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2012 Income Tax Forms

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2012 Income Tax Forms

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

The Treasury Department's Office of Tax Policy and IRS use the Guidance Priority List each year to identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance. The Guidance Priority List focuses resources on guidance items that are most important to taxpayers and tax administration. Published guidance plays an important role in increasing voluntary compliance by helping to clarify ambiguous areas of the tax law.

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Notice 2014-18
Public comment invited on recommendations for 2014-2015 Guidance Priority List (type IRS-2014-0011 in the search field on the Regulations.gov homepage)   

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Notice 2013-22 
Public comment invited on recommendations for 2013-2014 Guidance Priority List

Notice 2012-25
Public comment invited on recommendations for 2012-2013 Guidance Priority List

Notice 2011-39
Public comment on recommendations for 2011-2012 Guidance Priority List.

Notice 2010-43
Public comment on recommendations for 2010-2011 Guidance Priority List.

Notice 2009-43
Public comment on recommendations for 2009-2010 Guidance Priority List.

Notice 2008-47
Public comment on recommendations for 2008-2009 Guidance Priority List.


Public Comments on Recommendations for Priority Guidance Plan

Public Comment Notice 2013-22

 

 


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Page Last Reviewed or Updated: 28-Mar-2014

The 2012 Income Tax Forms

2012 income tax forms Publication 541 - Main Content Table of Contents Forming a PartnershipOrganizations Classified as Partnerships Family Partnership Partnership Agreement Terminating a PartnershipIRS e-file (Electronic Filing) Exclusion From Partnership Rules Partnership Return (Form 1065) Partnership DistributionsSubstantially appreciated inventory items. 2012 income tax forms Partner's Gain or Loss Partner's Basis for Distributed Property Transactions Between Partnership and PartnersGuaranteed Payments Sale or Exchange of Property Contribution of Property Contribution of Services Basis of Partner's InterestAdjusted Basis Effect of Partnership Liabilities Disposition of Partner's InterestSale, Exchange, or Other Transfer Payments for Unrealized Receivables and Inventory Items Liquidation at Partner's Retirement or Death Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)Partnership Item. 2012 income tax forms Small Partnerships and the Small Partnership Exception Small Partnership TEFRA Election Role of Tax Matters Partner (TMP) in TEFRA Proceedings Statute of Limitations and TEFRA Amended Returns and Administrative Adjustment Requests (AARs) How To Get Tax Help Forming a Partnership The following sections contain general information about partnerships. 2012 income tax forms Organizations Classified as Partnerships An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. 2012 income tax forms However, a joint undertaking merely to share expenses is not a partnership. 2012 income tax forms For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants. 2012 income tax forms The rules you must use to determine whether an organization is classified as a partnership changed for organizations formed after 1996. 2012 income tax forms Organizations formed after 1996. 2012 income tax forms   An organization formed after 1996 is classified as a partnership for federal tax purposes if it has two or more members and it is none of the following. 2012 income tax forms An organization formed under a federal or state law that refers to it as incorporated or as a corporation, body corporate, or body politic. 2012 income tax forms An organization formed under a state law that refers to it as a joint-stock company or joint-stock association. 2012 income tax forms An insurance company. 2012 income tax forms Certain banks. 2012 income tax forms An organization wholly owned by a state, local, or foreign government. 2012 income tax forms An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). 2012 income tax forms Certain foreign organizations identified in section 301. 2012 income tax forms 7701-2(b)(8) of the regulations. 2012 income tax forms A tax-exempt organization. 2012 income tax forms A real estate investment trust. 2012 income tax forms An organization classified as a trust under section 301. 2012 income tax forms 7701-4 of the regulations or otherwise subject to special treatment under the Internal Revenue Code. 2012 income tax forms Any other organization that elects to be classified as a corporation by filing Form 8832. 2012 income tax forms For more information, see the instructions for Form 8832. 2012 income tax forms Limited liability company. 2012 income tax forms   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. 2012 income tax forms Unlike a partnership, none of the members of an LLC are personally liable for its debts. 2012 income tax forms An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301. 2012 income tax forms 7701-3. 2012 income tax forms See Form 8832 and section 301. 2012 income tax forms 7701-3 of the regulations for more details. 2012 income tax forms A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for federal income tax purposes. 2012 income tax forms Organizations formed before 1997. 2012 income tax forms   An organization formed before 1997 and classified as a partnership under the old rules will generally continue to be classified as a partnership as long as the organization has at least two members and does not elect to be classified as a corporation by filing Form 8832. 2012 income tax forms Community property. 2012 income tax forms    Spouses who own a qualified entity (defined later) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. 2012 income tax forms They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor. 2012 income tax forms A change in reporting position will be treated for federal tax purposes as a conversion of the entity. 2012 income tax forms   A qualified entity is a business entity that meets all the following requirements. 2012 income tax forms The business entity is wholly owned by spouses as community property under the laws of a state, a foreign country, or a possession of the United States. 2012 income tax forms No person other than one or both spouses would be considered an owner for federal tax purposes. 2012 income tax forms The business entity is not treated as a corporation. 2012 income tax forms   For more information about community property, see Publication 555, Community Property. 2012 income tax forms Publication 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. 2012 income tax forms Family Partnership Members of a family can be partners. 2012 income tax forms However, family members (or any other person) will be recognized as partners only if one of the following requirements is met. 2012 income tax forms If capital is a material income-producing factor, they acquired their capital interest in a bona fide transaction (even if by gift or purchase from another family member), actually own the partnership interest, and actually control the interest. 2012 income tax forms If capital is not a material income-producing factor, they joined together in good faith to conduct a business. 2012 income tax forms They agreed that contributions of each entitle them to a share in the profits, and some capital or service has been (or is) provided by each partner. 2012 income tax forms Capital is material. 2012 income tax forms   Capital is a material income-producing factor if a substantial part of the gross income of the business comes from the use of capital. 2012 income tax forms Capital is ordinarily an income-producing factor if the operation of the business requires substantial inventories or investments in plants, machinery, or equipment. 2012 income tax forms Capital is not material. 2012 income tax forms   In general, capital is not a material income-producing factor if the income of the business consists principally of fees, commissions, or other compensation for personal services performed by members or employees of the partnership. 2012 income tax forms Capital interest. 2012 income tax forms   A capital interest in a partnership is an interest in its assets that is distributable to the owner of the interest in either of the following situations. 2012 income tax forms The owner withdraws from the partnership. 2012 income tax forms The partnership liquidates. 2012 income tax forms   The mere right to share in earnings and profits is not a capital interest in the partnership. 2012 income tax forms Gift of capital interest. 2012 income tax forms   If a family member (or any other person) receives a gift of a capital interest in a partnership in which capital is a material income-producing factor, the donee's distributive share of partnership income is subject to both of the following restrictions. 2012 income tax forms It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership. 2012 income tax forms The donee's distributive share of partnership income attributable to donated capital must not be proportionately greater than the donor's distributive share attributable to the donor's capital. 2012 income tax forms Purchase. 2012 income tax forms   For purposes of determining a partner's distributive share, an interest purchased by one family member from another family member is considered a gift from the seller. 2012 income tax forms The fair market value of the purchased interest is considered donated capital. 2012 income tax forms For this purpose, members of a family include only spouses, ancestors, and lineal descendants (or a trust for the primary benefit of those persons). 2012 income tax forms Example. 2012 income tax forms A father sold 50% of his business to his son. 2012 income tax forms The resulting partnership had a profit of $60,000. 2012 income tax forms Capital is a material income-producing factor. 2012 income tax forms The father performed services worth $24,000, which is reasonable compensation, and the son performed no services. 2012 income tax forms The $24,000 must be allocated to the father as compensation. 2012 income tax forms Of the remaining $36,000 of profit due to capital, at least 50%, or $18,000, must be allocated to the father since he owns a 50% capital interest. 2012 income tax forms The son's share of partnership profit cannot be more than $18,000. 2012 income tax forms Business owned and operated by spouses. 2012 income tax forms   If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. 2012 income tax forms If so, they should report income or loss from the business on Form 1065. 2012 income tax forms They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. 2012 income tax forms However, the spouses can elect not to treat the joint venture as a partnership by making a Qualified Joint Venture Election. 2012 income tax forms Qualified Joint Venture Election. 2012 income tax forms   A "qualified joint venture," whose only members are spouses filing a joint return, can elect not to be treated as a partnership for federal tax purposes. 2012 income tax forms A qualified joint venture conducts a trade or business where: the only members of the joint venture are spouses filing jointly; both spouses elect not to be treated as a partnership; both spouses materially participate in the trade or business (see Passive Activity Limitations in the Instructions for Form 1065 for a definition of material participation); and the business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or LLC. 2012 income tax forms   Under this election, a qualified joint venture conducted by spouses who file a joint return is not treated as a partnership for federal tax purposes and therefore does not have a Form 1065 filing requirement. 2012 income tax forms All items of income, gain, deduction, loss, and credit are divided between the spouses based on their respective interests in the venture. 2012 income tax forms Each spouse takes into account his or her respective share of these items as a sole proprietor. 2012 income tax forms Each spouse would account for his or her respective share on the appropriate form, such as Schedule C (Form 1040). 2012 income tax forms For purposes of determining net earnings from self-employment, each spouse's share of income or loss from a qualified joint venture is taken into account just as it is for federal income tax purposes (i. 2012 income tax forms e. 2012 income tax forms , based on their respective interests in the venture). 2012 income tax forms   If the spouses do not make the election to treat their respective interests in the joint venture as sole proprietorships, each spouse should carry his or her share of the partnership income or loss from Schedule K-1 (Form 1065) to their joint or separate Form(s) 1040. 2012 income tax forms Each spouse should include his or her respective share of self-employment income on a separate Schedule SE (Form 1040), Self-Employment Tax. 2012 income tax forms   This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. 2012 income tax forms However, this may not be true if either spouse exceeds the social security tax limitation. 2012 income tax forms   For more information on qualified joint ventures, go to IRS. 2012 income tax forms gov, enter “Election for Qualified Joint Ventures” in the search box and select the link reading “Election for Husband and Wife Unincorporated Businesses. 2012 income tax forms ” Partnership Agreement The partnership agreement includes the original agreement and any modifications. 2012 income tax forms The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement. 2012 income tax forms The agreement or modifications can be oral or written. 2012 income tax forms Partners can modify the partnership agreement for a particular tax year after the close of the year but not later than the date for filing the partnership return for that year. 2012 income tax forms This filing date does not include any extension of time. 2012 income tax forms If the partnership agreement or any modification is silent on any matter, the provisions of local law are treated as part of the agreement. 2012 income tax forms Terminating a Partnership A partnership terminates when one of the following events takes place. 2012 income tax forms All its operations are discontinued and no part of any business, financial operation, or venture is continued by any of its partners in a partnership. 2012 income tax forms At least 50% of the total interest in partnership capital and profits is sold or exchanged within a 12-month period, including a sale or exchange to another partner. 2012 income tax forms Unlike other partnerships, an electing large partnership does not terminate on the sale or exchange of 50% or more of the partnership interests within a 12-month period. 2012 income tax forms See section 1. 2012 income tax forms 708-1(b) of the regulations for more information on the termination of a partnership. 2012 income tax forms For special rules that apply to a merger, consolidation, or division of a partnership, see sections 1. 2012 income tax forms 708-1(c) and 1. 2012 income tax forms 708-1(d) of the regulations. 2012 income tax forms Date of termination. 2012 income tax forms   The partnership's tax year ends on the date of termination. 2012 income tax forms For the event described in (1), above, the date of termination is the date the partnership completes the winding up of its affairs. 2012 income tax forms For the event described in (2), above, the date of termination is the date of the sale or exchange of a partnership interest that, by itself or together with other sales or exchanges in the preceding 12 months, transfers an interest of 50% or more in both capital and profits. 2012 income tax forms Short period return. 2012 income tax forms   If a partnership is terminated before the end of what would otherwise be its tax year, Form 1065 must be filed for the short period, which is the period from the beginning of the tax year through the date of termination. 2012 income tax forms The return is due the 15th day of the fourth month following the date of termination. 2012 income tax forms See Partnership Return (Form 1065), later, for information about filing Form 1065. 2012 income tax forms Conversion of partnership into limited liability company (LLC). 2012 income tax forms   The conversion of a partnership into an LLC classified as a partnership for federal tax purposes does not terminate the partnership. 2012 income tax forms The conversion is not a sale, exchange, or liquidation of any partnership interest; the partnership's tax year does not close; and the LLC can continue to use the partnership's taxpayer identification number. 2012 income tax forms   However, the conversion may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities. 2012 income tax forms Because the partners share recourse and nonrecourse liabilities differently, their bases must be adjusted to reflect the new sharing ratios. 2012 income tax forms If a decrease in a partner's share of liabilities exceeds the partner's basis, he or she must recognize gain on the excess. 2012 income tax forms For more information, see Effect of Partnership Liabilities under Basis of Partner's Interest, later. 2012 income tax forms   The same rules apply if an LLC classified as a partnership is converted into a partnership. 2012 income tax forms IRS e-file (Electronic Filing) Please click here for the text description of the image. 2012 income tax forms e-file Certain partnerships with more than 100 partners are required to file Form 1065, Schedules K-1, and related forms and schedules electronically (e-file). 2012 income tax forms Other partnerships generally have the option to file electronically. 2012 income tax forms For details about IRS e-file, see the Form 1065 instructions. 2012 income tax forms Exclusion From Partnership Rules Certain partnerships that do not actively conduct a business can choose to be completely or partially excluded from being treated as partnerships for federal income tax purposes. 2012 income tax forms All the partners must agree to make the choice, and the partners must be able to compute their own taxable income without computing the partnership's income. 2012 income tax forms However, the partners are not exempt from the rule that limits a partner's distributive share of partnership loss to the adjusted basis of the partner's partnership interest. 2012 income tax forms Nor are they exempt from the requirement of a business purpose for adopting a tax year for the partnership that differs from its required tax year. 2012 income tax forms Investing partnership. 2012 income tax forms   An investing partnership can be excluded if the participants in the joint purchase, retention, sale, or exchange of investment property meet all the following requirements. 2012 income tax forms They own the property as co-owners. 2012 income tax forms They reserve the right separately to take or dispose of their shares of any property acquired or retained. 2012 income tax forms They do not actively conduct business or irrevocably authorize some person acting in a representative capacity to purchase, sell, or exchange the investment property. 2012 income tax forms Each separate participant can delegate authority to purchase, sell, or exchange his or her share of the investment property for the time being for his or her account, but not for a period of more than a year. 2012 income tax forms Operating agreement partnership. 2012 income tax forms   An operating agreement partnership group can be excluded if the participants in the joint production, extraction, or use of property meet all the following requirements. 2012 income tax forms They own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights. 2012 income tax forms They reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used. 2012 income tax forms They do not jointly sell services or the property produced or extracted. 2012 income tax forms Each separate participant can delegate authority to sell his or her share of the property produced or extracted for the time being for his or her account, but not for a period of time in excess of the minimum needs of the industry, and in no event for more than one year. 2012 income tax forms However, this exclusion does not apply to an unincorporated organization one of whose principal purposes is cycling, manufacturing, or processing for persons who are not members of the organization. 2012 income tax forms Electing the exclusion. 2012 income tax forms   An eligible organization that wishes to be excluded from the partnership rules must make the election not later than the time for filing the partnership return for the first tax year for which exclusion is desired. 2012 income tax forms This filing date includes any extension of time. 2012 income tax forms See Regulations section 1. 2012 income tax forms 761-2(b) for the procedures to follow. 2012 income tax forms Partnership Return (Form 1065) Every partnership that engages in a trade or business or has gross income must file an information return on Form 1065 showing its income, deductions, and other required information. 2012 income tax forms The partnership return must show the names and addresses of each partner and each partner's distributive share of taxable income. 2012 income tax forms The return must be signed by a general partner. 2012 income tax forms If a limited liability company is treated as a partnership, it must file Form 1065 and one of its members must sign the return. 2012 income tax forms A partnership is not considered to engage in a trade or business, and is not required to file a Form 1065, for any tax year in which it neither receives income nor pays or incurs any expenses treated as deductions or credits for federal income tax purposes. 2012 income tax forms See the Instructions for Form 1065 for more information about who must file Form 1065. 2012 income tax forms Partnership Distributions Partnership distributions include the following. 2012 income tax forms A withdrawal by a partner in anticipation of the current year's earnings. 2012 income tax forms A distribution of the current year's or prior years' earnings not needed for working capital. 2012 income tax forms A complete or partial liquidation of a partner's interest. 2012 income tax forms A distribution to all partners in a complete liquidation of the partnership. 2012 income tax forms A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. 2012 income tax forms If any gain or loss from the distribution is recognized by the partner, it must be reported on his or her return for the tax year in which the distribution is received. 2012 income tax forms Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year. 2012 income tax forms Effect on partner's basis. 2012 income tax forms   A partner's adjusted basis in his or her partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to the partner. 2012 income tax forms See Adjusted Basis under Basis of Partner's Interest, later. 2012 income tax forms Effect on partnership. 2012 income tax forms   A partnership generally does not recognize any gain or loss because of distributions it makes to partners. 2012 income tax forms The partnership may be able to elect to adjust the basis of its undistributed property. 2012 income tax forms Certain distributions treated as a sale or exchange. 2012 income tax forms   When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution. 2012 income tax forms Unrealized receivables or substantially appreciated inventory items distributed in exchange for any part of the partner's interest in other partnership property, including money. 2012 income tax forms Other property (including money) distributed in exchange for any part of a partner's interest in unrealized receivables or substantially appreciated inventory items. 2012 income tax forms   See Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. 2012 income tax forms   This treatment does not apply to the following distributions. 2012 income tax forms A distribution of property to the partner who contributed the property to the partnership. 2012 income tax forms Payments made to a retiring partner or successor in interest of a deceased partner that are the partner's distributive share of partnership income or guaranteed payments. 2012 income tax forms Substantially appreciated inventory items. 2012 income tax forms   Inventory items of the partnership are considered to have appreciated substantially in value if, at the time of the distribution, their total fair market value is more than 120% of the partnership's adjusted basis for the property. 2012 income tax forms However, if a principal purpose for acquiring inventory property is to avoid ordinary income treatment by reducing the appreciation to less than 120%, that property is excluded. 2012 income tax forms Partner's Gain or Loss A partner generally recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner's interest in the partnership. 2012 income tax forms Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. 2012 income tax forms If partnership property (other than marketable securities treated as money) is distributed to a partner, he or she generally does not recognize any gain until the sale or other disposition of the property. 2012 income tax forms For exceptions to these rules, see Distribution of partner's debt and Net precontribution gain, later. 2012 income tax forms Also, see Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. 2012 income tax forms Example. 2012 income tax forms The adjusted basis of Jo's partnership interest is $14,000. 2012 income tax forms She receives a distribution of $8,000 cash and land that has an adjusted basis of $2,000 and a fair market value of $3,000. 2012 income tax forms Because the cash received does not exceed the basis of her partnership interest, Jo does not recognize any gain on the distribution. 2012 income tax forms Any gain on the land will be recognized when she sells or otherwise disposes of it. 2012 income tax forms The distribution decreases the adjusted basis of Jo's partnership interest to $4,000 [$14,000 − ($8,000 + $2,000)]. 2012 income tax forms Marketable securities treated as money. 2012 income tax forms   Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. 2012 income tax forms This treatment, however, does not generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner. 2012 income tax forms   The amount treated as money is the security's fair market value when distributed, reduced (but not below zero) by the excess (if any) of: The partner's distributive share of the gain that would be recognized had the partnership sold all its marketable securities at their fair market value immediately before the transaction resulting in the distribution, over The partner's distributive share of the gain that would be recognized had the partnership sold all such securities it still held after the distribution at the fair market value in (1). 2012 income tax forms   For more information, including the definition of marketable securities, see section 731(c) of the Internal Revenue Code. 2012 income tax forms Loss on distribution. 2012 income tax forms   A partner does not recognize loss on a partnership distribution unless all the following requirements are met. 2012 income tax forms The adjusted basis of the partner's interest in the partnership exceeds the distribution. 2012 income tax forms The partner's entire interest in the partnership is liquidated. 2012 income tax forms The distribution is in money, unrealized receivables, or inventory items. 2012 income tax forms   There are exceptions to these general rules. 2012 income tax forms See the following discussions. 2012 income tax forms Also, see Liquidation at Partner's Retirement or Death under Disposition of Partner's Interest, later. 2012 income tax forms Distribution of partner's debt. 2012 income tax forms   If a partnership acquires a partner's debt and extinguishes the debt by distributing it to the partner, the partner will recognize capital gain or loss to the extent the fair market value of the debt differs from the basis of the debt (determined under the rules discussed in Partner's Basis for Distributed Property, later). 2012 income tax forms   The partner is treated as having satisfied the debt for its fair market value. 2012 income tax forms If the issue price (adjusted for any premium or discount) of the debt exceeds its fair market value when distributed, the partner may have to include the excess amount in income as canceled debt. 2012 income tax forms   Similarly, a deduction may be available to a corporate partner if the fair market value of the debt at the time of distribution exceeds its adjusted issue price. 2012 income tax forms Net precontribution gain. 2012 income tax forms   A partner generally must recognize gain on the distribution of property (other than money) if the partner contributed appreciated property to the partnership during the 7-year period before the distribution. 2012 income tax forms   The gain recognized is the lesser of the following amounts. 2012 income tax forms The excess of: The fair market value of the property received in the distribution, over The adjusted basis of the partner's interest in the partnership immediately before the distribution, reduced (but not below zero) by any money received in the distribution. 2012 income tax forms The “net precontribution gain” of the partner. 2012 income tax forms This is the net gain the partner would recognize if all the property contributed by the partner within 7 years of the distribution, and held by the partnership immediately before the distribution, were distributed to another partner, other than a partner who owns more than 50% of the partnership. 2012 income tax forms For information about the distribution of contributed property to another partner, see Contribution of Property , under Transactions Between Partnership and Partners, later. 2012 income tax forms   The character of the gain is determined by reference to the character of the net precontribution gain. 2012 income tax forms This gain is in addition to any gain the partner must recognize if the money distributed is more than his or her basis in the partnership. 2012 income tax forms For these rules, the term “money” includes marketable securities treated as money, as discussed earlier. 2012 income tax forms Effect on basis. 2012 income tax forms   The adjusted basis of the partner's interest in the partnership is increased by any net precontribution gain recognized by the partner. 2012 income tax forms Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. 2012 income tax forms See Basis of Partner's Interest , later. 2012 income tax forms   The partnership must adjust its basis in any property the partner contributed within 7 years of the distribution to reflect any gain that partner recognizes under this rule. 2012 income tax forms Exceptions. 2012 income tax forms   Any part of a distribution that is property the partner previously contributed to the partnership is not taken into account in determining the amount of the excess distribution or the partner's net precontribution gain. 2012 income tax forms For this purpose, the partner's previously contributed property does not include a contributed interest in an entity to the extent its value is due to property contributed to the entity after the interest was contributed to the partnership. 2012 income tax forms   Recognition of gain under this rule also does not apply to a distribution of unrealized receivables or substantially appreciated inventory items if the distribution is treated as a sale or exchange, as discussed earlier. 2012 income tax forms Partner's Basis for Distributed Property Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed to the partner by a partnership is its adjusted basis to the partnership immediately before the distribution. 2012 income tax forms However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. 2012 income tax forms Example 1. 2012 income tax forms The adjusted basis of Emily's partnership interest is $30,000. 2012 income tax forms She receives a distribution of property that has an adjusted basis of $20,000 to the partnership and $4,000 in cash. 2012 income tax forms Her basis for the property is $20,000. 2012 income tax forms Example 2. 2012 income tax forms The adjusted basis of Steve's partnership interest is $10,000. 2012 income tax forms He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. 2012 income tax forms His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives). 2012 income tax forms Complete liquidation of partner's interest. 2012 income tax forms   The basis of property received in complete liquidation of a partner's interest is the adjusted basis of the partner's interest in the partnership reduced by any money distributed to the partner in the same transaction. 2012 income tax forms Partner's holding period. 2012 income tax forms   A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. 2012 income tax forms If the property was contributed to the partnership by a partner, then the period it was held by that partner is also included. 2012 income tax forms Basis divided among properties. 2012 income tax forms   If the basis of property received is the adjusted basis of the partner's interest in the partnership (reduced by money received in the same transaction), it must be divided among the properties distributed to the partner. 2012 income tax forms For property distributed after August 5, 1997, allocate the basis using the following rules. 2012 income tax forms Allocate the basis first to unrealized receivables and inventory items included in the distribution by assigning a basis to each item equal to the partnership's adjusted basis in the item immediately before the distribution. 2012 income tax forms If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. 2012 income tax forms Allocate any remaining basis to properties other than unrealized receivables and inventory items by assigning a basis to each property equal to the partnership's adjusted basis in the property immediately before the distribution. 2012 income tax forms If the allocable basis exceeds the total of these assigned bases, increase the assigned bases by the amount of the excess. 2012 income tax forms If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. 2012 income tax forms Allocating a basis increase. 2012 income tax forms   Allocate any basis increase required in rule (2), above, first to properties with unrealized appreciation to the extent of the unrealized appreciation. 2012 income tax forms If the basis increase is less than the total unrealized appreciation, allocate it among those properties in proportion to their respective amounts of unrealized appreciation. 2012 income tax forms Allocate any remaining basis increase among all the properties in proportion to their respective fair market values. 2012 income tax forms Example. 2012 income tax forms Eun's basis in her partnership interest is $55,000. 2012 income tax forms In a distribution in liquidation of her entire interest, she receives properties A and B, neither of which is inventory or unrealized receivables. 2012 income tax forms Property A has an adjusted basis to the partnership of $5,000 and a fair market value of $40,000. 2012 income tax forms Property B has an adjusted basis to the partnership of $10,000 and a fair market value of $10,000. 2012 income tax forms To figure her basis in each property, Eun first assigns bases of $5,000 to property A and $10,000 to property B (their adjusted bases to the partnership). 2012 income tax forms This leaves a $40,000 basis increase (the $55,000 allocable basis minus the $15,000 total of the assigned bases). 2012 income tax forms She first allocates $35,000 to property A (its unrealized appreciation). 2012 income tax forms The remaining $5,000 is allocated between the properties based on their fair market values. 2012 income tax forms $4,000 ($40,000/$50,000) is allocated to property A and $1,000 ($10,000/$50,000) is allocated to property B. 2012 income tax forms Eun's basis in property A is $44,000 ($5,000 + $35,000 + $4,000) and her basis in property B is $11,000 ($10,000 + $1,000). 2012 income tax forms Allocating a basis decrease. 2012 income tax forms   Use the following rules to allocate any basis decrease required in rule (1) or rule (2), earlier. 2012 income tax forms Allocate the basis decrease first to items with unrealized depreciation to the extent of the unrealized depreciation. 2012 income tax forms If the basis decrease is less than the total unrealized depreciation, allocate it among those items in proportion to their respective amounts of unrealized depreciation. 2012 income tax forms Allocate any remaining basis decrease among all the items in proportion to their respective assigned basis amounts (as decreased in (1)). 2012 income tax forms Example. 2012 income tax forms Armando's basis in his partnership interest is $20,000. 2012 income tax forms In a distribution in liquidation of his entire interest, he receives properties C and D, neither of which is inventory or unrealized receivables. 2012 income tax forms Property C has an adjusted basis to the partnership of $15,000 and a fair market value of $15,000. 2012 income tax forms Property D has an adjusted basis to the partnership of $15,000 and a fair market value of $5,000. 2012 income tax forms To figure his basis in each property, Armando first assigns bases of $15,000 to property C and $15,000 to property D (their adjusted bases to the partnership). 2012 income tax forms This leaves a $10,000 basis decrease (the $30,000 total of the assigned bases minus the $20,000 allocable basis). 2012 income tax forms He allocates the entire $10,000 to property D (its unrealized depreciation). 2012 income tax forms Armando's basis in property C is $15,000 and his basis in property D is $5,000 ($15,000 − $10,000). 2012 income tax forms Distributions before August 6, 1997. 2012 income tax forms   For property distributed before August 6, 1997, allocate the basis using the following rules. 2012 income tax forms Allocate the basis first to unrealized receivables and inventory items included in the distribution to the extent of the partnership's adjusted basis in those items. 2012 income tax forms If the partnership's adjusted basis in those items exceeded the allocable basis, allocate the basis among the items in proportion to their adjusted bases to the partnership. 2012 income tax forms Allocate any remaining basis to other distributed properties in proportion to their adjusted bases to the partnership. 2012 income tax forms Partner's interest more than partnership basis. 2012 income tax forms   If the basis of a partner's interest to be divided in a complete liquidation of the partner's interest is more than the partnership's adjusted basis for the unrealized receivables and inventory items distributed, and if no other property is distributed to which the partner can apply the remaining basis, the partner has a capital loss to the extent of the remaining basis of the partnership interest. 2012 income tax forms Special adjustment to basis. 2012 income tax forms   A partner who acquired any part of his or her partnership interest in a sale or exchange or upon the death of another partner may be able to choose a special basis adjustment for property distributed by the partnership. 2012 income tax forms To choose the special adjustment, the partner must have received the distribution within 2 years after acquiring the partnership interest. 2012 income tax forms Also, the partnership must not have chosen the optional adjustment to basis when the partner acquired the partnership interest. 2012 income tax forms   If a partner chooses this special basis adjustment, the partner's basis for the property distributed is the same as it would have been if the partnership had chosen the optional adjustment to basis. 2012 income tax forms However, this assigned basis is not reduced by any depletion or depreciation that would have been allowed or allowable if the partnership had previously chosen the optional adjustment. 2012 income tax forms   The choice must be made with the partner's tax return for the year of the distribution if the distribution includes any property subject to depreciation, depletion, or amortization. 2012 income tax forms If the choice does not have to be made for the distribution year, it must be made with the return for the first year in which the basis of the distributed property is pertinent in determining the partner's income tax. 2012 income tax forms   A partner choosing this special basis adjustment must attach a statement to his or her tax return that the partner chooses under section 732(d) of the Internal Revenue Code to adjust the basis of property received in a distribution. 2012 income tax forms The statement must show the computation of the special basis adjustment for the property distributed and list the properties to which the adjustment has been allocated. 2012 income tax forms Example. 2012 income tax forms Chin Ho purchased a 25% interest in X partnership for $17,000 cash. 2012 income tax forms At the time of the purchase, the partnership owned inventory having a basis to the partnership of $14,000 and a fair market value of $16,000. 2012 income tax forms Thus, $4,000 of the $17,000 he paid was attributable to his share of inventory with a basis to the partnership of $3,500. 2012 income tax forms Within 2 years after acquiring his interest, Chin Ho withdrew from the partnership and for his entire interest received cash of $1,500, inventory with a basis to the partnership of $3,500, and other property with a basis of $6,000. 2012 income tax forms The value of the inventory received was 25% of the value of all partnership inventory. 2012 income tax forms (It is immaterial whether the inventory he received was on hand when he acquired his interest. 2012 income tax forms ) Since the partnership from which Chin Ho withdrew did not make the optional adjustment to basis, he chose to adjust the basis of the inventory received. 2012 income tax forms His share of the partnership's basis for the inventory is increased by $500 (25% of the $2,000 difference between the $16,000 fair market value of the inventory and its $14,000 basis to the partnership at the time he acquired his interest). 2012 income tax forms The adjustment applies only for purposes of determining his new basis in the inventory, and not for purposes of partnership gain or loss on disposition. 2012 income tax forms The total to be allocated among the properties Chin Ho received in the distribution is $15,500 ($17,000 basis of his interest − $1,500 cash received). 2012 income tax forms His basis in the inventory items is $4,000 ($3,500 partnership basis + $500 special adjustment). 2012 income tax forms The remaining $11,500 is allocated to his new basis for the other property he received. 2012 income tax forms Mandatory adjustment. 2012 income tax forms   A partner does not always have a choice of making this special adjustment to basis. 2012 income tax forms The special adjustment to basis must be made for a distribution of property (whether or not within 2 years after the partnership interest was acquired) if all the following conditions existed when the partner received the partnership interest. 2012 income tax forms The fair market value of all partnership property (other than money) was more than 110% of its adjusted basis to the partnership. 2012 income tax forms If there had been a liquidation of the partner's interest immediately after it was acquired, an allocation of the basis of that interest under the general rules (discussed earlier under Basis divided among properties) would have decreased the basis of property that could not be depreciated, depleted, or amortized and increased the basis of property that could be. 2012 income tax forms The optional basis adjustment, if it had been chosen by the partnership, would have changed the partner's basis for the property actually distributed. 2012 income tax forms Required statement. 2012 income tax forms   Generally, if a partner chooses a special basis adjustment and notifies the partnership, or if the partnership makes a distribution for which the special basis adjustment is mandatory, the partnership must provide a statement to the partner. 2012 income tax forms The statement must provide information necessary for the partner to compute the special basis adjustment. 2012 income tax forms Marketable securities. 2012 income tax forms   A partner's basis in marketable securities received in a partnership distribution, as determined in the preceding discussions, is increased by any gain recognized by treating the securities as money. 2012 income tax forms See Marketable securities treated as money under Partner's Gain or Loss, earlier. 2012 income tax forms The basis increase is allocated among the securities in proportion to their respective amounts of unrealized appreciation before the basis increase. 2012 income tax forms Transactions Between Partnership and Partners For certain transactions between a partner and his or her partnership, the partner is treated as not being a member of the partnership. 2012 income tax forms These transactions include the following. 2012 income tax forms Performing services for, or transferring property to, a partnership if: There is a related allocation and distribution to a partner, and The entire transaction, when viewed together, is properly characterized as occurring between the partnership and a partner not acting in the capacity of a partner. 2012 income tax forms Transferring money or other property to a partnership if: There is a related transfer of money or other property by the partnership to the contributing partner or another partner, and The transfers together are properly characterized as a sale or exchange of property. 2012 income tax forms Payments by accrual basis partnership to cash basis partner. 2012 income tax forms   A partnership that uses an accrual method of accounting cannot deduct any business expense owed to a cash basis partner until the amount is paid. 2012 income tax forms However, this rule does not apply to guaranteed payments made to a partner, which are generally deductible when accrued. 2012 income tax forms Guaranteed Payments Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. 2012 income tax forms A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. 2012 income tax forms This treatment is for purposes of determining gross income and deductible business expenses only. 2012 income tax forms For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. 2012 income tax forms Guaranteed payments are not subject to income tax withholding. 2012 income tax forms The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. 2012 income tax forms They are also listed on Schedules K and K-1 of the partnership return. 2012 income tax forms The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his or her distributive share of the partnership's other ordinary income. 2012 income tax forms Guaranteed payments made to partners for organizing the partnership or syndicating interests in the partnership are capital expenses. 2012 income tax forms Generally, organizational and syndication expenses are not deductible by the partnership. 2012 income tax forms However, a partnership can elect to deduct a portion of its organizational expenses and amortize the remaining expenses (see Business start-up and organizational costs in the Instructions for Form 1065). 2012 income tax forms Organizational expenses (if the election is not made) and syndication expenses paid to partners must be reported on the partners' Schedule K-1 as guaranteed payments. 2012 income tax forms Minimum payment. 2012 income tax forms   If a partner is to receive a minimum payment from the partnership, the guaranteed payment is the amount by which the minimum payment is more than the partner's distributive share of the partnership income before taking into account the guaranteed payment. 2012 income tax forms Example. 2012 income tax forms Under a partnership agreement, Divya is to receive 30% of the partnership income, but not less than $8,000. 2012 income tax forms The partnership has net income of $20,000. 2012 income tax forms Divya's share, without regard to the minimum guarantee, is $6,000 (30% × $20,000). 2012 income tax forms The guaranteed payment that can be deducted by the partnership is $2,000 ($8,000 − $6,000). 2012 income tax forms Divya's income from the partnership is $8,000, and the remaining $12,000 of partnership income will be reported by the other partners in proportion to their shares under the partnership agreement. 2012 income tax forms If the partnership net income had been $30,000, there would have been no guaranteed payment since her share, without regard to the guarantee, would have been greater than the guarantee. 2012 income tax forms Self-employed health insurance premiums. 2012 income tax forms   Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. 2012 income tax forms The partnership can deduct the payments as a business expense, and the partner must include them in gross income. 2012 income tax forms However, if the partnership accounts for insurance paid for a partner as a reduction in distributions to the partner, the partnership cannot deduct the premiums. 2012 income tax forms   A partner who qualifies can deduct 100% of the health insurance premiums paid by the partnership on his or her behalf as an adjustment to income. 2012 income tax forms The partner cannot deduct the premiums for any calendar month, or part of a month, in which the partner is eligible to participate in any subsidized health plan maintained by any employer of the partner, the partner's spouse, the partner's dependents, or any children under age 27 who are not dependents. 2012 income tax forms For more information on the self-employed health insurance deduction, see chapter 6 in Publication 535. 2012 income tax forms Including payments in partner's income. 2012 income tax forms   Guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends. 2012 income tax forms Example 1. 2012 income tax forms Under the terms of a partnership agreement, Erica is entitled to a fixed annual payment of $10,000 without regard to the income of the partnership. 2012 income tax forms Her distributive share of the partnership income is 10%. 2012 income tax forms The partnership has $50,000 of ordinary income after deducting the guaranteed payment. 2012 income tax forms She must include ordinary income of $15,000 ($10,000 guaranteed payment + $5,000 ($50,000 × 10%) distributive share) on her individual income tax return for her tax year in which the partnership's tax year ends. 2012 income tax forms Example 2. 2012 income tax forms Lamont is a calendar year taxpayer who is a partner in a partnership. 2012 income tax forms The partnership uses a fiscal year that ended January 31, 2013. 2012 income tax forms Lamont received guaranteed payments from the partnership from February 1, 2012, until December 31, 2012. 2012 income tax forms He must include these guaranteed payments in income for 2013 and report them on his 2013 income tax return. 2012 income tax forms Payments resulting in loss. 2012 income tax forms   If guaranteed payments to a partner result in a partnership loss in which the partner shares, the partner must report the full amount of the guaranteed payments as ordinary income. 2012 income tax forms The partner separately takes into account his or her distributive share of the partnership loss, to the extent of the adjusted basis of the partner's partnership interest. 2012 income tax forms Sale or Exchange of Property Special rules apply to a sale or exchange of property between a partnership and certain persons. 2012 income tax forms Losses. 2012 income tax forms   Losses will not be allowed from a sale or exchange of property (other than an interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%. 2012 income tax forms   If the sale or exchange is between two partnerships in which the same persons directly or indirectly own more than 50% of the capital or profits interests in each partnership, no deduction of a loss is allowed. 2012 income tax forms   The basis of each partner's interest in the partnership is decreased (but not below zero) by the partner's share of the disallowed loss. 2012 income tax forms   If the purchaser later sells the property, only the gain realized that is greater than the loss not allowed will be taxable. 2012 income tax forms If any gain from the sale of the property is not recognized because of this rule, the basis of each partner's interest in the partnership is increased by the partner's share of that gain. 2012 income tax forms Gains. 2012 income tax forms   Gains are treated as ordinary income in a sale or exchange of property directly or indirectly between a person and a partnership, or between two partnerships, if both of the following tests are met. 2012 income tax forms More than 50% of the capital or profits interest in the partnership(s) is directly or indirectly owned by the same person(s). 2012 income tax forms The property in the hands of the transferee immediately after the transfer is not a capital asset. 2012 income tax forms Property that is not a capital asset includes accounts receivable, inventory, stock-in-trade, and depreciable or real property used in a trade or business. 2012 income tax forms More than 50% ownership. 2012 income tax forms   To determine if there is more than 50% ownership in partnership capital or profits, the following rules apply. 2012 income tax forms An interest directly or indirectly owned by, or for, a corporation, partnership, estate, or trust is considered to be owned proportionately by, or for, its shareholders, partners, or beneficiaries. 2012 income tax forms An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. 2012 income tax forms For this rule, “family” includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants. 2012 income tax forms If a person is considered to own an interest using rule (1), that person (the “constructive owner”) is treated as if actually owning that interest when rules (1) and (2) are applied. 2012 income tax forms However, if a person is considered to own an interest using rule (2), that person is not treated as actually owning that interest in reapplying rule (2) to make another person the constructive owner. 2012 income tax forms Example. 2012 income tax forms Individuals A and B and Trust T are equal partners in Partnership ABT. 2012 income tax forms A's husband, AH, is the sole beneficiary of Trust T. 2012 income tax forms Trust T's partnership interest will be attributed to AH only for the purpose of further attributing the interest to A. 2012 income tax forms As a result, A is a more-than-50% partner. 2012 income tax forms This means that any deduction for losses on transactions between her and ABT will not be allowed, and gain from property that in the hands of the transferee is not a capital asset is treated as ordinary, rather than capital, gain. 2012 income tax forms More information. 2012 income tax forms   For more information on these special rules, see Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. 2012 income tax forms Contribution of Property Usually, neither the partner nor the partnership recognizes a gain or loss when property is contributed to the partnership in exchange for a partnership interest. 2012 income tax forms This applies whether a partnership is being formed or is already operating. 2012 income tax forms The partnership's holding period for the property includes the partner's holding period. 2012 income tax forms The contribution of limited partnership interests in one partnership for limited partnership interests in another partnership qualifies as a tax-free contribution of property to the second partnership if the transaction is made for business purposes. 2012 income tax forms The exchange is not subject to the rules explained later under Disposition of Partner's Interest. 2012 income tax forms Disguised sales. 2012 income tax forms   A contribution of money or other property to the partnership followed by a distribution of different property from the partnership to the partner is treated not as a contribution and distribution, but as a sale of property, if both of the following tests are met. 2012 income tax forms The distribution would not have been made but for the contribution. 2012 income tax forms The partner's right to the distribution does not depend on the success of partnership operations. 2012 income tax forms   All facts and circumstances are considered in determining if the contribution and distribution are more properly characterized as a sale. 2012 income tax forms However, if the contribution and distribution occur within 2 years of each other, the transfers are presumed to be a sale unless the facts clearly indicate that the transfers are not a sale. 2012 income tax forms If the contribution and distribution occur more than 2 years apart, the transfers are presumed not to be a sale unless the facts clearly indicate that the transfers are a sale. 2012 income tax forms Form 8275 required. 2012 income tax forms   A partner must attach Form 8275, Disclosure Statement, (or other statement) to his or her return if the partner contributes property to a partnership and, within 2 years (before or after the contribution), the partnership transfers money or other consideration to the partner. 2012 income tax forms For exceptions to this requirement, see section 1. 2012 income tax forms 707-3(c)(2) of the regulations. 2012 income tax forms   A partnership must attach Form 8275 (or other statement) to its return if it distributes property to a partner, and, within 2 years (before or after the distribution), the partner transfers money or other consideration to the partnership. 2012 income tax forms   Form 8275 must include the following information. 2012 income tax forms A caption identifying the statement as a disclosure under section 707 of the Internal Revenue Code. 2012 income tax forms A description of the transferred property or money, including its value. 2012 income tax forms A description of any relevant facts in determining if the transfers are properly viewed as a disguised sale. 2012 income tax forms See section 1. 2012 income tax forms 707-3(b)(2) of the regulations for a description of the facts and circumstances considered in determining if the transfers are a disguised sale. 2012 income tax forms Contribution to partnership treated as investment company. 2012 income tax forms   Gain is recognized when property is contributed (in exchange for an interest in the partnership) to a partnership that would be treated as an investment company if it were incorporated. 2012 income tax forms   A partnership is generally treated as an investment company if over 80% of the value of its assets is held for investment and consists of certain readily marketable items. 2012 income tax forms These items include money, stocks and other equity interests in a corporation, and interests in regulated investment companies and real estate investment trusts. 2012 income tax forms For more information, see section 351(e)(1) of the Internal Revenue Code and the related regulations. 2012 income tax forms Whether a partnership is treated as an investment company under this test is ordinarily determined immediately after the transfer of property. 2012 income tax forms   This rule applies to limited partnerships and general partnerships, regardless of whether they are privately formed or publicly syndicated. 2012 income tax forms Contribution to foreign partnership. 2012 income tax forms   A domestic partnership that contributed property after August 5, 1997, to a foreign partnership in exchange for a partnership interest may have to file Form 8865 if either of the following apply. 2012 income tax forms Immediately after the contribution, the partnership owned, directly or indirectly, at least a 10% interest in the foreign partnership. 2012 income tax forms The fair market value of the property contributed to the foreign partnership, when added to other contributions of property made to the partnership during the preceding 12-month period, is greater than $100,000. 2012 income tax forms   The partnership may also have to file Form 8865, even if no contributions are made during the tax year, if it owns a 10% or more interest in a foreign partnership at any time during the year. 2012 income tax forms See the form instructions for more information. 2012 income tax forms Basis of contributed property. 2012 income tax forms   If a partner contributes property to a partnership, the partnership's basis for determining depreciation, depletion, gain, or loss for the property is the same as the partner's adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution. 2012 income tax forms Allocations to account for built-in gain or loss. 2012 income tax forms   The fair market value of property at the time it is contributed may be different from the partner's adjusted basis. 2012 income tax forms The partnership must allocate among the partners any income, deduction, gain, or loss on the property in a manner that will account for the difference. 2012 income tax forms This rule also applies to contributions of accounts payable and other accrued but unpaid items of a cash basis partner. 2012 income tax forms   The partnership can use different allocation methods for different items of contributed property. 2012 income tax forms A single reasonable method must be consistently applied to each item, and the overall method or combination of methods must be reasonable. 2012 income tax forms See section 1. 2012 income tax forms 704-3 of the regulations for allocation methods generally considered reasonable. 2012 income tax forms   If the partnership sells contributed property and recognizes gain or loss, built-in gain or loss is allocated to the contributing partner. 2012 income tax forms If contributed property is subject to depreciation or other cost recovery, the allocation of deductions for these items takes into account built-in gain or loss on the property. 2012 income tax forms However, the total depreciation, depletion, gain, or loss allocated to partners cannot be more than the depreciation or depletion allowable to the partnership or the gain or loss realized by the partnership. 2012 income tax forms Example. 2012 income tax forms Areta and Sofia formed an equal partnership. 2012 income tax forms Areta contributed $10,000 in cash to the partnership and Sofia contributed depreciable property with a fair market value of $10,000 and an adjusted basis of $4,000. 2012 income tax forms The partnership's basis for depreciation is limited to the adjusted basis of the property in Sofia's hands, $4,000. 2012 income tax forms In effect, Areta purchased an undivided one-half interest in the depreciable property with her contribution of $10,000. 2012 income tax forms Assuming that the depreciation rate is 10% a year under the General Depreciation System (GDS), she would have been entitled to a depreciation deduction of $500 per year, based on her interest in the partnership, if the adjusted basis of the property equaled its fair market value when contributed. 2012 income tax forms To simplify this example, the depreciation deductions are determined without regard to any first-year depreciation conventions. 2012 income tax forms However, since the partnership is allowed only $400 per year of depreciation (10% of $4,000), no more than $400 can be allocated between the partners. 2012 income tax forms The entire $400 must be allocated to Areta. 2012 income tax forms Distribution of contributed property to another partner. 2012 income tax forms   If a partner contributes property to a partnership and the partnership distributes the property to another partner within 7 years of the contribution, the contributing partner must recognize gain or loss on the distribution. 2012 income tax forms   The recognized gain or loss is the amount the contributing partner would have recognized if the property had been sold for its fair market value when it was distributed. 2012 income tax forms This amount is the difference between the property's basis and its fair market value at the time of contribution. 2012 income tax forms The character of the gain or loss will be the same as the character of the gain or loss that would have resulted if the partnership had sold the property to the distributee partner. 2012 income tax forms Appropriate adjustments must be made to the adjusted basis of the contributing partner's partnership interest and to the adjusted basis of the property distributed to reflect the recognized gain or loss. 2012 income tax forms Disposition of certain contributed property. 2012 income tax forms   The following rules determine the character of the partnership's gain or loss on a disposition of certain types of contributed property. 2012 income tax forms Unrealized receivables. 2012 income tax forms If the property was an unrealized receivable in the hands of the contributing partner, any gain or loss on its disposition by the partnership is ordinary income or loss. 2012 income tax forms Unrealized receivables are defined later under Payments for Unrealized Receivables and Inventory Items. 2012 income tax forms When reading the definition, substitute “partner” for “partnership. 2012 income tax forms ” Inventory items. 2012 income tax forms If the property was an inventory item in the hands of the contributing partner, any gain or loss on its disposition by the partnership within 5 years after the contribution is ordinary income or loss. 2012 income tax forms Inventory items are defined later in Payments for Unrealized Receivables and Inventory Items. 2012 income tax forms Capital loss property. 2012 income tax forms If the property was a capital asset in the contributing partner's hands, any loss on its disposition by the partnership within 5 years after the contribution is a capital loss. 2012 income tax forms The capital loss is limited to the amount by which the partner's adjusted basis for the property exceeded the property's fair market value immediately before the contribution. 2012 income tax forms Substituted basis property. 2012 income tax forms If the disposition of any of the property listed in (1), (2), or (3) is a nonrecognition transaction, these rules apply when the recipient of the property disposes of any substituted basis property (other than certain corporate stock) resulting from the transaction. 2012 income tax forms Contribution of Services A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed. 2012 income tax forms Capital interest. 2012 income tax forms   A capital interest is an interest that would give the holder a share of the proceeds if the partnership's assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. 2012 income tax forms This determination generally is made at the time of receipt of the partnership interest. 2012 income tax forms The fair market value of such an interest received by a partner as compensation for services must generally be included in the partner's gross income in the first tax year in which the partner can transfer the interest or the interest is not subject to a substantial risk of forfeiture. 2012 income tax forms The capital interest transferred as compensation for services is subject to the rules for restricted property discussed in Publication 525 under Employee Compensation. 2012 income tax forms   The fair market value of an interest in partnership capital transferred to a partner as payment for services to the partnership is a guaranteed payment, discussed earlier. 2012 income tax forms Profits interest. 2012 income tax forms   A profits interest is a partnership interest other than a capital interest. 2012 income tax forms If a person receives a profits interest for providing services to, or for the benefit of, a partnership in a partner capacity or in anticipation of being a partner, the receipt of such an interest is not a taxable event for the partner or the partnership. 2012 income tax forms However, this does not apply in the following situations. 2012 income tax forms The profits interest relates to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease. 2012 income tax forms Within 2 years of receipt, the partner disposes of the profits interest. 2012 income tax forms The profits interest is a limited partnership interest in a publicly traded partnership. 2012 income tax forms   A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests. 2012 income tax forms Basis of Partner's Interest The basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. 2012 income tax forms If the partner must recognize gain as a result of the contribution, this gain is included in the basis of his or her interest. 2012 income tax forms Any increase in a partner's individual liabilities because of an assumption of partnership liabilities is considered a contribution of money to the partnership by the partner. 2012 income tax forms Interest acquired by gift, etc. 2012 income tax forms   If a partner acquires an interest in a partnership by gift, inheritance, or under any circumstance other than by a contribution of money or property to the partnership, the partner's basis must be determined using the basis rules described in Publication 551. 2012 income tax forms Adjusted Basis There is a worksheet for adjusting the basis of a partner's interest in the partnership in the Partner's Instructions for Schedule K-1 (Form 1065). 2012 income tax forms The basis of an interest in a partnership is increased or decreased by certain items. 2012 income tax forms Increases. 2012 income tax forms   A partner's basis is increased by the following items. 2012 income tax forms The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities. 2012 income tax forms The partner's distributive share of taxable and nontaxable partnership income. 2012 income tax forms The partner's distributive share of the excess of the deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners. 2012 income tax forms Decreases. 2012 income tax forms   The partner's basis is decreased (but never below zero) by the following items. 2012 income tax forms The money (including a decreased share of partnership liabilities or an assumption of the partner's individual liabilities by the partnership) and adjusted basis of property distributed to the partner by the partnership. 2012 income tax forms The partner's distributive share of the partnership losses (including capital losses). 2012 income tax forms The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. 2012 income tax forms This includes the partner's share of any section 179 expenses, even if the partner cannot deduct the entire amount on his or her individual income tax return. 2012 income tax forms The partner's deduction for depletion for any partnership oil and gas wells, up to the proportionate share of the adjusted basis of the wells allocated to the partner. 2012 income tax forms Partner's liabilities assumed by partnership. 2012 income tax forms   If contributed property is subject to a debt or if a partner's liabilities are assumed by the partnership, the basis of that partner's interest is reduced (but not below zero) by the liability assumed by the other partners. 2012 income tax forms This partner must reduce his or her basis because the assumption of the liability is treated as a distribution of money to that partner. 2012 income tax forms The other partners' assumption of the liability is treated as a contribution by them of money to the partnership. 2012 income tax forms See Effect of Partnership Liabilities , later. 2012 income tax forms Example 1. 2012 income tax forms Ivan acquired a 20% interest in a partnership by contributing property that had an adjusted basis to him of $8,000 and a $4,000 mortgage. 2012 income tax forms The partnership assumed payment of the mortgage. 2012 income tax forms The basis of Ivan's interest is: Adjusted basis of contributed property $8,000 Minus: Part of mortgage assumed by other partners (80% × $4,000) 3,200 Basis of Ivan's partnership interest $4,800 Example 2. 2012 income tax forms If, in Example 1, the contributed property had a $12,000 mortgage, the basis of Ivan's partnership interest would be zero. 2012 income tax forms The $1,600 difference between the mortgage assumed by the other partners, $9,600 (80% × $12,000), and his basis of $8,000 would be treated as capital gain from the sale or exchange of a partnership interest. 2012 income tax forms However, this gain would not increase the basis of his partnership interest. 2012 income tax forms Book value of partner's interest. 2012 income tax forms   The adjusted basis of a partner's interest is determined without considering any amount shown in the partnership books as a capital, equity, or similar account. 2012 income tax forms Example. 2012 income tax forms Enzo contributes to his partnership property that has an adjusted basis of $400 and a fair market value of $1,000. 2012 income tax forms His partner contributes $1,000 cash. 2012 income tax forms While each partner has increased his capital account by $1,000, which will be re