactions in stocks or securities, this applies to any nonresident alien, including a dealer or broker in stocks and securities. 1040   For transactions in commodities, this applies to commodities that are usually traded on an organized commodity exchange and to transactions that are usually carried out at such an exchange. 1040   This discussion does not apply if you have a U. 1040 S. 1040 office or other fixed place of business at any time during the tax year through which, or by the direction of which, you carry out your transactions in stocks, securities, or commodities. 1040 Trading for a nonresident alien's own account. 1040   You are not engaged in a trade or business in the United States if trading for your own account in stocks, securities, or commodities is your only U. 1040 S. 1040 business activity. 1040 This applies even if the trading takes place while you are present in the United States or is done by your employee or your broker or other agent. 1040   This does not apply to trading for your own account if you are a dealer in stocks, securities, or commodities. 1040 This does not necessarily mean, however, that as a dealer you are considered to be engaged in a trade or business in the United States. 1040 Determine that based on the facts and circumstances in each case or under the rules given above in Trading in stocks, securities, and commodities . 1040 Effectively Connected Income If you are engaged in a U. 1040 S. 1040 trade or business, all income, gain, or loss for the tax year that you get from sources within the United States (other than certain investment income) is treated as effectively connected income. 1040 This applies whether or not there is any connection between the income and the trade or business being carried on in the United States during the tax year. 1040 Two tests, described next under Investment Income, determine whether certain items of investment income (such as interest, dividends, and royalties) are treated as effectively connected with that business. 1040 In limited circumstances, some kinds of foreign source income may be treated as effectively connected with a trade or business in the United States. 1040 For a discussion of these rules, see Foreign Income , later. 1040 Investment Income Investment income from U. 1040 S. 1040 sources that may or may not be treated as effectively connected with a U. 1040 S. 1040 trade or business generally falls into the following three categories. 1040 Fixed or determinable income (interest, dividends, rents, royalties, premiums, annuities, etc. 1040 ). 1040 Gains (some of which are considered capital gains) from the sale or exchange of the following types of property. 1040 Timber, coal, or domestic iron ore with a retained economic interest. 1040 Patents, copyrights, and similar property on which you receive contingent payments after October 4, 1966. 1040 Patents transferred before October 5, 1966. 1040 Original issue discount obligations. 1040 Capital gains (and losses). 1040 Use the two tests, described next, to determine whether an item of U. 1040 S. 1040 source income falling in one of the three categories above and received during the tax year is effectively connected with your U. 1040 S. 1040 trade or business. 1040 If the tests indicate that the item of income is effectively connected, you must include it with your other effectively connected income. 1040 If the item of income is not effectively connected, include it with all other income discussed under The 30% Tax later, in this chapter. 1040 Asset-use test. 1040   This test usually applies to income that is not directly produced by trade or business activities. 1040 Under this test, if an item of income is from assets (property) used in, or held for use in, the trade or business in the United States, it is considered effectively connected. 1040   An asset is used in, or held for use in, the trade or business in the United States if the asset is: Held for the principal purpose of promoting the conduct of a trade or business in the United States, Acquired and held in the ordinary course of the trade or business conducted in the United States (for example, an account receivable or note receivable arising from that trade or business), or Otherwise held to meet the present needs of the trade or business in the United States and not its anticipated future needs. 1040 Generally, stock of a corporation is not treated as an asset used in, or held for use in, a trade or business in the United States. 1040 Business-activities test. 1040   This test usually applies when income, gain, or loss comes directly from the active conduct of the trade or business. 1040 The business-activities test is most important when: Dividends or interest are received by a dealer in stocks or securities, Royalties are received in the trade or business of licensing patents or similar property, or Service fees are earned by a servicing business. 1040 Under this test, if the conduct of the U. 1040 S. 1040 trade or business was a material factor in producing the income, the income is considered effectively connected. 1040 Personal Service Income You usually are engaged in a U. 1040 S. 1040 trade or business when you perform personal services in the United States. 1040 Personal service income you receive in a tax year in which you are engaged in a U. 1040 S. 1040 trade or business is effectively connected with a U. 1040 S. 1040 trade or business. 1040 Income received in a year other than the year you performed the services is also effectively connected if it would have been effectively connected if received in the year you performed the services. 1040 Personal service income includes wages, salaries, commissions, fees, per diem allowances, and employee allowances and bonuses. 1040 The income may be paid to you in the form of cash, services, or property. 1040 If you are engaged in a U. 1040 S. 1040 trade or business only because you perform personal services in the United States during the tax year, income and gains from assets, and gains and losses from the sale or exchange of capital assets are generally not effectively connected with your trade or business. 1040 However, if there is a direct economic relationship between your holding of the asset and your trade or business of performing personal services, the income, gain, or loss is effectively connected. 1040 Pensions. 1040   If you were a nonresident alien engaged in a U. 1040 S. 1040 trade or business after 1986 because you performed personal services in the United States, and you later receive a pension or retirement pay attributable to these services, such payments are effectively connected income in each year you receive them. 1040 This is true whether or not you are engaged in a U. 1040 S. 1040 trade or business in the year you receive the retirement pay. 1040 Transportation Income Transportation income (defined in chapter 2) is effectively connected if you meet both of the following conditions. 1040 You had a fixed place of business in the United States involved in earning the income. 1040 At least 90% of your U. 1040 S. 1040 source transportation income is attributable to regularly scheduled transportation. 1040 “Fixed place of business” generally means a place, site, structure, or other similar facility through which you engage in a trade or business. 1040 “Regularly scheduled transportation” means that a ship or aircraft follows a published schedule with repeated sailings or flights at regular intervals between the same points for voyages or flights that begin or end in the United States. 1040 This definition applies to both scheduled and chartered air transportation. 1040 If you do not meet the two conditions above, the income is not effectively connected and is taxed at a 4% rate. 1040 See Transportation Tax, later, in this chapter. 1040 Business Profits and Losses and Sales Transactions All profits or losses from U. 1040 S. 1040 sources that are from the operation of a business in the United States are effectively connected with a trade or business in the United States. 1040 For example, profit from the sale in the United States of inventory property purchased either in this country or in a foreign country is effectively connected trade or business income. 1040 A share of U. 1040 S. 1040 source profits or losses of a partnership that is engaged in a trade or business in the United States is also effectively connected with a trade or business in the United States. 1040 Real Property Gain or Loss Gains and losses from the sale or exchange of U. 1040 S. 1040 real property interests (whether or not they are capital assets) are taxed as if you are engaged in a trade or business in the United States. 1040 You must treat the gain or loss as effectively connected with that trade or business. 1040 U. 1040 S. 1040 real property interest. 1040   This is any interest in real property located in the United States or the U. 1040 S. 1040 Virgin Islands or any interest (other than as a creditor) in a domestic corporation that is a U. 1040 S. 1040 real property holding corporation. 1040 Real property includes the following. 1040 Land and unsevered natural products of the land, such as growing crops and timber, and mines, wells, and other natural deposits. 1040 Improvements on land, including buildings, other permanent structures, and their structural components. 1040 Personal property associated with the use of real property, such as equipment used in farming, mining, forestry, or construction or property used in lodging facilities or rented office space, unless the personal property is: Disposed of more than one year before or after the disposition of the real property, or Separately sold to persons unrelated either to the seller or to the buyer of the real property. 1040 U. 1040 S. 1040 real property holding corporation. 1040   A corporation is a U. 1040 S. 1040 real property holding corporation if the fair market value of the corporation's U. 1040 S. 1040 real property interests are at least 50% of the total fair market value of: The corporation's U. 1040 S. 1040 real property interests, plus The corporation's interests in real property located outside the United States, plus The corporation's other assets that are used in, or held for use in, a trade or business. 1040   Gain or loss on the sale of the stock in any domestic corporation is taxed as if you are engaged in a U. 1040 S. 1040 trade or business unless you establish that the corporation is not a U. 1040 S. 1040 real property holding corporation. 1040   A U. 1040 S. 1040 real property interest does not include a class of stock of a corporation that is regularly traded on an established securities market, unless you hold more than 5% of the fair market value of that class of stock. 1040 An interest in a foreign corporation owning U. 1040 S. 1040 real property generally is not a U. 1040 S. 1040 real property interest unless the corporation chooses to be treated as a domestic corporation. 1040 Qualified investment entities. 1040   Special rules apply to qualified investment entities (QIEs). 1040 A QIE is any real estate investment trust (REIT) or any regulated investment company (RIC) that is a U. 1040 S. 1040 real property holding corporation. 1040    Generally, any distribution from a QIE to a shareholder that is attributable to gain from the sale or exchange of a U. 1040 S. 1040 real property interest is treated as a U. 1040 S. 1040 real property gain by the shareholder receiving the distribution. 1040 A distribution by a QIE on stock regularly traded on an established securities market in the United States is not treated as gain from the sale or exchange of a U. 1040 S. 1040 real property interest if you did not own more than 5% of that stock at any time during the 1-year period ending on the date of the distribution. 1040 A distribution that you do not treat as gain from the sale or exchange of a U. 1040 S. 1040 real property interest is included in your gross income as a regular dividend. 1040 Note. 1040 Beginning January 1, 2014 (unless extended by legislation), a RIC that is a U. 1040 S. 1040 real property holding corporation will only be treated as a QIE for certain distributions from the RIC that are directly or indirectly attributable to distributions received by the RIC from a REIT. 1040 Domestically controlled QIE. 1040   The sale of an interest in a domestically controlled QIE is not the sale of a U. 1040 S. 1040 real property interest. 1040 The entity is domestically controlled if at all times during the testing period less than 50% in value of its stock was held, directly or indirectly, by foreign persons. 1040 The testing period is the shorter of (a) the 5-year period ending on the date of disposition, or (b) the period during which the entity was in existence. 1040 Wash sale. 1040    If you dispose of an interest in a domestically controlled QIE in an applicable wash sale transaction, special rules apply. 1040 An applicable wash sale transaction is one in which you: Dispose of an interest in the domestically controlled QIE during the 30-day period before the ex-dividend date of a distribution that you would (but for the disposition) have treated as gain from the sale or exchange of a U. 1040 S. 1040 real property interest, and Acquire, or enter into a contract or option to acquire, a substantially identical interest in that entity during the 61-day period that began on the first day of the 30-day period. 1040 If this occurs, you are treated as having gain from the sale or exchange of a U. 1040 S. 1040 real property interest in an amount equal to the distribution made after June 15, 2006, that would have been treated as such gain. 1040 This also applies to any substitute dividend payment. 1040   A transaction is not treated as an applicable wash sale transaction if: You actually receive the distribution from the domestically controlled QIE related to the interest disposed of, or acquired, in the transaction, or You dispose of any class of stock in a QIE that is regularly traded on an established securities market in the United States but only if you did not own more than 5% of that class of stock at any time during the 1-year period ending on the date of the distribution. 1040 Alternative minimum tax. 1040   There may be a minimum tax on your net gain from the disposition of U. 1040 S. 1040 real property interests. 1040 Figure the amount of this tax, if any, on Form 6251. 1040 Withholding of tax. 1040   If you dispose of a U. 1040 S. 1040 real property interest, the buyer may have to withhold tax. 1040 See the discussion of Tax Withheld on Real Property Sales in chapter 8. 1040 Foreign Income You must treat three kinds of foreign source income as effectively connected with a trade or business in the United States if: You have an office or other fixed place of business in the United States to which the income can be attributed, That office or place of business is a material factor in producing the income, and The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. 1040 An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. 1040 The three kinds of foreign source income are listed below. 1040 Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the United States or from any interest in such property. 1040 Included are rents or royalties for the use, or for the privilege of using, outside the United States, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the United States. 1040 Dividends, interest, or amounts received for the provision of a guarantee of indebtedness issued after September 27, 2010, from the active conduct of a banking, financing, or similar business in the United States. 1040 A substitute dividend or interest payment received under a securities lending transaction or a sale-repurchase transaction is treated the same as the amounts received on the transferred security. 1040 Income, gain, or loss from the sale outside the United States, through the U. 1040 S. 1040 office or other fixed place of business, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. 1040 Item (3) will not apply if you sold the property for use, consumption, or disposition outside the United States and an office or other fixed place of business in a foreign country was a material factor in the sale. 1040 Any foreign source income that is equivalent to any item of income described above is treated as effectively connected with a U. 1040 S. 1040 trade or business. 1040 For example, foreign source interest and dividend equivalents are treated as U. 1040 S. 1040 effectively connected income if the income is derived by a foreign person in the active conduct of a banking, financing, or similar business within the United States. 1040 Tax on Effectively Connected Income Income you receive during the tax year that is effectively connected with your trade or business in the United States is, after allowable deductions, taxed at the rates that apply to U. 1040 S. 1040 citizens and residents. 1040 Generally, you can receive effectively connected income only if you are a nonresident alien engaged in trade or business in the United States during the tax year. 1040 However, income you receive from the sale or exchange of property, the performance of services, or any other transaction in another tax year is treated as effectively connected in that year if it would have been effectively connected in the year the transaction took place or you performed the services. 1040 Example. 1040 Ted Richards, a nonresident alien, entered the United States in August 2012, to perform personal services in the U. 1040 S. 1040 office of his overseas employer. 1040 He worked in the U. 1040 S. 1040 office until December 25, 2012, but did not leave this country until January 11, 2013. 1040 On January 8, 2013, he received his final paycheck for services performed in the United States during 2012. 1040 All of Ted's income during his stay here is U. 1040 S. 1040 source income. 1040 During 2012, Ted was engaged in the trade or business of performing personal services in the United States. 1040 Therefore, all amounts paid to him in 2012 for services performed in the United States during 2012 are effectively connected with that trade or business during 2012. 1040 The salary payment Ted received in January 2013 is U. 1040 S. 1040 source income to him in 2013. 1040 It is effectively connected with a trade or business in the United States because he was engaged in a trade or business in the United States during 2012 when he performed the services that earned the income. 1040 Real property income. 1040   You may be able to choose to treat all income from real property as effectively connected. 1040 See Income From Real Property , later, in this chapter. 1040 The 30% Tax Tax at a 30% (or lower treaty) rate applies to certain items of income or gains from U. 1040 S. 1040 sources but only if the items are not effectively connected with your U. 1040 S. 1040 trade or business. 1040 Fixed or Determinable Income The 30% (or lower treaty) rate applies to the gross amount of U. 1040 S. 1040 source fixed or determinable annual or periodic gains, profits, or income. 1040 Income is fixed when it is paid in amounts known ahead of time. 1040 Income is determinable whenever there is a basis for figuring the amount to be paid. 1040 Income can be periodic if it is paid from time to time. 1040 It does not have to be paid annually or at regular intervals. 1040 Income can be determinable or periodic even if the length of time during which the payments are made is increased or decreased. 1040 Items specifically included as fixed or determinable income are interest (other than original issue discount), dividends, dividend equivalent payments (defined in chapter 2), rents, premiums, annuities, salaries, wages, and other compensation. 1040 A substitute dividend or interest payment received under a securities lending transaction or a sale-repurchase transaction is treated the same as the amounts received on the transferred security. 1040 Other items of income, such as royalties, also may be subject to the 30% tax. 1040 Some fixed or determinable income may be exempt from U. 1040 S. 1040 tax. 1040 See chapter 3 if you are not sure whether the income is taxable. 1040 Original issue discount (OID). 1040   If you sold, exchanged, or received a payment on a bond or other debt instrument that was issued at a discount after March 31, 1972, all or part of the original issue discount (OID) (other than portfolio interest) may be subject to the 30% tax. 1040 The amount of OID is the difference between the stated redemption price at maturity and the issue price of the debt instrument. 1040 The 30% tax applies in the following circumstances. 1040 You received a payment on a debt instrument. 1040 In this case, the amount of OID subject to tax is the OID that accrued while you held the debt instrument minus the OID previously taken into account. 1040 But the tax on the OID cannot be more than the payment minus the tax on the interest payment on the debt instrument. 1040 You sold or exchanged the debt instrument. 1040 The amount of OID subject to tax is the OID that accrued while you held the debt instrument minus the amount already taxed in (1) above. 1040   Report on your return the amount of OID shown on Form 1042-S, Foreign Person's U. 1040 S. 1040 Source Income Subject to Withholding, if you bought the debt instrument at original issue. 1040 However, you must recompute your proper share of OID shown on Form 1042-S if any of the following apply. 1040 You bought the debt instrument at a premium or paid an acquisition premium. 1040 The debt instrument is a stripped bond or a stripped coupon (including zero coupon instruments backed by U. 1040 S. 1040 Treasury securities). 1040 The debt instrument is a contingent payment or inflation-indexed debt instrument. 1040 For the definition of premium and acquisition premium and instructions on how to recompute OID, get Publication 1212. 1040   If you held a bond or other debt instrument that was issued at a discount before April 1, 1972, contact the IRS for further information. 1040 See chapter 12. 1040 Gambling Winnings In general, nonresident aliens are subject to the 30% tax on the gross proceeds from gambling won in the United States if that income is not effectively connected with a U. 1040 S. 1040 trade or business and is not exempted by treaty. 1040 However, no tax is imposed on nonbusiness gambling income a nonresident alien wins playing blackjack, baccarat, craps, roulette, or big-6 wheel in the United States. 1040 Nonresident aliens are taxed at graduated rates on net gambling income won in the United States that is effectively connected with a U. 1040 S. 1040 trade or business. 1040 Social Security Benefits A nonresident alien must include 85% of any U. 1040 S. 1040 social security benefit (and the social security equivalent part of a tier 1 railroad retirement benefit) in U. 1040 S. 1040 source fixed or determinable annual or periodic income. 1040 Social security benefits include monthly retirement, survivor, and disability benefits. 1040 This income is exempt under some tax treaties. 1040 See Table 1 in Publication 901, U. 1040 S. 1040 Tax Treaties, for a list of tax treaties that exempt U. 1040 S. 1040 social security benefits from U. 1040 S. 1040 tax. 1040 Sales or Exchanges of Capital Assets These rules apply only to those capital gains and losses from sources in the United States that are not effectively connected with a trade or business in the United States. 1040 They apply even if you are engaged in a trade or business in the United States. 1040 These rules do not apply to the sale or exchange of a U. 1040 S. 1040 real property interest or to the sale of any property that is effectively connected with a trade or business in the United States. 1040 See Real Property Gain or Loss , earlier, under Effectively Connected Income. 1040 A capital asset is everything you own except: Inventory. 1040 Business accounts or notes receivable. 1040 Depreciable property used in a trade or business. 1040 Real property used in a trade or business. 1040 Supplies regularly used in a trade or business. 1040 Certain copyrights, literary or musical or artistic compositions, letters or memoranda, or similar property. 1040 Certain U. 1040 S. 1040 government publications. 1040 Certain commodities derivative financial instruments held by a commodities derivatives dealer. 1040 Hedging transactions. 1040 A capital gain is a gain on the sale or exchange of a capital asset. 1040 A capital loss is a loss on the sale or exchange of a capital asset. 1040 If the sale is in foreign currency, for the purpose of determining gain, the cost and selling price of the property should be expressed in U. 1040 S. 1040 currency at the rate of exchange prevailing as of the date of the purchase and date of the sale, respectively. 1040 You may want to read Publication 544. 1040 However, use Publication 544 only to determine what is a sale or exchange of a capital asset, or what is treated as such. 1040 Specific tax treatment that applies to U. 1040 S. 1040 citizens or residents generally does not apply to you. 1040 The following gains are subject to the 30% (or lower treaty) rate without regard to the 183-day rule, discussed later. 1040 Gains on the disposal of timber, coal, or domestic iron ore with a retained economic interest. 1040 Gains on contingent payments received from the sale or exchange of patents, copyrights, and similar property after October 4, 1966. 1040 Gains on certain transfers of all substantial rights to, or an undivided interest in, patents if the transfers were made before October 5, 1966. 1040 Gains on the sale or exchange of original issue discount obligations. 1040 Gains in (1) are not subject to the 30% (or lower treaty) rate if you choose to treat the gains as effectively connected with a U. 1040 S. 1040 trade or business. 1040 See Income From Real Property , later. 1040 183-day rule. 1040   If you were in the United States for 183 days or more during the tax year, your net gain from sales or exchanges of capital assets is taxed at a 30% (or lower treaty) rate. 1040 For purposes of the 30% (or lower treaty) rate, net gain is the excess of your capital gains from U. 1040 S. 1040 sources over your capital losses from U. 1040 S. 1040 sources. 1040 This rule applies even if any of the transactions occurred while you were not in the United States. 1040   To determine your net gain, consider the amount of your gains and losses that would be recognized and taken into account only if, and to the extent that, they would be recognized and taken into account if you were in a U. 1040 S. 1040 trade or business during the year and the gains and losses were effectively connected with that trade or business during the tax year. 1040   In arriving at your net gain, do not take the following into consideration. 1040 The four types of gains listed earlier. 1040 The deduction for a capital loss carryover. 1040 Capital losses in excess of capital gains. 1040 Exclusion for gain from the sale or exchange of qualified small business stock (section 1202 exclusion). 1040 Losses from the sale or exchange of property held for personal use. 1040 However, losses resulting from casualties or thefts may be deductible on Schedule A (Form 1040NR). 1040 See Itemized Deductions in chapter 5. 1040   If you are not engaged in a trade or business in the United States and have not established a tax year for a prior period, your tax year will be the calendar year for purposes of the 183-day rule. 1040 Also, you must file your tax return on a calendar-year basis. 1040   If you were in the United States for less than 183 days during the tax year, capital gains (other than gains listed earlier) are tax exempt unless they are effectively connected with a trade or business in the United States during your tax year. 1040 Reporting. 1040   Report your gains and losses from the sales or exchanges of capital assets that are not effectively connected with a trade or business in the United States on page 4 of Form 1040NR. 1040 Report gains and losses from sales or exchanges of capital assets (including real property) that are effectively connected with a trade or business in the United States on a separate Schedule D (Form 1040), Form 4797, or both. 1040 Attach them to Form 1040NR. 1040 Income From Real Property If you have income from real property located in the United States that you own or have an interest in and hold for the production of income, you can choose to treat all income from that property as income effectively connected with a trade or business in the United States. 1040 The choice applies to all income from real property located in the United States and held for the production of income and to all income from any interest in such property. 1040 This includes income from rents, royalties from mines, oil or gas wells, or other natural resources. 1040 It also includes gains from the sale or exchange of timber, coal, or domestic iron ore with a retained economic interest. 1040 You can make this choice only for real property income that is not otherwise effectively connected with your U. 1040 S. 1040 trade or business. 1040 If you make the choice, you can claim deductions attributable to the real property income and only your net income from real property is taxed. 1040 This choice does not treat a nonresident alien, who is not otherwise engaged in a U. 1040 S. 1040 trade or business, as being engaged in a trade or business in the United States during the year. 1040 Example. 1040 You are a nonresident alien and are not engaged in a U. 1040 S. 1040 trade or business. 1040 You own a single-family house in the United States that you rent out. 1040 Your rental income for the year is $10,000. 1040 This is your only U. 1040 S. 1040 source income. 1040 As discussed earlier under The 30% Tax, the rental income is subject to a tax at a 30% (or lower treaty) rate. 1040 You received a Form 1042-S showing that your tenants properly withheld this tax from the rental income. 1040 You do not have to file a U. 1040 S. 1040 tax return (Form 1040NR) because your U. 1040 S. 1040 tax liability is satisfied by the withholding of tax. 1040 If you make the choice discussed earlier, you can offset the $10,000 income by certain rental expenses. 1040 (See Publication 527, Residential Rental Property, for information on rental expenses. 1040 ) Any resulting net income is taxed at graduated rates. 1040 If you make this choice, report the rental income and expenses on Schedule E (Form 1040) and attach the schedule to Form 1040NR. 1040 For the first year you make the choice, also attach the statement discussed next. 1040 Making the choice. 1040   Make the initial choice by attaching a statement to your return, or amended return, for the year of the choice. 1040 Include the following in your statement. 1040 That you are making the choice. 1040 Whether the choice is under Internal Revenue Code section 871(d) (explained earlier) or a tax treaty. 1040 A complete list of all your real property, or any interest in real property, located in the United States. 1040 Give the legal identification of U. 1040 S. 1040 timber, coal, or iron ore in which you have an interest. 1040 The extent of your ownership in the property. 1040 The location of the property. 1040 A description of any major improvements to the property. 1040 The dates you owned the property. 1040 Your income from the property. 1040 Details of any previous choices and revocations of the real property income choice. 1040   This choice stays in effect for all later tax years unless you revoke it. 1040 Revoking the choice. 1040   You can revoke the choice without IRS approval by filing Form 1040X, Amended U. 1040 S. 1040 Individual Income Tax Return, for the year you made the choice and for later tax years. 1040 You must file Form 1040X within 3 years from the date your return was filed or 2 years from the time the tax was paid, whichever is later. 1040 If this time period has expired for the year of choice, you cannot revoke the choice for that year. 1040 However, you may revoke the choice for later tax years only if you have IRS approval. 1040 For information on how to get IRS approval, see Regulation section 1. 1040 871-10(d)(2). 1040 Transportation Tax A 4% tax rate applies to transportation income that is not effectively connected because it does not meet the two conditions listed earlier under Transportation Income . 1040 If you receive transportation income subject to the 4% tax, you should figure the tax and show it on line 57 of Form 1040NR. 1040 Attach a statement to your return that includes the following information (if applicable). 1040 Your name, taxpayer identification number, and tax year. 1040 A description of the types of services performed (whether on or off board). 1040 Names of vessels or registration numbers of aircraft on which you performed the services. 1040 Amount of U. 1040 S. 1040 source transportation income derived from each type of service for each vessel or aircraft for the calendar year. 1040 Total amount of U. 1040 S. 1040 source transportation income derived from all types of services for the calendar year. 1040 This 4% tax applies to your U. 1040 S. 1040 source gross transportation income. 1040 This only includes transportation income that is treated as derived from sources in the United States if the transportation begins or ends in the United States. 1040 For transportation income from personal services, the transportation must be between the United States and a U. 1040 S. 1040 possession. 1040 For personal services of a nonresident alien, this only applies to income derived from, or in connection with, an aircraft. 1040 Interrupted Period of Residence You are subject to tax under a special rule if you interrupt your period of U. 1040 S. 1040 residence with a period of nonresidence. 1040 The special rule applies if you meet all of the following conditions. 1040 You were a U. 1040 S. 1040 resident for a period that includes at least 3 consecutive calendar years. 1040 You were a U. 1040 S. 1040 resident for at least 183 days in each of those years. 1040 You ceased to be treated as a U. 1040 S. 1040 resident. 1040 You then again became a U. 1040 S. 1040 resident before the end of the third calendar year after the end of the period described in (1) above. 1040 Under this special rule, you are subject to tax on your U. 1040 S. 1040 source gross income and gains on a net basis at the graduated rates applicable to individuals (with allowable deductions) for the period you were a nonresident alien, unless you would be subject to a higher tax under the 30% tax (discussed earlier) on income not connected with a U. 1040 S. 1040 trade or business. 1040 For information on how to figure the special tax, see How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) under Expatriation Tax , below. 1040 Example. 1040 John Willow, a citizen of New Zealand, entered the United States on April 1, 2008, as a lawful permanent resident. 1040 On August 1, 2010, John ceased to be a lawful permanent resident and returned to New Zealand. 1040 During his period of residence, he was present in the United States for at least 183 days in each of three consecutive years (2008, 2009, and 2010). 1040 He returned to the United States on October 5, 2013, as a lawful permanent resident. 1040 He became a resident before the close of the third calendar year (2013) beginning after the end of his first period of residence (August 1, 2010). 1040 Therefore, he is subject to tax under the special rule for the period of nonresidence (August 2, 2010, through October 4, 2013) if it is more than the tax that would normally apply to him as a nonresident alien. 1040 Reporting requirements. 1040   If you are subject to this tax for any year in the period you were a nonresident alien, you must file Form 1040NR for that year. 1040 The return is due by the due date (including extensions) for filing your U. 1040 S. 1040 income tax return for the year that you again become a U. 1040 S. 1040 resident. 1040 If you already filed returns for that period, you must file amended returns. 1040 You must attach a statement to your return that identifies the source of all of your U. 1040 S. 1040 and foreign gross income and the items of income subject to this special rule. 1040 Expatriation Tax The expatriation tax provisions apply to U. 1040 S. 1040 citizens who have renounced their citizenship and long-term residents who have ended their residency. 1040 The rules that apply are based on the dates of expatriation, which are described in the following sections. 1040 Expatriation Before June 4, 2004. 1040 Expatriation After June 3, 2004, and Before June 17, 2008. 1040 Expatriation After June 16, 2008. 1040 Long-term resident defined. 1040   You are a long-term resident if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your residency ends. 1040 In determining if you meet the 8-year requirement, do not count any year that you are treated as a resident of a foreign country under a tax treaty and do not waive treaty benefits. 1040 Expatriation Before June 4, 2004 If you expatriated before June 4, 2004, the expatriation rules apply if one of the principal purposes of the action is the avoidance of U. 1040 S. 1040 taxes. 1040 Unless you received a ruling from the IRS that you did not expatriate to avoid U. 1040 S. 1040 taxes, you are presumed to have tax avoidance as a principal purpose if: Your average annual net income tax for the last 5 tax years ending before the date of your action to relinquish your citizenship or terminate your residency was more than $100,000, or Your net worth on the date of your action was $500,000 or more. 1040 The amounts above are adjusted for inflation if your expatriation action is after 1997 (see Table 4-1). 1040 Table 4-1. 1040 Inflation-Adjusted Amounts for Expatriation Actions Before June 4, 2004 IF you expatriated during . 1040 . 1040 . 1040   THEN the rules outlined on this page apply if . 1040 . 1040 . 1040     Your 5-year average annual net income tax was more than . 1040 . 1040 . 1040 OR Your net worth equaled or exceeded . 1040 . 1040 . 1040 1999   110,000   552,000 2000   112,000   562,000 2001   116,000   580,000 2002   120,000   599,000 2003   122,000   608,000 2004 (before June 4)*   124,000   622,000 *If you expatriated after June 3, 2004, see Expatriation After June 3, 2004, and Before June 17, 2008 or Expatriation After June 16, 2008. 1040 Reporting requirements. 1040   If you lost your U. 1040 S. 1040 citizenship, you should have filed Form 8854 with a consular office or a federal court at the time of loss of citizenship. 1040 If you ended your long-term residency, you should have filed Form 8854 with the Internal Revenue Service when you filed your dual-status tax return for the year your residency ended. 1040   Your U. 1040 S. 1040 residency is considered to have ended when you ceased to be a lawful permanent resident or you began to be treated as a resident of another country under a tax treaty and do not waive treaty benefits. 1040 Penalties. 1040   If you failed to file Form 8854, you may have to pay a penalty equal to the greater of 5% of the expatriation tax or $1,000. 1040 The penalty will be assessed for each year of the 10-year period beginning on the date of expatriation during which your failure to file continues. 1040 The penalty will not be imposed if you can show that the failure is due to reasonable cause and not willful neglect. 1040 Expatriation tax. 1040   The expatriation tax applies to the 10-year period following the date of expatriation or termination of residency. 1040 It is figured in the same way as for those expatriating after June 3, 2004, and before June 17, 2008. 1040 See How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) in the next section. 1040 Expatriation After June 3, 2004, and Before June 17, 2008 If you expatriated after June 3, 2004, and before June 17, 2008, the expatriation rules apply to you if any of the following statements apply. 1040 Your average annual net income tax for the 5 tax years ending before the date of expatriation or termination of residency is more than: $124,000 if you expatriated or terminated residency in 2004. 1040 $127,000 if you expatriated or terminated residency in 2005. 1040 $131,000 if you expatriated or terminated residency in 2006. 1040 $136,000 if you expatriated or terminated residency in 2007. 1040 $139,000 if you expatriated or terminated residency in 2008. 1040 Your net worth is $2 million or more on the date of your expatriation or termination of residency. 1040 You fail to certify on Form 8854 that you have complied with all U. 1040 S. 1040 federal tax obligations for the 5 tax years preceding the date of your expatriation or termination of residency. 1040 Exception for dual-citizens and certain minors. 1040   Certain dual-citizens and certain minors (defined next) are not subject to the expatriation tax even if they meet (1) or (2) earlier. 1040 However, they still must provide the certification required in (3). 1040 Certain dual-citizens. 1040   You may qualify for the exception described above if all of the following apply. 1040 You became at birth a U. 1040 S. 1040 citizen and a citizen of another country and you continue to be a citizen of that other country. 1040 You were never a resident alien of the United States (as defined in chapter 1). 1040 You never held a U. 1040 S. 1040 passport. 1040 You were present in the United States for no more than 30 days during any calendar year that is 1 of the 10 calendar years preceding your loss of U. 1040 S. 1040 citizenship. 1040 Certain minors. 1040   You may qualify for the exception described above if you meet all of the following requirements. 1040 You became a U. 1040 S. 1040 citizen at birth. 1040 Neither of your parents was a U. 1040 S. 1040 citizen at the time of your birth. 1040 You expatriated before you were 18½. 1040 You were present in the United States for not more than 30 days during any calendar year that is 1 of the 10 calendar years preceding your expatriation. 1040 Tax consequences of presence in the United States. 1040   The following rules apply if you do not meet the exception above for dual-citizens and certain minors and the expatriation rules would otherwise apply to you. 1040   The expatriation tax does not apply to any tax year during the 10-year period if you are physically present in the United States for more than 30 days during the calendar year ending in that year. 1040 Instead, you are treated as a U. 1040 S. 1040 citizen or resident and taxed on your worldwide income for that tax year. 1040 You must file Form 1040, 1040A, or 1040EZ and figure your tax as prescribed in the instructions for those forms. 1040   When counting the number of days of presence during a calendar year, count any day you were physically present in the United States at any time during the day. 1040 However, do not count any days (up to a limit of 30 days) on which you performed personal services in the United States for an employer who is not related to you if either of the following apply. 1040 You have ties with other countries. 1040 You have ties with other countries if: You became (within a reasonable period after your expatriation or termination of residency) a citizen or resident of the country in which you, your spouse, or either of your parents were born, and You became fully liable for income tax in that country. 1040 You were physically present in the United States for 30 days or less during each year in the 10-year period ending on the date of expatriation or termination of residency. 1040 Do not count any day you were an exempt individual or were unable to leave the United States because of a medical condition that arose while you were in the United States. 1040 See Exempt individual and Medical condition in chapter 1 under Substantial Presence Test, but disregard the information about Form 8843. 1040 Related employer. 1040   If your employer in the United States is any of the following, then your employer is related to you. 1040 You must count any days you performed services in the United States for that employer as days of presence in the United States. 1040 Members of your family. 1040 This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc. 1040 ), and lineal descendants (children, grandchildren, etc. 1040 ). 1040 A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest. 1040 A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. 1040 (See Publication 550, chapter 4, Constructive ownership of stock, for how to determine whether you directly or indirectly own outstanding stock. 1040 ) A tax-exempt charitable or educational organization that is directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable. 1040 Date of tax expatriation. 1040   For purposes of U. 1040 S. 1040 tax rules, the date of your expatriation or termination of residency is the later of the dates on which you perform the following actions. 1040 You notify either the Department of State or the Department of Homeland Security (whichever is appropriate) of your expatriating act or termination of residency. 1040 You file Form 8854 in accordance with the form instructions. 1040 Annual return. 1040   If the expatriation tax applies to you, you must file Form 8854 each year during the 10-year period following the date of expatriation. 1040 You must file this form even if you owe no U. 1040 S. 1040 tax. 1040 Penalty. 1040   If you fail to file Form 8854 for any tax year, fail to include all information required to be shown on the form, or include incorrect information, you may have to pay a penalty of $10,000. 1040 You will not have to pay a penalty if you show that the failure is due to reasonable cause and not to willful neglect. 1040 How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) If the expatriation tax applies to you, you are generally subject to tax on your U. 1040 S. 1040 source gross income and gains on a net basis at the graduated rates applicable to individuals (with allowable deductions) unless you would be subject to a higher tax under the 30% tax (discussed earlier) on income not connected with a U. 1040 S. 1040 trade or business. 1040 For this purpose, U. 1040 S. 1040 source gross income (defined in chapter 2) includes gains from the sale or exchange of: Property (other than stock or debt obligations) located in the United States, Stock issued by a U. 1040 S. 1040 domestic corporation, and Debt obligations of U. 1040 S. 1040 persons or of the United States, a state or political subdivision thereof, or the District of Columbia. 1040 U. 1040 S. 1040 source income also includes any income or gain derived from stock in certain controlled foreign corporations if you owned, or were considered to own, at any time during the 2-year period ending on the date of expatriation, more than 50% of: The total combined voting power of all classes of that corporation's stock, or The total value of the stock. 1040 The income or gain is considered U. 1040 S. 1040 source income only to the extent of your share of earnings and profits earned or accumulated before the date of expatriation and during the periods you met the ownership requirements discussed above. 1040 Any exchange of property is treated as a sale of the property at its fair market value on the date of the exchange and any gain is treated as U. 1040 S. 1040 source gross income in the tax year of the exchange unless you enter into a gain recognition agreement under Notice 97-19. 1040 Other information. 1040   For more information on the expatriation tax provisions, including exceptions to the tax and special U. 1040 S. 1040 source rules, see section 877 of the Internal Revenue Code. 1040 Expatriation Tax Return If you expatriated or terminated your U. 1040 S. 1040 residency, or you are subject to the expatriation tax, you must file Form 8854, Initial and Annual Expatriation Statement. 1040 Attach it to Form 1040NR if you are required to file that form. 1040 If you are present in the United States following your expatriation and are subject to tax as a U. 1040 S. 1040 citizen or resident, file Form 8854 with Form 1040. 1040 Expatriation After June 16, 2008 If you expatriated after June 16, 2008, the expatriation rules apply to you if you meet any of the following conditions. 1040 Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than: $139,000 if you expatriated or terminated residency in 2008. 1040 $145,000 if you expatriated or terminated residency in 2009 or 2010. 1040 $147,000 if you expatriated or terminated residency in 2011. 1040 $151,000 if you expatriated or terminated residency in 2012. 1040 $155,000 if you expatriated or terminated residency in 2013. 1040 Your net worth is $2 million or more on the date of your expatriation or termination of residency. 1040 You fail to certify on Form 8854 that you have complied with all U. 1040 S. 1040 federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency. 1040 Exception for dual-citizens and certain minors. 1040   Certain dual-citizens and certain minors (defined next) are not subject to the expatriation tax even if they meet (1) or (2) above. 1040 However, they still must provide the certification required in (3) above. 1040 Certain dual-citizens. 1040   You may qualify for the exception described above if both of the following apply. 1040 You became at birth a U. 1040 S. 1040 citizen and a citizen of another country and you continue to be a citizen of, and are taxed as a resident of, that other country. 1040 You have been a resident of the United States for not more than 10 years during the 15-year tax period ending with the tax year during which the expatriation occurs. 1040 For the purpose of determining U. 1040 S. 1040 residency, use the substantial presence test described in chapter 1. 1040 Certain minors. 1040   You may qualify for the exception described earlier if you meet both of the following requirements. 1040 You expatriated before you were 18½. 1040 You have been a resident of the United States for not more than 10 tax years before the expatriation occurs. 1040 For the purpose of determining U. 1040 S. 1040 residency, use the substantial presence test described in chapter 1. 1040 Expatriation date. 1040   Your expatriation date is the date you relinquish U. 1040 S. 1040 citizenship (in the case of a former citizen) or terminate your long-term residency (in the case of a former U. 1040 S. 1040 resident). 1040 Former U. 1040 S. 1040 citizen. 1040   You are considered to have relinquished your U. 1040 S. 1040 citizenship on the earliest of the following dates. 1040 The date you renounced U. 1040 S. 1040 citizenship before a diplomatic or consular officer of the United States (provided that the voluntary renouncement was later confirmed by the issuance of a certificate of loss of nationality). 1040 The date you furnished to the State Department a signed statement of voluntary relinquishment of U. 1040 S. 1040 nationality confirming the performance of an expatriating act (provided that the voluntary relinquishment was later confirmed by the issuance of a certificate of loss of nationality). 1040 The date the State Department issued a certificate of loss of nationality. 1040 The date that a U. 1040 S. 1040 court canceled your certificate of naturalization. 1040 Former long-term resident. 1040   You are considered to have terminated your long-term residency on the earliest of the following dates. 1040 The date you voluntarily relinquished your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U. 1040 S. 1040 consular or immigration officer, and the Department of Homeland Security determined that you have, in fact, abandoned your lawful permanent resident status. 1040 The date you became subject to a final administrative order for your removal from the United States under the Immigration and Nationality Act and you actually left the United States as a result of that order. 1040 If you were a dual resident of the United States and a country with which the United States has an income tax treaty, the date you began to be treated as a resident of that country and you determined that, for purposes of the treaty, you are a resident of the treaty country and notify the IRS of that treatment on Forms 8833 and 8854. 1040 See Effect of Tax Treaties in chapter 1 for more information about dual residents. 1040 How To Figure the Expatriation Tax (If You Expatriate After June 16, 2008) In the year you expatriate, you are subject to income tax on the net unrealized gain (or loss) in your property as if the property had been sold for its fair market value on the day before your expatriation date (“mark-to-market tax”). 1040 This applies to most types of property interests you held on the date of relinquishment of citizenship or termination of residency. 1040 But see Exceptions , later. 1040 Gains arising from deemed sales must be taken into account for the tax year of the deemed sale without regard to other U. 1040 S. 1040 internal revenue laws. 1040 Losses from deemed sales must be taken into account to the extent otherwise provided under U. 1040 S. 1040 internal revenue laws. 1040 However, Internal Revenue Code section 1091 (relating to the disallowance of losses on wash sales of stock and securities) does not apply. 1040 The net gain that you otherwise must include in your income is reduced (but not below zero) by: $600,000 if you expatriated or terminated residency before January 1, 2009. 1040 $626,000 if you expatriated or terminated residency in 2009. 1040 $627,000 if you expatriated or terminated residency in 2010. 1040 $636,000 if you expatriated or terminated residency in 2011. 1040 $651,000 if you expatriated or terminated residency in 2012. 1040 $668,000 if you expatriated or terminated residency in 2013. 1040 Exceptions. 1040   The mark-to-market tax does not apply to the following. 1040 Eligible deferred compensation items. 1040 Ineligible deferred compensation items. 1040 Interests in nongrantor trusts. 1040 Specified tax deferred accounts. 1040 Instead, items (1) and (3) may be subject to withholding at source. 1040 In the case of item (2), you are treated as receiving the present value of your accrued benefit as of the day before the expatriation date. 1040 In the case of item (4), you are treated as receiving a distribution of your entire interest in the account on the day before your expatriation date. 1040 See paragraphs (d), (e), and (f) of section 877A for more information. 1040 Expatriation Tax Return If you expatriated or terminated your U. 1040 S. 1040 residency, or you are subject to the expatriation rules (as discussed earlier in the first paragraph under Expatriation After June 16, 2008), you must file Form 8854. 1040 Attach it to Form 1040 or Form 1040NR if you are required to file either of those forms. 1040 Deferral of payment of mark-to-market tax. 1040   You can make an irrevocable election to defer payment of the mark-to-market tax imposed on the deemed sale of property. 1040 If you make this election, the following rules apply. 1040 You can make the election on a property-by-property basis. 1040 The deferred tax attributable to a particular property is due on the return for the tax year in which you dispose of the property. 1040 Interest is charged for the period the tax is deferred. 1040 The due date for the payment of the deferred tax cannot be extended beyond the earlier of the following dates. 1040 The due date of the return required for the year of death. 1040 The time that the security provided for the property fails to be adequate. 1040 See item (6) below. 1040 You make the election on Form 8854. 1040 You must provide adequate security (such as a bond). 1040 You must make an irrevocable waiver of any right under any treaty of the United States which would preclude assessment or collection of the mark-to-market tax. 1040   For more information about the deferral of payment, see the Instructions for Form 8854. 1040 Prev  Up  Next   Home   More Online Publications
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Tax Relief for Victims of March 11 Floods in South Dakota

Updated 9/02/11 to include Yankton county.

SD-2011-19, August 24, 2011

ST. PAUL — Victims of flooding that began on March 11, 2011 in parts of South Dakota may qualify for tax relief from the Internal Revenue Service.

The President has declared the following counties a federal disaster area: Charles Mix, Hughes, Stanley, Union and Yankton. Individuals who reside or have a business in these counties may qualify for tax relief.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after March 11 and on or before June 30 have been postponed to June 30. This includes the April 18 deadline for filing 2010 individual income tax returns, making income tax payments and making 2010 contributions to an individual retirement account (IRA). This also includes the estimated tax payment for the second quarter of 2011 normally due June 15.

In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after March 11 and on or before March 28, 2011, as long as the deposits were made by March 28, 2011.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request this tax relief.

Covered Disaster Area

The counties listed above constitute a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and are entitled to the relief detailed below.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until June 30 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after March 11 and on or before June 30.

The IRS also gives affected taxpayers until June 30 to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (August 20, 2007), that are due to be performed on or after March 11 and on or before June 30.

This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise tax deposits due on or after March 11 and on or before March 28 provided the taxpayer made these deposits by March 28.

Casualty Losses

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.
Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “South Dakota/Flooding” at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

Taxpayers may download forms and publications from the official IRS website, irs.gov, or order them by calling 1-800-TAX-FORM (1-800-829-3676). The IRS toll-free number for general tax questions is 1-800-829-1040.

Related Information

Page Last Reviewed or Updated: 20-Mar-2014

The 1040

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