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Tax Planning Us 1040ez

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Tax Planning Us 1040ez

Tax planning us 1040ez 1. Tax planning us 1040ez   Travel Table of Contents Traveling Away From HomeTax Home Tax Home Different From Family Home Temporary Assignment or Job What Travel Expenses Are Deductible?Employee. Tax planning us 1040ez Business associate. Tax planning us 1040ez Bona fide business purpose. Tax planning us 1040ez Meals Travel in the United States Travel Outside the United States Luxury Water Travel Conventions If you temporarily travel away from your tax home, you can use this chapter to determine if you have deductible travel expenses. Tax planning us 1040ez This chapter discusses: Traveling away from home, Temporary assignment or job, and What travel expenses are deductible. Tax planning us 1040ez It also discusses the standard meal allowance, rules for travel inside and outside the United States, luxury water travel, and deductible convention expenses. Tax planning us 1040ez Travel expenses defined. Tax planning us 1040ez   For tax purposes, travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job. Tax planning us 1040ez   An ordinary expense is one that is common and accepted in your trade or business. Tax planning us 1040ez A necessary expense is one that is helpful and appropriate for your business. Tax planning us 1040ez An expense does not have to be required to be considered necessary. Tax planning us 1040ez   You will find examples of deductible travel expenses in Table 1-1 , later. Tax planning us 1040ez Traveling Away From Home You are traveling away from home if: Your duties require you to be away from the general area of your tax home (defined later) substantially longer than an ordinary day's work, and You need to sleep or rest to meet the demands of your work while away from home. Tax planning us 1040ez This rest requirement is not satisfied by merely napping in your car. Tax planning us 1040ez You do not have to be away from your tax home for a whole day or from dusk to dawn as long as your relief from duty is long enough to get necessary sleep or rest. Tax planning us 1040ez Example 1. Tax planning us 1040ez You are a railroad conductor. Tax planning us 1040ez You leave your home terminal on a regularly scheduled round-trip run between two cities and return home 16 hours later. Tax planning us 1040ez During the run, you have 6 hours off at your turnaround point where you eat two meals and rent a hotel room to get necessary sleep before starting the return trip. Tax planning us 1040ez You are considered to be away from home. Tax planning us 1040ez Example 2. Tax planning us 1040ez You are a truck driver. Tax planning us 1040ez You leave your terminal and return to it later the same day. Tax planning us 1040ez You get an hour off at your turnaround point to eat. Tax planning us 1040ez Because you are not off to get necessary sleep and the brief time off is not an adequate rest period, you are not traveling away from home. Tax planning us 1040ez Members of the Armed Forces. Tax planning us 1040ez   If you are a member of the U. Tax planning us 1040ez S. Tax planning us 1040ez Armed Forces on a permanent duty assignment overseas, you are not traveling away from home. Tax planning us 1040ez You cannot deduct your expenses for meals and lodging. Tax planning us 1040ez You cannot deduct these expenses even if you have to maintain a home in the United States for your family members who are not allowed to accompany you overseas. Tax planning us 1040ez If you are transferred from one permanent duty station to another, you may have deductible moving expenses, which are explained in Publication 521, Moving Expenses. Tax planning us 1040ez   A naval officer assigned to permanent duty aboard a ship that has regular eating and living facilities has a tax home (explained next) aboard the ship for travel expense purposes. Tax planning us 1040ez Tax Home To determine whether you are traveling away from home, you must first determine the location of your tax home. Tax planning us 1040ez Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. Tax planning us 1040ez It includes the entire city or general area in which your business or work is located. Tax planning us 1040ez If you have more than one regular place of business, your tax home is your main place of business. Tax planning us 1040ez See Main place of business or work , later. Tax planning us 1040ez If you do not have a regular or a main place of business because of the nature of your work, then your tax home may be the place where you regularly live. Tax planning us 1040ez See No main place of business or work , later. Tax planning us 1040ez If you do not have a regular or main place of business or post of duty and there is no place where you regularly live, you are considered an itinerant (a transient) and your tax home is wherever you work. Tax planning us 1040ez As an itinerant, you cannot claim a travel expense deduction because you are never considered to be traveling away from home. Tax planning us 1040ez Main place of business or work. Tax planning us 1040ez   If you have more than one place of work, consider the following when determining which one is your main place of business or work. Tax planning us 1040ez The total time you ordinarily spend in each place. Tax planning us 1040ez The level of your business activity in each place. Tax planning us 1040ez Whether your income from each place is significant or insignificant. Tax planning us 1040ez Example. Tax planning us 1040ez You live in Cincinnati where you have a seasonal job for 8 months each year and earn $40,000. Tax planning us 1040ez You work the other 4 months in Miami, also at a seasonal job, and earn $15,000. Tax planning us 1040ez Cincinnati is your main place of work because you spend most of your time there and earn most of your income there. Tax planning us 1040ez No main place of business or work. Tax planning us 1040ez   You may have a tax home even if you do not have a regular or main place of work. Tax planning us 1040ez Your tax home may be the home where you regularly live. Tax planning us 1040ez Factors used to determine tax home. Tax planning us 1040ez   If you do not have a regular or main place of business or work, use the following three factors to determine where your tax home is. Tax planning us 1040ez You perform part of your business in the area of your main home and use that home for lodging while doing business in the area. Tax planning us 1040ez You have living expenses at your main home that you duplicate because your business requires you to be away from that home. Tax planning us 1040ez You have not abandoned the area in which both your historical place of lodging and your claimed main home are located; you have a member or members of your family living at your main home; or you often use that home for lodging. Tax planning us 1040ez   If you satisfy all three factors, your tax home is the home where you regularly live. Tax planning us 1040ez If you satisfy only two factors, you may have a tax home depending on all the facts and circumstances. Tax planning us 1040ez If you satisfy only one factor, you are an itinerant; your tax home is wherever you work and you cannot deduct travel expenses. Tax planning us 1040ez Example 1. Tax planning us 1040ez You are single and live in Boston in an apartment you rent. Tax planning us 1040ez You have worked for your employer in Boston for a number of years. Tax planning us 1040ez Your employer enrolls you in a 12-month executive training program. Tax planning us 1040ez You do not expect to return to work in Boston after you complete your training. Tax planning us 1040ez During your training, you do not do any work in Boston. Tax planning us 1040ez Instead, you receive classroom and on-the-job training throughout the United States. Tax planning us 1040ez You keep your apartment in Boston and return to it frequently. Tax planning us 1040ez You use your apartment to conduct your personal business. Tax planning us 1040ez You also keep up your community contacts in Boston. Tax planning us 1040ez When you complete your training, you are transferred to Los Angeles. Tax planning us 1040ez You do not satisfy factor (1) because you did not work in Boston. Tax planning us 1040ez You satisfy factor (2) because you had duplicate living expenses. Tax planning us 1040ez You also satisfy factor (3) because you did not abandon your apartment in Boston as your main home, you kept your community contacts, and you frequently returned to live in your apartment. Tax planning us 1040ez Therefore, you have a tax home in Boston. Tax planning us 1040ez Example 2. Tax planning us 1040ez You are an outside salesperson with a sales territory covering several states. Tax planning us 1040ez Your employer's main office is in Newark, but you do not conduct any business there. Tax planning us 1040ez Your work assignments are temporary, and you have no way of knowing where your future assignments will be located. Tax planning us 1040ez You have a room in your married sister's house in Dayton. Tax planning us 1040ez You stay there for one or two weekends a year, but you do no work in the area. Tax planning us 1040ez You do not pay your sister for the use of the room. Tax planning us 1040ez You do not satisfy any of the three factors listed earlier. Tax planning us 1040ez You are an itinerant and have no tax home. Tax planning us 1040ez Tax Home Different From Family Home If you (and your family) do not live at your tax home (defined earlier), you cannot deduct the cost of traveling between your tax home and your family home. Tax planning us 1040ez You also cannot deduct the cost of meals and lodging while at your tax home. Tax planning us 1040ez See Example 1 , later. Tax planning us 1040ez If you are working temporarily in the same city where you and your family live, you may be considered as traveling away from home. Tax planning us 1040ez See Example 2 , later. Tax planning us 1040ez Example 1. Tax planning us 1040ez You are a truck driver and you and your family live in Tucson. Tax planning us 1040ez You are employed by a trucking firm that has its terminal in Phoenix. Tax planning us 1040ez At the end of your long runs, you return to your home terminal in Phoenix and spend one night there before returning home. Tax planning us 1040ez You cannot deduct any expenses you have for meals and lodging in Phoenix or the cost of traveling from Phoenix to Tucson. Tax planning us 1040ez This is because Phoenix is your tax home. Tax planning us 1040ez Example 2. Tax planning us 1040ez Your family home is in Pittsburgh, where you work 12 weeks a year. Tax planning us 1040ez The rest of the year you work for the same employer in Baltimore. Tax planning us 1040ez In Baltimore, you eat in restaurants and sleep in a rooming house. Tax planning us 1040ez Your salary is the same whether you are in Pittsburgh or Baltimore. Tax planning us 1040ez Because you spend most of your working time and earn most of your salary in Baltimore, that city is your tax home. Tax planning us 1040ez You cannot deduct any expenses you have for meals and lodging there. Tax planning us 1040ez However, when you return to work in Pittsburgh, you are away from your tax home even though you stay at your family home. Tax planning us 1040ez You can deduct the cost of your round trip between Baltimore and Pittsburgh. Tax planning us 1040ez You can also deduct your part of your family's living expenses for meals and lodging while you are living and working in Pittsburgh. Tax planning us 1040ez Temporary Assignment or Job You may regularly work at your tax home and also work at another location. Tax planning us 1040ez It may not be practical to return to your tax home from this other location at the end of each work day. Tax planning us 1040ez Temporary assignment vs. Tax planning us 1040ez indefinite assignment. Tax planning us 1040ez   If your assignment or job away from your main place of work is temporary, your tax home does not change. Tax planning us 1040ez You are considered to be away from home for the whole period you are away from your main place of work. Tax planning us 1040ez You can deduct your travel expenses if they otherwise qualify for deduction. Tax planning us 1040ez Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less. Tax planning us 1040ez    However, if your assignment or job is indefinite, the location of the assignment or job becomes your new tax home and you cannot deduct your travel expenses while there. Tax planning us 1040ez An assignment or job in a single location is considered indefinite if it is realistically expected to last for more than 1 year, whether or not it actually lasts for more than 1 year. Tax planning us 1040ez   If your assignment is indefinite, you must include in your income any amounts you receive from your employer for living expenses, even if they are called travel allowances and you account to your employer for them. Tax planning us 1040ez You may be able to deduct the cost of relocating to your new tax home as a moving expense. Tax planning us 1040ez See Publication 521 for more information. Tax planning us 1040ez Exception for federal crime investigations or prosecutions. Tax planning us 1040ez   If you are a federal employee participating in a federal crime investigation or prosecution, you are not subject to the 1-year rule. Tax planning us 1040ez This means you may be able to deduct travel expenses even if you are away from your tax home for more than 1 year provided you meet the other requirements for deductibility. Tax planning us 1040ez   For you to qualify, the Attorney General (or his or her designee) must certify that you are traveling: For the federal government, In a temporary duty status, and To investigate, prosecute, or provide support services for the investigation or prosecution of a federal crime. Tax planning us 1040ez Determining temporary or indefinite. Tax planning us 1040ez   You must determine whether your assignment is temporary or indefinite when you start work. Tax planning us 1040ez If you expect an assignment or job to last for 1 year or less, it is temporary unless there are facts and circumstances that indicate otherwise. Tax planning us 1040ez An assignment or job that is initially temporary may become indefinite due to changed circumstances. Tax planning us 1040ez A series of assignments to the same location, all for short periods but that together cover a long period, may be considered an indefinite assignment. Tax planning us 1040ez   The following examples illustrate whether an assignment or job is temporary or indefinite. Tax planning us 1040ez Example 1. Tax planning us 1040ez You are a construction worker. Tax planning us 1040ez You live and regularly work in Los Angeles. Tax planning us 1040ez You are a member of a trade union in Los Angeles that helps you get work in the Los Angeles area. Tax planning us 1040ez Your tax home is Los Angeles. Tax planning us 1040ez Because of a shortage of work, you took a job on a construction project in Fresno. Tax planning us 1040ez Your job was scheduled to end in 8 months. Tax planning us 1040ez The job actually lasted 10 months. Tax planning us 1040ez You realistically expected the job in Fresno to last 8 months. Tax planning us 1040ez The job actually did last less than 1 year. Tax planning us 1040ez The job is temporary and your tax home is still in Los Angeles. Tax planning us 1040ez Example 2. Tax planning us 1040ez The facts are the same as in Example 1, except that you realistically expected the work in Fresno to last 18 months. Tax planning us 1040ez The job actually was completed in 10 months. Tax planning us 1040ez Your job in Fresno is indefinite because you realistically expected the work to last longer than 1 year, even though it actually lasted less than 1 year. Tax planning us 1040ez You cannot deduct any travel expenses you had in Fresno because Fresno became your tax home. Tax planning us 1040ez Example 3. Tax planning us 1040ez The facts are the same as in Example 1, except that you realistically expected the work in Fresno to last 9 months. Tax planning us 1040ez After 8 months, however, you were asked to remain for 7 more months (for a total actual stay of 15 months). Tax planning us 1040ez Initially, you realistically expected the job in Fresno to last for only 9 months. Tax planning us 1040ez However, due to changed circumstances occurring after 8 months, it was no longer realistic for you to expect that the job in Fresno would last for 1 year or less. Tax planning us 1040ez You can only deduct your travel expenses for the first 8 months. Tax planning us 1040ez You cannot deduct any travel expenses you had after that time because Fresno became your tax home when the job became indefinite. Tax planning us 1040ez Going home on days off. Tax planning us 1040ez   If you go back to your tax home from a temporary assignment on your days off, you are not considered away from home while you are in your hometown. Tax planning us 1040ez You cannot deduct the cost of your meals and lodging there. Tax planning us 1040ez However, you can deduct your travel expenses, including meals and lodging, while traveling between your temporary place of work and your tax home. Tax planning us 1040ez You can claim these expenses up to the amount it would have cost you to stay at your temporary place of work. Tax planning us 1040ez   If you keep your hotel room during your visit home, you can deduct the cost of your hotel room. Tax planning us 1040ez In addition, you can deduct your expenses of returning home up to the amount you would have spent for meals had you stayed at your temporary place of work. Tax planning us 1040ez Probationary work period. Tax planning us 1040ez   If you take a job that requires you to move, with the understanding that you will keep the job if your work is satisfactory during a probationary period, the job is indefinite. Tax planning us 1040ez You cannot deduct any of your expenses for meals and lodging during the probationary period. Tax planning us 1040ez What Travel Expenses Are Deductible? Once you have determined that you are traveling away from your tax home, you can determine what travel expenses are deductible. Tax planning us 1040ez You can deduct ordinary and necessary expenses you have when you travel away from home on business. Tax planning us 1040ez The type of expense you can deduct depends on the facts and your circumstances. Tax planning us 1040ez Table 1-1 summarizes travel expenses you may be able to deduct. Tax planning us 1040ez You may have other deductible travel expenses that are not covered there, depending on the facts and your circumstances. Tax planning us 1040ez When you travel away from home on business, you should keep records of all the expenses you have and any advances you receive from your employer. Tax planning us 1040ez You can use a log, diary, notebook, or any other written record to keep track of your expenses. Tax planning us 1040ez The types of expenses you need to record, along with supporting documentation, are described in Table 5-1 (see chapter 5). Tax planning us 1040ez Separating costs. Tax planning us 1040ez   If you have one expense that includes the costs of meals, entertainment, and other services (such as lodging or transportation), you must allocate that expense between the cost of meals and entertainment and the cost of other services. Tax planning us 1040ez You must have a reasonable basis for making this allocation. Tax planning us 1040ez For example, you must allocate your expenses if a hotel includes one or more meals in its room charge. Tax planning us 1040ez Travel expenses for another individual. Tax planning us 1040ez    If a spouse, dependent, or other individual goes with you (or your employee) on a business trip or to a business convention, you generally cannot deduct his or her travel expenses. Tax planning us 1040ez Employee. Tax planning us 1040ez   You can deduct the travel expenses of someone who goes with you if that person: Is your employee, Has a bona fide business purpose for the travel, and Would otherwise be allowed to deduct the travel expenses. Tax planning us 1040ez Business associate. Tax planning us 1040ez   If a business associate travels with you and meets the conditions in (2) and (3), earlier, you can deduct the travel expenses you have for that person. Tax planning us 1040ez A business associate is someone with whom you could reasonably expect to actively conduct business. Tax planning us 1040ez A business associate can be a current or prospective (likely to become) customer, client, supplier, employee, agent, partner, or professional advisor. Tax planning us 1040ez Bona fide business purpose. Tax planning us 1040ez   A bona fide business purpose exists if you can prove a real business purpose for the individual's presence. Tax planning us 1040ez Incidental services, such as typing notes or assisting in entertaining customers, are not enough to make the expenses deductible. Tax planning us 1040ez Table 1-1. Tax planning us 1040ez Travel Expenses You Can Deduct   This chart summarizes expenses you can deduct when you travel away from home for business purposes. Tax planning us 1040ez IF you have expenses for. Tax planning us 1040ez . Tax planning us 1040ez . Tax planning us 1040ez THEN you can deduct the cost of. Tax planning us 1040ez . Tax planning us 1040ez . Tax planning us 1040ez transportation travel by airplane, train, bus, or car between your home and your business destination. Tax planning us 1040ez If you were provided with a free ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. Tax planning us 1040ez If you travel by ship, see Luxury Water Travel and Cruise Ships (under Conventions) for additional rules and limits. Tax planning us 1040ez taxi, commuter bus, and airport limousine fares for these and other types of transportation that take you between: The airport or station and your hotel, and The hotel and the work location of your customers or clients, your business meeting place, or your temporary work location. Tax planning us 1040ez baggage and shipping sending baggage and sample or display material between your regular and temporary work locations. Tax planning us 1040ez car operating and maintaining your car when traveling away from home on business. Tax planning us 1040ez You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking. Tax planning us 1040ez If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses. Tax planning us 1040ez lodging and meals your lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Tax planning us 1040ez Meals include amounts spent for food, beverages, taxes, and related tips. Tax planning us 1040ez See Meals for additional rules and limits. Tax planning us 1040ez cleaning dry cleaning and laundry. Tax planning us 1040ez telephone business calls while on your business trip. Tax planning us 1040ez This includes business communication by fax machine or other communication devices. Tax planning us 1040ez tips tips you pay for any expenses in this chart. Tax planning us 1040ez other other similar ordinary and necessary expenses related to your business travel. Tax planning us 1040ez These expenses might include transportation to or from a business meal, public stenographer's fees, computer rental fees, and operating and maintaining a house trailer. Tax planning us 1040ez Example. Tax planning us 1040ez Jerry drives to Chicago on business and takes his wife, Linda, with him. Tax planning us 1040ez Linda is not Jerry's employee. Tax planning us 1040ez Linda occasionally types notes, performs similar services, and accompanies Jerry to luncheons and dinners. Tax planning us 1040ez The performance of these services does not establish that her presence on the trip is necessary to the conduct of Jerry's business. Tax planning us 1040ez Her expenses are not deductible. Tax planning us 1040ez Jerry pays $199 a day for a double room. Tax planning us 1040ez A single room costs $149 a day. Tax planning us 1040ez He can deduct the total cost of driving his car to and from Chicago, but only $149 a day for his hotel room. Tax planning us 1040ez If he uses public transportation, he can deduct only his fare. Tax planning us 1040ez Meals You can deduct the cost of meals in either of the following situations. Tax planning us 1040ez It is necessary for you to stop for substantial sleep or rest to properly perform your duties while traveling away from home on business. Tax planning us 1040ez The meal is business-related entertainment. Tax planning us 1040ez Business-related entertainment is discussed in chapter 2 . Tax planning us 1040ez The following discussion deals only with meals that are not business-related entertainment. Tax planning us 1040ez Lavish or extravagant. Tax planning us 1040ez   You cannot deduct expenses for meals that are lavish or extravagant. Tax planning us 1040ez An expense is not considered lavish or extravagant if it is reasonable based on the facts and circumstances. Tax planning us 1040ez Expenses will not be disallowed merely because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. Tax planning us 1040ez 50% limit on meals. Tax planning us 1040ez   You can figure your meals expense using either of the following methods. Tax planning us 1040ez Actual cost. Tax planning us 1040ez The standard meal allowance. Tax planning us 1040ez Both of these methods are explained below. Tax planning us 1040ez But, regardless of the method you use, you generally can deduct only 50% of the unreimbursed cost of your meals. Tax planning us 1040ez   If you are reimbursed for the cost of your meals, how you apply the 50% limit depends on whether your employer's reimbursement plan was accountable or nonaccountable. Tax planning us 1040ez If you are not reimbursed, the 50% limit applies whether the unreimbursed meal expense is for business travel or business entertainment. Tax planning us 1040ez Chapter 2 discusses the 50% Limit in more detail, and chapter 6 discusses accountable and nonaccountable plans. Tax planning us 1040ez Actual Cost You can use the actual cost of your meals to figure the amount of your expense before reimbursement and application of the 50% deduction limit. Tax planning us 1040ez If you use this method, you must keep records of your actual cost. Tax planning us 1040ez Standard Meal Allowance Generally, you can use the “standard meal allowance” method as an alternative to the actual cost method. Tax planning us 1040ez It allows you to use a set amount for your daily meals and incidental expenses (M&IE), instead of keeping records of your actual costs. Tax planning us 1040ez The set amount varies depending on where and when you travel. Tax planning us 1040ez In this publication, “standard meal allowance” refers to the federal rate for M&IE, discussed later under Amount of standard meal allowance . Tax planning us 1040ez If you use the standard meal allowance, you still must keep records to prove the time, place, and business purpose of your travel. Tax planning us 1040ez See the recordkeeping rules for travel in chapter 5 . Tax planning us 1040ez Incidental expenses. Tax planning us 1040ez   The term “incidental expenses” means fees and tips given to porters, baggage carriers, hotel staff, and staff on ships. Tax planning us 1040ez   Incidental expenses do not include expenses for laundry, cleaning and pressing of clothing, lodging taxes, costs of telegrams or telephone calls, transportation between places of lodging or business and places where meals are taken, or the mailing cost of filing travel vouchers and paying employer-sponsored charge card billings. Tax planning us 1040ez Incidental-expenses-only method. Tax planning us 1040ez   You can use an optional method (instead of actual cost) for deducting incidental expenses only. Tax planning us 1040ez The amount of the deduction is $5 a day. Tax planning us 1040ez You can use this method only if you did not pay or incur any meal expenses. Tax planning us 1040ez You cannot use this method on any day that you use the standard meal allowance. Tax planning us 1040ez This method is subject to the proration rules for partial days. Tax planning us 1040ez See Travel for days you depart and return , later in this chapter. Tax planning us 1040ez Note. Tax planning us 1040ez The incidental-expenses-only method is not subject to the 50% limit discussed below. Tax planning us 1040ez Federal employees should refer to the Federal Travel Regulations at www. Tax planning us 1040ez gsa. Tax planning us 1040ez gov. Tax planning us 1040ez Find the “Most Requested Links” on the upper left and click on “Regulations: FAR, FMR, FTR” for Federal Travel Regulation (FTR) for changes affecting claims for reimbursement. Tax planning us 1040ez 50% limit may apply. Tax planning us 1040ez   If you use the standard meal allowance method for meal expenses and you are not reimbursed or you are reimbursed under a nonaccountable plan, you can generally deduct only 50% of the standard meal allowance. Tax planning us 1040ez If you are reimbursed under an accountable plan and you are deducting amounts that are more than your reimbursements, you can deduct only 50% of the excess amount. Tax planning us 1040ez The 50% limit is discussed in more detail in chapter 2, and accountable and nonaccountable plans are discussed in chapter 6. Tax planning us 1040ez There is no optional standard lodging amount similar to the standard meal allowance. Tax planning us 1040ez Your allowable lodging expense deduction is your actual cost. Tax planning us 1040ez Who can use the standard meal allowance. Tax planning us 1040ez   You can use the standard meal allowance whether you are an employee or self-employed, and whether or not you are reimbursed for your traveling expenses. Tax planning us 1040ez Use of the standard meal allowance for other travel. Tax planning us 1040ez   You can use the standard meal allowance to figure your meal expenses when you travel in connection with investment and other income-producing property. Tax planning us 1040ez You can also use it to figure your meal expenses when you travel for qualifying educational purposes. Tax planning us 1040ez You cannot use the standard meal allowance to figure the cost of your meals when you travel for medical or charitable purposes. Tax planning us 1040ez Amount of standard meal allowance. Tax planning us 1040ez   The standard meal allowance is the federal M&IE rate. Tax planning us 1040ez For travel in 2013, the rate for most small localities in the United States is $46 a day. Tax planning us 1040ez    Most major cities and many other localities in the United States are designated as high-cost areas, qualifying for higher standard meal allowances. Tax planning us 1040ez    You can find this information (organized by state) on the Internet at www. Tax planning us 1040ez gsa. Tax planning us 1040ez gov/perdiem. Tax planning us 1040ez Enter a zip code or select a city and state for the per diem rates for the current fiscal year. Tax planning us 1040ez Per diem rates for prior fiscal years are available by using the drop down menu under “Search by State. Tax planning us 1040ez ”   Per diem rates are listed by the Federal government's fiscal year which runs from October 1 to September 30. Tax planning us 1040ez You can choose to use the rates from the 2013 fiscal year per diem tables or the rates from the 2014 fiscal year tables, but you must consistently use the same tables for all travel you are reporting on your income tax return for the year. Tax planning us 1040ez   If you travel to more than one location in one day, use the rate in effect for the area where you stop for sleep or rest. Tax planning us 1040ez If you work in the transportation industry, however, see Special rate for transportation workers , later. Tax planning us 1040ez Standard meal allowance for areas outside the continental United States. Tax planning us 1040ez   The standard meal allowance rates above do not apply to travel in Alaska, Hawaii, or any other location outside the continental United States. Tax planning us 1040ez The Department of Defense establishes per diem rates for Alaska, Hawaii, Puerto Rico, American Samoa, Guam, Midway, the Northern Mariana Islands, the U. Tax planning us 1040ez S. Tax planning us 1040ez Virgin Islands, Wake Island, and other non-foreign areas outside the continental United States. Tax planning us 1040ez The Department of State establishes per diem rates for all other foreign areas. Tax planning us 1040ez    You can access per diem rates for non-foreign areas outside the continental United States at: www. Tax planning us 1040ez defensetravel. Tax planning us 1040ez dod. Tax planning us 1040ez mil/site/perdiemCalc. Tax planning us 1040ez cfm. Tax planning us 1040ez You can access all other foreign per diem rates at: www. Tax planning us 1040ez state. Tax planning us 1040ez gov/travel/. Tax planning us 1040ez Click on “Travel Per Diem Allowances for Foreign Areas,” under “Foreign Per Diem Rates” to obtain the latest foreign per diem rates. Tax planning us 1040ez Special rate for transportation workers. Tax planning us 1040ez   You can use a special standard meal allowance if you work in the transportation industry. Tax planning us 1040ez You are in the transportation industry if your work: Directly involves moving people or goods by airplane, barge, bus, ship, train, or truck, and Regularly requires you to travel away from home and, during any single trip, usually involves travel to areas eligible for different standard meal allowance rates. Tax planning us 1040ez If this applies to you, you can claim a standard meal allowance of $59 a day ($65 for travel outside the continental United States). Tax planning us 1040ez   Using the special rate for transportation workers eliminates the need for you to determine the standard meal allowance for every area where you stop for sleep or rest. Tax planning us 1040ez If you choose to use the special rate for any trip, you must use the special rate (and not use the regular standard meal allowance rates) for all trips you take that year. Tax planning us 1040ez Travel for days you depart and return. Tax planning us 1040ez   For both the day you depart for and the day you return from a business trip, you must prorate the standard meal allowance (figure a reduced amount for each day). Tax planning us 1040ez You can do so by one of two methods. Tax planning us 1040ez Method 1: You can claim 3/4 of the standard meal allowance. Tax planning us 1040ez Method 2: You can prorate using any method that you consistently apply and that is in accordance with reasonable business practice. Tax planning us 1040ez Example. Tax planning us 1040ez Jen is employed in New Orleans as a convention planner. Tax planning us 1040ez In March, her employer sent her on a 3-day trip to Washington, DC, to attend a planning seminar. Tax planning us 1040ez She left her home in New Orleans at 10 a. Tax planning us 1040ez m. Tax planning us 1040ez on Wednesday and arrived in Washington, DC, at 5:30 p. Tax planning us 1040ez m. Tax planning us 1040ez After spending two nights there, she flew back to New Orleans on Friday and arrived back home at 8:00 p. Tax planning us 1040ez m. Tax planning us 1040ez Jen's employer gave her a flat amount to cover her expenses and included it with her wages. Tax planning us 1040ez Under Method 1, Jen can claim 2½ days of the standard meal allowance for Washington, DC: 3/4 of the daily rate for Wednesday and Friday (the days she departed and returned), and the full daily rate for Thursday. Tax planning us 1040ez Under Method 2, Jen could also use any method that she applies consistently and that is in accordance with reasonable business practice. Tax planning us 1040ez For example, she could claim 3 days of the standard meal allowance even though a federal employee would have to use Method 1 and be limited to only 2½ days. Tax planning us 1040ez Travel in the United States The following discussion applies to travel in the United States. Tax planning us 1040ez For this purpose, the United States includes the 50 states and the District of Columbia. Tax planning us 1040ez The treatment of your travel expenses depends on how much of your trip was business related and on how much of your trip occurred within the United States. Tax planning us 1040ez See Part of Trip Outside the United States , later. Tax planning us 1040ez Trip Primarily for Business You can deduct all of your travel expenses if your trip was entirely business related. Tax planning us 1040ez If your trip was primarily for business and, while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct only your business-related travel expenses. Tax planning us 1040ez These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination. Tax planning us 1040ez Example. Tax planning us 1040ez You work in Atlanta and take a business trip to New Orleans in May. Tax planning us 1040ez Your business travel totals 850 miles round trip. Tax planning us 1040ez On your way, you stop in Mobile to visit your parents. Tax planning us 1040ez You spend $2,120 for the 9 days you are away from home for travel, meals, lodging, and other travel expenses. Tax planning us 1040ez If you had not stopped in Mobile, you would have been gone only 6 days, and your total cost would have been $1,820. Tax planning us 1040ez You can deduct $1,820 for your trip, including the cost of round-trip transportation to and from New Orleans. Tax planning us 1040ez The deduction for your meals is subject to the 50% limit on meals mentioned earlier. Tax planning us 1040ez Trip Primarily for Personal Reasons If your trip was primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal expense. Tax planning us 1040ez However, you can deduct any expenses you have while at your destination that are directly related to your business. Tax planning us 1040ez A trip to a resort or on a cruise ship may be a vacation even if the promoter advertises that it is primarily for business. Tax planning us 1040ez The scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, will not change what is really a vacation into a business trip. Tax planning us 1040ez Part of Trip Outside the United States If part of your trip is outside the United States, use the rules described later in this chapter under Travel Outside the United States for that part of the trip. Tax planning us 1040ez For the part of your trip that is inside the United States, use the rules for travel in the United States. Tax planning us 1040ez Travel outside the United States does not include travel from one point in the United States to another point in the United States. Tax planning us 1040ez The following discussion can help you determine whether your trip was entirely within the United States. Tax planning us 1040ez Public transportation. Tax planning us 1040ez   If you travel by public transportation, any place in the United States where that vehicle makes a scheduled stop is a point in the United States. Tax planning us 1040ez Once the vehicle leaves the last scheduled stop in the United States on its way to a point outside the United States, you apply the rules under Travel Outside the United States . Tax planning us 1040ez Example. Tax planning us 1040ez You fly from New York to Puerto Rico with a scheduled stop in Miami. Tax planning us 1040ez You return to New York nonstop. Tax planning us 1040ez The flight from New York to Miami is in the United States, so only the flight from Miami to Puerto Rico is outside the United States. Tax planning us 1040ez Because there are no scheduled stops between Puerto Rico and New York, all of the return trip is outside the United States. Tax planning us 1040ez Private car. Tax planning us 1040ez   Travel by private car in the United States is travel between points in the United States, even though you are on your way to a destination outside the United States. Tax planning us 1040ez Example. Tax planning us 1040ez You travel by car from Denver to Mexico City and return. Tax planning us 1040ez Your travel from Denver to the border and from the border back to Denver is travel in the United States, and the rules in this section apply. Tax planning us 1040ez The rules under Travel Outside the United States apply to your trip from the border to Mexico City and back to the border. Tax planning us 1040ez Travel Outside the United States If any part of your business travel is outside the United States, some of your deductions for the cost of getting to and from your destination may be limited. Tax planning us 1040ez For this purpose, the United States includes the 50 states and the District of Columbia. Tax planning us 1040ez How much of your travel expenses you can deduct depends in part upon how much of your trip outside the United States was business related. Tax planning us 1040ez Travel Entirely for Business or Considered Entirely for Business You can deduct all your travel expenses of getting to and from your business destination if your trip is entirely for business or considered entirely for business. Tax planning us 1040ez Travel entirely for business. Tax planning us 1040ez   If you travel outside the United States and you spend the entire time on business activities, you can deduct all of your travel expenses. Tax planning us 1040ez Travel considered entirely for business. Tax planning us 1040ez   Even if you did not spend your entire time on business activities, your trip is considered entirely for business if you meet at least one of the following four exceptions. Tax planning us 1040ez Exception 1 - No substantial control. Tax planning us 1040ez   Your trip is considered entirely for business if you did not have substantial control over arranging the trip. Tax planning us 1040ez The fact that you control the timing of your trip does not, by itself, mean that you have substantial control over arranging your trip. Tax planning us 1040ez   You do not have substantial control over your trip if you: Are an employee who was reimbursed or paid a travel expense allowance, and Are not related to your employer, or Are not a managing executive. Tax planning us 1040ez    “Related to your employer” is defined later in chapter 6 under Per Diem and Car Allowances . Tax planning us 1040ez   A “managing executive” is an employee who has the authority and responsibility, without being subject to the veto of another, to decide on the need for the business travel. Tax planning us 1040ez   A self-employed person generally has substantial control over arranging business trips. Tax planning us 1040ez Exception 2 - Outside United States no more than a week. Tax planning us 1040ez   Your trip is considered entirely for business if you were outside the United States for a week or less, combining business and nonbusiness activities. Tax planning us 1040ez One week means 7 consecutive days. Tax planning us 1040ez In counting the days, do not count the day you leave the United States, but do count the day you return to the United States. Tax planning us 1040ez Example. Tax planning us 1040ez You traveled to Brussels primarily for business. Tax planning us 1040ez You left Denver on Tuesday and flew to New York. Tax planning us 1040ez On Wednesday, you flew from New York to Brussels, arriving the next morning. Tax planning us 1040ez On Thursday and Friday, you had business discussions, and from Saturday until Tuesday, you were sightseeing. Tax planning us 1040ez You flew back to New York, arriving Wednesday afternoon. Tax planning us 1040ez On Thursday, you flew back to Denver. Tax planning us 1040ez Although you were away from your home in Denver for more than a week, you were not outside the United States for more than a week. Tax planning us 1040ez This is because the day you depart does not count as a day outside the United States. Tax planning us 1040ez You can deduct your cost of the round-trip flight between Denver and Brussels. Tax planning us 1040ez You can also deduct the cost of your stay in Brussels for Thursday and Friday while you conducted business. Tax planning us 1040ez However, you cannot deduct the cost of your stay in Brussels from Saturday through Tuesday because those days were spent on nonbusiness activities. Tax planning us 1040ez Exception 3 - Less than 25% of time on personal activities. Tax planning us 1040ez   Your trip is considered entirely for business if: You were outside the United States for more than a week, and You spent less than 25% of the total time you were outside the United States on nonbusiness activities. Tax planning us 1040ez For this purpose, count both the day your trip began and the day it ended. Tax planning us 1040ez Example. Tax planning us 1040ez You flew from Seattle to Tokyo, where you spent 14 days on business and 5 days on personal matters. Tax planning us 1040ez You then flew back to Seattle. Tax planning us 1040ez You spent 1 day flying in each direction. Tax planning us 1040ez Because only 5/21 (less than 25%) of your total time abroad was for nonbusiness activities, you can deduct as travel expenses what it would have cost you to make the trip if you had not engaged in any nonbusiness activity. Tax planning us 1040ez The amount you can deduct is the cost of the round-trip plane fare and 16 days of meals (subject to the 50% limit), lodging, and other related expenses. Tax planning us 1040ez Exception 4 - Vacation not a major consideration. Tax planning us 1040ez   Your trip is considered entirely for business if you can establish that a personal vacation was not a major consideration, even if you have substantial control over arranging the trip. Tax planning us 1040ez Travel Primarily for Business If you travel outside the United States primarily for business but spend some of your time on other activities, you generally cannot deduct all of your travel expenses. Tax planning us 1040ez You can only deduct the business portion of your cost of getting to and from your destination. Tax planning us 1040ez You must allocate the costs between your business and other activities to determine your deductible amount. Tax planning us 1040ez See Travel allocation rules , later. Tax planning us 1040ez You do not have to allocate your travel expenses if you meet one of the four exceptions listed earlier under Travel considered entirely for business . Tax planning us 1040ez In those cases, you can deduct the total cost of getting to and from your destination. Tax planning us 1040ez Travel allocation rules. Tax planning us 1040ez   If your trip outside the United States was primarily for business, you must allocate your travel time on a day-to-day basis between business days and nonbusiness days. Tax planning us 1040ez The days you depart from and return to the United States are both counted as days outside the United States. Tax planning us 1040ez   To figure the deductible amount of your round-trip travel expenses, use the following fraction. Tax planning us 1040ez The numerator (top number) is the total number of business days outside the United States. Tax planning us 1040ez The denominator (bottom number) is the total number of business and nonbusiness days of travel. Tax planning us 1040ez Counting business days. Tax planning us 1040ez   Your business days include transportation days, days your presence was required, days you spent on business, and certain weekends and holidays. Tax planning us 1040ez Transportation day. Tax planning us 1040ez   Count as a business day any day you spend traveling to or from a business destination. Tax planning us 1040ez However, if because of a nonbusiness activity you do not travel by a direct route, your business days are the days it would take you to travel a reasonably direct route to your business destination. Tax planning us 1040ez Extra days for side trips or nonbusiness activities cannot be counted as business days. Tax planning us 1040ez Presence required. Tax planning us 1040ez   Count as a business day any day your presence is required at a particular place for a specific business purpose. Tax planning us 1040ez Count it as a business day even if you spend most of the day on nonbusiness activities. Tax planning us 1040ez Day spent on business. Tax planning us 1040ez   If your principal activity during working hours is the pursuit of your trade or business, count the day as a business day. Tax planning us 1040ez Also, count as a business day any day you are prevented from working because of circumstances beyond your control. Tax planning us 1040ez Certain weekends and holidays. Tax planning us 1040ez   Count weekends, holidays, and other necessary standby days as business days if they fall between business days. Tax planning us 1040ez But if they follow your business meetings or activity and you remain at your business destination for nonbusiness or personal reasons, do not count them as business days. Tax planning us 1040ez Example 1. Tax planning us 1040ez Your tax home is New York City. Tax planning us 1040ez You travel to Quebec, where you have a business appointment on Friday. Tax planning us 1040ez You have another appointment on the following Monday. Tax planning us 1040ez Because your presence was required on both Friday and Monday, they are business days. Tax planning us 1040ez Because the weekend is between business days, Saturday and Sunday are counted as business days. Tax planning us 1040ez This is true even though you use the weekend for sightseeing, visiting friends, or other nonbusiness activity. Tax planning us 1040ez Example 2. Tax planning us 1040ez If, in Example 1, you had no business in Quebec after Friday, but stayed until Monday before starting home, Saturday and Sunday would be nonbusiness days. Tax planning us 1040ez Nonbusiness activity on the way to or from your business destination. Tax planning us 1040ez   If you stopped for a vacation or other nonbusiness activity either on the way from the United States to your business destination, or on the way back to the United States from your business destination, you must allocate part of your travel expenses to the nonbusiness activity. Tax planning us 1040ez   The part you must allocate is the amount it would have cost you to travel between the point where travel outside the United States begins and your nonbusiness destination and a return to the point where travel outside the United States ends. Tax planning us 1040ez   You determine the nonbusiness portion of that expense by multiplying it by a fraction. Tax planning us 1040ez The numerator (top number) of the fraction is the number of nonbusiness days during your travel outside the United States and the denominator (bottom number) is the total number of days you spend outside the United States. Tax planning us 1040ez Example. Tax planning us 1040ez You live in New York. Tax planning us 1040ez On May 4 you flew to Paris to attend a business conference that began on May 5. Tax planning us 1040ez The conference ended at noon on May 14. Tax planning us 1040ez That evening you flew to Dublin where you visited with friends until the afternoon of May 21, when you flew directly home to New York. Tax planning us 1040ez The primary purpose for the trip was to attend the conference. Tax planning us 1040ez If you had not stopped in Dublin, you would have arrived home the evening of May 14. Tax planning us 1040ez You do not meet any of the exceptions that would allow you to consider your travel entirely for business. Tax planning us 1040ez May 4 through May 14 (11 days) are business days and May 15 through May 21 (7 days) are nonbusiness days. Tax planning us 1040ez You can deduct the cost of your meals (subject to the 50% limit), lodging, and other business-related travel expenses while in Paris. Tax planning us 1040ez You cannot deduct your expenses while in Dublin. Tax planning us 1040ez You also cannot deduct 7/18 of what it would have cost you to travel round-trip between New York and Dublin. Tax planning us 1040ez You paid $750 to fly from New York to Paris, $400 to fly from Paris to Dublin, and $700 to fly from Dublin back to New York. Tax planning us 1040ez Round-trip airfare from New York to Dublin would have been $1,250. Tax planning us 1040ez You figure the deductible part of your air travel expenses by subtracting 7/18 of the round-trip fare and other expenses you would have had in traveling directly between New York and Dublin ($1,250 × 7/18 = $486) from your total expenses in traveling from New York to Paris to Dublin and back to New York ($750 + $400 + $700 = $1,850). Tax planning us 1040ez Your deductible air travel expense is $1,364 ($1,850 − $486). Tax planning us 1040ez Nonbusiness activity at, near, or beyond business destination. Tax planning us 1040ez   If you had a vacation or other nonbusiness activity at, near, or beyond your business destination, you must allocate part of your travel expenses to the nonbusiness activity. Tax planning us 1040ez   The part you must allocate is the amount it would have cost you to travel between the point where travel outside the United States begins and your business destination and a return to the point where travel outside the United States ends. Tax planning us 1040ez   You determine the nonbusiness portion of that expense by multiplying it by a fraction. Tax planning us 1040ez The numerator (top number) of the fraction is the number of nonbusiness days during your travel outside the United States and the denominator (bottom number) is the total number of days you spend outside the United States. Tax planning us 1040ez   None of your travel expenses for nonbusiness activities at, near, or beyond your business destination are deductible. Tax planning us 1040ez Example. Tax planning us 1040ez Assume that the dates are the same as in the previous example but that instead of going to Dublin for your vacation, you fly to Venice, Italy, for a vacation. Tax planning us 1040ez You cannot deduct any part of the cost of your trip from Paris to Venice and return to Paris. Tax planning us 1040ez In addition, you cannot deduct 7/18 of the airfare and other expenses from New York to Paris and back to New York. Tax planning us 1040ez You can deduct 11/18 of the round-trip plane fare and other travel expenses from New York to Paris, plus your meals (subject to the 50% limit), lodging, and any other business expenses you had in Paris. Tax planning us 1040ez (Assume these expenses total $4,939. Tax planning us 1040ez ) If the round-trip plane fare and other travel-related expenses (such as food during the trip) are $1,750, you can deduct travel costs of $1,069 (11/18 × $1,750), plus the full $4,939 for the expenses you had in Paris. Tax planning us 1040ez Other methods. Tax planning us 1040ez   You can use another method of counting business days if you establish that it more clearly reflects the time spent on other than business activities outside the United States. Tax planning us 1040ez Travel Primarily for Personal Reasons If you travel outside the United States primarily for vacation or for investment purposes, the entire cost of the trip is a nondeductible personal expense. Tax planning us 1040ez However, if you spend some time attending brief professional seminars or a continuing education program, you can deduct your registration fees and other expenses you have that are directly related to your business. Tax planning us 1040ez Example. Tax planning us 1040ez The university from which you graduated has a continuing education program for members of its alumni association. Tax planning us 1040ez This program consists of trips to various foreign countries where academic exercises and conferences are set up to acquaint individuals in most occupations with selected facilities in several regions of the world. Tax planning us 1040ez However, none of the conferences are directed toward specific occupations or professions. Tax planning us 1040ez It is up to each participant to seek out specialists and organizational settings appropriate to his or her occupational interests. Tax planning us 1040ez Three-hour sessions are held each day over a 5-day period at each of the selected overseas facilities where participants can meet with individual practitioners. Tax planning us 1040ez These sessions are composed of a variety of activities including workshops, mini-lectures, role playing, skill development, and exercises. Tax planning us 1040ez Professional conference directors schedule and conduct the sessions. Tax planning us 1040ez Participants can choose those sessions they wish to attend. Tax planning us 1040ez You can participate in this program since you are a member of the alumni association. Tax planning us 1040ez You and your family take one of the trips. Tax planning us 1040ez You spend about 2 hours at each of the planned sessions. Tax planning us 1040ez The rest of the time you go touring and sightseeing with your family. Tax planning us 1040ez The trip lasts less than 1 week. Tax planning us 1040ez Your travel expenses for the trip are not deductible since the trip was primarily a vacation. Tax planning us 1040ez However, registration fees and any other incidental expenses you have for the five planned sessions you attended that are directly related and beneficial to your business are deductible business expenses. Tax planning us 1040ez These expenses should be specifically stated in your records to ensure proper allocation of your deductible business expenses. Tax planning us 1040ez Luxury Water Travel If you travel by ocean liner, cruise ship, or other form of luxury water transportation for business purposes, there is a daily limit on the amount you can deduct. Tax planning us 1040ez The limit is twice the highest federal per diem rate allowable at the time of your travel. Tax planning us 1040ez (Generally, the federal per diem is the amount paid to federal government employees for daily living expenses when they travel away from home, but in the United States, for business purposes. Tax planning us 1040ez ) Daily limit on luxury water travel. Tax planning us 1040ez   The highest federal per diem rate allowed and the daily limit for luxury water travel in 2013 is shown in the following table. Tax planning us 1040ez   2013 Dates Highest Federal Per Diem Daily Limit on Luxury Water Travel   Jan. Tax planning us 1040ez 1 – Mar. Tax planning us 1040ez 31 $367 $734   Apr. Tax planning us 1040ez 1 – June 30 312 624   July 1 – Aug. Tax planning us 1040ez 31 310 620   Sept. Tax planning us 1040ez 1 – Sept. Tax planning us 1040ez 30 366 732   Oct. Tax planning us 1040ez 1 – Dec. Tax planning us 1040ez 31 374 748 Example. Tax planning us 1040ez Caroline, a travel agent, traveled by ocean liner from New York to London, England, on business in May. Tax planning us 1040ez Her expense for the 6-day cruise was $5,200. Tax planning us 1040ez Caroline's deduction for the cruise cannot exceed $3,744 (6 days × $624 daily limit). Tax planning us 1040ez Meals and entertainment. Tax planning us 1040ez   If your expenses for luxury water travel include separately stated amounts for meals or entertainment, those amounts are subject to the 50% limit on meals and entertainment before you apply the daily limit. Tax planning us 1040ez For a discussion of the 50% Limit , see chapter 2. Tax planning us 1040ez Example. Tax planning us 1040ez In the previous example, Caroline's luxury water travel had a total cost of $5,200. Tax planning us 1040ez Of that amount, $3,700 was separately stated as meals and entertainment. Tax planning us 1040ez Caroline, who is self-employed, is not reimbursed for any of her travel expenses. Tax planning us 1040ez Caroline figures her deductible travel expenses as follows. Tax planning us 1040ez Meals and entertainment $3,700   50% limit × . Tax planning us 1040ez 50   Allowable meals &     entertainment $1,850   Other travel expenses + 1,800   Allowable cost before the daily limit $3,650 Daily limit for May 2013 $624   Times number of days × 6   Maximum luxury water travel     deduction $3,744 Amount of allowable deduction $3,650 Caroline's deduction for her cruise is limited to $3,650, even though the limit on luxury water travel is slightly higher. Tax planning us 1040ez Not separately stated. Tax planning us 1040ez   If your meal or entertainment charges are not separately stated or are not clearly identifiable, you do not have to allocate any portion of the total charge to meals or entertainment. Tax planning us 1040ez Exceptions The daily limit on luxury water travel (discussed earlier) does not apply to expenses you have to attend a convention, seminar, or meeting on board a cruise ship. Tax planning us 1040ez See Cruise Ships under Conventions. Tax planning us 1040ez Conventions You can deduct your travel expenses when you attend a convention if you can show that your attendance benefits your trade or business. Tax planning us 1040ez You cannot deduct the travel expenses for your family. Tax planning us 1040ez If the convention is for investment, political, social, or other purposes unrelated to your trade or business, you cannot deduct the expenses. Tax planning us 1040ez Your appointment or election as a delegate does not, in itself, determine whether you can deduct travel expenses. Tax planning us 1040ez You can deduct your travel expenses only if your attendance is connected to your own trade or business. Tax planning us 1040ez Convention agenda. Tax planning us 1040ez   The convention agenda or program generally shows the purpose of the convention. Tax planning us 1040ez You can show your attendance at the convention benefits your trade or business by comparing the agenda with the official duties and responsibilities of your position. Tax planning us 1040ez The agenda does not have to deal specifically with your official duties and responsibilities; it will be enough if the agenda is so related to your position that it shows your attendance was for business purposes. Tax planning us 1040ez Conventions Held Outside the North American Area You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless: The meeting is directly related to your trade or business, and It is reasonable to hold the meeting outside the North American area. Tax planning us 1040ez See Reasonableness test , later. Tax planning us 1040ez If the meeting meets these requirements, you also must satisfy the rules for deducting expenses for business trips in general, discussed earlier under Travel Outside the United States . Tax planning us 1040ez North American area. Tax planning us 1040ez   The North American area includes the following locations. Tax planning us 1040ez American Samoa Johnston Island Antigua and Barbuda Kingman Reef Aruba Marshall Islands Bahamas Mexico Baker Island Micronesia Barbados Midway Islands Bermuda Netherlands Antilles Canada Northern Mariana Costa Rica Islands Dominica Palau Dominican Republic Palmyra Atoll Grenada Panama Guam Puerto Rico Guyana Trinidad and Tobago Honduras USA Howland Island U. Tax planning us 1040ez S. Tax planning us 1040ez Virgin Islands Jamaica Wake Island Jarvis Island   The North American area also includes U. Tax planning us 1040ez S. Tax planning us 1040ez islands, cays, and reefs that are possessions of the United States and not part of the fifty states or the District of Columbia. Tax planning us 1040ez Reasonableness test. Tax planning us 1040ez   The following factors are taken into account to determine if it was reasonable to hold the meeting outside the North American area. Tax planning us 1040ez The purpose of the meeting and the activities taking place at the meeting. Tax planning us 1040ez The purposes and activities of the sponsoring organizations or groups. Tax planning us 1040ez The homes of the active members of the sponsoring organizations and the places at which other meetings of the sponsoring organizations or groups have been or will be held. Tax planning us 1040ez Other relevant factors you may present. Tax planning us 1040ez Cruise Ships You can deduct up to $2,000 per year of your expenses of attending conventions, seminars, or similar meetings held on cruise ships. Tax planning us 1040ez All ships that sail are considered cruise ships. Tax planning us 1040ez You can deduct these expenses only if all of the following requirements are met. Tax planning us 1040ez The convention, seminar, or meeting is directly related to your trade or business. Tax planning us 1040ez The cruise ship is a vessel registered in the United States. Tax planning us 1040ez All of the cruise ship's ports of call are in the United States or in possessions of the United States. Tax planning us 1040ez You attach to your return a written statement signed by you that includes information about: The total days of the trip (not including the days of transportation to and from the cruise ship port), The number of hours each day that you devoted to scheduled business activities, and A program of the scheduled business activities of the meeting. Tax planning us 1040ez You attach to your return a written statement signed by an officer of the organization or group sponsoring the meeting that includes: A schedule of the business activities of each day of the meeting, and The number of hours you attended the scheduled business activities. Tax planning us 1040ez Prev  Up  Next   Home   More Online Publications
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The Tax Planning Us 1040ez

Tax planning us 1040ez Internal Revenue Bulletin:  2013-7  February 11, 2013  Rev. Tax planning us 1040ez Proc. Tax planning us 1040ez 2013-16 Table of Contents SECTION 1. Tax planning us 1040ez PURPOSE SECTION 2. Tax planning us 1040ez BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE SECTION 3. Tax planning us 1040ez BACKGROUND—APPLICABLE PROVISIONS OF LAW SECTION 4. Tax planning us 1040ez FEDERAL INCOME TAX TREATMENT SECTION 5. Tax planning us 1040ez INFORMATION-REPORTING OBLIGATIONS SECTION 6. Tax planning us 1040ez HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA SECTION 7. Tax planning us 1040ez PENALTY RELIEF FOR 2012 SECTION 8. Tax planning us 1040ez SCOPE AND EFFECTIVE DATE SECTION 9. Tax planning us 1040ez DRAFTING INFORMATION SECTION 1. Tax planning us 1040ez PURPOSE This revenue procedure provides guidance to mortgage loan holders, loan servicers, and borrowers who are participating in the Department of the Treasury’s (Treasury) and Department of Housing and Urban Development’s (HUD) Home Affordable Modification Program® (HAMP®). Tax planning us 1040ez Under HAMP, a borrower may be eligible for principal reduction of the outstanding balance of a qualifying mortgage pursuant to the program’s Principal Reduction AlternativeSM (PRA). Tax planning us 1040ez In appropriate cases, HAMP has been offering the PRA as part of a HAMP loan modification since the last quarter of 2010. Tax planning us 1040ez Current plans call for HAMP to continue accepting new borrowers through the end of 2013. Tax planning us 1040ez The Internal Revenue Service (Service) is providing this guidance to address the tax consequences for borrowers (HAMP-PRA borrowers) who are participating in the PRA and the reporting obligations for participating mortgage loan holders and servicers. Tax planning us 1040ez SECTION 2. Tax planning us 1040ez BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE . Tax planning us 1040ez 01 To help distressed borrowers lower their monthly mortgage payments, Treasury and HUD established HAMP for mortgage loans that are not owned or guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Tax planning us 1040ez A description of the program can be found at www. Tax planning us 1040ez makinghomeaffordable. Tax planning us 1040ez gov. Tax planning us 1040ez . Tax planning us 1040ez 02 Under HAMP, a participating loan servicer, acting on behalf of the mortgage loan holder, must consider a sequence of modification steps for each eligible borrower’s mortgage loan until the borrower’s monthly payment is reduced to a monthly payment amount determined under the HAMP guidelines. Tax planning us 1040ez These steps include a reduction in the mortgage loan’s interest rate, an extension of the mortgage loan’s term, and a reduction in the mortgage loan’s principal balance. Tax planning us 1040ez . Tax planning us 1040ez 03 In some cases, the unpaid principal balance of the modified mortgage loan is divided into (1) an amount that bears stated interest and that is used to calculate the borrower’s new monthly mortgage payment (the “Non-forbearance Portion”), and (2) a forbearance amount, which does not bear stated interest and on which periodic payments of stated principal are not required. Tax planning us 1040ez The stated principal of the forbearance amount is due upon the earliest of the borrower’s transfer of the property, payoff of the balance on the Non-forbearance Portion of the mortgage loan, or maturity of the mortgage loan. Tax planning us 1040ez However, as noted in section 2. Tax planning us 1040ez 06 of this revenue procedure, a HAMP-PRA borrower sometimes may not have to pay all or a portion of the forbearance amount. Tax planning us 1040ez (The forbearance amount associated with a HAMP-PRA principal reduction is called the “PRA Forbearance Amount. Tax planning us 1040ez ”) . Tax planning us 1040ez 04 If a mortgage loan is being considered for a HAMP modification and the amount owed on the mortgage loan is greater than 115 percent of the value of the property, then the servicer must consider whether principal reduction under PRA should be used as part of the HAMP modification. Tax planning us 1040ez . Tax planning us 1040ez 05 The first step toward a HAMP modification is a trial period plan, in which the borrower’s monthly mortgage payment is set at a monthly payment amount determined under the HAMP guidelines. Tax planning us 1040ez The trial period plan effective date is the due date for the first of the reduced payments that are to be made under the trial period plan. Tax planning us 1040ez (It is the first day of either the first or the second month after the servicer transmits the trial period notice to the borrower. Tax planning us 1040ez ) In general, the trial period is three months, and, during this period, the borrower must satisfy certain conditions before the changes to the terms of the mortgage loan become permanent (the “Trial Period Conditions”). Tax planning us 1040ez Specifically, depending on the borrower’s trial period payment history, the borrower’s compliance with HAMP and servicer guidelines, and his or her satisfaction of all other Trial Period Conditions, the borrower will be offered a permanent modification of the terms of the mortgage loan, including monthly mortgage payments that are lower than those under the old mortgage loan. Tax planning us 1040ez Until the effective date of a permanent modification, the terms of the existing mortgage loan continue to apply. Tax planning us 1040ez . Tax planning us 1040ez 06 After the mortgage loan is permanently modified under HAMP, if the modified mortgage loan is in good standing on the first, second, or third annual anniversary of the trial period plan effective date (the “Three-year Period”), the servicer must reduce the unpaid principal balance of the mortgage loan on the respective anniversary date by one-third of the initial PRA Forbearance Amount. Tax planning us 1040ez (The servicer allocates the entire reduction to the remaining PRA Forbearance Amount. Tax planning us 1040ez ) In general, if a HAMP-PRA borrower’s mortgage loan is in good standing and if the HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan prior to the reduction of the entire PRA Forbearance Amount, the servicer must reduce the remaining outstanding principal balance of the mortgage loan by the remaining PRA Forbearance Amount. Tax planning us 1040ez . Tax planning us 1040ez 07 In connection with every HAMP loan modification, the HAMP program administrator (acting on behalf of the federal government) provides incentives to the borrower, the servicer, and the investor (that is, the holder of the mortgage loan). Tax planning us 1040ez If a HAMP loan modification includes a PRA principal reduction, the HAMP program administrator makes additional incentive payments to the investor. Tax planning us 1040ez These additional incentives are called “PRA Investor Incentive Payments” and are generally spread over three years. Tax planning us 1040ez The size of the PRA Investor Incentive Payments depends on the amount of principal reduced, the loan-to-value ratio at the time of the HAMP modification, and the loan’s payment history before the modification. Tax planning us 1040ez The PRA Investor Incentive Payments range from 18 to 63 percent of the principal amounts reduced. Tax planning us 1040ez For purposes of this revenue procedure, the excess of the initial PRA Forbearance Amount of a mortgage loan over the aggregate PRA Investor Incentive Payments scheduled to be paid with respect to that loan is called the “PRA Adjusted Forbearance Amount. Tax planning us 1040ez ” . Tax planning us 1040ez 08 A PRA Investor Incentive Payment is earned by the investor on each date on which the servicer reduces the unpaid principal balance of the mortgage loan by a portion of the PRA Forbearance Amount (generally, on the first three annual anniversaries of the trial period plan effective date). Tax planning us 1040ez . Tax planning us 1040ez 09 If a HAMP-PRA borrower’s early payment in full of the Non-forbearance Portion of the mortgage loan accelerates the reduction of the remaining PRA Forbearance Amount (described above in section 2. Tax planning us 1040ez 06 of this revenue procedure), the remaining PRA Investor Incentive Payments from the HAMP program administrator are also accelerated. Tax planning us 1040ez . Tax planning us 1040ez 10 If, prior to completion of the Three-year Period, a mortgage loan ceases to be in good standing because of the HAMP-PRA borrower’s payment history, then the remaining PRA Forbearance Amount is not further reduced and is due when the HAMP-PRA borrower transfers the property, the HAMP-PRA borrower refinances, or otherwise pays off the Non-forbearance Portion of the mortgage loan, or the mortgage loan matures. Tax planning us 1040ez SECTION 3. Tax planning us 1040ez BACKGROUND—APPLICABLE PROVISIONS OF LAW . Tax planning us 1040ez 01 Under § 61 of the Internal Revenue Code, except as otherwise provided in subtitle A, gross income means all income from whatever source derived, including income from discharge of indebtedness. Tax planning us 1040ez See § 61(a)(12). Tax planning us 1040ez . Tax planning us 1040ez 02 Under § 1. Tax planning us 1040ez 1001-3 of the Income Tax Regulations, if a debt instrument undergoes a significant modification, then the modification results in an exchange of the original debt instrument for the modified debt instrument. Tax planning us 1040ez In general, an agreement to change a term of a debt instrument is a modification at the time the borrower and holder enter into the agreement, even if the change in term is not immediately effective. Tax planning us 1040ez However, if the change is conditioned on reasonable closing conditions, a modification occurs on the closing date of the agreement. Tax planning us 1040ez See § 1. Tax planning us 1040ez 1001-3(c)(6). Tax planning us 1040ez . Tax planning us 1040ez 03 Under § 108(e)(10), in the case of a debt-for-debt exchange (including a deemed exchange under § 1. Tax planning us 1040ez 1001-3), the borrower is treated as having satisfied the original debt instrument with an amount of money equal to the issue price of the new debt instrument. Tax planning us 1040ez If the amount of debt satisfied in this manner exceeds that issue price, the borrower realizes discharge of indebtedness income on the exchange. Tax planning us 1040ez See also § 1. Tax planning us 1040ez 61-12(c). Tax planning us 1040ez . Tax planning us 1040ez 04 The issue price of a non-publicly traded debt instrument issued for non-publicly traded property generally reflects the amount of principal that the borrower is required to pay to the holder of the instrument. Tax planning us 1040ez If a borrower has the ability to avoid paying certain amounts (including principal) without violating the terms of the instrument, the payment schedule for the instrument is generally determined based on an assumption that the borrower will avoid any requirement to make those payments. Tax planning us 1040ez See, e. Tax planning us 1040ez g. Tax planning us 1040ez , §§ 1. Tax planning us 1040ez 1272-1(c)(5) and 1. Tax planning us 1040ez 1274-2(d). Tax planning us 1040ez . Tax planning us 1040ez 05 Under § 108(a), gross income does not include any amount that but for § 108(a) would be includible in gross income by reason of the discharge (in whole or in part) of a taxpayer’s indebtedness if (1) the indebtedness discharged is qualified principal residence indebtedness that is discharged before January 1, 2014, or (2) the discharge occurs when the taxpayer is insolvent. Tax planning us 1040ez Section 108(a)(1)(E) and 108(a)(1)(B). Tax planning us 1040ez (Although § 108 contains other exclusions as well, this revenue procedure focuses on these two exclusions because they are the most likely to apply to the greatest number of HAMP-PRA borrowers. Tax planning us 1040ez ) . Tax planning us 1040ez 06 Under §§ 108(h) and 163(h)(3)(B), qualified principal residence indebtedness is any indebtedness that is incurred by a borrower to buy, build, or substantially improve the borrower’s principal residence and is secured by that residence. Tax planning us 1040ez . Tax planning us 1040ez 07 Qualified principal residence indebtedness also includes a loan secured by the borrower’s principal residence that refinances qualified principal residence indebtedness, but only to the extent of the amount of the refinanced indebtedness. Tax planning us 1040ez See §§ 108(h) and 163(h)(3)(B)(i). Tax planning us 1040ez . Tax planning us 1040ez 08 The maximum amount of discharged indebtedness that a borrower may exclude from gross income under the qualified principal residence indebtedness exclusion is $2,000,000 ($1,000,000 for a married individual filing a separate return). Tax planning us 1040ez Under § 108(h)(4), if only part of the discharged indebtedness is qualified principal residence indebtedness, then the exclusion applies only to the amount of the discharged indebtedness that exceeds the amount of the loan (determined immediately before the discharge) that is not qualified principal residence indebtedness. Tax planning us 1040ez . Tax planning us 1040ez 09 Under § 108(a)(3), the insolvency exclusion applies to the lesser of the amount of the debt discharged or the amount by which the taxpayer is insolvent immediately before the discharge. Tax planning us 1040ez . Tax planning us 1040ez 10 Section 108(d)(3) provides that, for purposes of the insolvency exclusion, a taxpayer is insolvent to the extent that the taxpayer’s total liabilities exceed the fair market value of all of the taxpayer’s assets immediately before the discharge of indebtedness. Tax planning us 1040ez Under § 108(a)(2)(C), the qualified principal residence indebtedness exclusion takes precedence over the insolvency exclusion when both exclusions apply to discharged indebtedness, unless the taxpayer elects to apply the insolvency exclusion. Tax planning us 1040ez . Tax planning us 1040ez 11 If an amount is excluded from gross income as a discharge of qualified principal residence indebtedness, the taxpayer must reduce the basis of the taxpayer’s principal residence. Tax planning us 1040ez See § 108(h)(1). Tax planning us 1040ez If a discharged amount is excluded from gross income because the taxpayer was insolvent when the discharge occurred, the taxpayer must reduce certain tax attributes (possibly including basis). Tax planning us 1040ez See § 108(b). Tax planning us 1040ez For further discussion of income from the discharge of indebtedness, the qualified principal residence indebtedness exclusion, the insolvency exclusion, and other exclusions from gross income that may apply, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Tax planning us 1040ez . Tax planning us 1040ez 12 Taxpayers who exclude any discharged amounts from gross income report both the exclusion and the resulting reduction in basis or other tax attributes on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). Tax planning us 1040ez See Form 982 instructions and Publication 4681. Tax planning us 1040ez This form is to be filed with the tax return for the taxable year in which the amount is discharged but is excluded from gross income. Tax planning us 1040ez . Tax planning us 1040ez 13 Governmental payments made to or on behalf of individuals or other persons are included within the broad definition of gross income under § 61 unless an exception applies. Tax planning us 1040ez See Notice 2003-18, 2003-1 C. Tax planning us 1040ez B. Tax planning us 1040ez 699, and Rev. Tax planning us 1040ez Rul. Tax planning us 1040ez 79-356, 1979-2 C. Tax planning us 1040ez B. Tax planning us 1040ez 28. Tax planning us 1040ez However, if disbursements are made by a governmental unit to individuals in the interest of the general welfare (that is, are generally based on individual or family need) and the disbursements do not represent compensation for services, then the amounts disbursed are excluded from the income of the recipient (general welfare exclusion). Tax planning us 1040ez See Rev. Tax planning us 1040ez Rul. Tax planning us 1040ez 2005-46, 2005-2 C. Tax planning us 1040ez B. Tax planning us 1040ez 120, and Rev. Tax planning us 1040ez Rul. Tax planning us 1040ez 75-246, 1975-1 C. Tax planning us 1040ez B. Tax planning us 1040ez 24. Tax planning us 1040ez . Tax planning us 1040ez 14 Under § 451 and § 1. Tax planning us 1040ez 451-1(a), a taxpayer that uses the cash receipts and disbursements method of accounting includes income in gross income when the taxpayer actually or constructively receives the income. Tax planning us 1040ez . Tax planning us 1040ez 15 Section 6041 requires every person engaged in a trade or business (including the United States and its agencies) to (1) file an information return (Form 1099-MISC, Miscellaneous Income, is used for this purpose) for each calendar year in which the person makes, in the course of its trade or business, payments to another person of fixed or determinable income aggregating $600 or more, and (2) furnish a copy of the information return to that other person. Tax planning us 1040ez See § 6041(a) and (d) and § 1. Tax planning us 1040ez 6041-1(a)(1) and (b). Tax planning us 1040ez . Tax planning us 1040ez 16 Section 6050P requires applicable entities (including the United States and its agencies, financial entities, and any organization a significant trade or business of which is the lending of money) to (1) file an information return (Form 1099-C, Cancellation of Debt, is used for this purpose) for each calendar year in which it discharges indebtedness of another person of $600 or more, and (2) furnish a copy of the information return to that other person. Tax planning us 1040ez See § 6050P(a)-(c) and §§ 1. Tax planning us 1040ez 6050P-1(a) and 1. Tax planning us 1040ez 6050P-2(a) and (d). Tax planning us 1040ez . Tax planning us 1040ez 17 Section 6721 imposes penalties with respect to information returns required to be filed with the Service. Tax planning us 1040ez These penalties apply in the case of a failure to timely file an information return, a failure to include all required information on the return, or the inclusion of incorrect information on the return. Tax planning us 1040ez Section 6724(d)(1) includes Forms 1099-MISC and 1099-C in the term “information return. Tax planning us 1040ez ” . Tax planning us 1040ez 18 Section 6722 imposes penalties with respect to payee statements required to be furnished to payees. Tax planning us 1040ez These penalties apply in the case of a failure to timely furnish a payee statement, a failure to include all required information on the statement, or the inclusion of incorrect information on the payee statement. Tax planning us 1040ez Section 6724(d)(2) includes in the term “payee statement” copies of Forms 1099-MISC and 1099-C that are required to be furnished to taxpayers. Tax planning us 1040ez SECTION 4. Tax planning us 1040ez FEDERAL INCOME TAX TREATMENT . Tax planning us 1040ez 01 Because a HAMP modification with a PRA principal reduction is a significant modification, it results in a deemed debt-for-debt exchange in which the HAMP-PRA borrower satisfies the old mortgage loan by issuing a new one. Tax planning us 1040ez See § 1. Tax planning us 1040ez 1001-3. Tax planning us 1040ez At the time of the modification, therefore, under § 108 and this revenue procedure, the HAMP-PRA borrower realizes discharge of indebtedness income equal to any excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new (post-modification) mortgage loan. Tax planning us 1040ez See also § 61(a)(12) and § 1. Tax planning us 1040ez 61-12(c). Tax planning us 1040ez . Tax planning us 1040ez 02 A HAMP-PRA borrower has the ability to avoid payment of the PRA Adjusted Forbearance Amount. Tax planning us 1040ez Because the HAMP-PRA borrower has this ability, that amount should not be taken into account in determining the issue price of the new mortgage loan. Tax planning us 1040ez Because the issue price of the new mortgage loan does not include the PRA Adjusted Forbearance Amount, the PRA Adjusted Forbearance Amount contributes to the excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new mortgage loan. Tax planning us 1040ez . Tax planning us 1040ez 03 On the other hand, the investor has not given up its right to receive the remainder of the PRA Forbearance Amount, because the HAMP program administrator is expected to make those payments on the HAMP-PRA borrower’s behalf by making the PRA Investor Incentive Payments. Tax planning us 1040ez Because the remainder of the PRA Forbearance Amount is payable in this manner, that remainder is included in the issue price of the new mortgage loan. Tax planning us 1040ez . Tax planning us 1040ez 04 The Trial Period Conditions are reasonable closing conditions that must be satisfied before the changes to the terms of the mortgage loan become permanent. Tax planning us 1040ez Therefore, for purposes of § 1. Tax planning us 1040ez 1001-3, the date of the modification is the date of the permanent modification. Tax planning us 1040ez . Tax planning us 1040ez 05 Unless an exclusion applies, the HAMP-PRA borrower includes in gross income the discharge of indebtedness income described in section 4. Tax planning us 1040ez 01 of this revenue procedure for the taxable year in which the permanent modification occurs. Tax planning us 1040ez Under certain conditions, however, section 6 of this revenue procedure permits a borrower to report the discharge of indebtedness under HAMP-PRA over the Three-year Period. Tax planning us 1040ez The qualified principal residence indebtedness exclusion under § 108(a)(1)(E) and the insolvency exclusion under § 108(a)(1)(B) are two exclusions that may apply to the discharge. Tax planning us 1040ez . Tax planning us 1040ez 06 The PRA Investor Incentive Payment is treated as a payment on the mortgage loan by the HAMP program administrator on behalf of the HAMP-PRA borrower. Tax planning us 1040ez . Tax planning us 1040ez 07 To the extent that the HAMP-PRA borrower uses the property as the HAMP-PRA borrower’s principal residence or the property is occupied by the HAMP-PRA borrower’s legal dependent, parent, or grandparent without rent being charged or collected, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the PRA Investor Incentive Payments that the HAMP program administrator makes to the investor in the mortgage loan. Tax planning us 1040ez This is consistent with Rev. Tax planning us 1040ez Rul. Tax planning us 1040ez 2009-19, 2009-28 I. Tax planning us 1040ez R. Tax planning us 1040ez B. Tax planning us 1040ez 111, which addressed the treatment of Pay-for-Performance Success Payments. Tax planning us 1040ez . Tax planning us 1040ez 08 To the extent that the HAMP-PRA borrower uses the property as a rental property or holds the property vacant and available for rent, the HAMP-PRA borrower includes PRA Investor Incentive Payments in gross income. Tax planning us 1040ez If the HAMP-PRA borrower uses the cash receipts and disbursements method of accounting, then the HAMP-PRA borrower includes a PRA Investor Incentive Payment in gross income in the taxable year in which it is applied as a payment on the HAMP-PRA borrower’s mortgage loan. Tax planning us 1040ez . Tax planning us 1040ez 09 As described in section 2. Tax planning us 1040ez 09 of this revenue procedure, if a HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan while the loan is in good standing and prior to completion of the Three-year Period, that payment accelerates both the reduction in the remaining PRA Forbearance Amount and the PRA Investor Incentive Payments from the HAMP program administrator. Tax planning us 1040ez To the extent that the HAMP-PRA borrower is described in section 4. Tax planning us 1040ez 07 of this revenue procedure, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the accelerated PRA Investor Incentive Payments. Tax planning us 1040ez To the extent that the HAMP-PRA borrower is described in section 4. Tax planning us 1040ez 08 of this revenue procedure, the HAMP-PRA borrower includes in income in the year of the acceleration the remaining amount of the PRA Investor Incentive Payment. Tax planning us 1040ez SECTION 5. Tax planning us 1040ez INFORMATION-REPORTING OBLIGATIONS . Tax planning us 1040ez 01 Under § 6050P, the investor is required to file a Form 1099-C with respect to a borrower who realizes discharge of indebtedness of $600 or more. Tax planning us 1040ez A copy of this form is required to be furnished to the borrower. Tax planning us 1040ez . Tax planning us 1040ez 02 As stated in sections 4. Tax planning us 1040ez 01 and 4. Tax planning us 1040ez 04 of this revenue procedure, the HAMP-PRA discharge of indebtedness is realized at the time of the permanent modification of the mortgage loan. Tax planning us 1040ez . Tax planning us 1040ez 03 An investor is an applicable entity that is required under § 1. Tax planning us 1040ez 6050P-1 and this revenue procedure to issue a Form 1099-C for discharge of indebtedness. Tax planning us 1040ez Under § 1. Tax planning us 1040ez 6050P-1(b)(2)(F), the permanent modification of a mortgage loan is an identifiable event. Tax planning us 1040ez Identifiable events determine when Forms 1099-C have to be issued. Tax planning us 1040ez Thus, the Form 1099-C is issued for the calendar year in which the permanent mortgage loan modification occurs. Tax planning us 1040ez This rule under § 1. Tax planning us 1040ez 6050P-1(b)(2)(F) applies even if, under section 6 of this revenue procedure, the HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the times when the unpaid principal balance of the new mortgage loan is reduced. Tax planning us 1040ez . Tax planning us 1040ez 04 The investor (or the loan servicer acting on behalf of the investor) reports the full amount of the discharge on the Form 1099-C regardless of whether some or all of the amount is excludible from income under the qualified principal residence indebtedness exclusion, the insolvency exclusion, or any other exclusion that may apply. Tax planning us 1040ez That discharged amount will generally be the PRA Adjusted Forbearance Amount (which does not include the amounts expected to be satisfied by PRA Investor Incentive Payments). Tax planning us 1040ez . Tax planning us 1040ez 05 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. Tax planning us 1040ez 07 of this revenue procedure, the PRA Investor Incentive Payments are excluded from the gross income of the HAMP-PRA borrower, and thus they are not fixed or determinable income to the HAMP-PRA borrower. Tax planning us 1040ez Under § 6041, these payments are not subject to information reporting. Tax planning us 1040ez See Notice 2011-14, 2011-11 I. Tax planning us 1040ez R. Tax planning us 1040ez B. Tax planning us 1040ez 544, 546. Tax planning us 1040ez . Tax planning us 1040ez 06 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. Tax planning us 1040ez 08 of this revenue procedure, the PRA Investor Incentive Payments are includible in gross income as fixed or determinable income in the taxable year required by the HAMP-PRA borrower’s method of accounting. Tax planning us 1040ez The payment is subject to the information reporting requirements of § 6041, as described in section 3. Tax planning us 1040ez 15 of this revenue procedure. Tax planning us 1040ez Accordingly, the HAMP program administrator is required to issue a Form 1099-MISC reporting the PRA Investor Incentive Payment. Tax planning us 1040ez SECTION 6. Tax planning us 1040ez HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA . Tax planning us 1040ez 01 In general. Tax planning us 1040ez The HAMP-PRA program began in the last quarter of 2010, and since that time there has been uncertainty about whether the amount of the discharge of indebtedness should be reported in the year of the permanent modification or over the Three-year Period (when the unpaid principal balance on the new mortgage loan is reduced). Tax planning us 1040ez As a result, some HAMP-PRA borrowers have been reporting the discharge of indebtedness under HAMP-PRA over the Three-year Period. Tax planning us 1040ez Given the temporary nature of the program and the issuance of this guidance after participation in the program has begun, in the interests of equitable and sound tax administration, HAMP-PRA borrowers may report discharges of indebtedness under HAMP-PRA under the rules in this section 6. Tax planning us 1040ez A HAMP-PRA borrower may choose to report discharges of indebtedness under HAMP-PRA pursuant to the rules in this section 6 only if the borrower applies the same borrower option under section 6. Tax planning us 1040ez 02 of this revenue procedure consistently to the taxable year of the permanent modification and to all subsequent taxable years. Tax planning us 1040ez Thus, a HAMP-PRA borrower may not choose a borrower option under section 6. Tax planning us 1040ez 02 of this revenue procedure if a statute of limitations has expired for any of the taxable years that are necessary for consistent application of that option. Tax planning us 1040ez . Tax planning us 1040ez 02 HAMP-PRA borrower options. Tax planning us 1040ez A HAMP-PRA borrower may treat the HAMP-PRA discharge as being realized in either of the following ways— (1) One hundred percent of the PRA Adjusted Forbearance Amount at the time of the permanent modification; or (2) One third of the PRA Adjusted Forbearance Amount on each of the first three annual anniversaries of the trial period plan effective date (described in section 2. Tax planning us 1040ez 06 of this revenue procedure), when, as required by the terms of the new mortgage loan, the servicer reduces the unpaid principal balance of the new mortgage loan. Tax planning us 1040ez If some or all of the reduction in the unpaid principal balance is accelerated (as described in section 2. Tax planning us 1040ez 06 of this revenue procedure) because the HAMP-PRA borrower prepays the Non-forbearance Portion of the mortgage loan, then the HAMP-PRA discharge represented by the amount of the reduction that was accelerated is treated as being realized at the time of the accelerated reduction. Tax planning us 1040ez . Tax planning us 1040ez 03 HAMP-PRA borrowers who choose to realize the HAMP-PRA discharge at the time of the permanent modification. Tax planning us 1040ez (1) If a HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the time of the permanent modification, then for the taxable year in which the permanent modification occurs, the HAMP-PRA borrower reports on Form 982 the amount, if any, of the discharge that is excluded from gross income and includes in gross income any remaining discharge. Tax planning us 1040ez (2) If a HAMP-PRA borrower’s mortgage loan was permanently modified under HAMP in 2010 or 2011, and if the borrower was reporting the discharge of indebtedness using the method described in section 6. Tax planning us 1040ez 02(2) of this revenue procedure, then the borrower may change to reporting the discharge of indebtedness using the method described in section 6. Tax planning us 1040ez 02(1) of this revenue procedure by filing a 2012 Form 982 with the borrower’s timely filed (with extensions) 2012 income tax return. Tax planning us 1040ez This section 6. Tax planning us 1040ez 03(2) applies only if the change to reporting the discharge using the method described in section 6. Tax planning us 1040ez 02(1) of this revenue procedure does not change the borrower’s federal income tax liability (including any change in federal income tax liability due to a change in basis or tax attributes (under § 108(h)(1) or § 108(b))) for any taxable year prior to the borrower’s 2012 taxable year. Tax planning us 1040ez To make this change, the borrower must— (i) Compute the amount of discharge of indebtedness that would be included in income under § 61(a)(12) or excluded from gross income under § 108, basing the computation of the discharge on the facts as of the year of the permanent modification; and (ii) Report on a 2012 Form 982 the reduction in basis or tax attributes (under § 108(h)(1) or § 108(b)) due to the permanent modification that the borrower would have reported on the Form 982 for the taxable year of the permanent modification, minus any reductions due to the permanent modification that the borrower actually reported on Forms 982 for taxable years prior to 2012. Tax planning us 1040ez (3) Example. Tax planning us 1040ez The following example illustrates the application of section 6. Tax planning us 1040ez 03(2) of this revenue procedure. Tax planning us 1040ez In 2010, B’s basis in B’s principal residence was $330,000. Tax planning us 1040ez In 2010, B’s mortgage loan on the principal residence is permanently modified under HAMP-PRA. Tax planning us 1040ez B realized $30,000 of cancellation of indebtedness from the permanent modification, all of which qualifies for the exclusion from income for qualified principal residence indebtedness under § 108(a)(1)(E). Tax planning us 1040ez The trial period plan effective date also fell in 2010. Tax planning us 1040ez B’s federal income tax return for 2010 was consistent with B’s reporting this discharge of indebtedness using the method described in section 6. Tax planning us 1040ez 02(2) of this revenue procedure. Tax planning us 1040ez That is, B’s 2010 return did not include income from discharge of indebtedness under HAMP-PRA, nor did the return contain a Form 982 reporting exclusion of any such discharge of indebtedness. Tax planning us 1040ez The next year, B reported on line 10(b) of the 2011 Form 982 that B filed with B’s 2011 federal income tax return a $10,000 reduction in basis in the principal residence. Tax planning us 1040ez For 2012, B chooses to change to reporting the discharge of indebtedness using the method described in section 6. Tax planning us 1040ez 02(1) of this revenue procedure. Tax planning us 1040ez Thus, B files a 2012 Form 982 with B’s timely filed (including extensions) 2012 federal income tax return, and on line 10(b) of that form, B reports a $20,000 basis reduction in the principal residence ($30,000 basis reduction that B would have excluded from income in 2010 using the method described in section 6. Tax planning us 1040ez 02(1) of this revenue procedure, minus the $10,000 basis reduction that B reported on B’s 2011 Form 982). Tax planning us 1040ez (4) If a HAMP-PRA borrower reports the entire HAMP-PRA discharge using the method described in section 6. Tax planning us 1040ez 02(1) of this revenue procedure, and if that HAMP-PRA borrower’s mortgage loan ceases to be in good standing during the Three-year Period as described in section 2. Tax planning us 1040ez 10 of this revenue procedure, then some or all of the anticipated reductions in the PRA Adjusted Forbearance Amount will not take place. Tax planning us 1040ez Because the amount of these anticipated reductions was not included in determining the issue price of the new mortgage loan that, pursuant to § 1. Tax planning us 1040ez 1001-3, the HAMP-PRA borrower is deemed to issue in satisfaction of the old mortgage loan, the issue price of the new mortgage loan was understated. Tax planning us 1040ez Under these circumstances, the discharge of indebtedness income determined as of the date of the permanent modification will have been overstated. Tax planning us 1040ez (5) The Service will not challenge a HAMP-PRA borrower who is described in section 6. Tax planning us 1040ez 03(4) of this revenue procedure and who takes the following corrective measures: (i) If a HAMP-PRA borrower included any of the discharge of indebtedness in gross income, the HAMP-PRA borrower may file an amended return that does not include the amount of the discharge of indebtedness that was previously reported as gross income but that, because of the HAMP-PRA borrower’s failure to keep the new mortgage loan in good standing, was not ultimately discharged. Tax planning us 1040ez The amended return should be for the taxable year in which the income was included (that is, the year of the permanent modification), provided the applicable statute of limitations remains open for that taxable year. Tax planning us 1040ez (ii) If the HAMP-PRA borrower did not include any of the discharge of indebtedness in gross income (that is, if the HAMP-PRA borrower excluded all of it), the HAMP-PRA borrower may file a new Form 982 that the Service will treat as superseding the earlier Form 982. Tax planning us 1040ez The new Form 982 will reflect the revised reduction in basis or in tax attributes (under § 108(h)(1) or § 108(b)). Tax planning us 1040ez The new Form 982 should be the Form 982 for the year of the permanent modification and should be filed with the return for the taxable year in which the HAMP-PRA borrower’s mortgage loan ceased to be in good standing. Tax planning us 1040ez . Tax planning us 1040ez 04 HAMP-PRA borrowers who choose to treat the HAMP-PRA discharge as being realized on the dates on which the unpaid principal balance of the mortgage loan is reduced. Tax planning us 1040ez (1) If a HAMP-PRA borrower chooses to realize the HAMP-PRA discharge at the times that the unpaid principal balance on the new mortgage loan is reduced, instead of at the time of the permanent modification, then the HAMP-PRA borrower’s federal income tax returns for the taxable year that contains the permanent modification and for the subsequent taxable years must not treat any of the discharge as being realized at the time of the permanent modification and must treat the entire HAMP-PRA discharge as being realized in the amounts—and at the times—of the reductions in the unpaid principal balance. Tax planning us 1040ez Except as described in the last sentence of this paragraph, therefore, the income tax return for the year of the permanent modification must include no gross income from—nor report on Form 982 an exclusion of—any amount of the HAMP-PRA discharge. Tax planning us 1040ez Instead, the HAMP-PRA discharge is included in gross income (or is reported on Form 982 as excluded from gross income) in the subsequent years in which the unpaid principal balance is reduced. Tax planning us 1040ez If the first such reduction occurs in the year of the permanent modification, however, then the amount of any such reduction is reflected as an inclusion or exclusion on the federal income tax return for that year. Tax planning us 1040ez (2) A HAMP-PRA borrower who has been using the method described in section 6. Tax planning us 1040ez 02(1) of this revenue procedure may change to the method described in section 6. Tax planning us 1040ez 02(2) but must comply with the consistency and open-year requirements described in section 6. Tax planning us 1040ez 01 of this revenue procedure. Tax planning us 1040ez SECTION 7. Tax planning us 1040ez PENALTY RELIEF FOR 2012 . Tax planning us 1040ez 01 The Service will not assert penalties under § 6721 or § 6722 against an investor for failing to timely file and furnish a 2012 Form 1099-C as required by section 5. Tax planning us 1040ez 03 through 5. Tax planning us 1040ez 04 and section 8. Tax planning us 1040ez 02 of this revenue procedure with respect to discharge of indebtedness resulting from HAMP-PRA permanent modifications that take place during calendar year 2012 if the following requirements are satisfied: (1) Not later than February 28, 2013, a statement is sent to the HAMP-PRA borrower containing the following: (a) The HAMP-PRA borrower’s name, address, and taxpayer identification number; and (b) The date and amount of the discharge of indebtedness (as described in sections 4. Tax planning us 1040ez 01 through 4. Tax planning us 1040ez 04 of this revenue procedure) that is required to be reported for 2012. Tax planning us 1040ez (2) Not later than March 28, 2013, a statement is sent to the Service. Tax planning us 1040ez It must be in the form of a single statement that separately lists for each HAMP-PRA borrower the information specified in section 7. Tax planning us 1040ez 01(1) of this revenue procedure. Tax planning us 1040ez The statement should be sent to the Service at the following address: Internal Revenue Service Center Stop 6728AUSC Austin, TX 73301 . Tax planning us 1040ez 02 The Service will not assert penalties under § 6721 or § 6722 with respect to any Forms 1099-MISC for 2012 that sections 5. Tax planning us 1040ez 06 and 8. Tax planning us 1040ez 02 of this revenue procedure require to be filed with the Service and furnished to taxpayers. Tax planning us 1040ez . Tax planning us 1040ez 03 Section 8. Tax planning us 1040ez 03 and 8. Tax planning us 1040ez 04 of this revenue procedure, below, describes penalty relief regarding Forms 1099-C and 1099-MISC for 2010 and 2011. Tax planning us 1040ez SECTION 8. Tax planning us 1040ez SCOPE AND EFFECTIVE DATE . Tax planning us 1040ez 01 This revenue procedure applies to all borrowers, investors, and servicers who participate, or have participated, in the HAMP-PRA, regardless of when the permanent modification occurs. Tax planning us 1040ez . Tax planning us 1040ez 02 Section 5 of this revenue procedure is effective for Forms 1099-C and 1099-MISC due or filed after January 24, 2013. Tax planning us 1040ez . Tax planning us 1040ez 03 Because of the effective date in section 8. Tax planning us 1040ez 02 of this revenue procedure, an investor is not subject to penalties under § 6721 or § 6722 on the grounds that the investor failed to timely file and furnish a 2010 or 2011 Form 1099-C as described in section 5. Tax planning us 1040ez 03 through 5. Tax planning us 1040ez 04 of this revenue procedure (or on the grounds that the investor filed or furnished a 2010 or 2011 Form 1099-C that is inconsistent with section 5. Tax planning us 1040ez 03 through 5. Tax planning us 1040ez 04 of this revenue procedure), provided that the investor demonstrates a good faith attempt to comply with the requirements of § 6050P and that the failure was not due to willful neglect. Tax planning us 1040ez . Tax planning us 1040ez 04 Because of the effective date in section 8. Tax planning us 1040ez 02 of this revenue procedure, the Service will not assert penalties under § 6721 or § 6722 on the grounds of a failure to timely file and furnish a 2010 or 2011 Form 1099-MISC, as described in section 5. Tax planning us 1040ez 06 of this revenue procedure. Tax planning us 1040ez SECTION 9. Tax planning us 1040ez DRAFTING INFORMATION The principal authors of this revenue procedure are Ronald J. Tax planning us 1040ez Goldstein of the Office of Chief Counsel (Procedure and Administration); Shareen S. Tax planning us 1040ez Pflanz and Sheldon A. Tax planning us 1040ez Iskow of the Office of Chief Counsel (Income Tax and Accounting); and Andrea M. Tax planning us 1040ez Hoffenson of the Office of Chief Counsel (Financial Institutions and Products). Tax planning us 1040ez For further information regarding this revenue procedure, contact Procedure and Administration branch 1 at (202) 622-4910, Income Tax and Accounting branch 4 at (202) 622-4920, or Financial Institutions and Products branch 1 at (202) 622-3920 (not toll-free calls). Tax planning us 1040ez Prev  Up  Next   Home   More Internal Revenue Bulletins