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2010 Tax Returns Online

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2010 Tax Returns Online

2010 tax returns online 4. 2010 tax returns online   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. 2010 tax returns online S. 2010 tax returns online 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. 2010 tax returns online Useful Items - You may want to see: Publication 519 U. 2010 tax returns online S. 2010 tax returns online Tax Guide for Aliens 570 Tax Guide for Individuals With Income from U. 2010 tax returns online S. 2010 tax returns online Possessions 596 Earned Income Credit (EIC) Form (and Instructions) 1040X Amended U. 2010 tax returns online S. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online If you are a U. 2010 tax returns online S. 2010 tax returns online citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. 2010 tax returns online However, you may qualify to exclude from income up to $97,600 of your foreign earnings. 2010 tax returns online In addition, you can exclude or deduct certain foreign housing amounts. 2010 tax returns online See Foreign Earned Income Exclusion and Foreign Housing Exclusion and Deduction, later. 2010 tax returns online You also may be entitled to exclude from income the value of meals and lodging provided to you by your employer. 2010 tax returns online See Exclusion of Meals and Lodging, later. 2010 tax returns online 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. 2010 tax returns online Your tax home must be in a foreign country. 2010 tax returns online You must have foreign earned income. 2010 tax returns online You must be one of the following. 2010 tax returns online A U. 2010 tax returns online S. 2010 tax returns online citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. 2010 tax returns online A U. 2010 tax returns online S. 2010 tax returns online 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. 2010 tax returns online A U. 2010 tax returns online S. 2010 tax returns online citizen or a U. 2010 tax returns online S. 2010 tax returns online 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. 2010 tax returns online See Publication 519 to find out if you are a U. 2010 tax returns online S. 2010 tax returns online resident alien for tax purposes and whether you keep that alien status when you temporarily work abroad. 2010 tax returns online If you are a nonresident alien married to a U. 2010 tax returns online S. 2010 tax returns online 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. 2010 tax returns online For information on making the choice, see the discussion in chapter 1 under Nonresident Alien Spouse Treated as a Resident . 2010 tax returns online Waiver of minimum time requirements. 2010 tax returns online   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. 2010 tax returns online This is fully explained under Waiver of Time Requirements , later. 2010 tax returns online   See Figure 4-A and information in this chapter to determine if you are eligible to claim either exclusion or the deduction. 2010 tax returns online 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. 2010 tax returns online Bona fide residence and physical presence are explained later. 2010 tax returns online 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. 2010 tax returns online Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. 2010 tax returns online Having a “tax home” in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online However, your abode is not necessarily in the United States while you are temporarily in the United States. 2010 tax returns online 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. 2010 tax returns online “Abode” has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. 2010 tax returns online It does not mean your principal place of business. 2010 tax returns online “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home. 2010 tax returns online ” The location of your abode often will depend on where you maintain your economic, family, and personal ties. 2010 tax returns online Example 1. 2010 tax returns online 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. 2010 tax returns online You return to your family residence in the United States during your off periods. 2010 tax returns online You are considered to have an abode in the United States and do not satisfy the tax home test in the foreign country. 2010 tax returns online You cannot claim either of the exclusions or the housing deduction. 2010 tax returns online Example 2. 2010 tax returns online For several years, you were a marketing executive with a producer of machine tools in Toledo, Ohio. 2010 tax returns online 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. 2010 tax returns online Before you left, you distributed business cards showing your business and home addresses in London. 2010 tax returns online You kept ownership of your home in Toledo but rented it to another family. 2010 tax returns online You placed your car in storage. 2010 tax returns online In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London. 2010 tax returns online Shortly after moving, you leased a car and you and your spouse got British driving licenses. 2010 tax returns online Your entire family got library cards for the local public library. 2010 tax returns online You and your spouse opened bank accounts with a London bank and secured consumer credit. 2010 tax returns online 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. 2010 tax returns online Your abode is in London for the time you live there. 2010 tax returns online You satisfy the tax home test in the foreign country. 2010 tax returns online Please click here for the text description of the image. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online If you expect it to last for more than 1 year, it is indefinite. 2010 tax returns online 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. 2010 tax returns online Once your expectation changes, it is indefinite. 2010 tax returns online 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. 2010 tax returns online A foreign country includes any territory under the sovereignty of a government other than that of the United States. 2010 tax returns online The term “foreign country” includes the country's airspace and territorial waters, but not international waters and the airspace above them. 2010 tax returns online 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. 2010 tax returns online The term “foreign country” does not include Antarctica or U. 2010 tax returns online S. 2010 tax returns online possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U. 2010 tax returns online S. 2010 tax returns online Virgin Islands, and Johnston Island. 2010 tax returns online 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. 2010 tax returns online American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands Residence or presence in a U. 2010 tax returns online S. 2010 tax returns online possession does not qualify you for the foreign earned income exclusion. 2010 tax returns online You may, however, qualify for an exclusion of your possession income on your U. 2010 tax returns online S. 2010 tax returns online return. 2010 tax returns online American Samoa. 2010 tax returns online   There is a possession exclusion available to individuals who are bona fide residents of American Samoa for the entire tax year. 2010 tax returns online Gross income from sources within American Samoa may be eligible for this exclusion. 2010 tax returns online Income that is effectively connected with the conduct of a trade or business within American Samoa also may be eligible for this exclusion. 2010 tax returns online Use Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, to figure the exclusion. 2010 tax returns online Guam and the Commonwealth of the Northern Mariana Islands. 2010 tax returns online   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. 2010 tax returns online   For more information, see Publication 570. 2010 tax returns online Puerto Rico and U. 2010 tax returns online S. 2010 tax returns online Virgin Islands Residents of Puerto Rico and the U. 2010 tax returns online S. 2010 tax returns online Virgin Islands cannot claim the foreign earned income exclusion or the foreign housing exclusion. 2010 tax returns online Puerto Rico. 2010 tax returns online   Generally, if you are a U. 2010 tax returns online S. 2010 tax returns online citizen who is a bona fide resident of Puerto Rico for the entire tax year, you are not subject to U. 2010 tax returns online S. 2010 tax returns online tax on income from Puerto Rican sources. 2010 tax returns online This does not include amounts paid for services performed as an employee of the United States. 2010 tax returns online However, you are subject to U. 2010 tax returns online S. 2010 tax returns online tax on your income from sources outside Puerto Rico. 2010 tax returns online In figuring your U. 2010 tax returns online S. 2010 tax returns online tax, you cannot deduct expenses allocable to income not subject to tax. 2010 tax returns online 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. 2010 tax returns online You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either: A U. 2010 tax returns online S. 2010 tax returns online citizen, or A U. 2010 tax returns online S. 2010 tax returns online resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect. 2010 tax returns online You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online Bona fide residence. 2010 tax returns online   To meet the bona fide residence test, you must have established a bona fide residence in a foreign country. 2010 tax returns online   Your bona fide residence is not necessarily the same as your domicile. 2010 tax returns online Your domicile is your permanent home, the place to which you always return or intend to return. 2010 tax returns online Example. 2010 tax returns online You could have your domicile in Cleveland, Ohio, and a bona fide residence in Edinburgh, Scotland, if you intend to return eventually to Cleveland. 2010 tax returns online The fact that you go to Scotland does not automatically make Scotland your bona fide residence. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online You are clearly not a resident of Scotland in the first instance. 2010 tax returns online However, in the second, you are a resident because your stay in Scotland appears to be permanent. 2010 tax returns online 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. 2010 tax returns online Determination. 2010 tax returns online   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. 2010 tax returns online   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. 2010 tax returns online 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. 2010 tax returns online IRS cannot make this determination until you file Form 2555. 2010 tax returns online Statement to foreign authorities. 2010 tax returns online   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. 2010 tax returns online Special agreements and treaties. 2010 tax returns online   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. 2010 tax returns online 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. 2010 tax returns online Example 1. 2010 tax returns online You are a U. 2010 tax returns online S. 2010 tax returns online citizen employed in the United Kingdom by a U. 2010 tax returns online S. 2010 tax returns online employer under contract with the U. 2010 tax returns online S. 2010 tax returns online Armed Forces. 2010 tax returns online You are not subject to the North Atlantic Treaty Status of Forces Agreement. 2010 tax returns online You may be a bona fide resident of the United Kingdom. 2010 tax returns online Example 2. 2010 tax returns online You are a U. 2010 tax returns online S. 2010 tax returns online 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. 2010 tax returns online You are not a bona fide resident of the United Kingdom. 2010 tax returns online Example 3. 2010 tax returns online You are a U. 2010 tax returns online S. 2010 tax returns online citizen employed in Japan by a U. 2010 tax returns online S. 2010 tax returns online employer under contract with the U. 2010 tax returns online S. 2010 tax returns online Armed Forces. 2010 tax returns online You are subject to the agreement of the Treaty of Mutual Cooperation and Security between the United States and Japan. 2010 tax returns online Being subject to the agreement does not make you a bona fide resident of Japan. 2010 tax returns online Example 4. 2010 tax returns online You are a U. 2010 tax returns online S. 2010 tax returns online citizen employed as an “official” by the United Nations in Switzerland. 2010 tax returns online You are exempt from Swiss taxation on the salary or wages paid to you by the United Nations. 2010 tax returns online This does not prevent you from being a bona fide resident of Switzerland. 2010 tax returns online Effect of voting by absentee ballot. 2010 tax returns online   If you are a U. 2010 tax returns online S. 2010 tax returns online 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. 2010 tax returns online   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. 2010 tax returns online Uninterrupted period including entire tax year. 2010 tax returns online   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. 2010 tax returns online An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis. 2010 tax returns online   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. 2010 tax returns online 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. 2010 tax returns online Example 1. 2010 tax returns online You arrived with your family in Lisbon, Portugal, on November 1, 2011. 2010 tax returns online Your assignment is indefinite, and you intend to live there with your family until your company sends you to a new post. 2010 tax returns online You immediately established residence there. 2010 tax returns online You spent April of 2012 at a business conference in the United States. 2010 tax returns online Your family stayed in Lisbon. 2010 tax returns online Immediately following the conference, you returned to Lisbon and continued living there. 2010 tax returns online 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. 2010 tax returns online Example 2. 2010 tax returns online Assume the same facts as in Example 1, except that you transferred back to the United States on December 13, 2012. 2010 tax returns online 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. 2010 tax returns online You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test (discussed later). 2010 tax returns online Bona fide resident for part of a year. 2010 tax returns online   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. 2010 tax returns online Your period of bona fide residence can include an entire tax year plus parts of 2 other tax years. 2010 tax returns online Example. 2010 tax returns online You were a bona fide resident of Singapore from March 1, 2011, through September 14, 2013. 2010 tax returns online On September 15, 2013, you returned to the United States. 2010 tax returns online 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. 2010 tax returns online Reassignment. 2010 tax returns online   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. 2010 tax returns online Example 1. 2010 tax returns online You were a resident of Pakistan from October 1, 2012, through November 30, 2013. 2010 tax returns online On December 1, 2013, you and your family returned to the United States to wait for an assignment to another foreign country. 2010 tax returns online Your household goods also were returned to the United States. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test, discussed later. 2010 tax returns online Example 2. 2010 tax returns online 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. 2010 tax returns online On December 1, 2013, you and your family returned to the United States for a month's vacation. 2010 tax returns online On January 2, 2014, you arrived in Turkey for your new assignment. 2010 tax returns online Because you did not interrupt your bona fide residence abroad, you meet the bona fide residence test. 2010 tax returns online 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. 2010 tax returns online The 330 days do not have to be consecutive. 2010 tax returns online Any U. 2010 tax returns online S. 2010 tax returns online citizen or resident alien can use the physical presence test to qualify for the exclusions and the deduction. 2010 tax returns online The physical presence test is based only on how long you stay in a foreign country or countries. 2010 tax returns online 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. 2010 tax returns online 330 full days. 2010 tax returns online   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. 2010 tax returns online You can count days you spent abroad for any reason. 2010 tax returns online You do not have to be in a foreign country only for employment purposes. 2010 tax returns online You can be on vacation. 2010 tax returns online   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. 2010 tax returns online Exception. 2010 tax returns online   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. 2010 tax returns online See Waiver of Time Requirements, later. 2010 tax returns online Full day. 2010 tax returns online   A full day is a period of 24 consecutive hours, beginning at midnight. 2010 tax returns online Travel. 2010 tax returns online    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. 2010 tax returns online Example. 2010 tax returns online You leave the United States for France by air on June 10. 2010 tax returns online You arrive in France at 9:00 a. 2010 tax returns online m. 2010 tax returns online on June 11. 2010 tax returns online Your first full day of physical presence in France is June 12. 2010 tax returns online Passing over foreign country. 2010 tax returns online   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. 2010 tax returns online Example. 2010 tax returns online You leave the United States by air at 9:30 a. 2010 tax returns online m. 2010 tax returns online on June 10 to travel to Kenya. 2010 tax returns online You pass over western Africa at 11:00 p. 2010 tax returns online m. 2010 tax returns online on June 10 and arrive in Kenya at 12:30 a. 2010 tax returns online m. 2010 tax returns online on June 11. 2010 tax returns online Your first full day in a foreign country is June 11. 2010 tax returns online Change of location. 2010 tax returns online   You can move about from one place to another in a foreign country or to another foreign country without losing full days. 2010 tax returns online 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. 2010 tax returns online Example 1. 2010 tax returns online You leave Ireland by air at 11:00 p. 2010 tax returns online m. 2010 tax returns online on July 6 and arrive in Sweden at 5:00 a. 2010 tax returns online m. 2010 tax returns online on July 7. 2010 tax returns online Your trip takes less than 24 hours and you lose no full days. 2010 tax returns online Example 2. 2010 tax returns online You leave Norway by ship at 10:00 p. 2010 tax returns online m. 2010 tax returns online on July 6 and arrive in Portugal at 6:00 a. 2010 tax returns online m. 2010 tax returns online on July 8. 2010 tax returns online 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. 2010 tax returns online If you remain in Portugal, your next full day in a foreign country is July 9. 2010 tax returns online In United States while in transit. 2010 tax returns online   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. 2010 tax returns online You are treated as traveling over areas not within any foreign country. 2010 tax returns online    Please click here for the text description of the image. 2010 tax returns online Figure 4-B How to figure the 12-month period. 2010 tax returns online   There are four rules you should know when figuring the 12-month period. 2010 tax returns online Your 12-month period can begin with any day of the month. 2010 tax returns online It ends the day before the same calendar day, 12 months later. 2010 tax returns online Your 12-month period must be made up of consecutive months. 2010 tax returns online Any 12-month period can be used if the 330 days in a foreign country fall within that period. 2010 tax returns online 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. 2010 tax returns online You can choose the 12-month period that gives you the greatest exclusion. 2010 tax returns online In determining whether the 12-month period falls within a longer stay in the foreign country, 12-month periods can overlap one another. 2010 tax returns online Example 1. 2010 tax returns online You are a construction worker who works on and off in a foreign country over a 20-month period. 2010 tax returns online 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. 2010 tax returns online Example 2. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online By overlapping the 12-month periods in this way, you meet the physical presence test for the whole 20-month period. 2010 tax returns online See Figure 4-B, on the previous page. 2010 tax returns online Waiver of Time Requirements Both the bona fide residence test and the physical presence test contain minimum time requirements. 2010 tax returns online 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. 2010 tax returns online You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online U. 2010 tax returns online S. 2010 tax returns online Travel Restrictions If you are present in a foreign country in violation of U. 2010 tax returns online S. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online For 2013, the only country to which travel restrictions applied was Cuba. 2010 tax returns online The restrictions applied for the entire year. 2010 tax returns online However, individuals working at the U. 2010 tax returns online S. 2010 tax returns online Naval Base at Guantanamo Bay in Cuba are not in violation of U. 2010 tax returns online S. 2010 tax returns online law. 2010 tax returns online Personal service income earned by individuals at the base is eligible for the foreign earned income exclusion provided the other requirements are met. 2010 tax returns online 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. 2010 tax returns online Foreign earned income generally is income you receive for services you perform during a period in which you meet both of the following requirements. 2010 tax returns online Your tax home is in a foreign country. 2010 tax returns online You meet either the bona fide residence test or the physical presence test. 2010 tax returns online To determine whether your tax home is in a foreign country, see Tax Home in Foreign Country, earlier. 2010 tax returns online 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. 2010 tax returns online Foreign earned income does not include the following amounts. 2010 tax returns online 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. 2010 tax returns online Pension or annuity payments you receive, including social security benefits (see Pensions and annuities, later). 2010 tax returns online Pay you receive as an employee of the U. 2010 tax returns online S. 2010 tax returns online Government. 2010 tax returns online (See U. 2010 tax returns online S. 2010 tax returns online Government Employees, later. 2010 tax returns online ) Amounts you include in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract. 2010 tax returns online 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. 2010 tax returns online Payments you receive after the end of the tax year following the tax year in which you performed the services that earned the income. 2010 tax returns online Earned income. 2010 tax returns online   This is pay for personal services performed, such as wages, salaries, or professional fees. 2010 tax returns online The list that follows classifies many types of income into three categories. 2010 tax returns online The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both. 2010 tax returns online For more information on earned and unearned income, see Earned and Unearned Income, later. 2010 tax returns online 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. 2010 tax returns online Noncash income. 2010 tax returns online   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. 2010 tax returns online Allowances or reimbursements. 2010 tax returns online   Earned income includes allowances or reimbursements you receive, such as the following amounts. 2010 tax returns online    Cost-of-living allowances. 2010 tax returns online Overseas differential. 2010 tax returns online Family allowance. 2010 tax returns online Reimbursement for education or education allowance. 2010 tax returns online Home leave allowance. 2010 tax returns online Quarters allowance. 2010 tax returns online Reimbursement for moving or moving allowance (unless excluded from income as discussed later in Reimbursement of employee expenses under Earned and Unearned Income). 2010 tax returns online Source of Earned Income The source of your earned income is the place where you perform the services for which you received the income. 2010 tax returns online Foreign earned income is income you receive for working in a foreign country. 2010 tax returns online Where or how you are paid has no effect on the source of the income. 2010 tax returns online 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. 2010 tax returns online Example. 2010 tax returns online You are a U. 2010 tax returns online S. 2010 tax returns online citizen, a bona fide resident of Canada, and working as a mining engineer. 2010 tax returns online Your salary is $76,800 per year. 2010 tax returns online You also receive a $6,000 cost-of-living allowance, and a $6,000 education allowance. 2010 tax returns online Your employment contract did not indicate that you were entitled to these allowances only while outside the United States. 2010 tax returns online Your total income is $88,800. 2010 tax returns online You work a 5-day week, Monday through Friday. 2010 tax returns online After subtracting your vacation, you have a total of 240 workdays in the year. 2010 tax returns online You worked in the United States during the year for 6 weeks (30 workdays). 2010 tax returns online The following shows how to figure the part of your income that is for work done in Canada during the year. 2010 tax returns online   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. 2010 tax returns online Earned and Unearned Income Earned income was defined earlier as pay for personal services performed. 2010 tax returns online Some types of income are not easily identified as earned or unearned income. 2010 tax returns online Some of these types of income are further explained here. 2010 tax returns online Income from a sole proprietorship or partnership. 2010 tax returns online   Income from a business in which capital investment is an important part of producing the income may be unearned income. 2010 tax returns online 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. 2010 tax returns online Capital a factor. 2010 tax returns online   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. 2010 tax returns online   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. 2010 tax returns online Because you do not have a net profit, the 30% limit does not apply. 2010 tax returns online Example 1. 2010 tax returns online You are a U. 2010 tax returns online S. 2010 tax returns online citizen and meet the bona fide residence test. 2010 tax returns online You invest in a partnership based in Cameroon that is engaged solely in selling merchandise outside the United States. 2010 tax returns online You perform no services for the partnership. 2010 tax returns online At the end of the tax year, your share of the net profits is $80,000. 2010 tax returns online The entire $80,000 is unearned income. 2010 tax returns online Example 2. 2010 tax returns online Assume that in Example 1 you spend time operating the business. 2010 tax returns online Your share of the net profits is $80,000; 30% of your share of the profits is $24,000. 2010 tax returns online 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. 2010 tax returns online Capital not a factor. 2010 tax returns online   If capital is not an income-producing factor and personal services produce the business income, the 30% rule does not apply. 2010 tax returns online The entire amount of business income is earned income. 2010 tax returns online Example. 2010 tax returns online You and Lou Green are management consultants and operate as equal partners in performing services outside the United States. 2010 tax returns online Because capital is not an income- producing factor, all the income from the partnership is considered earned income. 2010 tax returns online Income from a corporation. 2010 tax returns online   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. 2010 tax returns online Any amount over what is considered a reasonable salary is unearned income. 2010 tax returns online Example 1. 2010 tax returns online You are a U. 2010 tax returns online S. 2010 tax returns online citizen and an officer and stockholder of a corporation in Honduras. 2010 tax returns online You perform no work or service of any kind for the corporation. 2010 tax returns online During the tax year you receive a $10,000 “salary” from the corporation. 2010 tax returns online The $10,000 clearly is not for personal services and is unearned income. 2010 tax returns online Example 2. 2010 tax returns online You are a U. 2010 tax returns online S. 2010 tax returns online citizen and work full time as secretary-treasurer of your corporation. 2010 tax returns online During the tax year you receive $100,000 as salary from the corporation. 2010 tax returns online If $80,000 is a reasonable allowance as pay for the work you did, then $80,000 is earned income. 2010 tax returns online Stock options. 2010 tax returns online   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. 2010 tax returns online   If your gain on the disposition of stock you got by exercising an option is treated as capital gain, your gain is unearned income. 2010 tax returns online   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. 2010 tax returns online 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. 2010 tax returns online Any part of the earned income that is due to work you did outside the United States is foreign earned income. 2010 tax returns online   See Publication 525, Taxable and Nontaxable Income, for a discussion of the treatment of stock options. 2010 tax returns online Pensions and annuities. 2010 tax returns online    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. 2010 tax returns online Royalties. 2010 tax returns online   Royalties from the leasing of oil and mineral lands and patents generally are a form of rent or dividends and are unearned income. 2010 tax returns online   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. 2010 tax returns online Rental income. 2010 tax returns online   Generally, rental income is unearned income. 2010 tax returns online 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. 2010 tax returns online Example. 2010 tax returns online Larry Smith, a U. 2010 tax returns online S. 2010 tax returns online citizen living in Australia, owns and operates a rooming house in Sydney. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online It is all unearned income. 2010 tax returns online Professional fees. 2010 tax returns online   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. 2010 tax returns online Income of an artist. 2010 tax returns online   Income you receive from the sale of paintings you created is earned income. 2010 tax returns online Scholarships and fellowships. 2010 tax returns online   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. 2010 tax returns online 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. 2010 tax returns online    Certain scholarship and fellowship income may be exempt under other provisions. 2010 tax returns online See Publication 970, Tax Benefits for Education, chapter 1. 2010 tax returns online Use of employer's property or facilities. 2010 tax returns online   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. 2010 tax returns online 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. 2010 tax returns online Example. 2010 tax returns online You are privately employed and live in Japan all year. 2010 tax returns online You are paid a salary of $6,000 a month. 2010 tax returns online You live rent-free in a house provided by your employer that has a fair rental value of $3,000 a month. 2010 tax returns online The house is not provided for your employer's convenience. 2010 tax returns online You report on the calendar-year, cash basis. 2010 tax returns online 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. 2010 tax returns online Reimbursement of employee expenses. 2010 tax returns online   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. 2010 tax returns online   The expenses for which you are reimbursed are not considered allocable (related) to your earned income. 2010 tax returns online If expenses and reimbursement are equal, there is nothing to allocate to excluded income. 2010 tax returns online 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. 2010 tax returns online (See chapter 5. 2010 tax returns online ) 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. 2010 tax returns online   These rules do not apply to the following individuals. 2010 tax returns online Straight-commission salespersons. 2010 tax returns online 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. 2010 tax returns online Accountable plan. 2010 tax returns online   An accountable plan is a reimbursement or allowance arrangement that includes all three of the following rules. 2010 tax returns online The expenses covered under the plan must have a business connection. 2010 tax returns online The employee must adequately account to the employer for these expenses within a reasonable period of time. 2010 tax returns online The employee must return any excess reimbursement or allowance within a reasonable period of time. 2010 tax returns online Reimbursement of moving expenses. 2010 tax returns online   Reimbursement of moving expenses may be earned income. 2010 tax returns online 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. 2010 tax returns online This section discusses reimbursements that must be included in earned income. 2010 tax returns online Publication 521, Moving Expenses, discusses additional rules that apply to moving expense deductions and reimbursements. 2010 tax returns online   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. 2010 tax returns online   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. 2010 tax returns online 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. 2010 tax returns online Move from U. 2010 tax returns online S. 2010 tax returns online to foreign country. 2010 tax returns online   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. 2010 tax returns online 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. 2010 tax returns online   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. 2010 tax returns online To figure the amount earned in the year of the move, multiply the reimbursement by a fraction. 2010 tax returns online 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. 2010 tax returns online   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. 2010 tax returns online The part earned in each year is figured as shown in the following example. 2010 tax returns online Example. 2010 tax returns online You are a U. 2010 tax returns online S. 2010 tax returns online citizen working in the United States. 2010 tax returns online You were told in October 2012 that you were being transferred to a foreign country. 2010 tax returns online 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. 2010 tax returns online Your employer reimbursed you $2,000 in January 2013 for the part of the moving expense that you were not allowed to deduct. 2010 tax returns online 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. 2010 tax returns online You figure the part of the reimbursement for services performed in the foreign country in 2012 by multiplying the total reimbursement by a fraction. 2010 tax returns online 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. 2010 tax returns online The remaining part of the reimbursement is for services performed in the foreign country in 2013. 2010 tax returns online This computation is used only to determine when the reimbursement is considered earned. 2010 tax returns online You would include the amount of the reimbursement in income in 2013, the year you received it. 2010 tax returns online Move between foreign countries. 2010 tax returns online   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. 2010 tax returns online Move to U. 2010 tax returns online S. 2010 tax returns online   If you move to the United States, the moving expense reimbursement that you must include in income is generally considered to be U. 2010 tax returns online S. 2010 tax returns online source income. 2010 tax returns online   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. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online   See the discussion under Move from U. 2010 tax returns online S. 2010 tax returns online to foreign country , earlier, to figure the amount of the includible reimbursement considered earned in the year of the move. 2010 tax returns online 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. 2010 tax returns online Example. 2010 tax returns online You are a U. 2010 tax returns online S. 2010 tax returns online citizen employed in a foreign country. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online The fraction is the number of days of foreign residence during the year (90) divided by the number of days in the year (365). 2010 tax returns online The remaining part of the includible reimbursement is for services performed in the foreign country in 2012. 2010 tax returns online You report the amount of the includible reimbursement in 2013, the year you received it. 2010 tax returns online    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. 2010 tax returns online Storage expense reimbursements. 2010 tax returns online   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. 2010 tax returns online U. 2010 tax returns online S. 2010 tax returns online 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. 2010 tax returns online This includes amounts paid from both appropriated and nonappropriated funds. 2010 tax returns online 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. 2010 tax returns online United States Armed Forces exchanges. 2010 tax returns online Commissioned and noncommissioned officers' messes. 2010 tax returns online Armed Forces motion picture services. 2010 tax returns online Kindergartens on foreign Armed Forces installations. 2010 tax returns online Amounts paid by the United States or its agencies to persons who are not their employees may qualify for exclusion or deduction. 2010 tax returns online If you are a U. 2010 tax returns online S. 2010 tax returns online Government employee paid by a U. 2010 tax returns online S. 2010 tax returns online 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. 2010 tax returns online S. 2010 tax returns online Government and does not qualify for exclusion or deduction. 2010 tax returns online If you have questions about whether you are an employee or an independent contractor, get Publication 15-A, Employer's Supplemental Tax Guide. 2010 tax returns online American Institute in Taiwan. 2010 tax returns online   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. 2010 tax returns online If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U. 2010 tax returns online S. 2010 tax returns online tax up to the amount that equals tax-exempt allowances received by civilian employees of the U. 2010 tax returns online S. 2010 tax returns online Government. 2010 tax returns online Allowances. 2010 tax returns online   Cost-of-living and foreign-area allowances paid under certain acts of Congress to U. 2010 tax returns online S. 2010 tax returns online 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. 2010 tax returns online Post differentials are wages that must be included in gross income, regardless of the act of Congress under which they are paid. 2010 tax returns online More information. 2010 tax returns online   Publication 516, U. 2010 tax returns online S. 2010 tax returns online Government Civilian Employees Stationed Abroad, has more information for U. 2010 tax returns online S. 2010 tax returns online Government employees abroad. 2010 tax returns online 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. 2010 tax returns online The meals are furnished: On the business premises of your employer, and For the convenience of your employer. 2010 tax returns online The lodging is furnished: On the business premises of your employer, For the convenience of your employer, and As a condition of your employment. 2010 tax returns online 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. 2010 tax returns online Amounts you do not include in income because of these rules are not foreign earned income. 2010 tax returns online If you receive a Form W-2, excludable amounts should not be included in the total reported in box 1 as wages. 2010 tax returns online Family. 2010 tax returns online   Your family, for this purpose, includes only your spouse and your dependents. 2010 tax returns online Lodging. 2010 tax returns online   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. 2010 tax returns online Business premises of employer. 2010 tax returns online   Generally, the business premises of your employer is wherever you work. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online Convenience of employer. 2010 tax returns online   Whether meals or lodging are provided for your employer's convenience must be determined from all the facts and circumstances. 2010 tax returns online 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. 2010 tax returns online   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. 2010 tax returns online Condition of employment. 2010 tax returns online   Lodging is provided as a condition of employment if you must accept the lodging to properly carry out the duties of your job. 2010 tax returns online 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. 2010 tax returns online Foreign camps. 2010 tax returns online   If the lodging is in a camp located in a foreign country, the camp is considered part of your employer's business premises. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online Foreign earned income was defined earlier in this chapter. 2010 tax returns online You also can choose to exclude from your income a foreign housing amount. 2010 tax returns online This is explained later under Foreign Housing Exclusion. 2010 tax returns online If you choose to exclude a foreign housing amount, you must figure the foreign housing exclusion before you figure the foreign earned income exclusion. 2010 tax returns online Your foreign earned income exclusion is limited to your foreign earned income minus your foreign housing exclusion. 2010 tax returns online 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. 2010 tax returns online This includes any expenses, losses, and other normally deductible items allocable to the excluded income. 2010 tax returns online For more information about deductions and credits, see chapter 5 . 2010 tax returns online Limit on Excludable Amount You may be able to exclude up to $97,600 of your foreign earned income in 2013. 2010 tax returns online 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). 2010 tax returns online 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. 2010 tax returns online You do not both need to meet the same test. 2010 tax returns online Together, you and your spouse can exclude as much as $195,200. 2010 tax returns online Paid in year following work. 2010 tax returns online   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. 2010 tax returns online If you report your income on a cash basis, you report the income on your return for the year you receive it. 2010 tax returns online 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. 2010 tax returns online For an exception to this general rule, see Year-end payroll period, later. 2010 tax returns online Example. 2010 tax returns online You were a bona fide resident of Brazil for all of 2012 and 2013. 2010 tax returns online You report your income on the cash basis. 2010 tax returns online In 2012, you were paid $84,200 for work you did in Brazil during that year. 2010 tax returns online You excluded all of the $84,200 from your income in 2012. 2010 tax returns online In 2013, you were paid $117,300 for your work in Brazil. 2010 tax returns online $18,800 was for work you did in 2012 and $98,500 was for work you did in 2013. 2010 tax returns online You can exclude $10,900 of the $18,800 from your income in 2013. 2010 tax returns online This is the $95,100 maximum exclusion in 2012 minus the $84,200 actually excluded that year. 2010 tax returns online 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. 2010 tax returns online You can exclude $97,600 of the $98,500 you were paid for work you did in 2013 from your 2013 income. 2010 tax returns online 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). 2010 tax returns online 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). 2010 tax returns online Year-end payroll period. 2010 tax returns online   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. 2010 tax returns online 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. 2010 tax returns online The period for which the payment is made is a normal payroll period of your employer that regularly applies to you. 2010 tax returns online The payroll period includes the last day of your tax year (December 31 if you figure your taxes on a calendar-year basis). 2010 tax returns online The payroll period is not longer than 16 days. 2010 tax returns online 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. 2010 tax returns online Example. 2010 tax returns online You are paid twice a month. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online Because all of the above conditions are met, the pay you received on January 1, 2013, is considered earned in 2013. 2010 tax returns online Income earned over more than 1 year. 2010 tax returns online   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. 2010 tax returns online For example, a bonus may be based on work you did over several years. 2010 tax returns online You determine the amount of the bonus that is considered earned in a particular year in two steps. 2010 tax returns online Divide the bonus by the number of calendar months in the period when you did the work that resulted in the bonus. 2010 tax returns online Multiply the result of (1) by the number of months you did the work during the year. 2010 tax returns online This is the amount that is subject to the exclusion limit for that tax year. 2010 tax returns online Income received more than 1 year after it was earned. 2010 tax returns online   You cannot exclude income you receive after the end of the year following the year you do the work to earn it. 2010 tax returns online Example. 2010 tax returns online   You were a bona fide resident of Sweden for 2011, 2012, and 2013. 2010 tax returns online You report your income on the cash basis. 2010 tax returns online 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. 2010 tax returns online You excluded all the income on your 2011 and 2012 returns. 2010 tax returns online   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. 2010 tax returns online 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. 2010 tax returns online You must include the $10,000 in income. 2010 tax returns online You can exclude all of the $82,000 received for work you did in 2013. 2010 tax returns online Community income. 2010 tax returns online   The maximum exclusion applies separately to the earnings of spouses. 2010 tax returns online Ignore any community property laws when you figure your limit on the foreign earned income exclusion. 2010 tax returns online Part-year exclusion. 2010 tax returns online   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. 2010 tax returns online 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. 2010 tax returns online   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. 2010 tax returns online 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. 2010 tax returns online Example. 2010 tax returns online 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. 2010 tax returns online You can exclude a maximum of 75/365 of $97,600, or $20,055, of your foreign earned income for 2013. 2010 tax returns online 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. 2010 tax returns online Physical presence test. 2010 tax returns online   Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. 2010 tax returns online 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. 2010 tax returns online Example. 2010 tax returns online 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. 2010 tax returns online You figure the maximum exclusion for 2012 as follows. 2010 tax returns online Beginning with June 1, 2012, count forward 330 full days. 2010 tax returns online Do not count the 16 days you spent in the United States. 2010 tax returns online The 330th day, May 12, 2013, is the last day of a 12-month period. 2010 tax returns online Count backward 12 months from May 11, 2013, to find the first day of this 12-month period, May 12, 2012. 2010 tax returns online This 12-month period runs from May 12, 2012, through May 11, 2013. 2010 tax returns online Count the total days during 2012 that fall within this 12-month period. 2010 tax returns online This is 234 days (May 12, 2012 – December 31, 2012). 2010 tax returns online Multiply $95,100 (the maximum exclusion for 2012) by the fraction 234/366 to find your maximum exclusion for 2012 ($60,802). 2010 tax returns online You figure the maximum exclusion for 2013 in the opposite manner. 2010 tax returns online Beginning with your last full day, September 30, 2013, count backward 330 full days. 2010 tax returns online Do not count the 16 days you spent in the United States. 2010 tax returns online That day, October 20, 2012, is the first day of a 12-month period. 2010 tax returns online Count forward 12 months from October 20, 2012, to find the last day of this 12-month period, October 19, 2013. 2010 tax returns online This 12-month period runs from October 20, 2012, through October 19, 2013. 2010 tax returns online Count the total days during 2013 that fall within this 12-month period. 2010 tax returns online This is 292 days (January 1, 2013 – October 19, 2013). 2010 tax returns online Multiply $97,600, the maximum limit, by the fraction 292/365 to find your maximum exclusion for 2013 ($78,080). 2010 tax returns online Choosing the Exclusion The foreign earned income exclusion is voluntary. 2010 tax returns online You can choose the exclusion by completing the appropriate parts of Form 2555. 2010 tax returns online 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. 2010 tax returns online A return filed by the due date (including any extensions). 2010 tax returns online A return amending a timely-filed return. 2010 tax returns online 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. 2010 tax returns online A return filed within 1 year from the original due date of the return (determined without regard to any extensions). 2010 tax returns online Filing after the above periods. 2010 tax returns online   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. 2010 tax returns online 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. 2010 tax returns online 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. 2010 tax returns online 911-7(a)(2)(i)(D). 2010 tax returns online ” 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. 2010 tax returns online You must request a private letter ruling under Income Tax Regulation 301. 2010 tax returns online 9100-3 and Revenue Procedure 2013-1, 2013-1 I. 2010 tax returns online R. 2010 tax returns online B. 2010 tax returns online 1, available at www. 2010 tax returns online irs. 2010 tax returns online gov/irb/2013-01_IRB/ar06. 2010 tax returns online html. 2010 tax returns online 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. 2010 tax returns online Foreign tax credit or deduction. 2010 tax returns online  
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IRS - Taxpayer Compliance Research

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The IRS seeks to help taxpayers comply with their tax obligations voluntarily and timely. The articles and publications on this page contain research related to taxpayer compliance. Compliance measurement research, also known as the tax gap, examines how much tax is not paid voluntarily and timely. Another set of research looks at the causes of taxpayer compliance.

All files on this page are available in Adobe® PDF format, which requires the free Adobe Acrobat® reader to view and print the file.


Tax Gap

Federal Tax Compliance Research: Individual Income Tax Gap Estimates for 1985, 1988, and 1992

Author:

IRS, Compliance Research

Publication date: April 1996, revised
Written for:

Publication 1415

Federal Tax Compliance Research: Gross and Net Employment Tax Gap Estimates for 1984-1997

Author:

IRS, Research Division

Publication date: October 1993, revised
Written for: Publication 1415-E

Income Tax Compliance Research: Net Tax Gap and Remittance Gap Estimates

Author:

IRS Research Division

Publication date: April 1990, revised
Written for:

Publication 1415


Compliance Analysis

Statistical Analysis of Compliance Using the NRP Data: Detection Controlled Models

Author:

Jonathan Feinstein
Yale University

Publication date: June 2004
Written for: 2004 IRS Research Conference
       
Trends as Changes in Variance: The Case of Tax Noncompliance
Author: Kim M. Bloomquist
IRS
Publication date: June 2003
Written for: 2003 IRS Research Conference
                                                   
IRS's Comprehensive Approach to Compliance Measurement
Authors: Robert E. Brown, IRS, National Research Program,
Mark J. Mazur, IRS, Research, Analysis, and Statistics
Publication date: June 2003
Written for: 2003 National Tax Association Spring Symposium
                                                  
Developing an Econometric Model for Measuring Tax Noncompliance Using Operational Audit Data
Authors: Brian Erard, B. Erard and Associates,
Chih-Chin Ho, IRS
Publication date: August 2002
Written for: 2002 American Statistical Association Conference
                                                                 
Compliance Estimates for Earned Income Tax Credit Claimed on 1999 Returns
Author: IRS
Publication date: June 2002
Written for: 2002 IRS Research Conference
                                                  
Compliance Measurement and Workload Selection with Operational Audit Data
Author: Brian Erard, B. Erard and Associates
Publication date: June 2002
Written for: 2002 IRS Research Conference
                                  
Trends in Book-Tax Income and Balance Sheet Differences
Authors:

Lillian Mills and Kaye Newberry, University of Arizona,
William B. Trautman, IRS, Large and Mid-Size Business Division

Publication date: June 2002
Written for: 2002 IRS Research Conference
                                        
Nonfiler Profiles, Fiscal Year 1993: A Focus on Repeaters
Author: Laura R. Rosage
IRS
Publication date: 1996
Written for: SOI Bulletin, Summer Issue
                                                


Determinants of Taxpayer Compliance

Audit Information Dissemination, Taxpayer Communication, and Compliance: An Experimental Approach
Authors:

James Alm, Georgia State University,
Betty Jackson, University of Colorado at Boulder,
Michael McKee, University of Tennessee at Knoxville

Publication date: June 2004 
Written for: 2004 IRS Research Conference 
    
                          
Criminal Investigation Enforcement Activities and Taxpayer Noncompliance
Author:

Jeffrey Dubin
California Institute of Technology

Publication date: June 2004
Written for: 2004 IRS Research Conference
                                                   
Tax Evasion, Income Inequality and Opportunity Costs of Compliance
Author: Kim M. Bloomquist,
IRS, Office of Research
Publication date: November 2003
Written for: 2003 National Tax Association Annual Conference
                                                  
Economic and Behavioral Determinants of Tax Compliance: Evidence from the 1997 Arkansas Tax Penalty Amnesty Program
Authors: Christina M. Ritsema, Hope College,
Deborah W. Thomas and Gary D. Ferrier, University of Arkansas
Publication date: June 2003
Written for: 2003 IRS Research Conference
                                                                 
The Impact of the IRS on Voluntary Tax Compliance: Preliminary Empirical Results
Author: Alan H. Plumley, Technical Advisor,
IRS, Office of Research
Publication date: November 2002
Written for: 2002 National Tax Association Conference
                                                  
The Determinants of Individual Income Tax Compliance: Estimating the Impacts of Tax Policy, Enforcement and IRS Responsiveness
Author: Alan H. Plumley, Technical Advisor,
IRS, Office of Research
Publication date: November 1996, revised
Written for: IRS Publication 1916



 

 

 

  

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Page Last Reviewed or Updated: 12-Mar-2014

The 2010 Tax Returns Online

2010 tax returns online 13. 2010 tax returns online   Basis of Property Table of Contents Introduction Useful Items - You may want to see: Cost BasisReal Property Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostProperty Received for Services Taxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed From Personal to Business or Rental Use Stocks and Bonds Introduction This chapter discusses how to figure your basis in property. 2010 tax returns online It is divided into the following sections. 2010 tax returns online Cost basis. 2010 tax returns online Adjusted basis. 2010 tax returns online Basis other than cost. 2010 tax returns online Your basis is the amount of your investment in property for tax purposes. 2010 tax returns online Use the basis to figure gain or loss on the sale, exchange, or other disposition of property. 2010 tax returns online Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses. 2010 tax returns online If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. 2010 tax returns online Only the basis allocated to the business or investment use of the property can be depreciated. 2010 tax returns online Your original basis in property is adjusted (increased or decreased) by certain events. 2010 tax returns online For example, if you make improvements to the property, increase your basis. 2010 tax returns online If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis. 2010 tax returns online Keep accurate records of all items that affect the basis of your property. 2010 tax returns online For more information on keeping records, see chapter 1. 2010 tax returns online Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 525 Taxable and Nontaxable Income 535 Business Expenses 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 551 Basis of Assets 946 How To Depreciate Property Cost Basis The basis of property you buy is usually its cost. 2010 tax returns online The cost is the amount you pay in cash, debt obligations, other property, or services. 2010 tax returns online Your cost also includes amounts you pay for the following items: Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if you assume liability for the seller). 2010 tax returns online In addition, the basis of real estate and business assets may include other items. 2010 tax returns online Loans with low or no interest. 2010 tax returns online    If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus any amount considered to be unstated interest. 2010 tax returns online You generally have unstated interest if your interest rate is less than the applicable federal rate. 2010 tax returns online   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. 2010 tax returns online Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. 2010 tax returns online If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. 2010 tax returns online Lump sum purchase. 2010 tax returns online   If you buy buildings and the land on which they stand for a lump sum, allocate the cost basis among the land and the buildings. 2010 tax returns online Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the time of purchase. 2010 tax returns online Figure the basis of each asset by multiplying the lump sum by a fraction. 2010 tax returns online The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. 2010 tax returns online    If you are not certain of the FMVs of the land and buildings, you can allocate the basis according to their assessed values for real estate tax purposes. 2010 tax returns online Fair market value (FMV). 2010 tax returns online   FMV is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the necessary facts. 2010 tax returns online Sales of similar property on or about the same date may be helpful in figuring the FMV of the property. 2010 tax returns online Assumption of mortgage. 2010 tax returns online   If you buy property and assume (or buy the property subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. 2010 tax returns online Settlement costs. 2010 tax returns online   Your basis includes the settlement fees and closing costs you paid for buying the property. 2010 tax returns online (A fee for buying property is a cost that must be paid even if you buy the property for cash. 2010 tax returns online ) Do not include fees and costs for getting a loan on the property in your basis. 2010 tax returns online   The following are some of the settlement fees or closing costs you can include in the basis of your property. 2010 tax returns online Abstract fees (abstract of title fees). 2010 tax returns online Charges for installing utility services. 2010 tax returns online Legal fees (including fees for the title search and preparation of the sales contract and deed). 2010 tax returns online Recording fees. 2010 tax returns online Survey fees. 2010 tax returns online Transfer taxes. 2010 tax returns online Owner's title insurance. 2010 tax returns online Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. 2010 tax returns online   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 2010 tax returns online   The following are some of the settlement fees and closing costs you cannot include in the basis of property. 2010 tax returns online Casualty insurance premiums. 2010 tax returns online Rent for occupancy of the property before closing. 2010 tax returns online Charges for utilities or other services related to occupancy of the property before closing. 2010 tax returns online Charges connected with getting a loan, such as points (discount points, loan origination fees), mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender. 2010 tax returns online Fees for refinancing a mortgage. 2010 tax returns online Real estate taxes. 2010 tax returns online   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. 2010 tax returns online You cannot deduct them as an expense. 2010 tax returns online    If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. 2010 tax returns online Do not include that amount in the basis of your property. 2010 tax returns online If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. 2010 tax returns online Points. 2010 tax returns online   If you pay points to get a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. 2010 tax returns online Generally, you deduct the points over the term of the loan. 2010 tax returns online For more information on how to deduct points, see chapter 23. 2010 tax returns online Points on home mortgage. 2010 tax returns online   Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. 2010 tax returns online If certain requirements are met, you can deduct the points in full for the year in which they are paid. 2010 tax returns online Reduce the basis of your home by any seller-paid points. 2010 tax returns online Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the cost basis or basis other than cost (discussed later) of the property. 2010 tax returns online The result is the adjusted basis. 2010 tax returns online Increases to Basis Increase the basis of any property by all items properly added to a capital account. 2010 tax returns online Examples of items that increase basis are shown in Table 13-1. 2010 tax returns online These include the items discussed below. 2010 tax returns online Improvements. 2010 tax returns online   Add to your basis in property the cost of improvements having a useful life of more than 1 year, that increase the value of the property, lengthen its life, or adapt it to a different use. 2010 tax returns online For example, improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, or paving your driveway. 2010 tax returns online Assessments for local improvements. 2010 tax returns online   Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. 2010 tax returns online Do not deduct them as taxes. 2010 tax returns online However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements. 2010 tax returns online Example. 2010 tax returns online Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. 2010 tax returns online Add the assessment to your property's basis. 2010 tax returns online In this example, the assessment is a depreciable asset. 2010 tax returns online Decreases to Basis Decrease the basis of any property by all items that represent a return of capital for the period during which you held the property. 2010 tax returns online Examples of items that decrease basis are shown in Table 13-1. 2010 tax returns online These include the items discussed below. 2010 tax returns online Table 13-1. 2010 tax returns online Examples of Adjustments to Basis Increases to Basis Decreases to Basis • Capital improvements: • Exclusion from income of   Putting an addition on your home subsidies for energy conservation   Replacing an entire roof measures   Paving your driveway     Installing central air conditioning • Casualty or theft loss deductions   Rewiring your home and insurance reimbursements       • Assessments for local improvements:     Water connections     Extending utility service lines to the property • Postponed gain from the sale of a home   Sidewalks • Alternative motor vehicle credit  (Form 8910)   Roads       • Alternative fuel vehicle refueling     property credit (Form 8911)           • Residential energy credits (Form 5695)       • Casualty losses: • Depreciation and section 179 deduction   Restoring damaged property     • Nontaxable corporate distributions • Legal fees:     Cost of defending and perfecting a title • Certain canceled debt excluded from   Fees for getting a reduction of an assessment income     • Zoning costs • Easements           • Adoption tax benefits Casualty and theft losses. 2010 tax returns online   If you have a casualty or theft loss, decrease the basis in your property by any insurance proceeds or other reimbursement and by any deductible loss not covered by insurance. 2010 tax returns online    You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition. 2010 tax returns online   For more information on casualty and theft losses, see chapter 25. 2010 tax returns online Depreciation and section 179 deduction. 2010 tax returns online   Decrease the basis of your qualifying business property by any section 179 deduction you take and the depreciation you deducted, or could have deducted (including any special depreciation allowance), on your tax returns under the method of depreciation you selected. 2010 tax returns online   For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562. 2010 tax returns online Example. 2010 tax returns online You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. 2010 tax returns online You added an improvement to the duplex that cost $10,000. 2010 tax returns online In February last year, the duplex was damaged by fire. 2010 tax returns online Up to that time, you had been allowed depreciation of $23,000. 2010 tax returns online You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. 2010 tax returns online You deducted a casualty loss of $1,000 on your income tax return for last year. 2010 tax returns online You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. 2010 tax returns online You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. 2010 tax returns online Figure the adjusted basis of the duplex as follows: Original cost of duplex $35,000 Addition to duplex 10,000 Total cost of duplex $45,000 Minus: Depreciation 23,000 Adjusted basis before casualty $22,000 Minus: Insurance proceeds $19,700     Deducted casualty loss 1,000     Salvage proceeds 1,300 22,000 Adjusted basis after casualty $-0- Add: Cost of restoring duplex 19,000 Adjusted basis after restoration $19,000 Note. 2010 tax returns online Your basis in the land is its original cost of $5,000. 2010 tax returns online Easements. 2010 tax returns online   The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. 2010 tax returns online It reduces the basis of the affected part of the property. 2010 tax returns online If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. 2010 tax returns online   If the gain is on a capital asset, see chapter 16 for information about how to report it. 2010 tax returns online If the gain is on property used in a trade or business, see Publication 544 for information about how to report it. 2010 tax returns online Exclusion of subsidies for energy conservation measures. 2010 tax returns online   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. 2010 tax returns online Reduce the basis of the property for which you received the subsidy by the excluded amount. 2010 tax returns online For more information about this subsidy, see chapter 12. 2010 tax returns online Postponed gain from sale of home. 2010 tax returns online    If you postponed gain from the sale of your main home under rules in effect before May 7, 1997, you must reduce the basis of the home you acquired as a replacement by the amount of the postponed gain. 2010 tax returns online For more information on the rules for the sale of a home, see chapter 15. 2010 tax returns online Basis Other Than Cost There are many times when you cannot use cost as basis. 2010 tax returns online In these cases, the fair market value or the adjusted basis of the property can be used. 2010 tax returns online Fair market value (FMV) and adjusted basis were discussed earlier. 2010 tax returns online Property Received for Services If you receive property for your services, include the FMV of the property in income. 2010 tax returns online The amount you include in income becomes your basis. 2010 tax returns online If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. 2010 tax returns online Restricted property. 2010 tax returns online   If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested. 2010 tax returns online However, this rule does not apply if you make an election to include in income the FMV of the property at the time it is transferred to you, less any amount you paid for it. 2010 tax returns online Property is substantially vested when it is transferable or when it is not subject to a substantial risk of forfeiture (you do not have a good chance of losing it). 2010 tax returns online For more information, see Restricted Property in Publication 525. 2010 tax returns online Bargain purchases. 2010 tax returns online   A bargain purchase is a purchase of an item for less than its FMV. 2010 tax returns online If, as compensation for services, you buy goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. 2010 tax returns online Your basis in the property is its FMV (your purchase price plus the amount you include in income). 2010 tax returns online   If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. 2010 tax returns online However, your basis in the property is still its FMV. 2010 tax returns online See Employee Discounts in Publication 15-B. 2010 tax returns online Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. 2010 tax returns online A taxable gain or deductible loss also is known as a recognized gain or loss. 2010 tax returns online If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. 2010 tax returns online Involuntary Conversions If you receive replacement property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property using the basis of the converted property. 2010 tax returns online Similar or related property. 2010 tax returns online   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the same as the converted property's basis on the date of the conversion, with the following adjustments. 2010 tax returns online Decrease the basis by the following. 2010 tax returns online Any loss you recognize on the involuntary conversion. 2010 tax returns online Any money you receive that you do not spend on similar property. 2010 tax returns online Increase the basis by the following. 2010 tax returns online Any gain you recognize on the involuntary conversion. 2010 tax returns online Any cost of acquiring the replacement property. 2010 tax returns online Money or property not similar or related. 2010 tax returns online    If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the conversion. 2010 tax returns online Example. 2010 tax returns online The state condemned your property. 2010 tax returns online The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. 2010 tax returns online You realized a gain of $5,000 ($31,000 − $26,000). 2010 tax returns online You bought replacement property similar in use to the converted property for $29,000. 2010 tax returns online You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. 2010 tax returns online Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. 2010 tax returns online The basis of the replacement property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of replacement property $26,000 Allocating the basis. 2010 tax returns online   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. 2010 tax returns online Basis for depreciation. 2010 tax returns online   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. 2010 tax returns online For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. 2010 tax returns online Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. 2010 tax returns online If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. 2010 tax returns online See Nontaxable Trades in chapter 14. 2010 tax returns online Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. 2010 tax returns online To qualify as a like-kind exchange, the property traded and the property received must be both of the following. 2010 tax returns online Qualifying property. 2010 tax returns online Like-kind property. 2010 tax returns online The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. 2010 tax returns online If you trade property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property you gave up increased by the money you paid. 2010 tax returns online Qualifying property. 2010 tax returns online   In a like-kind exchange, you must hold for investment or for productive use in your trade or business both the property you give up and the property you receive. 2010 tax returns online Like-kind property. 2010 tax returns online   There must be an exchange of like-kind property. 2010 tax returns online Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. 2010 tax returns online The exchange of real estate for real estate and personal property for similar personal property are exchanges of like-kind property. 2010 tax returns online Example. 2010 tax returns online You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. 2010 tax returns online The dealer allows you $2,000 on the old truck, and you pay $4,800. 2010 tax returns online This is a like-kind exchange. 2010 tax returns online The basis of the new truck is $6,500 (the adjusted basis of the old one, $1,700, plus the amount you paid, $4,800). 2010 tax returns online If you sell your old truck to a third party for $2,000 instead of trading it in and then buy a new one from the dealer, you have a taxable gain of $300 on the sale (the $2,000 sale price minus the $1,700 adjusted basis). 2010 tax returns online The basis of the new truck is the price you pay the dealer. 2010 tax returns online Partially nontaxable exchanges. 2010 tax returns online   A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. 2010 tax returns online The basis of the property you receive is the same as the adjusted basis of the property you gave up, with the following adjustments. 2010 tax returns online Decrease the basis by the following amounts. 2010 tax returns online Any money you receive. 2010 tax returns online Any loss you recognize on the exchange. 2010 tax returns online Increase the basis by the following amounts. 2010 tax returns online Any additional costs you incur. 2010 tax returns online Any gain you recognize on the exchange. 2010 tax returns online If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. 2010 tax returns online Allocation of basis. 2010 tax returns online   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. 2010 tax returns online The rest is the basis of the like-kind property. 2010 tax returns online More information. 2010 tax returns online   See Like-Kind Exchanges in chapter 1 of Publication 544 for more information. 2010 tax returns online Basis for depreciation. 2010 tax returns online   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange. 2010 tax returns online For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. 2010 tax returns online Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. 2010 tax returns online The same rule applies to a transfer by your former spouse that is incident to divorce. 2010 tax returns online However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. 2010 tax returns online If the property transferred to you is a series E, series EE, or series I U. 2010 tax returns online S. 2010 tax returns online savings bond, the transferor must include in income the interest accrued to the date of transfer. 2010 tax returns online Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. 2010 tax returns online For more information on these bonds, see chapter 7. 2010 tax returns online At the time of the transfer, the transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. 2010 tax returns online For more information about the transfer of property from a spouse, see chapter 14. 2010 tax returns online Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. 2010 tax returns online FMV less than donor's adjusted basis. 2010 tax returns online   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. 2010 tax returns online Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. 2010 tax returns online Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. 2010 tax returns online See Adjusted Basis , earlier. 2010 tax returns online Example. 2010 tax returns online You received an acre of land as a gift. 2010 tax returns online At the time of the gift, the land had an FMV of $8,000. 2010 tax returns online The donor's adjusted basis was $10,000. 2010 tax returns online After you received the property, no events occurred to increase or decrease your basis. 2010 tax returns online If you later sell the property for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis at the time of the gift ($10,000) as your basis to figure gain. 2010 tax returns online If you sell the property for $7,000, you will have a $1,000 loss because you must use the FMV at the time of the gift ($8,000) as your basis to figure loss. 2010 tax returns online If the sales price is between $8,000 and $10,000, you have neither gain nor loss. 2010 tax returns online Business property. 2010 tax returns online   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. 2010 tax returns online FMV equal to or greater than donor's adjusted basis. 2010 tax returns online   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. 2010 tax returns online Increase your basis by all or part of any gift tax paid, depending on the date of the gift, explained later. 2010 tax returns online   Also, for figuring gain or loss from a sale or other disposition or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. 2010 tax returns online See Adjusted Basis , earlier. 2010 tax returns online   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. 2010 tax returns online Figure the increase by multiplying the gift tax paid by a fraction. 2010 tax returns online The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. 2010 tax returns online   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. 2010 tax returns online The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. 2010 tax returns online Example. 2010 tax returns online In 2013, you received a gift of property from your mother that had an FMV of $50,000. 2010 tax returns online Her adjusted basis was $20,000. 2010 tax returns online The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). 2010 tax returns online She paid a gift tax of $7,320 on the property. 2010 tax returns online Your basis is $26,076, figured as follows: Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000     Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . 2010 tax returns online 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. 2010 tax returns online If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. 2010 tax returns online However, your basis cannot exceed the FMV of the gift at the time it was given to you. 2010 tax returns online Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. 2010 tax returns online The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. 2010 tax returns online The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes. 2010 tax returns online The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. 2010 tax returns online If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. 2010 tax returns online For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. 2010 tax returns online Property inherited from a decedent who died in 2010. 2010 tax returns online   If you inherited property from a decedent who died in 2010, special rules may apply. 2010 tax returns online For more information, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. 2010 tax returns online Community property. 2010 tax returns online   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. 2010 tax returns online When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. 2010 tax returns online For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. 2010 tax returns online Example. 2010 tax returns online You and your spouse owned community property that had a basis of $80,000. 2010 tax returns online When your spouse died, half the FMV of the community interest was includible in your spouse's estate. 2010 tax returns online The FMV of the community interest was $100,000. 2010 tax returns online The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). 2010 tax returns online The basis of the other half to your spouse's heirs is also $50,000. 2010 tax returns online For more information about community property, see Publication 555, Community Property. 2010 tax returns online Property Changed From Personal to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you can begin to depreciate the property at the time of the change. 2010 tax returns online To do so, you must figure its basis for depreciation at the time of the change. 2010 tax returns online An example of changing property held for personal use to business or rental use would be renting out your former personal residence. 2010 tax returns online Basis for depreciation. 2010 tax returns online   The basis for depreciation is the lesser of the following amounts. 2010 tax returns online The FMV of the property on the date of the change. 2010 tax returns online Your adjusted basis on the date of the change. 2010 tax returns online Example. 2010 tax returns online Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. 2010 tax returns online You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. 2010 tax returns online Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. 2010 tax returns online Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). 2010 tax returns online On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. 2010 tax returns online The basis for figuring depreciation on the house is its FMV on the date of the change ($165,000) because it is less than your adjusted basis ($178,000). 2010 tax returns online Sale of property. 2010 tax returns online   If you later sell or dispose of property changed to business or rental use, the basis you use will depend on whether you are figuring gain or loss. 2010 tax returns online Gain. 2010 tax returns online   The basis for figuring a gain is your adjusted basis in the property when you sell the property. 2010 tax returns online Example. 2010 tax returns online Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. 2010 tax returns online Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). 2010 tax returns online Loss. 2010 tax returns online   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. 2010 tax returns online Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . 2010 tax returns online Example. 2010 tax returns online Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. 2010 tax returns online In this case, you would start with the FMV on the date of the change to rental use ($180,000), because it is less than the adjusted basis of $203,000 ($178,000 + $25,000 (land)) on that date. 2010 tax returns online Reduce that amount ($180,000) by the depreciation deductions ($37,500). 2010 tax returns online The basis for loss is $142,500 ($180,000 − $37,500). 2010 tax returns online Stocks and Bonds The basis of stocks or bonds you buy generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. 2010 tax returns online If you get stocks or bonds other than by purchase, your basis is usually determined by the FMV or the previous owner's adjusted basis, as discussed earlier. 2010 tax returns online You must adjust the basis of stocks for certain events that occur after purchase. 2010 tax returns online For example, if you receive additional stock from nontaxable stock dividends or stock splits, reduce your basis for each share of stock by dividing the adjusted basis of the old stock by the number of shares of old and new stock. 2010 tax returns online This rule applies only when the additional stock received is identical to the stock held. 2010 tax returns online Also reduce your basis when you receive nontaxable distributions. 2010 tax returns online They are a return of capital. 2010 tax returns online Example. 2010 tax returns online In 2011 you bought 100 shares of XYZ stock for $1,000 or $10 a share. 2010 tax returns online In 2012 you bought 100 shares of XYZ stock for $1,600 or $16 a share. 2010 tax returns online In 2013 XYZ declared a 2-for-1 stock split. 2010 tax returns online You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share. 2010 tax returns online Other basis. 2010 tax returns online   There are other ways to figure the basis of stocks or bonds depending on how you acquired them. 2010 tax returns online For detailed information, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. 2010 tax returns online Identifying stocks or bonds sold. 2010 tax returns online   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stocks or bonds. 2010 tax returns online If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. 2010 tax returns online For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. 2010 tax returns online Mutual fund shares. 2010 tax returns online   If you sell mutual fund shares you acquired at various times and prices and left on deposit in an account kept by a custodian or agent, you can elect to use an average basis. 2010 tax returns online For more information, see Publication 550. 2010 tax returns online Bond premium. 2010 tax returns online   If you buy a taxable bond at a premium and elect to amortize the premium, reduce the basis of the bond by the amortized premium you deduct each year. 2010 tax returns online See Bond Premium Amortization in chapter 3 of Publication 550 for more information. 2010 tax returns online Although you cannot deduct the premium on a tax-exempt bond, you must amortize the premium each year and reduce your basis in the bond by the amortized amount. 2010 tax returns online Original issue discount (OID) on debt instruments. 2010 tax returns online   You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. 2010 tax returns online See Original Issue Discount (OID) in chapter 7 and Publication 1212, Guide To Original Issue Discount (OID) Instruments. 2010 tax returns online Tax-exempt obligations. 2010 tax returns online    OID on tax-exempt obligations is generally not taxable. 2010 tax returns online However, when you dispose of a tax-exempt obligation issued after September 3, 1982, and acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. 2010 tax returns online The accrued OID is added to the basis of the obligation to determine your gain or loss. 2010 tax returns online See chapter 4 of Publication 550. 2010 tax returns online Prev  Up  Next   Home   More Online Publications