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1040ez Worksheet

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1040ez Worksheet

1040ez worksheet 4. 1040ez worksheet   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. 1040ez worksheet Payments from checking accounts. 1040ez worksheet Amounts paid within 30 days. 1040ez worksheet Optional method for determining date of reallocation. 1040ez worksheet Interest on a segregated account. 1040ez worksheet How to report. 1040ez worksheet Interest You Can DeductStatement. 1040ez worksheet Expenses paid to obtain a mortgage. 1040ez worksheet Prepayment penalty. 1040ez worksheet De minimis OID. 1040ez worksheet Constant-yield method. 1040ez worksheet Loan or mortgage ends. 1040ez worksheet Interest You Cannot DeductPenalties. 1040ez worksheet Who is a key person? Exceptions for pre-June 1997 contracts. 1040ez worksheet Interest allocated to unborrowed policy cash value. 1040ez worksheet Capitalization of Interest When To Deduct InterestPrepaid interest. 1040ez worksheet Discounted loan. 1040ez worksheet Refunds of interest. 1040ez worksheet Prepaid interest. 1040ez worksheet Discounted loan. 1040ez worksheet Tax deficiency. 1040ez worksheet Related person. 1040ez worksheet Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. 1040ez worksheet Introduction This chapter discusses the tax treatment of business interest expense. 1040ez worksheet Business interest expense is an amount charged for the use of money you borrowed for business activities. 1040ez worksheet Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. 1040ez worksheet Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. 1040ez worksheet 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. 1040ez worksheet Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. 1040ez worksheet If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. 1040ez worksheet Allocate your interest expense to the following categories. 1040ez worksheet Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. 1040ez worksheet You allocate loan proceeds by tracing disbursements to specific uses. 1040ez worksheet The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. 1040ez worksheet Secured loan. 1040ez worksheet   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. 1040ez worksheet Example. 1040ez worksheet You secure a loan with property used in your business. 1040ez worksheet You use the loan proceeds to buy an automobile for personal use. 1040ez worksheet You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. 1040ez worksheet    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. 1040ez worksheet The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. 1040ez worksheet For more information, see Publication 936. 1040ez worksheet Allocation period. 1040ez worksheet   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. 1040ez worksheet The date the loan is repaid. 1040ez worksheet The date the loan is reallocated to another use. 1040ez worksheet Proceeds not disbursed to borrower. 1040ez worksheet   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. 1040ez worksheet This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. 1040ez worksheet Proceeds deposited in borrower's account. 1040ez worksheet   Treat loan proceeds deposited in an account as property held for investment. 1040ez worksheet It does not matter whether the account pays interest. 1040ez worksheet Any interest you pay on the loan is investment interest expense. 1040ez worksheet If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. 1040ez worksheet Example. 1040ez worksheet Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. 1040ez worksheet No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. 1040ez worksheet On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. 1040ez worksheet On September 4, Celina uses an additional $40,000 from the account for personal purposes. 1040ez worksheet Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. 1040ez worksheet From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. 1040ez worksheet From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. 1040ez worksheet Order of funds spent. 1040ez worksheet   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. 1040ez worksheet Any unborrowed amounts held in the same account. 1040ez worksheet Any amounts deposited after these loan proceeds. 1040ez worksheet Example. 1040ez worksheet On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. 1040ez worksheet The following table shows the transactions in her account during the tax year. 1040ez worksheet Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. 1040ez worksheet She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. 1040ez worksheet She treats the $800 used for an investment as made entirely from the proceeds of Loan C. 1040ez worksheet She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. 1040ez worksheet For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. 1040ez worksheet Payments from checking accounts. 1040ez worksheet   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. 1040ez worksheet You can treat checks written on the same day as written in any order. 1040ez worksheet Amounts paid within 30 days. 1040ez worksheet   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. 1040ez worksheet This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. 1040ez worksheet   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. 1040ez worksheet If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. 1040ez worksheet   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. 1040ez worksheet Example. 1040ez worksheet Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. 1040ez worksheet Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. 1040ez worksheet Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. 1040ez worksheet Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. 1040ez worksheet In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. 1040ez worksheet Optional method for determining date of reallocation. 1040ez worksheet   You can use the following method to determine the date loan proceeds are reallocated to another use. 1040ez worksheet You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. 1040ez worksheet The first day of that month. 1040ez worksheet The date the loan proceeds are deposited in the account. 1040ez worksheet However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. 1040ez worksheet Interest on a segregated account. 1040ez worksheet   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. 1040ez worksheet When the interest earned is used up, any remaining payments are from loan proceeds. 1040ez worksheet Example. 1040ez worksheet You borrowed $20,000 and used the proceeds of this loan to open a new savings account. 1040ez worksheet When the account had earned interest of $867, you withdrew $20,000 for personal purposes. 1040ez worksheet You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). 1040ez worksheet All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. 1040ez worksheet The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. 1040ez worksheet The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. 1040ez worksheet Loan repayment. 1040ez worksheet   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. 1040ez worksheet Personal use. 1040ez worksheet Investments and passive activities (other than those included in (3)). 1040ez worksheet Passive activities in connection with a rental real estate activity in which you actively participate. 1040ez worksheet Former passive activities. 1040ez worksheet Trade or business use and expenses for certain low-income housing projects. 1040ez worksheet Line of credit (continuous borrowings). 1040ez worksheet   The following rules apply if you have a line of credit or similar arrangement. 1040ez worksheet Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. 1040ez worksheet Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. 1040ez worksheet Treat these loans as repaid in the order shown on the loan agreement. 1040ez worksheet Loan refinancing. 1040ez worksheet   Allocate the replacement loan to the same uses to which the repaid loan was allocated. 1040ez worksheet Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. 1040ez worksheet Debt-financed distribution. 1040ez worksheet   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. 1040ez worksheet The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. 1040ez worksheet How to report. 1040ez worksheet   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). 1040ez worksheet If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). 1040ez worksheet If the proceeds were used in an investment activity, enter the interest on Form 4952. 1040ez worksheet If the proceeds are used for personal purposes, the interest is generally not deductible. 1040ez worksheet Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. 1040ez worksheet Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. 1040ez worksheet It does not matter what type of property secures the loan. 1040ez worksheet You can deduct interest on a debt only if you meet all the following requirements. 1040ez worksheet You are legally liable for that debt. 1040ez worksheet Both you and the lender intend that the debt be repaid. 1040ez worksheet You and the lender have a true debtor-creditor relationship. 1040ez worksheet Partial liability. 1040ez worksheet   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. 1040ez worksheet Example. 1040ez worksheet You and your brother borrow money. 1040ez worksheet You are liable for 50% of the note. 1040ez worksheet You use your half of the loan in your business, and you make one-half of the loan payments. 1040ez worksheet You can deduct your half of the total interest payments as a business deduction. 1040ez worksheet Mortgage. 1040ez worksheet   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. 1040ez worksheet However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. 1040ez worksheet Statement. 1040ez worksheet   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. 1040ez worksheet You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. 1040ez worksheet A governmental unit is a person for purposes of furnishing the statement. 1040ez worksheet   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. 1040ez worksheet You cannot deduct this amount. 1040ez worksheet For information on how to report this refund, see Refunds of interest, later in this chapter. 1040ez worksheet Expenses paid to obtain a mortgage. 1040ez worksheet   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. 1040ez worksheet These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. 1040ez worksheet If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. 1040ez worksheet Prepayment penalty. 1040ez worksheet   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. 1040ez worksheet Interest on employment tax deficiency. 1040ez worksheet   Interest charged on employment taxes assessed on your business is deductible. 1040ez worksheet Original issue discount (OID). 1040ez worksheet   OID is a form of interest. 1040ez worksheet A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. 1040ez worksheet The OID is the difference between the stated redemption price at maturity and the issue price of the loan. 1040ez worksheet   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. 1040ez worksheet Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. 1040ez worksheet You generally deduct OID over the term of the loan. 1040ez worksheet Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. 1040ez worksheet De minimis OID. 1040ez worksheet   The OID is de minimis if it is less than one-fourth of 1% (. 1040ez worksheet 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). 1040ez worksheet   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. 1040ez worksheet On a constant-yield basis over the term of the loan. 1040ez worksheet On a straight-line basis over the term of the loan. 1040ez worksheet In proportion to stated interest payments. 1040ez worksheet In its entirety at maturity of the loan. 1040ez worksheet You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. 1040ez worksheet Example. 1040ez worksheet On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. 1040ez worksheet The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. 1040ez worksheet Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. 1040ez worksheet The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . 1040ez worksheet 0025 × 10). 1040ez worksheet You choose to deduct the OID on a straight-line basis over the term of the loan. 1040ez worksheet Beginning in 2013, you can deduct $150 each year for 10 years. 1040ez worksheet Constant-yield method. 1040ez worksheet   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. 1040ez worksheet You figure your deduction for the first year using the following steps. 1040ez worksheet Determine the issue price of the loan. 1040ez worksheet Generally, this equals the proceeds of the loan. 1040ez worksheet If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. 1040ez worksheet Multiply the result in (1) by the yield to maturity. 1040ez worksheet Subtract any qualified stated interest payments from the result in (2). 1040ez worksheet This is the OID you can deduct in the first year. 1040ez worksheet   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). 1040ez worksheet To get the adjusted issue price, add to the issue price any OID previously deducted. 1040ez worksheet Then follow steps (2) and (3) above. 1040ez worksheet   The yield to maturity is generally shown in the literature you receive from your lender. 1040ez worksheet If you do not have this information, consult your lender or tax advisor. 1040ez worksheet In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. 1040ez worksheet Example. 1040ez worksheet The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. 1040ez worksheet The yield to maturity on your loan is 10. 1040ez worksheet 2467%, compounded annually. 1040ez worksheet For 2013, you can deduct $93 [($98,500 × . 1040ez worksheet 102467) − $10,000]. 1040ez worksheet For 2014, you can deduct $103 [($98,593 × . 1040ez worksheet 102467) − $10,000]. 1040ez worksheet Loan or mortgage ends. 1040ez worksheet   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. 1040ez worksheet A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. 1040ez worksheet If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. 1040ez worksheet See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. 1040ez worksheet Points. 1040ez worksheet   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. 1040ez worksheet These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. 1040ez worksheet If any of these charges (points) are solely for the use of money, they are interest. 1040ez worksheet   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. 1040ez worksheet However, you can choose to fully deduct points in the year paid if you meet certain tests. 1040ez worksheet For exceptions to the general rule, see Publication 936. 1040ez worksheet The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. 1040ez worksheet Partial payments on a nontax debt. 1040ez worksheet   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. 1040ez worksheet You can deduct only the interest. 1040ez worksheet This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. 1040ez worksheet Installment purchase. 1040ez worksheet   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. 1040ez worksheet If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). 1040ez worksheet The amount recharacterized as interest reduces your basis in the property and increases your interest expense. 1040ez worksheet For more information on installment sales and unstated interest, see Publication 537. 1040ez worksheet Interest You Cannot Deduct Certain interest payments cannot be deducted. 1040ez worksheet In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. 1040ez worksheet You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. 1040ez worksheet Interest paid with funds borrowed from original lender. 1040ez worksheet   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. 1040ez worksheet You can deduct the interest expense once you start making payments on the new loan. 1040ez worksheet   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. 1040ez worksheet All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. 1040ez worksheet Capitalized interest. 1040ez worksheet   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. 1040ez worksheet See Capitalization of Interest, later. 1040ez worksheet In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. 1040ez worksheet Add this interest to the basis of the property. 1040ez worksheet Commitment fees or standby charges. 1040ez worksheet   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. 1040ez worksheet You may be able to deduct them as business expenses. 1040ez worksheet   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. 1040ez worksheet See Capitalization of Interest, later. 1040ez worksheet Interest on income tax. 1040ez worksheet   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. 1040ez worksheet Treat this interest as a business deduction only in figuring a net operating loss deduction. 1040ez worksheet Penalties. 1040ez worksheet   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. 1040ez worksheet You cannot deduct them. 1040ez worksheet Generally, you cannot deduct any fines or penalties. 1040ez worksheet Interest on loans with respect to life insurance policies. 1040ez worksheet   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. 1040ez worksheet   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. 1040ez worksheet However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. 1040ez worksheet Who is a key person?   A key person is an officer or 20% owner. 1040ez worksheet However, the number of individuals you can treat as key persons is limited to the greater of the following. 1040ez worksheet Five individuals. 1040ez worksheet The lesser of 5% of the total officers and employees of the company or 20 individuals. 1040ez worksheet Exceptions for pre-June 1997 contracts. 1040ez worksheet   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. 1040ez worksheet If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. 1040ez worksheet Interest allocated to unborrowed policy cash value. 1040ez worksheet   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. 1040ez worksheet This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. 1040ez worksheet For more information, see section 264(f) of the Internal Revenue Code. 1040ez worksheet Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. 1040ez worksheet The property must be produced by you for use in your trade or business or for sale to customers. 1040ez worksheet You cannot capitalize interest related to property that you acquire in any other manner. 1040ez worksheet Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. 1040ez worksheet Designated property is any of the following. 1040ez worksheet Real property. 1040ez worksheet Tangible personal property with a class life of 20 years or more. 1040ez worksheet Tangible personal property with an estimated production period of more than 2 years. 1040ez worksheet Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. 1040ez worksheet Property you produce. 1040ez worksheet   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. 1040ez worksheet Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. 1040ez worksheet Carrying charges. 1040ez worksheet   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. 1040ez worksheet You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. 1040ez worksheet For more information, see chapter 7. 1040ez worksheet Capitalized interest. 1040ez worksheet   Treat capitalized interest as a cost of the property produced. 1040ez worksheet You recover your interest when you sell or use the property. 1040ez worksheet If the property is inventory, recover capitalized interest through cost of goods sold. 1040ez worksheet If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. 1040ez worksheet Partnerships and S corporations. 1040ez worksheet   The interest capitalization rules are applied first at the partnership or S corporation level. 1040ez worksheet The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. 1040ez worksheet   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. 1040ez worksheet You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. 1040ez worksheet To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. 1040ez worksheet Additional information. 1040ez worksheet   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. 1040ez worksheet For more information, see sections 1. 1040ez worksheet 263A-8 through 1. 1040ez worksheet 263A-15 of the regulations and Notice 88-99. 1040ez worksheet Notice 88-99 is in Cumulative Bulletin 1988-2. 1040ez worksheet When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. 1040ez worksheet Cash method. 1040ez worksheet   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. 1040ez worksheet You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. 1040ez worksheet Prepaid interest. 1040ez worksheet   You generally cannot deduct any interest paid before the year it is due. 1040ez worksheet Interest paid in advance can be deducted only in the tax year in which it is due. 1040ez worksheet Discounted loan. 1040ez worksheet   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. 1040ez worksheet For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. 1040ez worksheet Refunds of interest. 1040ez worksheet   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. 1040ez worksheet If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. 1040ez worksheet Accrual method. 1040ez worksheet   Under an accrual method, you can deduct only interest that has accrued during the tax year. 1040ez worksheet Prepaid interest. 1040ez worksheet   See Prepaid interest, earlier. 1040ez worksheet Discounted loan. 1040ez worksheet   See Discounted loan, earlier. 1040ez worksheet Tax deficiency. 1040ez worksheet   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. 1040ez worksheet If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. 1040ez worksheet   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. 1040ez worksheet Related person. 1040ez worksheet   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. 1040ez worksheet The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. 1040ez worksheet See section 267 of the Internal Revenue Code for more information. 1040ez worksheet Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. 1040ez worksheet See Treatment of gift and demand loans, later, in this discussion. 1040ez worksheet A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. 1040ez worksheet A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. 1040ez worksheet A loan in exchange for a note that requires the payment of interest at the applicable federal rate. 1040ez worksheet An additional payment in an amount equal to the forgone interest. 1040ez worksheet The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. 1040ez worksheet Forgone interest. 1040ez worksheet   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. 1040ez worksheet Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. 1040ez worksheet Internal Revenue Bulletins are available on the IRS web site at www. 1040ez worksheet irs. 1040ez worksheet gov/irb. 1040ez worksheet You can also contact an IRS office to get these rates. 1040ez worksheet Loans subject to the rules. 1040ez worksheet   The rules for below-market loans apply to the following. 1040ez worksheet Gift loans (below-market loans where the forgone interest is in the nature of a gift). 1040ez worksheet Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). 1040ez worksheet Corporation-shareholder loans. 1040ez worksheet Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). 1040ez worksheet Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). 1040ez worksheet   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. 1040ez worksheet Treatment of gift and demand loans. 1040ez worksheet   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. 1040ez worksheet ) equal to the forgone interest on the loan. 1040ez worksheet You are then treated as transferring this amount back to the lender as interest. 1040ez worksheet These transfers are considered to occur annually, generally on December 31. 1040ez worksheet If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. 1040ez worksheet The lender must report it as interest income. 1040ez worksheet Limit on forgone interest for gift loans of $100,000 or less. 1040ez worksheet   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. 1040ez worksheet This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. 1040ez worksheet If the borrower's net investment income is $1,000 or less, it is treated as zero. 1040ez worksheet This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. 1040ez worksheet Treatment of term loans. 1040ez worksheet   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. 1040ez worksheet ) on the date the loan is made. 1040ez worksheet This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. 1040ez worksheet The same amount is treated as original issue discount on the loan. 1040ez worksheet See Original issue discount (OID) under Interest You Can Deduct, earlier. 1040ez worksheet Exceptions for loans of $10,000 or less. 1040ez worksheet   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. 1040ez worksheet This exception applies only to the following. 1040ez worksheet Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. 1040ez worksheet Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. 1040ez worksheet This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. 1040ez worksheet Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. 1040ez worksheet Exceptions for loans without significant tax effect. 1040ez worksheet   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. 1040ez worksheet Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. 1040ez worksheet Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. 1040ez worksheet Certain employee-relocation loans. 1040ez worksheet Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. 1040ez worksheet S. 1040ez worksheet trade or business and not exempt from U. 1040ez worksheet S. 1040ez worksheet tax under an income tax treaty. 1040ez worksheet Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. 1040ez worksheet Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. 1040ez worksheet Consider all the following factors. 1040ez worksheet Whether items of income and deduction generated by the loan offset each other. 1040ez worksheet The amount of the items. 1040ez worksheet The cost of complying with the below-market loan provisions if they were to apply. 1040ez worksheet Any reasons, other than taxes, for structuring the transaction as a below-market loan. 1040ez worksheet Exception for loans to qualified continuing care facilities. 1040ez worksheet   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. 1040ez worksheet A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. 1040ez worksheet Designed to provide services under continuing care contracts (defined below). 1040ez worksheet Includes an independent living unit, and either an assisted living or nursing facility, or both. 1040ez worksheet Substantially all of the independent living unit residents are covered by continuing care contracts. 1040ez worksheet A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. 1040ez worksheet The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. 1040ez worksheet The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. 1040ez worksheet The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. 1040ez worksheet For more information, see section 7872(h) of the Internal Revenue Code. 1040ez worksheet Sale or exchange of property. 1040ez worksheet   Different rules generally apply to a loan connected with the sale or exchange of property. 1040ez worksheet If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. 1040ez worksheet However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. 1040ez worksheet See Unstated Interest and Original Issue Discount (OID) in Publication 537. 1040ez worksheet More information. 1040ez worksheet   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. 1040ez worksheet 7872-5 of the regulations. 1040ez worksheet Prev  Up  Next   Home   More Online Publications
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The 1040ez Worksheet

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