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File 2012 Federal Taxes

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File 2012 Federal Taxes

File 2012 federal taxes 4. File 2012 federal taxes   Student Loan Interest Deduction Table of Contents Introduction Student Loan Interest DefinedQualified Student Loan Qualified Education Expenses Include As Interest Do Not Include As Interest When Must Interest Be Paid Can You Claim the DeductionNo Double Benefit Allowed Figuring the DeductionEffect of the Amount of Your Income on the Amount of Your Deduction Which Worksheet To Use Claiming the Deduction Introduction Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. File 2012 federal taxes However, if your modified adjusted gross income (MAGI) is less than $75,000 ($155,000 if filing a joint return) there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. File 2012 federal taxes For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. File 2012 federal taxes This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2013. File 2012 federal taxes The student loan interest deduction is taken as an adjustment to income. File 2012 federal taxes This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). File 2012 federal taxes This chapter explains: What type of loan interest you can deduct, Whether you can claim the deduction, What expenses you must have paid with the student loan, Who is an eligible student, How to figure the deduction, and How to claim the deduction. File 2012 federal taxes Table 4-1. File 2012 federal taxes Student Loan Interest Deduction at a Glance This table summarizes the features of the student loan interest deduction. File 2012 federal taxes Do not rely on this table alone. File 2012 federal taxes Refer to the text for complete details. File 2012 federal taxes Feature   Description Maximum benefit   You can reduce your income subject to tax by up to $2,500. File 2012 federal taxes Loan qualifications   Your student loan: •must have been taken out solely to pay qualified education expenses, and •cannot be from a related person or made under a qualified employer plan. File 2012 federal taxes Student qualifications   The student must be: •you, your spouse, or your dependent, and  •enrolled at least half-time in a degree program. File 2012 federal taxes Time limit on deduction   You can deduct interest paid during the remaining period of your student loan. File 2012 federal taxes Limit on modified adjusted gross income (MAGI)   $155,000 if married filing a joint return; $75,000 if single, head of household, or qualifying widow(er). File 2012 federal taxes Student Loan Interest Defined Student loan interest is interest you paid during the year on a qualified student loan. File 2012 federal taxes It includes both required and voluntary interest payments. File 2012 federal taxes Qualified Student Loan This is a loan you took out solely to pay qualified education expenses (defined later) that were: For you, your spouse, or a person who was your dependent when you took out the loan, Paid or incurred within a reasonable period of time before or after you took out the loan, and For education provided during an academic period for an eligible student. File 2012 federal taxes Loans from the following sources are not qualified student loans. File 2012 federal taxes A related person. File 2012 federal taxes A qualified employer plan. File 2012 federal taxes Your dependent. File 2012 federal taxes   Generally, your dependent is someone who is either a: Qualifying child, or Qualifying relative. File 2012 federal taxes You can find more information about dependents in Publication 501. File 2012 federal taxes Exceptions. File 2012 federal taxes   For purposes of the student loan interest deduction, there are the following exceptions to the general rules for dependents. File 2012 federal taxes An individual can be your dependent even if you are the dependent of another taxpayer. File 2012 federal taxes An individual can be your dependent even if the individual files a joint return with a spouse. File 2012 federal taxes An individual can be your dependent even if the individual had gross income for the year that was equal to or more than the exemption amount for the year ($3,900 for 2013). File 2012 federal taxes Reasonable period of time. File 2012 federal taxes   Qualified education expenses are treated as paid or incurred within a reasonable period of time before or after you take out the loan if they are paid with the proceeds of student loans that are part of a federal postsecondary education loan program. File 2012 federal taxes   Even if not paid with the proceeds of that type of loan, the expenses are treated as paid or incurred within a reasonable period of time if both of the following requirements are met. File 2012 federal taxes The expenses relate to a specific academic period, and The loan proceeds are disbursed within a period that begins 90 days before the start of that academic period and ends 90 days after the end of that academic period. File 2012 federal taxes   If neither of the above situations applies, the reasonable period of time usually is determined based on all the relevant facts and circumstances. File 2012 federal taxes Academic period. File 2012 federal taxes   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. File 2012 federal taxes In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. File 2012 federal taxes Eligible student. File 2012 federal taxes   This is a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. File 2012 federal taxes Enrolled at least half-time. File 2012 federal taxes   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study. File 2012 federal taxes   The standard for what is half of the normal full-time work load is determined by each eligible educational institution. File 2012 federal taxes However, the standard may not be lower than any of those established by the U. File 2012 federal taxes S. File 2012 federal taxes Department of Education under the Higher Education Act of 1965. File 2012 federal taxes Related person. File 2012 federal taxes   You cannot deduct interest on a loan you get from a related person. File 2012 federal taxes Related persons include: Your spouse, Your brothers and sisters, Your half brothers and half sisters, Your ancestors (parents, grandparents, etc. File 2012 federal taxes ), Your lineal descendants (children, grandchildren, etc. File 2012 federal taxes ), and Certain corporations, partnerships, trusts, and exempt organizations. File 2012 federal taxes Qualified employer plan. File 2012 federal taxes   You cannot deduct interest on a loan made under a qualified employer plan or under a contract purchased under such a plan. File 2012 federal taxes Qualified Education Expenses For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. File 2012 federal taxes They include amounts paid for the following items. File 2012 federal taxes Tuition and fees. File 2012 federal taxes Room and board. File 2012 federal taxes Books, supplies, and equipment. File 2012 federal taxes Other necessary expenses (such as transportation). File 2012 federal taxes The cost of room and board qualifies only to the extent that it is not more than the greater of: The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. File 2012 federal taxes Eligible educational institution. File 2012 federal taxes   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. File 2012 federal taxes S. File 2012 federal taxes Department of Education. File 2012 federal taxes It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. File 2012 federal taxes   Certain educational institutions located outside the United States also participate in the U. File 2012 federal taxes S. File 2012 federal taxes Department of Education's Federal Student Aid (FSA) programs. File 2012 federal taxes   For purposes of the student loan interest deduction, an eligible educational institution also includes an institution conducting an internship or residency program leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training. File 2012 federal taxes   An educational institution must meet the above criteria only during the academic period(s) for which the student loan was incurred. File 2012 federal taxes The deductibility of interest on the loan is not affected by the institution's subsequent loss of eligibility. File 2012 federal taxes    The educational institution should be able to tell you if it is an eligible educational institution. File 2012 federal taxes Adjustments to Qualified Education Expenses You must reduce your qualified education expenses by the total amount paid for them with the following tax-free items. File 2012 federal taxes Employer-provided educational assistance. File 2012 federal taxes See chapter 11, Employer-Provided Educational Assistance . File 2012 federal taxes Tax-free distribution of earnings from a Coverdell education savings account (ESA). File 2012 federal taxes See Tax-Free Distributions in chapter 7, Coverdell Education Savings Account. File 2012 federal taxes Tax-free distribution of earnings from a qualified tuition program (QTP). File 2012 federal taxes See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program. File 2012 federal taxes U. File 2012 federal taxes S. File 2012 federal taxes savings bond interest that you exclude from income because it is used to pay qualified education expenses. File 2012 federal taxes See chapter 10, Education Savings Bond Program . File 2012 federal taxes The tax-free part of scholarships and fellowships. File 2012 federal taxes See Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. File 2012 federal taxes Veterans' educational assistance. File 2012 federal taxes See Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. File 2012 federal taxes Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. File 2012 federal taxes Include As Interest In addition to simple interest on the loan, if all other requirements are met, the items discussed below can be student loan interest. File 2012 federal taxes Loan origination fee. File 2012 federal taxes   In general, this is a one-time fee charged by the lender when a loan is made. File 2012 federal taxes To be deductible as interest, a loan origination fee must be for the use of money rather than for property or services (such as commitment fees or processing costs) provided by the lender. File 2012 federal taxes A loan origination fee treated as interest accrues over the term of the loan. File 2012 federal taxes   Loan origination fees were not required to be reported on Form 1098-E, Student Loan Interest Statement, for loans made before September 1, 2004. File 2012 federal taxes If loan origination fees are not included in the amount reported on your Form 1098-E, you can use any reasonable method to allocate the loan origination fees over the term of the loan. File 2012 federal taxes The method shown in the example below allocates equal portions of the loan origination fee to each payment required under the terms of the loan. File 2012 federal taxes A method that results in the double deduction of the same portion of a loan origination fee would not be reasonable. File 2012 federal taxes Example. File 2012 federal taxes In August 2004, Bill took out a student loan for $16,000 to pay the tuition for his senior year of college. File 2012 federal taxes The lender charged a 3% loan origination fee ($480) that was withheld from the funds Bill received. File 2012 federal taxes Bill began making payments on his student loan in 2013. File 2012 federal taxes Because the loan origination fee was not included in his 2013 Form 1098-E, Bill can use any reasonable method to allocate that fee over the term of the loan. File 2012 federal taxes Bill's loan is payable in 120 equal monthly payments. File 2012 federal taxes He allocates the $480 fee equally over the total number of payments ($480 ÷ 120 months = $4 per month). File 2012 federal taxes Bill made 7 payments in 2013, so he paid $28 ($4 × 7) of interest attributable to the loan origination fee. File 2012 federal taxes To determine his student loan interest deduction, he will add the $28 to the amount of other interest reported to him on Form 1098-E. File 2012 federal taxes Capitalized interest. File 2012 federal taxes   This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. File 2012 federal taxes Capitalized interest is treated as interest for tax purposes and is deductible as payments of principal are made on the loan. File 2012 federal taxes No deduction for capitalized interest is allowed in a year in which no loan payments were made. File 2012 federal taxes Interest on revolving lines of credit. File 2012 federal taxes   This interest, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) only to pay qualified education expenses. File 2012 federal taxes See Qualified Education Expenses , earlier. File 2012 federal taxes Interest on refinanced student loans. File 2012 federal taxes   This includes interest on both: Consolidated loans—loans used to refinance more than one student loan of the same borrower, and Collapsed loans—two or more loans of the same borrower that are treated by both the lender and the borrower as one loan. File 2012 federal taxes    If you refinance a qualified student loan for more than your original loan and you use the additional amount for any purpose other than qualified education expenses, you cannot deduct any interest paid on the refinanced loan. File 2012 federal taxes Voluntary interest payments. File 2012 federal taxes   These are payments made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment or the loan has not yet entered repayment status. File 2012 federal taxes Example. File 2012 federal taxes The payments on Roger's student loan were scheduled to begin in June 2012, 6 months after he graduated from college. File 2012 federal taxes He began making payments as required. File 2012 federal taxes In September 2013, Roger enrolled in graduate school on a full-time basis. File 2012 federal taxes He applied for and was granted deferment of his loan payments while in graduate school. File 2012 federal taxes Wanting to pay down his student loan as much as possible, he made loan payments in October and November 2013. File 2012 federal taxes Even though these were voluntary (not required) payments, Roger can deduct the interest paid in October and November. File 2012 federal taxes Allocating Payments Between Interest and Principal The allocation of payments between interest and principal for tax purposes might not be the same as the allocation shown on the Form 1098-E or other statement you receive from the lender or loan servicer. File 2012 federal taxes To make the allocation for tax purposes, a payment generally applies first to stated interest that remains unpaid as of the date the payment is due, second to any loan origination fees allocable to the payment, third to any capitalized interest that remains unpaid as of the date the payment is due, and fourth to the outstanding principal. File 2012 federal taxes Example. File 2012 federal taxes In August 2012, Peg took out a $10,000 student loan to pay the tuition for her senior year of college. File 2012 federal taxes The lender charged a 3% loan origination fee ($300) that was withheld from the funds Peg received. File 2012 federal taxes The interest (5% simple) on this loan accrued while she completed her senior year and for 6 months after she graduated. File 2012 federal taxes At the end of that period, the lender determined the amount to be repaid by capitalizing all accrued but unpaid interest ($625 interest accrued from August 2012 through October 2013) and adding it to the outstanding principal balance of the loan. File 2012 federal taxes The loan is payable over 60 months, with a payment of $200. File 2012 federal taxes 51 due on the first of each month, beginning November 2013. File 2012 federal taxes Peg did not receive a Form 1098-E for 2013 from her lender because the amount of interest she paid did not require the lender to issue an information return. File 2012 federal taxes However, she did receive an account statement from the lender that showed the following 2013 payments on her outstanding loan of $10,625 ($10,000 principal + $625 accrued but unpaid interest). File 2012 federal taxes Payment Date   Payment   Stated Interest   Principal November 2013   $200. File 2012 federal taxes 51   $44. File 2012 federal taxes 27   $156. File 2012 federal taxes 24 December 2013   $200. File 2012 federal taxes 51   $43. File 2012 federal taxes 62   $156. File 2012 federal taxes 89 Totals   $401. File 2012 federal taxes 02   $87. File 2012 federal taxes 89   $313. File 2012 federal taxes 13 To determine the amount of interest that could be deducted on the loan for 2013, Peg starts with the total amount of stated interest she paid, $87. File 2012 federal taxes 89. File 2012 federal taxes Next, she allocates the loan origination fee over the term of the loan ($300 ÷ 60 months = $5 per month). File 2012 federal taxes A total of $10 ($5 of each of the two principal payments) should be treated as interest for tax purposes. File 2012 federal taxes Peg then applies the unpaid capitalized interest ($625) to the two principal payments in the order in which they were made, and determines that the remaining amount of principal of both payments is treated as interest for tax purposes. File 2012 federal taxes Assuming that Peg qualifies to take the student loan interest deduction, she can deduct $401. File 2012 federal taxes 02 ($87. File 2012 federal taxes 89 + $10 + $303. File 2012 federal taxes 13). File 2012 federal taxes For 2014, Peg will continue to allocate $5 of the loan origination fee to the principal portion of each monthly payment she makes and treat that amount as interest for tax purposes. File 2012 federal taxes She also will apply the remaining amount of capitalized interest ($625 − $303. File 2012 federal taxes 13 = $321. File 2012 federal taxes 87) to the principal payments in the order in which they are made until the balance is zero, and treat those amounts as interest for tax purposes. File 2012 federal taxes Do Not Include As Interest You cannot claim a student loan interest deduction for any of the following items. File 2012 federal taxes Interest you paid on a loan if, under the terms of the loan, you are not legally obligated to make interest payments. File 2012 federal taxes Loan origination fees that are payments for property or services provided by the lender, such as commitment fees or processing costs. File 2012 federal taxes Interest you paid on a loan to the extent payments were made through your participation in the National Health Service Corps Loan Repayment Program (the “NHSC Loan Repayment Program”) or certain other loan repayment assistance programs. File 2012 federal taxes For more information, see Student Loan Repayment Assistance in chapter 5, Student Loan Cancellations and Repayment Assistance. File 2012 federal taxes When Must Interest Be Paid You can deduct all interest you paid during the year on your student loan, including voluntary payments, until the loan is paid off. File 2012 federal taxes Can You Claim the Deduction Generally, you can claim the deduction if all of the following requirements are met. File 2012 federal taxes Your filing status is any filing status except married filing separately. File 2012 federal taxes No one else is claiming an exemption for you on his or her tax return. File 2012 federal taxes You are legally obligated to pay interest on a qualified student loan. File 2012 federal taxes You paid interest on a qualified student loan. File 2012 federal taxes Claiming an exemption for you. File 2012 federal taxes   Another taxpayer is claiming an exemption for you if he or she lists your name and other required information on his or her Form 1040 (or Form 1040A), line 6c, or Form 1040NR, line 7c. File 2012 federal taxes Example 1. File 2012 federal taxes During 2013, Josh paid $600 interest on his qualified student loan. File 2012 federal taxes Only he is legally obligated to make the payments. File 2012 federal taxes No one claimed an exemption for Josh for 2013. File 2012 federal taxes Assuming all other requirements are met, Josh can deduct the $600 of interest he paid on his 2013 Form 1040 or 1040A. File 2012 federal taxes Example 2. File 2012 federal taxes During 2013, Jo paid $1,100 interest on her qualified student loan. File 2012 federal taxes Only she is legally obligated to make the payments. File 2012 federal taxes Jo's parents claimed an exemption for her on their 2013 tax return. File 2012 federal taxes In this case, neither Jo nor her parents may deduct the student loan interest Jo paid in 2013. File 2012 federal taxes Interest paid by others. File 2012 federal taxes   If you are the person legally obligated to make interest payments and someone else makes a payment of interest on your behalf, you are treated as receiving the payments from the other person and, in turn, paying the interest. File 2012 federal taxes Example 1. File 2012 federal taxes Darla obtained a qualified student loan to attend college. File 2012 federal taxes After Darla's graduation from college, she worked as an intern for a nonprofit organization. File 2012 federal taxes As part of the internship program, the nonprofit organization made an interest payment on behalf of Darla. File 2012 federal taxes This payment was treated as additional compensation and reported in box 1 of her Form W-2. File 2012 federal taxes Assuming all other qualifications are met, Darla can deduct this payment of interest on her tax return. File 2012 federal taxes Example 2. File 2012 federal taxes Ethan obtained a qualified student loan to attend college. File 2012 federal taxes After graduating from college, the first monthly payment on his loan was due in December. File 2012 federal taxes As a gift, Ethan's mother made this payment for him. File 2012 federal taxes No one is claiming a dependency exemption for Ethan on his or her tax return. File 2012 federal taxes Assuming all other qualifications are met, Ethan can deduct this payment of interest on his tax return. File 2012 federal taxes No Double Benefit Allowed You cannot deduct as interest on a student loan any amount that is an allowable deduction under any other provision of the tax law (for example, as home mortgage interest). File 2012 federal taxes Figuring the Deduction Your student loan interest deduction for 2013 is generally the smaller of: $2,500, or The interest you paid in 2013. File 2012 federal taxes However, the amount determined above may be gradually reduced (phased out) or eliminated based on your filing status and MAGI as explained below. File 2012 federal taxes You can use Worksheet 4-1. File 2012 federal taxes Student Loan Interest Deduction Worksheet (at the end of this chapter) to figure both your MAGI and your deduction. File 2012 federal taxes Form 1098-E. File 2012 federal taxes   To help you figure your student loan interest deduction, you should receive Form 1098-E. File 2012 federal taxes Generally, an institution (such as a bank or governmental agency) that received interest payments of $600 or more during 2013 on one or more qualified student loans must send Form 1098-E (or acceptable substitute) to each borrower by January 31, 2014. File 2012 federal taxes   For qualified student loans taken out before September 1, 2004, the institution is required to include on Form 1098-E only payments of stated interest. File 2012 federal taxes Other interest payments, such as certain loan origination fees and capitalized interest, may not appear on the form you receive. File 2012 federal taxes However, if you pay qualifying interest that is not included on Form 1098-E, you can also deduct those amounts. File 2012 federal taxes See Allocating Payments Between Interest and Principal , earlier. File 2012 federal taxes    The lender may ask for a completed Form W-9S, or similar statement to obtain the borrower's name, address, and taxpayer identification number. File 2012 federal taxes The form may also be used by the borrower to certify that the student loan was incurred solely to pay for qualified education expenses. File 2012 federal taxes Effect of the Amount of Your Income on the Amount of Your Deduction The amount of your student loan interest deduction is phased out (gradually reduced) if your MAGI is between $60,000 and $75,000 ($125,000 and $155,000 if you file a joint return). File 2012 federal taxes You cannot take a student loan interest deduction if your MAGI is $75,000 or more ($155,000 or more if you file a joint return). File 2012 federal taxes Modified adjusted gross income (MAGI). File 2012 federal taxes   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return before subtracting any deduction for student loan interest. File 2012 federal taxes However, as discussed below, there may be other modifications. File 2012 federal taxes Table 4-2 shows how the amount of your MAGI can affect your student loan interest deduction. File 2012 federal taxes Table 4-2. File 2012 federal taxes Effect of MAGI on Student Loan Interest Deduction IF your filing status is. File 2012 federal taxes . File 2012 federal taxes . File 2012 federal taxes AND your MAGI is. File 2012 federal taxes . File 2012 federal taxes . File 2012 federal taxes THEN your student loan interest deduction is. File 2012 federal taxes . File 2012 federal taxes . File 2012 federal taxes single,  head of household, or qualifying widow(er) not more than $60,000 not affected by the phaseout. File 2012 federal taxes more than $60,000  but less than $75,000 reduced because of the phaseout. File 2012 federal taxes $75,000 or more eliminated by the phaseout. File 2012 federal taxes married filing joint return not more than $125,000 not affected by the phaseout. File 2012 federal taxes more than $125,000 but less than $155,000 reduced because of the phaseout. File 2012 federal taxes $155,000 or more eliminated by the phaseout. File 2012 federal taxes MAGI when using Form 1040A. File 2012 federal taxes   If you file Form 1040A, your MAGI is the AGI on line 22 of that form figured without taking into account any amount on line 18 (student loan interest deduction) and line 19 (tuition and fees deduction). File 2012 federal taxes MAGI when using Form 1040. File 2012 federal taxes   If you file Form 1040, your MAGI is the AGI on line 38 of that form figured without taking into account any amount on line 33 (student loan interest deduction), line 34 (tuition and fees deduction), or line 35 (domestic production activities deduction), and modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. File 2012 federal taxes MAGI when using Form 1040NR. File 2012 federal taxes   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form figured without taking into account any amount on line 33 (student loan interest deduction) and line 34 (domestic production activities deduction). File 2012 federal taxes MAGI when using Form 1040NR-EZ. File 2012 federal taxes   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form figured without taking into account any amount on line 9 (student loan interest deduction). File 2012 federal taxes Phaseout. File 2012 federal taxes   If your MAGI is within the range of incomes where the credit must be reduced, you must figure your reduced deduction. File 2012 federal taxes To figure the phaseout, multiply your interest deduction (before the phaseout) by a fraction. File 2012 federal taxes The numerator is your MAGI minus $60,000 ($125,000 in the case of a joint return). File 2012 federal taxes The denominator is $15,000 ($30,000 in the case of a joint return). File 2012 federal taxes Subtract the result from your deduction (before the phaseout) to give you the amount you can deduct. File 2012 federal taxes Example 1. File 2012 federal taxes During 2013 you paid $800 interest on a qualified student loan. File 2012 federal taxes Your 2013 MAGI is $145,000 and you are filing a joint return. File 2012 federal taxes You must reduce your deduction by $533, figured as follows. File 2012 federal taxes   $800 × $145,000 − $125,000  $30,000 = $533   Your reduced student loan interest deduction is $267 ($800 − $533). File 2012 federal taxes Example 2. File 2012 federal taxes The facts are the same as in Example 1 except that you paid $2,750 interest. File 2012 federal taxes Your maximum deduction for 2013 is $2,500. File 2012 federal taxes You must reduce your maximum deduction by $1,667, figured as follows. File 2012 federal taxes   $2,500 × $145,000 − $125,000  $30,000 = $1,667   In this example, your reduced student loan interest deduction is $833 ($2,500 − $1,667). File 2012 federal taxes Which Worksheet To Use Generally, you figure the deduction using the Student Loan Interest Deduction Worksheet in the instructions for Form 1040, Form 1040A, or Form 1040NR. File 2012 federal taxes However, if you are filing Form 2555, Foreign Earned Income, Form 2555-EZ, Foreign Earned Income Exclusion, or Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, or you are excluding income from sources within Puerto Rico, you must complete Worksheet 4-1. File 2012 federal taxes Student Loan Interest Deduction Worksheet at the end of this chapter. File 2012 federal taxes Claiming the Deduction The student loan interest deduction is an adjustment to income. File 2012 federal taxes To claim the deduction, enter the allowable amount on line 33 (Form 1040), line 18 (Form 1040A), line 33 (Form 1040NR), or line 9 (Form 1040NR-EZ). File 2012 federal taxes Worksheet 4-1. File 2012 federal taxes Student Loan Interest Deduction Worksheet Use this worksheet instead of the worksheet in the Form 1040 instructions if you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico. File 2012 federal taxes Before using this worksheet, you must complete Form 1040, lines 7 through 32, plus any amount to be entered on the dotted line next to line 36. File 2012 federal taxes 1. File 2012 federal taxes Enter the total interest you paid in 2013 on qualified student loans. File 2012 federal taxes Do not enter  more than $2,500 1. File 2012 federal taxes   2. File 2012 federal taxes Enter the amount from Form 1040, line 22 2. File 2012 federal taxes       3. File 2012 federal taxes Enter the total of the amounts from Form 1040,  lines 23 through 32 3. File 2012 federal taxes           4. File 2012 federal taxes Enter the total of any amounts entered on the dotted line next to Form 1040, line 36 4. File 2012 federal taxes           5. File 2012 federal taxes Add lines 3 and 4 5. File 2012 federal taxes       6. File 2012 federal taxes Subtract line 5 from line 2 6. File 2012 federal taxes       7. File 2012 federal taxes Enter any foreign earned income exclusion and/or housing  exclusion (Form 2555, line 45, or Form 2555-EZ, line 18) 7. File 2012 federal taxes       8. File 2012 federal taxes Enter any foreign housing deduction (Form 2555, line 50) 8. File 2012 federal taxes       9. File 2012 federal taxes Enter the amount of income from Puerto Rico you are excluding 9. File 2012 federal taxes       10. File 2012 federal taxes Enter the amount of income from American Samoa  you are excluding (Form 4563, line 15) 10. File 2012 federal taxes       11. File 2012 federal taxes Add lines 6 through 10. File 2012 federal taxes This is your modified adjusted gross income 11. File 2012 federal taxes   12. File 2012 federal taxes Enter the amount shown below for your filing status 12. File 2012 federal taxes     •Single, head of household, or qualifying widow(er)—$60,000       •Married filing jointly—$125,000     13. File 2012 federal taxes Is the amount on line 11 more than the amount on line 12?       □ No. File 2012 federal taxes Skip lines 13 and 14, enter -0- on line 15, and go to line 16. File 2012 federal taxes       □ Yes. File 2012 federal taxes Subtract line 12 from line 11 13. File 2012 federal taxes   14. File 2012 federal taxes Divide line 13 by $15,000 ($30,000 if married filing jointly). File 2012 federal taxes Enter the result as a decimal  (rounded to at least three places). File 2012 federal taxes If the result is 1. File 2012 federal taxes 000 or more, enter 1. File 2012 federal taxes 000 14. File 2012 federal taxes . File 2012 federal taxes 15. File 2012 federal taxes Multiply line 1 by line 14 15. File 2012 federal taxes   16. File 2012 federal taxes Student loan interest deduction. File 2012 federal taxes Subtract line 15 from line 1. File 2012 federal taxes Enter the result here  and on Form 1040, line 33. File 2012 federal taxes Do not include this amount in figuring any other  deduction on your return (such as on Schedule A, C, E, etc. File 2012 federal taxes ) 16. File 2012 federal taxes   Prev  Up  Next   Home   More Online Publications
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The File 2012 Federal Taxes

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