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2011 Tax

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2011 Tax

2011 tax 19. 2011 tax   Education- Related Adjustments Table of Contents Introduction Useful Items - You may want to see: Student Loan Interest DeductionStudent Loan Interest Defined Can You Claim the Deduction How Much Can You Deduct How Do You Figure the Deduction Tuition and Fees DeductionCan You Claim the Deduction What Expenses Qualify Who Is an Eligible Student Who Can Claim a Dependent's Expenses How Much Can You Deduct Educator Expenses Introduction This chapter discusses the education-related adjustment you can deduct in figuring your adjusted gross income. 2011 tax This chapter covers the student loan interest deduction, tuition and fees deduction, and the deduction for educator expenses. 2011 tax Useful Items - You may want to see: Publication 970 Tax Benefits for Education Student Loan Interest Deduction Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. 2011 tax However, if your modified adjusted gross income (MAGI) is less than $75,000 ($155,000 if filing a joint return) there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. 2011 tax For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. 2011 tax This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2013. 2011 tax Table 19-1 summarizes the features of the student loan interest deduction. 2011 tax Table 19-1. 2011 tax Student Loan Interest Deduction at a Glance Do not rely on this table alone. 2011 tax Refer to the text for more details. 2011 tax Feature Description Maximum benefit You can reduce your income subject to tax by up to $2,500. 2011 tax Loan qualifications Your student loan: •  must have been taken out solely to pay qualified education expenses, and   • cannot be from a related person or made under a qualified employer plan. 2011 tax Student qualifications The student must be: • you, your spouse, or your dependent, and   • enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential at an eligible educational institution. 2011 tax Time limit on deduction You can deduct interest paid during the remaining period of your student loan. 2011 tax Phaseout The amount of your deduction depends on your income level. 2011 tax Student Loan Interest Defined Student loan interest is interest you paid during the year on a qualified student loan. 2011 tax It includes both required and voluntary interest payments. 2011 tax Qualified Student Loan This is a loan you took out solely to pay qualified education expenses (defined later) that were: For you, your spouse, or a person who was your dependent (defined in chapter 3) when you took out the loan, Paid or incurred within a reasonable period of time before or after you took out the loan, and For education provided during an academic period when the student is an eligible student. 2011 tax Loans from the following sources are not qualified student loans. 2011 tax A related person. 2011 tax A qualified employer plan. 2011 tax Exceptions. 2011 tax   For purposes of the student loan interest deduction, the following are exceptions to the general rules for dependents. 2011 tax An individual can be your dependent even if you are the dependent of another taxpayer. 2011 tax An individual can be your dependent even if the individual files a joint return with a spouse. 2011 tax An individual can be your dependent even if the individual had gross income for the year that was equal to or more than the exemption amount for the year ($3,900 for 2013). 2011 tax    Reasonable period of time. 2011 tax   Qualified education expenses are treated as paid or incurred within a reasonable period of time before or after you take out the loan if they are paid with the proceeds of student loans that are part of a federal postsecondary education loan program. 2011 tax   Even if not paid with the proceeds of that type of loan, the expenses are treated as paid or incurred within a reasonable period of time if both of the following requirements are met. 2011 tax The expenses relate to a specific academic period. 2011 tax The loan proceeds are disbursed within a period that begins 90 days before the start of that academic period and ends 90 days after the end of that academic period. 2011 tax   If neither of the above situations applies, the reasonable period of time is determined based on all the relevant facts and circumstances. 2011 tax Academic period. 2011 tax   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. 2011 tax In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. 2011 tax Eligible student. 2011 tax   This is a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. 2011 tax Enrolled at least half-time. 2011 tax   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study. 2011 tax   The standard for what is half of the normal full-time work load is determined by each eligible educational institution. 2011 tax However, the standard may not be lower than any of those established by the U. 2011 tax S. 2011 tax Department of Education under the Higher Education Act of 1965. 2011 tax Related person. 2011 tax   You cannot deduct interest on a loan you get from a related person. 2011 tax Related persons include: Your spouse, Your brothers and sisters, Your half brothers and half sisters, Your ancestors (parents, grandparents, etc. 2011 tax ), Your lineal descendants (children, grandchildren, etc. 2011 tax ), and Certain corporations, partnerships, trusts, and exempt organizations. 2011 tax Qualified employer plan. 2011 tax   You cannot deduct interest on a loan made under a qualified employer plan or under a contract purchased under such a plan. 2011 tax Qualified Education Expenses For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. 2011 tax They include amounts paid for the following items. 2011 tax Tuition and fees. 2011 tax Room and board. 2011 tax Books, supplies, and equipment. 2011 tax Other necessary expenses (such as transportation). 2011 tax The cost of room and board qualifies only to the extent that it is not more than: The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or If greater, the actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. 2011 tax Eligible educational institution. 2011 tax   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. 2011 tax S. 2011 tax Department of Education. 2011 tax It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. 2011 tax   Certain educational institutions located outside the United States also participate in the U. 2011 tax S. 2011 tax Department of Education's Federal Student Aid (FSA) programs. 2011 tax   For purposes of the student loan interest deduction, an eligible educational institution also includes an institution conducting an internship or residency program leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training. 2011 tax   An educational institution must meet the above criteria only during the academic period(s) for which the student loan was incurred. 2011 tax The deductibility of interest on the loan is not affected by the institution's subsequent loss of eligibility. 2011 tax    The educational institution should be able to tell you if it is an eligible educational institution. 2011 tax Adjustments to qualified education expenses. 2011 tax   You must reduce your qualified education expenses by certain tax-free items (such as the tax-free part of scholarships and fellowships). 2011 tax See chapter 4 of Publication 970 for details. 2011 tax Include as Interest In addition to simple interest on the loan, certain loan origination fees, capitalized interest, interest on revolving lines of credit, and interest on refinanced student loans can be student loan interest if all other requirements are met. 2011 tax Loan origination fee. 2011 tax   In general, this is a one-time fee charged by the lender when a loan is made. 2011 tax To be deductible as interest, the fee must be for the use of money rather than for property or services (such as commitment fees or processing costs) provided by the lender. 2011 tax A loan origination fee treated as interest accrues over the life of the loan. 2011 tax Capitalized interest. 2011 tax    This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. 2011 tax Interest on revolving lines of credit. 2011 tax   This interest, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) only to pay qualified education expenses. 2011 tax See Qualified Education Expenses , earlier. 2011 tax Interest on refinanced student loans. 2011 tax   This includes interest on both: Consolidated loans—loans used to refinance more than one student loan of the same borrower, and Collapsed loans—two or more loans of the same borrower that are treated by both the lender and the borrower as one loan. 2011 tax If you refinance a qualified student loan for more than your original loan and you use the additional amount for any purpose other than qualified education expenses, you cannot deduct any interest paid on the refinanced loan. 2011 tax Voluntary interest payments. 2011 tax   These are payments made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment or the loan has not yet entered repayment status. 2011 tax Do Not Include as Interest You cannot claim a student loan interest deduction for any of the following items. 2011 tax Interest you paid on a loan if, under the terms of the loan, you are not legally obligated to make interest payments. 2011 tax Loan origination fees that are payments for property or services provided by the lender, such as commitment fees or processing costs. 2011 tax Interest you paid on a loan to the extent payments were made through your participation in the National Health Service Corps Loan Repayment Program (the “NHSC Loan Repayment Program”) or certain other loan repayment assistance programs. 2011 tax For more information, see Student Loan Repayment Assistance in chapter 5 of Publication 970. 2011 tax Can You Claim the Deduction Generally, you can claim the deduction if all of the following requirements are met. 2011 tax Your filing status is any filing status except married filing separately. 2011 tax No one else is claiming an exemption for you on his or her tax return. 2011 tax You are legally obligated to pay interest on a qualified student loan. 2011 tax You paid interest on a qualified student loan. 2011 tax Interest paid by others. 2011 tax   If you are the person legally obligated to make interest payments and someone else makes a payment of interest on your behalf, you are treated as receiving the payments from the other person and, in turn, paying the interest. 2011 tax See chapter 4 of Publication 970 for more information. 2011 tax No Double Benefit Allowed You cannot deduct as interest on a student loan any amount that is an allowable deduction under any other provision of the tax law (for example, home mortgage interest). 2011 tax How Much Can You Deduct Your student loan interest deduction for 2013 is generally the smaller of: $2,500, or The interest you paid in 2013. 2011 tax However, the amount determined above is phased out (gradually reduced) if your MAGI is between $60,000 and $75,000 ($125,000 and $155,000 if you file a joint return). 2011 tax You cannot take a student loan interest deduction if your MAGI is $75,000 or more ($155,000 or more if you file a joint return). 2011 tax For details on figuring your MAGI, see chapter 4 of Publication 970. 2011 tax How Do You Figure the Deduction Generally, you figure the deduction using the Student Loan Interest Deduction Worksheet in the Form 1040 or Form 1040A instructions. 2011 tax However, if you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico, you must complete Worksheet 4-1 in chapter 4 of Publication 970. 2011 tax To help you figure your student loan interest deduction, you should receive Form 1098-E, Student Loan Interest Statement. 2011 tax Generally, an institution (such as a bank or governmental agency) that received interest payments of $600 or more during 2013 on one or more qualified student loans must send Form 1098-E (or acceptable substitute) to each borrower by January 31, 2014. 2011 tax For qualified student loans taken out before September 1, 2004, the institution is required to include on Form 1098-E only payments of stated interest. 2011 tax Other interest payments, such as certain loan origination fees and capitalized interest, may not appear on the form you receive. 2011 tax However, if you pay qualifying interest that is not included on Form 1098-E, you can also deduct those amounts. 2011 tax For information on allocating payments between interest and principal, see chapter 4 of Publication 970. 2011 tax To claim the deduction, enter the allowable amount on Form 1040, line 33, or Form 1040A, line 18. 2011 tax Tuition and Fees Deduction You may be able to deduct qualified education expenses paid during the year for yourself, your spouse, or your dependent(s). 2011 tax You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. 2011 tax The qualified expenses must be for higher education, as explained later under What Expenses Qualify . 2011 tax The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. 2011 tax Table 19-2 summarizes the features of the tuition and fees deduction. 2011 tax You may be able to take a credit for your education expenses instead of a deduction. 2011 tax You can choose the one that will give you the lower tax. 2011 tax See chapter 35, Education Credits, for details about the credits. 2011 tax Can You Claim the Deduction The following rules will help you determine if you can claim the tuition and fees deduction. 2011 tax Who Can Claim the Deduction Generally, you can claim the tuition and fees deduction if all three of the following requirements are met. 2011 tax You paid qualified education expenses of higher education in 2013 for academic periods beginning in 2013 and those beginning in the first three months of 2014. 2011 tax You paid the education expenses for an eligible student. 2011 tax The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption (defined in chapter 3) on your tax return. 2011 tax Qualified education expenses are defined under What Expenses Qualify . 2011 tax Eligible students are defined later under Who Is an Eligible Student . 2011 tax Who Cannot Claim the Deduction You cannot claim the tuition and fees deduction if any of the following apply. 2011 tax Your filing status is married filing separately. 2011 tax Another person can claim an exemption for you as a dependent on his or her tax return. 2011 tax You cannot take the deduction even if the other person does not actually claim that exemption. 2011 tax Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return). 2011 tax You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. 2011 tax More information on nonresident aliens can be found in Publication 519, U. 2011 tax S. 2011 tax Tax Guide for Aliens. 2011 tax You or anyone else claims an American opportunity or lifetime learning credit in 2013 with respect to expenses of the student for whom the qualified education expenses were paid. 2011 tax However, a state tax credit will not disqualify you from claiming a tuition and fees deduction. 2011 tax Table 19-2. 2011 tax Tuition and Fees Deduction at a Glance Do not rely on this table alone. 2011 tax Refer to the text for more details. 2011 tax Question   Answer What is the maximum benefit?   You can reduce your income subject to tax by up to $4,000. 2011 tax Where is the deduction taken?   As an adjustment to income on Form 1040, line 34, or Form 1040A, line 19. 2011 tax For whom must the expenses be paid?   A student enrolled in an eligible educational institution who is either: you, your spouse, or your dependent for whom you claim an exemption. 2011 tax What tuition and fees are deductible?   Tuition and fees required for enrollment or attendance at an eligible postsecondary educational institution, but not including personal, living, or family expenses, such as room and board. 2011 tax What Expenses Qualify The tuition and fees deduction is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. 2011 tax Generally, the deduction is allowed for qualified education expenses paid in 2013 in connection with enrollment at an institution of higher education during 2013 or for an academic period (defined earlier under Student Loan Interest Deduction ) beginning in 2013 or in the first 3 months of 2014. 2011 tax Payments with borrowed funds. 2011 tax   You can claim a tuition and fees deduction for qualified education expenses paid with the proceeds of a loan. 2011 tax Use the expenses to figure the deduction for the year in which the expenses are paid, not the year in which the loan is repaid. 2011 tax Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account. 2011 tax Student withdraws from class(es). 2011 tax   You can claim a tuition and fees deduction for qualified education expenses not refunded when a student withdraws. 2011 tax Qualified Education Expenses For purposes of the tuition and fees deduction, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. 2011 tax Eligible educational institution. 2011 tax   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. 2011 tax S. 2011 tax Department of Education. 2011 tax It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. 2011 tax The educational institution should be able to tell you if it is an eligible educational institution. 2011 tax   Certain educational institutions located outside the United States also participate in the U. 2011 tax S. 2011 tax Department of Education's Federal Student Aid (FSA) programs. 2011 tax Academic period. 2011 tax    An academic period is any quarter, semester, trimester, or any other period of study as reasonably determined by an eligible educational institution. 2011 tax If an eligible educational institution uses credit hours and does not have academic terms, each payment period may be treated as an academic period. 2011 tax Related expenses. 2011 tax   Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses for the tuition and fees deduction only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance. 2011 tax Prepaid expenses. 2011 tax   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring the tuition and fees deduction. 2011 tax See Academic period, earlier. 2011 tax For example, if you pay $2,000 in December 2013 for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring the tuition and fees deduction for 2013 only if you meet all the other requirements. 2011 tax    You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 tuition and fees deduction. 2011 tax No Double Benefit Allowed You cannot do any of the following. 2011 tax Deduct qualified education expenses you deduct under any other provision of the law, for example, as a business expense. 2011 tax Deduct qualified education expenses for a student on your income tax return if you or anyone else claims an American opportunity or lifetime learning credit for that same student in the same year. 2011 tax Deduct qualified education expenses that have been used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or a qualified tuition program (QTP). 2011 tax For a QTP, this applies only to the amount of tax-free earnings that were distributed, not to the recovery of contributions to the program. 2011 tax See Figuring the Taxable Portion of a Distribution in chapter 7 (Coverdell ESA) and chapter 8 (QTP) of Publication 970. 2011 tax Deduct qualified education expenses that have been paid with tax-free interest on U. 2011 tax S. 2011 tax savings bonds (Form 8815). 2011 tax See Figuring the Tax-Free Amount in chapter 10 of Publication 970. 2011 tax Deduct qualified education expenses that have been paid with tax-free educational assistance such as a scholarship, grant, or employer-provided educational assistance. 2011 tax See Adjustments to qualified education expenses, later. 2011 tax Adjustments to qualified education expenses. 2011 tax   For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. 2011 tax The result is the amount of adjusted qualified education expenses for each student. 2011 tax Tax-free educational assistance. 2011 tax   For tax-free educational assistance you received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance to that academic period. 2011 tax See Academic period, earlier. 2011 tax   This includes: The tax-free part of scholarships and fellowships, including Pell grants (see chapter 1 of Publication 970), The tax-free part of any employer-provided educational assistance (see chapter 11 of Publication 970), Veterans' educational assistance (see chapter 1 of Publication 970), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. 2011 tax Generally, any scholarship or fellowship you receive is treated as tax-free educational assistance. 2011 tax However, a scholarship or fellowship is not treated as tax-free educational assistance to the extent you include it in gross income (if you are required to file a tax return) for the year the scholarship or fellowship is received and either: The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. 2011 tax 970, chapter 1. 2011 tax The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. 2011 tax 970, chapter 1. 2011 tax You may be able to increase the combined value of your tuition and fees deduction and certain educational assistance if you include some or all of the educational assistance in income in the year it is received. 2011 tax For details, see Adjustments to Qualified Education Expenses in chapter 6 of Pub. 2011 tax 970. 2011 tax Some tax-free educational assistance received in 2013 may be treated as a refund of qualified education expenses paid in 2013. 2011 tax This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). 2011 tax If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed, later. 2011 tax If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed, later. 2011 tax Refunds. 2011 tax   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or may require you to include some or all of the refund in your gross income for the year the refund is received. 2011 tax See chapter 6 of Pub. 2011 tax 970 for more information. 2011 tax Some tax-free educational assistance received after 2013 may be treated as a refund. 2011 tax See Tax-free educational assistance, earlier. 2011 tax Refunds received in 2013. 2011 tax    For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses paid in 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. 2011 tax Refunds received after 2013 but before your income tax return is filed. 2011 tax   If you receive a refund after 2013 of qualified education expenses you paid in 2013 and the refund is received before you file your 2013 income tax return, reduce the amount of qualified education expenses for 2013 by the amount of the refund. 2011 tax Refunds received after 2013 and after your income tax return is filed. 2011 tax   If you receive a refund after 2013 of qualified education expenses you paid in 2013 and the refund is received after you file your 2013 income tax return, you may need to include some or all of the refund in your gross income for the year the refund is received. 2011 tax See chapter 6 of Pub. 2011 tax 970 for more information. 2011 tax Coordination with Coverdell education savings accounts and qualified tuition programs. 2011 tax    Reduce your qualified education expenses by any qualified education expenses used to figure the exclusion from gross income of (a) interest received under an education savings bond program, or (b) any distribution from a Coverdell education savings account or qualified tuition program (QTP). 2011 tax For a QTP, this applies only to the amount of tax-free earnings that were distributed, not to the recovery of contributions to the program. 2011 tax Amounts that do not reduce qualified education expenses. 2011 tax   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. 2011 tax   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. 2011 tax The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses. 2011 tax The use of the money is not restricted. 2011 tax Expenses That Do Not Qualify Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. 2011 tax This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. 2011 tax Sports, games, hobbies, and noncredit courses. 2011 tax   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. 2011 tax However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify. 2011 tax Comprehensive or bundled fees. 2011 tax   Some eligible educational institutions combine all of their fees for an academic period into one amount. 2011 tax If you do not receive, or do not have access to, an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. 2011 tax The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T, Tuition Statement. 2011 tax See How Do You Figure the Deduction , later, for more information about Form 1098-T. 2011 tax Who Is an Eligible Student For purposes of the tuition and fees deduction, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (defined earlier). 2011 tax Who Can Claim a Dependent's Expenses Generally, in order to claim the tuition and fees deduction for qualified education expenses for a dependent, you must: Have paid the expenses, and Claim an exemption for the student as a dependent. 2011 tax Table 19-3 summarizes who can claim the deduction. 2011 tax How Much Can You Deduct The maximum tuition and fees deduction in 2013 is $4,000, $2,000, or $0, depending on the amount of your MAGI. 2011 tax For details on figuring your MAGI, see chapter 6 of Publication 970. 2011 tax How Do You Figure the Deduction Figure the deduction using Form 8917. 2011 tax To help you figure your tuition and fees deduction, you should receive Form 1098-T, Tuition Statement. 2011 tax Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2014. 2011 tax To claim the deduction, enter the allowable amount on Form 1040, line 34, or Form 1040A, line 19, and attach your completed Form 8917. 2011 tax Table 19-3. 2011 tax Who Can Claim a Dependent's Expenses Do not rely on this table alone. 2011 tax See Who Can Claim a Dependent's Expenses in chapter 6 of Publication 970. 2011 tax IF your dependent is an eligible student and you. 2011 tax . 2011 tax . 2011 tax AND. 2011 tax . 2011 tax . 2011 tax THEN. 2011 tax . 2011 tax . 2011 tax claim an exemption for your dependent you paid all qualified education expenses for your dependent only you can deduct the qualified education expenses that you paid. 2011 tax Your dependent cannot take a deduction. 2011 tax claim an exemption for your dependent your dependent paid all qualified education expenses no one is allowed to take a deduction. 2011 tax do not claim an exemption for your dependent you paid all qualified education expenses no one is allowed to take a deduction. 2011 tax do not claim an exemption for your dependent your dependent paid all qualified education expenses no one is allowed to take a deduction. 2011 tax Educator Expenses If you were an eligible educator in 2013, you can deduct on Form 1040, line 23, or Form 1040A, line 16, up to $250 of qualified expenses you paid in 2013. 2011 tax If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. 2011 tax However, neither spouse can deduct more than $250 of his or her qualified expenses on Form 1040, line 23, or Form 1040A, line 16. 2011 tax You may be able to deduct expenses that are more than the $250 (or $500) limit on Schedule A (Form 1040), line 21. 2011 tax Eligible educator. 2011 tax   An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year. 2011 tax Qualified expenses. 2011 tax   Qualified expenses include ordinary and necessary expenses paid in connection with books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom. 2011 tax An ordinary expense is one that is common and accepted in your educational field. 2011 tax A necessary expense is one that is helpful and appropriate for your profession as an educator. 2011 tax An expense does not have to be required to be considered necessary. 2011 tax   Qualified expenses do not include expenses for home schooling or for nonathletic supplies for courses in health or physical education. 2011 tax   You must reduce your qualified expenses by the following amounts. 2011 tax Excludable U. 2011 tax S. 2011 tax series EE and I savings bond interest from Form 8815. 2011 tax See Figuring the Tax-Free Amount in chapter 10 of Publication 970. 2011 tax Nontaxable qualified tuition program earnings or distributions. 2011 tax See Figuring the Taxable Portion of a Distribution in chapter 8 of Publication 970. 2011 tax Nontaxable distribution of earnings from a Coverdell education savings account. 2011 tax See Figuring the Taxable Portion of a Distribution in chapter 7 of Publication 970. 2011 tax Any reimbursements you received for these expenses that were not reported to you in box 1 of your Form W-2. 2011 tax Prev  Up  Next   Home   More Online Publications
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The 2011 Tax

2011 tax 2. 2011 tax   Source of Income Table of Contents Introduction Topics - This chapter discusses: Resident Aliens Nonresident AliensInterest Income Dividends Guarantee of Indebtedness Personal Services Transportation Income Scholarships, Grants, Prizes, and Awards Pensions and Annuities Rents or Royalties Real Property Personal Property Community Income Introduction After you have determined your alien status, you must determine the source of your income. 2011 tax This chapter will help you determine the source of different types of income you may receive during the tax year. 2011 tax This chapter also discusses special rules for married individuals who are domiciled in a country with community property laws. 2011 tax Topics - This chapter discusses: Income source rules, and Community income. 2011 tax Resident Aliens A resident alien's income is generally subject to tax in the same manner as a U. 2011 tax S. 2011 tax citizen. 2011 tax If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U. 2011 tax S. 2011 tax tax return. 2011 tax You must report these amounts from sources within and outside the United States. 2011 tax Nonresident Aliens A nonresident alien usually is subject to U. 2011 tax S. 2011 tax income tax only on U. 2011 tax S. 2011 tax source income. 2011 tax Under limited circumstances, certain foreign source income is subject to U. 2011 tax S. 2011 tax tax. 2011 tax See Foreign Income in chapter 4. 2011 tax The general rules for determining U. 2011 tax S. 2011 tax source income that apply to most nonresident aliens are shown in Table 2-1. 2011 tax The following discussions cover the general rules as well as the exceptions to these rules. 2011 tax Not all items of U. 2011 tax S. 2011 tax source income are taxable. 2011 tax See chapter 3. 2011 tax Interest Income Generally, U. 2011 tax S. 2011 tax source interest income includes the following items. 2011 tax Interest on bonds, notes, or other interest-bearing obligations of U. 2011 tax S. 2011 tax residents or domestic corporations. 2011 tax Interest paid by a domestic or foreign partnership or foreign corporation engaged in a U. 2011 tax S. 2011 tax trade or business at any time during the tax year. 2011 tax Original issue discount. 2011 tax Interest from a state, the District of Columbia, or the U. 2011 tax S. 2011 tax Government. 2011 tax The place or manner of payment is immaterial in determining the source of the income. 2011 tax A substitute interest payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as the interest on the transferred security. 2011 tax Exceptions. 2011 tax   U. 2011 tax S. 2011 tax source interest income does not include the following items. 2011 tax Interest paid by a resident alien or a domestic corporation on obligations issued before August 10, 2010, if for the 3-year period ending with the close of the payer's tax year preceding the interest payment, at least 80% of the payer's total gross income: Is from sources outside the United States, and Is attributable to the active conduct of a trade or business by the individual or corporation in a foreign country or a U. 2011 tax S. 2011 tax possession. 2011 tax However, the interest will be considered U. 2011 tax S. 2011 tax source interest income if either of the following apply. 2011 tax The recipient of the interest is related to the resident alien or domestic corporation. 2011 tax See section 954(d)(3) for the definition of related person. 2011 tax The terms of the obligation are significantly modified after August 9, 2010. 2011 tax Any extension of the term of the obligation is considered a significant modification. 2011 tax Interest paid by a foreign branch of a domestic corporation or a domestic partnership on deposits or withdrawable accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under federal or state law if the interest paid or credited can be deducted by the association. 2011 tax Interest on deposits with a foreign branch of a domestic corporation or domestic partnership, but only if the branch is in the commercial banking business. 2011 tax Dividends In most cases, dividend income received from domestic corporations is U. 2011 tax S. 2011 tax source income. 2011 tax Dividend income from foreign corporations is usually foreign source income. 2011 tax Exceptions to both of these rules are discussed below. 2011 tax A substitute dividend payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as a distribution on the transferred security. 2011 tax Dividend equivalent payments. 2011 tax   U. 2011 tax S. 2011 tax source dividends also include all dividend equivalent payments. 2011 tax Dividend equivalent payments include substitute dividends, payments made pursuant to a specified notional principal contract, and all similar payments that, directly or indirectly, are contingent on or determined by reference to, the payment of a dividend from U. 2011 tax S. 2011 tax sources. 2011 tax    The Internal Revenue Service has issued final regulations that would affect the treatment of dividend equivalent payments and specified notional principal contracts. 2011 tax You can view this regulation at www. 2011 tax irs. 2011 tax gov/irb/2013-52_IRB/ar08. 2011 tax html. 2011 tax First exception. 2011 tax   Dividends received from a domestic corporation are not U. 2011 tax S. 2011 tax source income if the corporation elects to take the American Samoa economic development credit. 2011 tax Second exception. 2011 tax   Part of the dividends received from a foreign corporation is U. 2011 tax S. 2011 tax source income if 25% or more of its total gross income for the 3-year period ending with the close of its tax year preceding the declaration of dividends was effectively connected with a trade or business in the United States. 2011 tax If the corporation was formed less than 3 years before the declaration, use its total gross income from the time it was formed. 2011 tax Determine the part that is U. 2011 tax S. 2011 tax source income by multiplying the dividend by the following fraction. 2011 tax   Foreign corporation's gross income connected with a U. 2011 tax S. 2011 tax trade or business for the 3-year period     Foreign corporation's gross income from all sources for that period   Guarantee of Indebtedness Certain amounts received directly or indirectly, for the provision of a guarantee of indebtedness issued after September 27, 2010, are U. 2011 tax S. 2011 tax source income. 2011 tax They must be paid by a noncorporate resident or U. 2011 tax S. 2011 tax corporation or by any foreign person if the amounts are effectively connected with the conduct of a U. 2011 tax S. 2011 tax trade or business. 2011 tax For more information, see Internal Revenue Code sections 861(a)(9) and 862(a)(9). 2011 tax Personal Services All wages and any other compensation for services performed in the United States are considered to be from sources in the United States. 2011 tax The only exceptions to this rule are discussed in chapter 3 under Employees of foreign persons, organizations, or offices, and under Crew members. 2011 tax If you are an employee and receive compensation for labor or personal services performed both inside and outside the United States, special rules apply in determining the source of the compensation. 2011 tax Compensation (other than certain fringe benefits) is sourced on a time basis. 2011 tax Certain fringe benefits (such as housing and education) are sourced on a geographical basis. 2011 tax Or, you may be permitted to use an alternative basis to determine the source of compensation. 2011 tax See Alternative Basis , later. 2011 tax Multi-level marketing. 2011 tax   Certain companies sell products through a multi-level marketing arrangement, such that an upper-tier distributor, who has sponsored a lower-tier distributor, is entitled to a payment from the company based on certain activities of that lower-tier distributor. 2011 tax Generally, depending on the facts, payments from such multi-level marketing companies to independent (non-employee) distributors (upper-tier distributors) that are based on the sales or purchases of persons whom they have sponsored (lower-tier distributors) constitute income for the performance of personal services in recruiting, training, and supporting the lower-tier distributors. 2011 tax The source of such income is generally based on where the services of the upper-tier distributor are performed, and may, depending on the facts, be considered multi-year compensation, with the source of income determined over the period to which such compensation is attributable. 2011 tax Self-employed individuals. 2011 tax   If you are self-employed, you determine the source of compensation for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. 2011 tax In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. 2011 tax Time Basis Use a time basis to figure your U. 2011 tax S. 2011 tax source compensation (other than the fringe benefits discussed later). 2011 tax Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed services in the United States during the year     Total number of days you performed services during the year   You can use a unit of time less than a day in the above fraction, if appropriate. 2011 tax The time period for which the compensation is made does not have to be a year. 2011 tax Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. 2011 tax Example 1. 2011 tax Christina Brooks, a resident of the Netherlands, worked 240 days for a U. 2011 tax S. 2011 tax company during the tax year. 2011 tax She received $80,000 in compensation. 2011 tax None of it was for fringe benefits. 2011 tax Christina performed services in the United States for 60 days and performed services in the Netherlands for 180 days. 2011 tax Using the time basis for determining the source of compensation, $20,000 ($80,000 × 60/240) is her U. 2011 tax S. 2011 tax source income. 2011 tax Example 2. 2011 tax Rob Waters, a resident of South Africa, is employed by a corporation. 2011 tax His annual salary is $100,000. 2011 tax None of it is for fringe benefits. 2011 tax During the first quarter of the year he worked entirely within the United States. 2011 tax On April 1, Rob was transferred to Singapore for the remainder of the year. 2011 tax Rob is able to establish that the first quarter of the year and the last 3 quarters of the year are two separate, distinct, and continuous periods of time. 2011 tax Accordingly, $25,000 of Rob's annual salary is attributable to the first quarter of the year (. 2011 tax 25 × $100,000). 2011 tax All of it is U. 2011 tax S. 2011 tax source income because he worked entirely within the United States during that quarter. 2011 tax The remaining $75,000 is attributable to the last three quarters of the year. 2011 tax During those quarters, he worked 150 days in Singapore and 30 days in the United States. 2011 tax His periodic performance of services in the United States did not result in distinct, separate, and continuous periods of time. 2011 tax Of this $75,000, $12,500 ($75,000 × 30/180) is U. 2011 tax S. 2011 tax source income. 2011 tax Multi-year compensation. 2011 tax   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. 2011 tax Multi-year compensation is compensation that is included in your income in one tax year but that is attributable to a period that includes two or more tax years. 2011 tax   You determine the period to which the compensation is attributable based on the facts and circumstances of your case. 2011 tax For example, an amount of compensation that specifically relates to a period of time that includes several calendar years is attributable to the entire multi-year period. 2011 tax   The amount of compensation treated as from U. 2011 tax S. 2011 tax sources is figured by multiplying the total multi-year compensation by a fraction. 2011 tax The numerator of the fraction is the number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in the United States in connection with the project. 2011 tax The denominator of the fraction is the total number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in connection with the project. 2011 tax Geographical Basis Compensation you receive as an employee in the form of the following fringe benefits is sourced on a geographical basis. 2011 tax Housing. 2011 tax Education. 2011 tax Local transportation. 2011 tax Tax reimbursement. 2011 tax Hazardous or hardship duty pay as defined in Regulations section 1. 2011 tax 861-4(b)(2)(ii)(D)(5). 2011 tax Moving expense reimbursement. 2011 tax The amount of fringe benefits must be reasonable and you must substantiate them by adequate records or by sufficient evidence. 2011 tax Principal place of work. 2011 tax   The above fringe benefits, except for tax reimbursement and hazardous or hardship duty pay, are sourced based on your principal place of work. 2011 tax Your principal place of work is usually the place where you spend most of your working time. 2011 tax This could be your office, plant, store, shop, or other location. 2011 tax If there is no one place where you spend most of your working time, your main job location is the place where your work is centered, such as where you report for work or are otherwise required to “base” your work. 2011 tax   If you have more than one job at any time, your main job location depends on the facts in each case. 2011 tax The more important factors to be considered are: The total time you spend at each place, The amount of work you do at each place, and How much money you earn at each place. 2011 tax Housing. 2011 tax   The source of a housing fringe benefit is determined based on the location of your principal place of work. 2011 tax A housing fringe benefit includes payments to you or on your behalf (and your family's if your family resides with you) only for the following. 2011 tax Rent. 2011 tax Utilities (except telephone charges). 2011 tax Real and personal property insurance. 2011 tax Occupancy taxes not deductible under section 164 or 216(a). 2011 tax Nonrefundable fees for securing a leasehold. 2011 tax Rental of furniture and accessories. 2011 tax Household repairs. 2011 tax Residential parking. 2011 tax Fair rental value of housing provided in kind by your employer. 2011 tax   A housing fringe benefit does not include: Deductible interest and taxes (including deductible interest and taxes of a tenant-stockholder in a cooperative housing corporation), The cost of buying property, including principal payments on a mortgage, The cost of domestic labor (maids, gardeners, etc. 2011 tax ), Pay television subscriptions, Improvements and other expenses that increase the value or appreciably prolong the life of property, Purchased furniture or accessories, Depreciation or amortization of property or improvements, The value of meals or lodging that you exclude from gross income, or The value of meals or lodging that you deduct as moving expenses. 2011 tax Education. 2011 tax   The source of an education fringe benefit for the education expenses of your dependents is determined based on the location of your principal place of work. 2011 tax An education fringe benefit includes payments only for the following expenses for education at an elementary or secondary school. 2011 tax Tuition, fees, academic tutoring, special needs services for a special needs student, books, supplies, and other equipment. 2011 tax Room and board and uniforms that are required or provided by the school in connection with enrollment or attendance. 2011 tax Local transportation. 2011 tax   The source of a local transportation fringe benefit is determined based on the location of your principal place of work. 2011 tax Your local transportation fringe benefit is the amount that you receive as compensation for local transportation for you or your spouse or dependents at the location of your principal place of work. 2011 tax The amount treated as a local transportation fringe benefit is limited to actual expenses incurred for local transportation and the fair rental value of any employer-provided vehicle used predominantly by you, your spouse, or your dependents for local transportation. 2011 tax Actual expenses do not include the cost (including interest) of any vehicle purchased by you or on your behalf. 2011 tax Tax reimbursement. 2011 tax   The source of a tax reimbursement fringe benefit is determined based on the location of the jurisdiction that imposed the tax for which you are reimbursed. 2011 tax Moving expense reimbursement. 2011 tax   The source of a moving expense reimbursement is generally based on the location of your new principal place of work. 2011 tax However, the source is determined based on the location of your former principal place of work if you provide sufficient evidence that such determination of source is more appropriate under the facts and circumstances of your case. 2011 tax Sufficient evidence generally requires an agreement between you and your employer, or a written statement of company policy, which is reduced to writing before the move and which is entered into or established to induce you or other employees to move to another country. 2011 tax The written statement or agreement must state that your employer will reimburse you for moving expenses that you incur to return to your former principal place of work regardless of whether you continue to work for your employer after returning to that location. 2011 tax It may contain certain conditions upon which the right to reimbursement is determined as long as those conditions set forth standards that are definitely ascertainable and can only be fulfilled prior to, or through completion of, your return move to your former principal place of work. 2011 tax Alternative Basis If you are an employee, you can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your compensation than the time or geographical basis. 2011 tax If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your compensation. 2011 tax Also, if your total compensation from all sources is $250,000 or more, check “Yes” to both questions on line K on page 5 of Form 1040NR, and attach a written statement to your tax return that sets forth all of the following. 2011 tax Your name and social security number (written across the top of the statement). 2011 tax The specific compensation income, or the specific fringe benefit, for which you are using the alternative basis. 2011 tax For each item in (2), the alternative basis of allocation of source used. 2011 tax For each item in (2), a computation showing how the alternative allocation was computed. 2011 tax A comparison of the dollar amount of the U. 2011 tax S. 2011 tax compensation and foreign compensation sourced under both the alternative basis and the time or geographical basis discussed earlier. 2011 tax Transportation Income Transportation income is income from the use of a vessel or aircraft or for the performance of services directly related to the use of any vessel or aircraft. 2011 tax This is true whether the vessel or aircraft is owned, hired, or leased. 2011 tax The term “vessel or aircraft” includes any container used in connection with a vessel or aircraft. 2011 tax All income from transportation that begins and ends in the United States is treated as derived from sources in the United States. 2011 tax If the transportation begins or ends in the United States, 50% of the transportation income is treated as derived from sources in the United States. 2011 tax For transportation income from personal services, 50% of the income is U. 2011 tax S. 2011 tax source income if the transportation is between the United States and a U. 2011 tax S. 2011 tax possession. 2011 tax For nonresident aliens, this only applies to income derived from, or in connection with, an aircraft. 2011 tax For information on how U. 2011 tax S. 2011 tax source transportation income is taxed, see chapter 4. 2011 tax Scholarships, Grants, Prizes, and Awards Generally, the source of scholarships, fellowship grants, grants, prizes, and awards is the residence of the payer regardless of who actually disburses the funds. 2011 tax However, see Activities to be performed outside the United States , later. 2011 tax For example, payments for research or study in the United States made by the United States, a noncorporate U. 2011 tax S. 2011 tax resident, or a domestic corporation, are from U. 2011 tax S. 2011 tax sources. 2011 tax Similar payments from a foreign government or foreign corporation are foreign source payments even though the funds may be disbursed through a U. 2011 tax S. 2011 tax agent. 2011 tax Payments made by an entity designated as a public international organization under the International Organizations Immunities Act are from foreign sources. 2011 tax Activities to be performed outside the United States. 2011 tax   Scholarships, fellowship grants, targeted grants, and achievement awards received by nonresident aliens for activities performed, or to be performed, outside the United States are not U. 2011 tax S. 2011 tax source income. 2011 tax    These rules do not apply to amounts paid as salary or other compensation for services. 2011 tax See Personal Services, earlier, for the source rules that apply. 2011 tax Pensions and Annuities If you receive a pension from a domestic trust for services performed both in and outside the United States, part of the pension payment is from U. 2011 tax S. 2011 tax sources. 2011 tax That part is the amount attributable to earnings of the pension plan and the employer contributions made for services performed in the United States. 2011 tax This applies whether the distribution is made under a qualified or nonqualified stock bonus, pension, profit-sharing, or annuity plan (whether or not funded). 2011 tax If you performed services as an employee of the United States, you may receive a distribution from the U. 2011 tax S. 2011 tax Government under a plan, such as the Civil Service Retirement System, that is treated as a qualified pension plan. 2011 tax Your U. 2011 tax S. 2011 tax source income is the otherwise taxable amount of the distribution that is attributable to your total U. 2011 tax S. 2011 tax Government basic pay other than tax-exempt pay for services performed outside the United States. 2011 tax Rents or Royalties Your U. 2011 tax S. 2011 tax source income includes rent and royalty income received during the tax year from property located in the United States or from any interest in that property. 2011 tax U. 2011 tax S. 2011 tax source income also includes rents or royalties for the use of, or for the privilege of using, in the United States, intangible property such as patents, copyrights, secret processes and formulas, goodwill, trademarks, franchises, and similar property. 2011 tax Real Property Real property is land and buildings and generally anything built on, growing on, or attached to land. 2011 tax Gross income from sources in the United States includes gains, profits, and income from the sale or other disposition of real property located in the United States. 2011 tax Natural resources. 2011 tax   The income from the sale of products of any farm, mine, oil or gas well, other natural deposit, or timber located in the United States and sold in a foreign country, or located in a foreign country and sold in the United States, is partly from sources in the United States. 2011 tax For information on determining that part, see section 1. 2011 tax 863-1(b) of the regulations. 2011 tax Table 2-1. 2011 tax Summary of Source Rules for Income of Nonresident Aliens Item of income Factor determining source Salaries, wages, other compensation Where services performed Business income:   Personal services Where services performed Sale of inventory—purchased Where sold Sale of inventory—produced Allocation Interest Residence of payer Dividends Whether a U. 2011 tax S. 2011 tax or foreign corporation* Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. 2011 tax Where property is used Sale of real property Location of property Sale of personal property Seller's tax home (but see Personal Property , later, for exceptions) Pension distributions attributable to contributions Where services were performed that earned the pension Investment earnings on pension contributions Location of pension trust Sale of natural resources Allocation based on fair market value of product at export terminal. 2011 tax For more information, see section 1. 2011 tax 863-1(b) of the regulations. 2011 tax *Exceptions include: a) Dividends paid by a U. 2011 tax S. 2011 tax corporation are foreign source if the corporation elects the  American Samoa economic development credit. 2011 tax  b) Part of a dividend paid by a foreign corporation is U. 2011 tax S. 2011 tax source if at least 25% of the  corporation's gross income is effectively connected with a U. 2011 tax S. 2011 tax trade or business for the  3 tax years before the year in which the dividends are declared. 2011 tax Personal Property Personal property is property, such as machinery, equipment, or furniture, that is not real property. 2011 tax Gain or loss from the sale or exchange of personal property generally has its source in the United States if you have a tax home in the United States. 2011 tax If you do not have a tax home in the United States, the gain or loss generally is considered to be from sources outside the United States. 2011 tax Tax home. 2011 tax   Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. 2011 tax Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual. 2011 tax If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. 2011 tax If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work. 2011 tax Inventory property. 2011 tax   Inventory property is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. 2011 tax Income from the sale of inventory that you purchased is sourced where the property is sold. 2011 tax Generally, this is where title to the property passes to the buyer. 2011 tax For example, income from the sale of inventory in the United States is U. 2011 tax S. 2011 tax source income, whether you purchased it in the United States or in a foreign country. 2011 tax   Income from the sale of inventory property that you produced in the United States and sold outside the United States (or vice versa) is partly from sources in the United States and partly from sources outside the United States. 2011 tax For information on making this allocation, see section 1. 2011 tax 863-3 of the regulations. 2011 tax   These rules apply even if your tax home is not in the United States. 2011 tax Depreciable property. 2011 tax   To determine the source of any gain from the sale of depreciable personal property, you must first figure the part of the gain that is not more than the total depreciation adjustments on the property. 2011 tax You allocate this part of the gain to sources in the United States based on the ratio of U. 2011 tax S. 2011 tax depreciation adjustments to total depreciation adjustments. 2011 tax The rest of this part of the gain is considered to be from sources outside the United States. 2011 tax   For this purpose, “U. 2011 tax S. 2011 tax depreciation adjustments” are the depreciation adjustments to the basis of the property that are allowable in figuring taxable income from U. 2011 tax S. 2011 tax sources. 2011 tax However, if the property is used predominantly in the United States during a tax year, all depreciation deductions allowable for that year are treated as U. 2011 tax S. 2011 tax depreciation adjustments. 2011 tax But there are some exceptions for certain transportation, communications, and other property used internationally. 2011 tax   Gain from the sale of depreciable property that is more than the total depreciation adjustments on the property is sourced as if the property were inventory property, as discussed above. 2011 tax   A loss is sourced in the same way as the depreciation deductions were sourced. 2011 tax However, if the property was used predominantly in the United States, the entire loss reduces U. 2011 tax S. 2011 tax source income. 2011 tax   The basis of property usually means the cost (money plus the fair market value of other property or services) of property you acquire. 2011 tax Depreciation is an amount deducted to recover the cost or other basis of a trade or business asset. 2011 tax The amount you can deduct depends on the property's cost, when you began using the property, how long it will take to recover your cost, and which depreciation method you use. 2011 tax A depreciation deduction is any deduction for depreciation or amortization or any other allowable deduction that treats a capital expenditure as a deductible expense. 2011 tax Intangible property. 2011 tax   Intangible property includes patents, copyrights, secret processes or formulas, goodwill, trademarks, trade names, or other like property. 2011 tax The gain from the sale of amortizable or depreciable intangible property, up to the previously allowable amortization or depreciation deductions, is sourced in the same way as the original deductions were sourced. 2011 tax This is the same as the source rule for gain from the sale of depreciable property. 2011 tax See Depreciable property , earlier, for details on how to apply this rule. 2011 tax   Gain in excess of the amortization or depreciation deductions is sourced in the country where the property is used if the income from the sale is contingent on the productivity, use, or disposition of that property. 2011 tax If the income is not contingent on the productivity, use, or disposition of the property, the income is sourced according to your tax home as discussed earlier. 2011 tax If payments for goodwill do not depend on its productivity, use, or disposition, their source is the country in which the goodwill was generated. 2011 tax Sales through offices or fixed places of business. 2011 tax   Despite any of the earlier rules, if you do not have a tax home in the United States, but you maintain an office or other fixed place of business in the United States, treat the income from any sale of personal property (including inventory property) that is attributable to that office or place of business as U. 2011 tax S. 2011 tax source income. 2011 tax However, this rule does not apply to sales of inventory property for use, disposition, or consumption outside the United States if your office or other fixed place of business outside the United States materially participated in the sale. 2011 tax   If you have a tax home in the United States but maintain an office or other fixed place of business outside the United States, income from sales of personal property, other than inventory, depreciable property, or intangibles, that is attributable to that foreign office or place of business may be treated as U. 2011 tax S. 2011 tax source income. 2011 tax The income is treated as U. 2011 tax S. 2011 tax source income if an income tax of less than 10% of the income from the sale is paid to a foreign country. 2011 tax This rule also applies to losses if the foreign country would have imposed an income tax of less than 10% had the sale resulted in a gain. 2011 tax Community Income If you are married and you or your spouse is subject to the community property laws of a foreign country, a U. 2011 tax S. 2011 tax state, or a U. 2011 tax S. 2011 tax possession, you generally must follow those laws to determine the income of yourself and your spouse for U. 2011 tax S. 2011 tax tax purposes. 2011 tax But you must disregard certain community property laws if: Both you and your spouse are nonresident aliens, or One of you is a nonresident alien and the other is a U. 2011 tax S. 2011 tax citizen or resident and you do not both choose to be treated as U. 2011 tax S. 2011 tax residents as explained in chapter 1. 2011 tax In these cases, you and your spouse must report community income as explained later. 2011 tax Earned income. 2011 tax   Earned income of a spouse, other than trade or business income and a partner's distributive share of partnership income, is treated as the income of the spouse whose services produced the income. 2011 tax That spouse must report all of it on his or her separate return. 2011 tax Trade or business income. 2011 tax   Trade or business income, other than a partner's distributive share of partnership income, is treated as the income of the spouse carrying on the trade or business. 2011 tax That spouse must report all of it on his or her separate return. 2011 tax Partnership income (or loss). 2011 tax   A partner's distributive share of partnership income (or loss) is treated as the income (or loss) of the partner. 2011 tax The partner must report all of it on his or her separate return. 2011 tax Separate property income. 2011 tax   Income derived from the separate property of one spouse (and which is not earned income, trade or business income, or partnership distributive share income) is treated as the income of that spouse. 2011 tax That spouse must report all of it on his or her separate return. 2011 tax Use the appropriate community property law to determine what is separate property. 2011 tax Other community income. 2011 tax   All other community income is treated as provided by the applicable community property laws. 2011 tax Prev  Up  Next   Home   More Online Publications