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IRS Releases the Dirty Dozen Tax Scams for 2013

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Dirty Dozen: English | Spanish | ASL

IR-2013-33, March 26, 2013

WASHINGTON — The Internal Revenue Service today issued its annual “Dirty Dozen” list of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.

The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.

"This tax season, the IRS has stepped up its efforts to protect taxpayers from a wide range of schemes, including moving aggressively to combat identity theft and refund fraud," said IRS Acting Commissioner Steven T. Miller. "The Dirty Dozen list shows that scams come in many forms during filing season. Don't let a scam artist steal from you or talk you into doing something you will regret later."

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

The following are the Dirty Dozen tax scams for 2013:

Identity Theft

Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.

Combating identity theft and refund fraud is a top priority for the IRS, and we are taking special steps to assist victims. For the 2013 tax season, the IRS has put in place a number of additional steps to prevent identity theft and detect refund fraud before it occurs. We have dramatically enhanced our systems, and we are committed to continuing to improve our prevention, detection and assistance efforts.

The IRS has a comprehensive and aggressive identity theft strategy employing a three-pronged effort focusing on fraud prevention, early detection and victim assistance. We are continually reviewing our processes and policies to ensure that we are doing everything possible to minimize identity theft incidents, to help those victimized by it and to investigate those who are committing the crimes.

The IRS continues to increase its efforts against refund fraud, which includes identity theft. During 2012, the IRS prevented the issuance of $20 billion of fraudulent refunds, including those related to identity theft, compared with $14 billion in 2011.

This January, the IRS also conducted a coordinated and highly successful identity theft enforcement sweep. The coast-to-coast effort against identity theft suspects led to 734 enforcement actions in January, including 298 indictments, informations, complaints and arrests. The effort comes on top of a growing identity theft effort that led to 2,400 other enforcement actions against identity thieves during fiscal year 2012. The Criminal Investigation unit has devoted more than 500,000 staff-hours to fighting this issue.

We know identity theft is a frustrating and complex process for victims. The IRS has 3,000 people working on identity theft related cases — more than double the number in late 2011. And we have trained 35,000 employees who work with taxpayers to help with identity theft situations.

The IRS has a special section on IRS.gov dedicated to identity theft issues, including YouTube videos, tips for taxpayers and an assistance guide. For victims, the information includes how to contact the IRS Identity Protection Specialized Unit. For other taxpayers, there are tips on how taxpayers can protect themselves against identity theft.

Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. Taxpayers can call the IRS Identity Protection Specialized Unit at 800-908-4490. More information can be found on the special identity protection page.

Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information that can help you protect yourself from email scams.

Return Preparer Fraud

About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.

It is important to choose carefully when hiring an individual or firm to prepare your return. This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).

The IRS also has created a new web page to assist taxpayers. For tips about choosing a preparer, red flags, details on preparer qualifications and information on how and when to make a complaint, visit www.irs.gov/chooseataxpro.

Remember: Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. Make sure the preparer you hire is up to the task.

IRS.gov has general information on reporting tax fraud. More specifically, report abusive tax preparers to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 and fill it out or order by mail at 800-TAX FORM (800-829-3676). The form includes a return address.

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

Since 2009, 38,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.

At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS continues working on a wide range of international tax issues and follows ongoing efforts with DOJ to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

The IRS has collected $5.5 billion so far from people who participated in offshore voluntary disclosure programs since 2009.

“Free Money” from the IRS & Tax Scams Involving Social Security

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes promise refunds to people who have little or no income and normally don’t have a tax filing requirement – and are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.

Scammers prey on low income individuals and the elderly and members of church congregations with bogus promises of free money. They build false hopes and charge people good money for bad advice including encouraging taxpayers to make fictitious claims for refunds or rebates based on false statements of entitlement to tax credits. For example, some promoters claim they can obtain for their victims, often senior citizens, a tax refund or nonexistent stimulus payment based on the American Opportunity Tax Credit, even if the victim was not enrolled in or paying for college. Con artists also falsely claim that refunds are available even if the victim went to school decades ago. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone. The IRS warns all taxpayers to remain vigilant.

There are also a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return.

Beware: Intentional mistakes of this kind can result in a $5,000 penalty.

Impersonation of Charitable Organizations

Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters.

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims. As in the case of a recent disaster, Hurricane Sandy, the IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:

  • To help disaster victims, donate to recognized charities.
  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
  • Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits  a contribution from you. Scam artists may use this information to steal your identity and money.
  • Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

Call the IRS toll-free disaster assistance telephone number (1-866-562-5227) if you are a disaster victim with specific questions about tax relief or disaster related tax issues.

False/Inflated Income and Expenses

Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is another popular scam. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.

Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit although they were not eligible. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

False Form 1099 Refund Claims

In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

Falsely Claiming Zero Wages

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.

Disguised Corporate Ownership

Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.

These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.
 

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Page Last Reviewed or Updated: 07-Mar-2014

The Form 1040nr

Form 1040nr 4. Form 1040nr   Foreign Earned Income and Housing: Exclusion – Deduction Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Who Qualifies for the Exclusions and the Deduction? RequirementsTax Home in Foreign Country Bona Fide Residence Test Physical Presence Test Waiver of Time Requirements U. Form 1040nr S. Form 1040nr Travel Restrictions Foreign Earned Income Foreign Earned Income ExclusionLimit on Excludable Amount Choosing the Exclusion Foreign Housing Exclusion and DeductionHousing Amount Foreign Housing Exclusion Foreign Housing Deduction Married Couples Form 2555 and Form 2555-EZForm 2555-EZ Form 2555 Topics - This chapter discusses: Who qualifies for the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, The requirements that must be met to claim either exclusion or the deduction, How to figure the foreign earned income exclusion, and How to figure the foreign housing exclusion and the foreign housing deduction. Form 1040nr Useful Items - You may want to see: Publication 519 U. Form 1040nr S. Form 1040nr Tax Guide for Aliens 570 Tax Guide for Individuals With Income from U. Form 1040nr S. Form 1040nr Possessions 596 Earned Income Credit (EIC) Form (and Instructions) 1040X Amended U. Form 1040nr S. Form 1040nr Individual Income Tax Return 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion See chapter 7 for information about getting these publications and forms. Form 1040nr Who Qualifies for the Exclusions and the Deduction? If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction. Form 1040nr If you are a U. Form 1040nr S. Form 1040nr citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. Form 1040nr However, you may qualify to exclude from income up to $97,600 of your foreign earnings. Form 1040nr In addition, you can exclude or deduct certain foreign housing amounts. Form 1040nr See Foreign Earned Income Exclusion and Foreign Housing Exclusion and Deduction, later. Form 1040nr You also may be entitled to exclude from income the value of meals and lodging provided to you by your employer. Form 1040nr See Exclusion of Meals and Lodging, later. Form 1040nr Requirements To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must meet all three of the following requirements. Form 1040nr Your tax home must be in a foreign country. Form 1040nr You must have foreign earned income. Form 1040nr You must be one of the following. Form 1040nr A U. Form 1040nr S. Form 1040nr citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Form 1040nr A U. Form 1040nr S. Form 1040nr resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Form 1040nr A U. Form 1040nr S. Form 1040nr citizen or a U. Form 1040nr S. Form 1040nr resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. Form 1040nr See Publication 519 to find out if you are a U. Form 1040nr S. Form 1040nr resident alien for tax purposes and whether you keep that alien status when you temporarily work abroad. Form 1040nr If you are a nonresident alien married to a U. Form 1040nr S. Form 1040nr citizen or resident alien, and both you and your spouse choose to treat you as a resident alien, you are a resident alien for tax purposes. Form 1040nr For information on making the choice, see the discussion in chapter 1 under Nonresident Alien Spouse Treated as a Resident . Form 1040nr Waiver of minimum time requirements. Form 1040nr   The minimum time requirements for bona fide residence and physical presence can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. Form 1040nr This is fully explained under Waiver of Time Requirements , later. Form 1040nr   See Figure 4-A and information in this chapter to determine if you are eligible to claim either exclusion or the deduction. Form 1040nr Tax Home in Foreign Country To qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, your tax home must be in a foreign country throughout your period of bona fide residence or physical presence abroad. Form 1040nr Bona fide residence and physical presence are explained later. Form 1040nr Tax Home Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Form 1040nr Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. Form 1040nr Having a “tax home” in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes. Form 1040nr If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live. Form 1040nr If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work. Form 1040nr You are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. Form 1040nr However, your abode is not necessarily in the United States while you are temporarily in the United States. Form 1040nr Your abode is also not necessarily in the United States merely because you maintain a dwelling in the United States, whether or not your spouse or dependents use the dwelling. Form 1040nr “Abode” has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. Form 1040nr It does not mean your principal place of business. Form 1040nr “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home. Form 1040nr ” The location of your abode often will depend on where you maintain your economic, family, and personal ties. Form 1040nr Example 1. Form 1040nr You are employed on an offshore oil rig in the territorial waters of a foreign country and work a 28-day on/28-day off schedule. Form 1040nr You return to your family residence in the United States during your off periods. Form 1040nr You are considered to have an abode in the United States and do not satisfy the tax home test in the foreign country. Form 1040nr You cannot claim either of the exclusions or the housing deduction. Form 1040nr Example 2. Form 1040nr For several years, you were a marketing executive with a producer of machine tools in Toledo, Ohio. Form 1040nr In November of last year, your employer transferred you to London, England, for a minimum of 18 months to set up a sales operation for Europe. Form 1040nr Before you left, you distributed business cards showing your business and home addresses in London. Form 1040nr You kept ownership of your home in Toledo but rented it to another family. Form 1040nr You placed your car in storage. Form 1040nr In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London. Form 1040nr Shortly after moving, you leased a car and you and your spouse got British driving licenses. Form 1040nr Your entire family got library cards for the local public library. Form 1040nr You and your spouse opened bank accounts with a London bank and secured consumer credit. Form 1040nr You joined a local business league and both you and your spouse became active in the neighborhood civic association and worked with a local charity. Form 1040nr Your abode is in London for the time you live there. Form 1040nr You satisfy the tax home test in the foreign country. Form 1040nr Please click here for the text description of the image. Form 1040nr Figure 4–A Can I Claim the Exclusion or Deduction? Temporary or Indefinite Assignment The location of your tax home often depends on whether your assignment is temporary or indefinite. Form 1040nr If you are temporarily absent from your tax home in the United States on business, you may be able to deduct your away-from-home expenses (for travel, meals, and lodging), but you would not qualify for the foreign earned income exclusion. Form 1040nr If your new work assignment is for an indefinite period, your new place of employment becomes your tax home and you would not be able to deduct any of the related expenses that you have in the general area of this new work assignment. Form 1040nr If your new tax home is in a foreign country and you meet the other requirements, your earnings may qualify for the foreign earned income exclusion. Form 1040nr If you expect your employment away from home in a single location to last, and it does last, for 1 year or less, it is temporary unless facts and circumstances indicate otherwise. Form 1040nr If you expect it to last for more than 1 year, it is indefinite. Form 1040nr If you expect it to last for 1 year or less, but at some later date you expect it to last longer than 1 year, it is temporary (in the absence of facts and circumstances indicating otherwise) until your expectation changes. Form 1040nr Once your expectation changes, it is indefinite. Form 1040nr Foreign Country To meet the bona fide residence test or the physical presence test, you must live in or be present in a foreign country. Form 1040nr A foreign country includes any territory under the sovereignty of a government other than that of the United States. Form 1040nr The term “foreign country” includes the country's airspace and territorial waters, but not international waters and the airspace above them. Form 1040nr It also includes the seabed and subsoil of those submarine areas adjacent to the country's territorial waters over which it has exclusive rights under international law to explore and exploit the natural resources. Form 1040nr The term “foreign country” does not include Antarctica or U. Form 1040nr S. Form 1040nr possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U. Form 1040nr S. Form 1040nr Virgin Islands, and Johnston Island. Form 1040nr For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, the terms “foreign,” “abroad,” and “overseas” refer to areas outside the United States and those areas listed or described in the previous sentence. Form 1040nr American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands Residence or presence in a U. Form 1040nr S. Form 1040nr possession does not qualify you for the foreign earned income exclusion. Form 1040nr You may, however, qualify for an exclusion of your possession income on your U. Form 1040nr S. Form 1040nr return. Form 1040nr American Samoa. Form 1040nr   There is a possession exclusion available to individuals who are bona fide residents of American Samoa for the entire tax year. Form 1040nr Gross income from sources within American Samoa may be eligible for this exclusion. Form 1040nr Income that is effectively connected with the conduct of a trade or business within American Samoa also may be eligible for this exclusion. Form 1040nr Use Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, to figure the exclusion. Form 1040nr Guam and the Commonwealth of the Northern Mariana Islands. Form 1040nr   An exclusion will be available to residents of Guam and the Commonwealth of the Northern Mariana Islands if, and when, new implementation agreements take effect between the United States and those possessions. Form 1040nr   For more information, see Publication 570. Form 1040nr Puerto Rico and U. Form 1040nr S. Form 1040nr Virgin Islands Residents of Puerto Rico and the U. Form 1040nr S. Form 1040nr Virgin Islands cannot claim the foreign earned income exclusion or the foreign housing exclusion. Form 1040nr Puerto Rico. Form 1040nr   Generally, if you are a U. Form 1040nr S. Form 1040nr citizen who is a bona fide resident of Puerto Rico for the entire tax year, you are not subject to U. Form 1040nr S. Form 1040nr tax on income from Puerto Rican sources. Form 1040nr This does not include amounts paid for services performed as an employee of the United States. Form 1040nr However, you are subject to U. Form 1040nr S. Form 1040nr tax on your income from sources outside Puerto Rico. Form 1040nr In figuring your U. Form 1040nr S. Form 1040nr tax, you cannot deduct expenses allocable to income not subject to tax. Form 1040nr Bona Fide Residence Test You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Form 1040nr You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either: A U. Form 1040nr S. Form 1040nr citizen, or A U. Form 1040nr S. Form 1040nr resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect. Form 1040nr You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year. Form 1040nr If you go to a foreign country to work on a particular job for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country even though you work there for 1 tax year or longer. Form 1040nr The length of your stay and the nature of your job are only two of the factors to be considered in determining whether you meet the bona fide residence test. Form 1040nr Bona fide residence. Form 1040nr   To meet the bona fide residence test, you must have established a bona fide residence in a foreign country. Form 1040nr   Your bona fide residence is not necessarily the same as your domicile. Form 1040nr Your domicile is your permanent home, the place to which you always return or intend to return. Form 1040nr Example. Form 1040nr You could have your domicile in Cleveland, Ohio, and a bona fide residence in Edinburgh, Scotland, if you intend to return eventually to Cleveland. Form 1040nr The fact that you go to Scotland does not automatically make Scotland your bona fide residence. Form 1040nr If you go there as a tourist, or on a short business trip, and return to the United States, you have not established bona fide residence in Scotland. Form 1040nr But if you go to Scotland to work for an indefinite or extended period and you set up permanent quarters there for yourself and your family, you probably have established a bona fide residence in a foreign country, even though you intend to return eventually to the United States. Form 1040nr You are clearly not a resident of Scotland in the first instance. Form 1040nr However, in the second, you are a resident because your stay in Scotland appears to be permanent. Form 1040nr If your residency is not as clearly defined as either of these illustrations, it may be more difficult to decide whether you have established a bona fide residence. Form 1040nr Determination. Form 1040nr   Questions of bona fide residence are determined according to each individual case, taking into account factors such as your intention, the purpose of your trip, and the nature and length of your stay abroad. Form 1040nr   To meet the bona fide residence test, you must show the Internal Revenue Service (IRS) that you have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Form 1040nr The IRS decides whether you are a bona fide resident of a foreign country largely on the basis of facts you report on Form 2555. Form 1040nr IRS cannot make this determination until you file Form 2555. Form 1040nr Statement to foreign authorities. Form 1040nr   You are not considered a bona fide resident of a foreign country if you make a statement to the authorities of that country that you are not a resident of that country, and the authorities: Hold that you are not subject to their income tax laws as a resident, or Have not made a final decision on your status. Form 1040nr Special agreements and treaties. Form 1040nr   An income tax exemption provided in a treaty or other international agreement will not in itself prevent you from being a bona fide resident of a foreign country. Form 1040nr Whether a treaty prevents you from becoming a bona fide resident of a foreign country is determined under all provisions of the treaty, including specific provisions relating to residence or privileges and immunities. Form 1040nr Example 1. Form 1040nr You are a U. Form 1040nr S. Form 1040nr citizen employed in the United Kingdom by a U. Form 1040nr S. Form 1040nr employer under contract with the U. Form 1040nr S. Form 1040nr Armed Forces. Form 1040nr You are not subject to the North Atlantic Treaty Status of Forces Agreement. Form 1040nr You may be a bona fide resident of the United Kingdom. Form 1040nr Example 2. Form 1040nr You are a U. Form 1040nr S. Form 1040nr citizen in the United Kingdom who qualifies as an “employee” of an armed service or as a member of a “civilian component” under the North Atlantic Treaty Status of Forces Agreement. Form 1040nr You are not a bona fide resident of the United Kingdom. Form 1040nr Example 3. Form 1040nr You are a U. Form 1040nr S. Form 1040nr citizen employed in Japan by a U. Form 1040nr S. Form 1040nr employer under contract with the U. Form 1040nr S. Form 1040nr Armed Forces. Form 1040nr You are subject to the agreement of the Treaty of Mutual Cooperation and Security between the United States and Japan. Form 1040nr Being subject to the agreement does not make you a bona fide resident of Japan. Form 1040nr Example 4. Form 1040nr You are a U. Form 1040nr S. Form 1040nr citizen employed as an “official” by the United Nations in Switzerland. Form 1040nr You are exempt from Swiss taxation on the salary or wages paid to you by the United Nations. Form 1040nr This does not prevent you from being a bona fide resident of Switzerland. Form 1040nr Effect of voting by absentee ballot. Form 1040nr   If you are a U. Form 1040nr S. Form 1040nr citizen living abroad, you can vote by absentee ballot in any election held in the United States without risking your status as a bona fide resident of a foreign country. Form 1040nr   However, if you give information to the local election officials about the nature and length of your stay abroad that does not match the information you give for the bona fide residence test, the information given in connection with absentee voting will be considered in determining your status, but will not necessarily be conclusive. Form 1040nr Uninterrupted period including entire tax year. Form 1040nr   To meet the bona fide residence test, you must reside in a foreign country or countries for an uninterrupted period that includes an entire tax year. Form 1040nr An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis. Form 1040nr   During the period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the United States or elsewhere for vacation or business. Form 1040nr To keep your status as a bona fide resident of a foreign country, you must have a clear intention of returning from such trips, without unreasonable delay, to your foreign residence or to a new bona fide residence in another foreign country. Form 1040nr Example 1. Form 1040nr You arrived with your family in Lisbon, Portugal, on November 1, 2011. Form 1040nr Your assignment is indefinite, and you intend to live there with your family until your company sends you to a new post. Form 1040nr You immediately established residence there. Form 1040nr You spent April of 2012 at a business conference in the United States. Form 1040nr Your family stayed in Lisbon. Form 1040nr Immediately following the conference, you returned to Lisbon and continued living there. Form 1040nr On January 1, 2013, you completed an uninterrupted period of residence for a full tax year (2012), and you meet the bona fide residence test. Form 1040nr Example 2. Form 1040nr Assume the same facts as in Example 1, except that you transferred back to the United States on December 13, 2012. Form 1040nr You would not meet the bona fide residence test because your bona fide residence in the foreign country, although it lasted more than a year, did not include a full tax year. Form 1040nr You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test (discussed later). Form 1040nr Bona fide resident for part of a year. Form 1040nr   Once you have established bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year, you are a bona fide resident of that country for the period starting with the date you actually began the residence and ending with the date you abandon the foreign residence. Form 1040nr Your period of bona fide residence can include an entire tax year plus parts of 2 other tax years. Form 1040nr Example. Form 1040nr You were a bona fide resident of Singapore from March 1, 2011, through September 14, 2013. Form 1040nr On September 15, 2013, you returned to the United States. Form 1040nr Since you were a bona fide resident of a foreign country for all of 2012, you were also a bona fide resident of a foreign country from March 1, 2011, through the end of 2011 and from January 1, 2013, through September 14, 2013. Form 1040nr Reassignment. Form 1040nr   If you are assigned from one foreign post to another, you may or may not have a break in foreign residence between your assignments, depending on the circumstances. Form 1040nr Example 1. Form 1040nr You were a resident of Pakistan from October 1, 2012, through November 30, 2013. Form 1040nr On December 1, 2013, you and your family returned to the United States to wait for an assignment to another foreign country. Form 1040nr Your household goods also were returned to the United States. Form 1040nr Your foreign residence ended on November 30, 2013, and did not begin again until after you were assigned to another foreign country and physically entered that country. Form 1040nr Since you were not a bona fide resident of a foreign country for the entire tax year of 2012 or 2013 you do not meet the bona fide residence test in either year. Form 1040nr You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test, discussed later. Form 1040nr Example 2. Form 1040nr Assume the same facts as in Example 1, except that upon completion of your assignment in Pakistan you were given a new assignment to Turkey. Form 1040nr On December 1, 2013, you and your family returned to the United States for a month's vacation. Form 1040nr On January 2, 2014, you arrived in Turkey for your new assignment. Form 1040nr Because you did not interrupt your bona fide residence abroad, you meet the bona fide residence test. Form 1040nr Physical Presence Test You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. Form 1040nr The 330 days do not have to be consecutive. Form 1040nr Any U. Form 1040nr S. Form 1040nr citizen or resident alien can use the physical presence test to qualify for the exclusions and the deduction. Form 1040nr The physical presence test is based only on how long you stay in a foreign country or countries. Form 1040nr This test does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad. Form 1040nr 330 full days. Form 1040nr   Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during a 12-month period. Form 1040nr You can count days you spent abroad for any reason. Form 1040nr You do not have to be in a foreign country only for employment purposes. Form 1040nr You can be on vacation. Form 1040nr   You do not meet the physical presence test if illness, family problems, a vacation, or your employer's orders cause you to be present for less than the required amount of time. Form 1040nr Exception. Form 1040nr   You can be physically present in a foreign country or countries for less than 330 full days and still meet the physical presence test if you are required to leave a country because of war or civil unrest. Form 1040nr See Waiver of Time Requirements, later. Form 1040nr Full day. Form 1040nr   A full day is a period of 24 consecutive hours, beginning at midnight. Form 1040nr Travel. Form 1040nr    When you leave the United States to go directly to a foreign country or when you return directly to the United States from a foreign country, the time you spend on or over international waters does not count toward the 330-day total. Form 1040nr Example. Form 1040nr You leave the United States for France by air on June 10. Form 1040nr You arrive in France at 9:00 a. Form 1040nr m. Form 1040nr on June 11. Form 1040nr Your first full day of physical presence in France is June 12. Form 1040nr Passing over foreign country. Form 1040nr   If, in traveling from the United States to a foreign country, you pass over a foreign country before midnight of the day you leave, the first day you can count toward the 330-day total is the day following the day you leave the United States. Form 1040nr Example. Form 1040nr You leave the United States by air at 9:30 a. Form 1040nr m. Form 1040nr on June 10 to travel to Kenya. Form 1040nr You pass over western Africa at 11:00 p. Form 1040nr m. Form 1040nr on June 10 and arrive in Kenya at 12:30 a. Form 1040nr m. Form 1040nr on June 11. Form 1040nr Your first full day in a foreign country is June 11. Form 1040nr Change of location. Form 1040nr   You can move about from one place to another in a foreign country or to another foreign country without losing full days. Form 1040nr If any part of your travel is not within any foreign country and takes less than 24 hours, you are considered to be in a foreign country during that part of travel. Form 1040nr Example 1. Form 1040nr You leave Ireland by air at 11:00 p. Form 1040nr m. Form 1040nr on July 6 and arrive in Sweden at 5:00 a. Form 1040nr m. Form 1040nr on July 7. Form 1040nr Your trip takes less than 24 hours and you lose no full days. Form 1040nr Example 2. Form 1040nr You leave Norway by ship at 10:00 p. Form 1040nr m. Form 1040nr on July 6 and arrive in Portugal at 6:00 a. Form 1040nr m. Form 1040nr on July 8. Form 1040nr Since your travel is not within a foreign country or countries and the trip takes more than 24 hours, you lose as full days July 6, 7, and 8. Form 1040nr If you remain in Portugal, your next full day in a foreign country is July 9. Form 1040nr In United States while in transit. Form 1040nr   If you are in transit between two points outside the United States and are physically present in the United States for less than 24 hours, you are not treated as present in the United States during the transit. Form 1040nr You are treated as traveling over areas not within any foreign country. Form 1040nr    Please click here for the text description of the image. Form 1040nr Figure 4-B How to figure the 12-month period. Form 1040nr   There are four rules you should know when figuring the 12-month period. Form 1040nr Your 12-month period can begin with any day of the month. Form 1040nr It ends the day before the same calendar day, 12 months later. Form 1040nr Your 12-month period must be made up of consecutive months. Form 1040nr Any 12-month period can be used if the 330 days in a foreign country fall within that period. Form 1040nr You do not have to begin your 12-month period with your first full day in a foreign country or end it with the day you leave. Form 1040nr You can choose the 12-month period that gives you the greatest exclusion. Form 1040nr In determining whether the 12-month period falls within a longer stay in the foreign country, 12-month periods can overlap one another. Form 1040nr Example 1. Form 1040nr You are a construction worker who works on and off in a foreign country over a 20-month period. Form 1040nr You might pick up the 330 full days in a 12-month period only during the middle months of the time you work in the foreign country because the first few and last few months of the 20-month period are broken up by long visits to the United States. Form 1040nr Example 2. Form 1040nr You work in New Zealand for a 20-month period from January 1, 2012, through August 31, 2013, except that you spend 28 days in February 2012 and 28 days in February 2013 on vacation in the United States. Form 1040nr You are present in New Zealand for at least 330 full days during each of the following two 12-month periods: January 1, 2012 – December 31, 2012 and September 1, 2012 – August 31, 2013. Form 1040nr By overlapping the 12-month periods in this way, you meet the physical presence test for the whole 20-month period. Form 1040nr See Figure 4-B, on the previous page. Form 1040nr Waiver of Time Requirements Both the bona fide residence test and the physical presence test contain minimum time requirements. Form 1040nr The minimum time requirements can be waived, however, if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. Form 1040nr You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. Form 1040nr To qualify for the waiver, you must actually have your tax home in the foreign country and be a bona fide resident of, or be physically present in, the foreign country on or before the beginning date of the waiver. Form 1040nr Early in 2014, the IRS will publish in the Internal Revenue Bulletin a list of the only countries that qualify for the waiver for 2013 and the effective dates. Form 1040nr If you left one of the countries on or after the date listed for each country, you can meet the bona fide residence test or physical presence test for 2013 without meeting the minimum time requirement. Form 1040nr However, in figuring your exclusion, the number of your qualifying days of bona fide residence or physical presence includes only days of actual residence or presence within the country. Form 1040nr U. Form 1040nr S. Form 1040nr Travel Restrictions If you are present in a foreign country in violation of U. Form 1040nr S. Form 1040nr law, you will not be treated as a bona fide resident of a foreign country or as physically present in a foreign country while you are in violation of the law. Form 1040nr Income that you earn from sources within such a country for services performed during a period of violation does not qualify as foreign earned income. Form 1040nr Your housing expenses within that country (or outside that country for housing your spouse or dependents) while you are in violation of the law cannot be included in figuring your foreign housing amount. Form 1040nr For 2013, the only country to which travel restrictions applied was Cuba. Form 1040nr The restrictions applied for the entire year. Form 1040nr However, individuals working at the U. Form 1040nr S. Form 1040nr Naval Base at Guantanamo Bay in Cuba are not in violation of U. Form 1040nr S. Form 1040nr law. Form 1040nr Personal service income earned by individuals at the base is eligible for the foreign earned income exclusion provided the other requirements are met. Form 1040nr Foreign Earned Income To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income. Form 1040nr Foreign earned income generally is income you receive for services you perform during a period in which you meet both of the following requirements. Form 1040nr Your tax home is in a foreign country. Form 1040nr You meet either the bona fide residence test or the physical presence test. Form 1040nr To determine whether your tax home is in a foreign country, see Tax Home in Foreign Country, earlier. Form 1040nr To determine whether you meet either the bona fide residence test or the physical presence test, see Bona Fide Residence Test and Physical Presence Test, earlier. Form 1040nr Foreign earned income does not include the following amounts. Form 1040nr The value of meals and lodging that you exclude from your income because the meals and lodging were furnished for the convenience of your employer. Form 1040nr Pension or annuity payments you receive, including social security benefits (see Pensions and annuities, later). Form 1040nr Pay you receive as an employee of the U. Form 1040nr S. Form 1040nr Government. Form 1040nr (See U. Form 1040nr S. Form 1040nr Government Employees, later. Form 1040nr ) Amounts you include in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract. Form 1040nr Any unallowable moving expense deduction that you choose to recapture as explained under Moving Expense Attributable to Foreign Earnings in 2 Years in chapter 5. Form 1040nr Payments you receive after the end of the tax year following the tax year in which you performed the services that earned the income. Form 1040nr Earned income. Form 1040nr   This is pay for personal services performed, such as wages, salaries, or professional fees. Form 1040nr The list that follows classifies many types of income into three categories. Form 1040nr The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both. Form 1040nr For more information on earned and unearned income, see Earned and Unearned Income, later. Form 1040nr Earned Income Unearned Income Variable Income Salaries and wages Dividends Business profits Commissions Interest Royalties Bonuses Capital gains Rents Professional fees Gambling winnings Scholarships and fellowships Tips Alimony     Social security benefits     Pensions     Annuities     In addition to the types of earned income listed, certain noncash income and allowances or reimbursements are considered earned income. Form 1040nr Noncash income. Form 1040nr   The fair market value of property or facilities provided to you by your employer in the form of lodging, meals, or use of a car is earned income. Form 1040nr Allowances or reimbursements. Form 1040nr   Earned income includes allowances or reimbursements you receive, such as the following amounts. Form 1040nr    Cost-of-living allowances. Form 1040nr Overseas differential. Form 1040nr Family allowance. Form 1040nr Reimbursement for education or education allowance. Form 1040nr Home leave allowance. Form 1040nr Quarters allowance. Form 1040nr Reimbursement for moving or moving allowance (unless excluded from income as discussed later in Reimbursement of employee expenses under Earned and Unearned Income). Form 1040nr Source of Earned Income The source of your earned income is the place where you perform the services for which you received the income. Form 1040nr Foreign earned income is income you receive for working in a foreign country. Form 1040nr Where or how you are paid has no effect on the source of the income. Form 1040nr For example, income you receive for work done in Austria is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City. Form 1040nr Example. Form 1040nr You are a U. Form 1040nr S. Form 1040nr citizen, a bona fide resident of Canada, and working as a mining engineer. Form 1040nr Your salary is $76,800 per year. Form 1040nr You also receive a $6,000 cost-of-living allowance, and a $6,000 education allowance. Form 1040nr Your employment contract did not indicate that you were entitled to these allowances only while outside the United States. Form 1040nr Your total income is $88,800. Form 1040nr You work a 5-day week, Monday through Friday. Form 1040nr After subtracting your vacation, you have a total of 240 workdays in the year. Form 1040nr You worked in the United States during the year for 6 weeks (30 workdays). Form 1040nr The following shows how to figure the part of your income that is for work done in Canada during the year. Form 1040nr   Number of days worked in Canada during the year (210) × Total income ($88,800) = $77,700     Number of days of work during the year for which payment was made (240)   Your foreign source earned income is $77,700. Form 1040nr Earned and Unearned Income Earned income was defined earlier as pay for personal services performed. Form 1040nr Some types of income are not easily identified as earned or unearned income. Form 1040nr Some of these types of income are further explained here. Form 1040nr Income from a sole proprietorship or partnership. Form 1040nr   Income from a business in which capital investment is an important part of producing the income may be unearned income. Form 1040nr If you are a sole proprietor or partner and your personal services are also an important part of producing the income, the part of the income that represents the value of your personal services will be treated as earned income. Form 1040nr Capital a factor. Form 1040nr   If capital investment is an important part of producing income, no more than 30% of your share of the net profits of the business is earned income. Form 1040nr   If you have no net profits, the part of your gross profit that represents a reasonable allowance for personal services actually performed is considered earned income. Form 1040nr Because you do not have a net profit, the 30% limit does not apply. Form 1040nr Example 1. Form 1040nr You are a U. Form 1040nr S. Form 1040nr citizen and meet the bona fide residence test. Form 1040nr You invest in a partnership based in Cameroon that is engaged solely in selling merchandise outside the United States. Form 1040nr You perform no services for the partnership. Form 1040nr At the end of the tax year, your share of the net profits is $80,000. Form 1040nr The entire $80,000 is unearned income. Form 1040nr Example 2. Form 1040nr Assume that in Example 1 you spend time operating the business. Form 1040nr Your share of the net profits is $80,000; 30% of your share of the profits is $24,000. Form 1040nr If the value of your services for the year is $15,000, your earned income is limited to the value of your services, $15,000. Form 1040nr Capital not a factor. Form 1040nr   If capital is not an income-producing factor and personal services produce the business income, the 30% rule does not apply. Form 1040nr The entire amount of business income is earned income. Form 1040nr Example. Form 1040nr You and Lou Green are management consultants and operate as equal partners in performing services outside the United States. Form 1040nr Because capital is not an income- producing factor, all the income from the partnership is considered earned income. Form 1040nr Income from a corporation. Form 1040nr   The salary you receive from a corporation is earned income only if it represents a reasonable allowance as compensation for work you do for the corporation. Form 1040nr Any amount over what is considered a reasonable salary is unearned income. Form 1040nr Example 1. Form 1040nr You are a U. Form 1040nr S. Form 1040nr citizen and an officer and stockholder of a corporation in Honduras. Form 1040nr You perform no work or service of any kind for the corporation. Form 1040nr During the tax year you receive a $10,000 “salary” from the corporation. Form 1040nr The $10,000 clearly is not for personal services and is unearned income. Form 1040nr Example 2. Form 1040nr You are a U. Form 1040nr S. Form 1040nr citizen and work full time as secretary-treasurer of your corporation. Form 1040nr During the tax year you receive $100,000 as salary from the corporation. Form 1040nr If $80,000 is a reasonable allowance as pay for the work you did, then $80,000 is earned income. Form 1040nr Stock options. Form 1040nr   You may have earned income if you disposed of stock that you got by exercising a stock option granted to you under an employee stock purchase plan. Form 1040nr   If your gain on the disposition of stock you got by exercising an option is treated as capital gain, your gain is unearned income. Form 1040nr   However, if you disposed of the stock less than 2 years after you were granted the option or less than 1 year after you got the stock, part of the gain on the disposition may be earned income. Form 1040nr It is considered received in the year you disposed of the stock and earned in the year you performed the services for which you were granted the option. Form 1040nr Any part of the earned income that is due to work you did outside the United States is foreign earned income. Form 1040nr   See Publication 525, Taxable and Nontaxable Income, for a discussion of the treatment of stock options. Form 1040nr Pensions and annuities. Form 1040nr    For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, amounts received as pensions or annuities are unearned income. Form 1040nr Royalties. Form 1040nr   Royalties from the leasing of oil and mineral lands and patents generally are a form of rent or dividends and are unearned income. Form 1040nr   Royalties received by a writer are earned income if they are received: For the transfer of property rights of the writer in the writer's product, or Under a contract to write a book or series of articles. Form 1040nr Rental income. Form 1040nr   Generally, rental income is unearned income. Form 1040nr If you perform personal services in connection with the production of rent, up to 30% of your net rental income can be considered earned income. Form 1040nr Example. Form 1040nr Larry Smith, a U. Form 1040nr S. Form 1040nr citizen living in Australia, owns and operates a rooming house in Sydney. Form 1040nr If he is operating the rooming house as a business that requires capital and personal services, he can consider up to 30% of net rental income as earned income. Form 1040nr On the other hand, if he just owns the rooming house and performs no personal services connected with its operation, except perhaps making minor repairs and collecting rents, none of his net income from the house is considered earned income. Form 1040nr It is all unearned income. Form 1040nr Professional fees. Form 1040nr   If you are engaged in a professional occupation (such as a doctor or lawyer), all fees received in the performance of these services are earned income. Form 1040nr Income of an artist. Form 1040nr   Income you receive from the sale of paintings you created is earned income. Form 1040nr Scholarships and fellowships. Form 1040nr   Any portion of a scholarship or fellowship grant that is paid to you for teaching, research or other services is considered earned income if you must include it in your gross income. Form 1040nr If the payer of the grant is required to provide you with a Form W-2, Wage and Tax Statement, these amounts will be listed as wages. Form 1040nr    Certain scholarship and fellowship income may be exempt under other provisions. Form 1040nr See Publication 970, Tax Benefits for Education, chapter 1. Form 1040nr Use of employer's property or facilities. Form 1040nr   If you receive fringe benefits in the form of the right to use your employer's property or facilities, the fair market value of that right is earned income. Form 1040nr Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being required to buy or sell, and both having reasonable knowledge of all the necessary facts. Form 1040nr Example. Form 1040nr You are privately employed and live in Japan all year. Form 1040nr You are paid a salary of $6,000 a month. Form 1040nr You live rent-free in a house provided by your employer that has a fair rental value of $3,000 a month. Form 1040nr The house is not provided for your employer's convenience. Form 1040nr You report on the calendar-year, cash basis. Form 1040nr You received $72,000 salary from foreign sources plus $36,000 fair rental value of the house, or a total of $108,000 of earned income. Form 1040nr Reimbursement of employee expenses. Form 1040nr   If you are reimbursed under an accountable plan (defined below) for expenses you incur on your employer's behalf and you have adequately accounted to your employer for the expenses, do not include the reimbursement for those expenses in your earned income. Form 1040nr   The expenses for which you are reimbursed are not considered allocable (related) to your earned income. Form 1040nr If expenses and reimbursement are equal, there is nothing to allocate to excluded income. Form 1040nr If expenses are more than the reimbursement, the unreimbursed expenses are considered to have been incurred in producing earned income and must be divided between your excluded and included income in determining the amount of unreimbursed expenses you can deduct. Form 1040nr (See chapter 5. Form 1040nr ) If the reimbursement is more than the expenses, no expenses remain to be divided between excluded and included income and the excess reimbursement must be included in earned income. Form 1040nr   These rules do not apply to the following individuals. Form 1040nr Straight-commission salespersons. Form 1040nr Employees who have arrangements with their employers under which taxes are not withheld on a percentage of the commissions because the employers consider that percentage to be attributable to the employees' expenses. Form 1040nr Accountable plan. Form 1040nr   An accountable plan is a reimbursement or allowance arrangement that includes all three of the following rules. Form 1040nr The expenses covered under the plan must have a business connection. Form 1040nr The employee must adequately account to the employer for these expenses within a reasonable period of time. Form 1040nr The employee must return any excess reimbursement or allowance within a reasonable period of time. Form 1040nr Reimbursement of moving expenses. Form 1040nr   Reimbursement of moving expenses may be earned income. Form 1040nr You must include as earned income: Any reimbursements of, or payments for, nondeductible moving expenses, Reimbursements that are more than your deductible expenses and that you do not return to your employer, Any reimbursements made (or treated as made) under a nonaccountable plan (any plan that does not meet the rules listed above for an accountable plan), even if they are for deductible expenses, and Any reimbursement of moving expenses you deducted in an earlier year. Form 1040nr This section discusses reimbursements that must be included in earned income. Form 1040nr Publication 521, Moving Expenses, discusses additional rules that apply to moving expense deductions and reimbursements. Form 1040nr   The rules for determining when the reimbursement is considered earned or where the reimbursement is considered earned may differ somewhat from the general rules previously discussed. Form 1040nr   Although you receive the reimbursement in one tax year, it may be considered earned for services performed, or to be performed, in another tax year. Form 1040nr You must report the reimbursement as income on your return in the year you receive it, even if it is considered earned during a different year. Form 1040nr Move from U. Form 1040nr S. Form 1040nr to foreign country. Form 1040nr   If you move from the United States to a foreign country, your moving expense reimbursement is generally considered pay for future services to be performed at the new location. Form 1040nr The reimbursement is considered earned solely in the year of the move if you qualify for the exclusion for a period that includes at least 120 days during that tax year. Form 1040nr   If you are neither a bona fide resident of nor physically present in a foreign country or countries for a period that includes 120 days during the year of the move, a portion of the reimbursement is considered earned in the year of the move and a portion is considered earned in the year following the year of the move. Form 1040nr To figure the amount earned in the year of the move, multiply the reimbursement by a fraction. Form 1040nr The numerator (top number) is the number of days in your qualifying period that fall within the year of the move, and the denominator (bottom number) is the total number of days in the year of the move. Form 1040nr   The difference between the total reimbursement and the amount considered earned in the year of the move is the amount considered earned in the year following the year of the move. Form 1040nr The part earned in each year is figured as shown in the following example. Form 1040nr Example. Form 1040nr You are a U. Form 1040nr S. Form 1040nr citizen working in the United States. Form 1040nr You were told in October 2012 that you were being transferred to a foreign country. Form 1040nr You arrived in the foreign country on December 15, 2012, and you are a bona fide resident for the remainder of 2012 and all of 2013. Form 1040nr Your employer reimbursed you $2,000 in January 2013 for the part of the moving expense that you were not allowed to deduct. Form 1040nr Because you did not qualify for the exclusion under the bona fide residence test for at least 120 days in 2012 (the year of the move), the reimbursement is considered pay for services performed in the foreign country for both 2012 and 2013. Form 1040nr You figure the part of the reimbursement for services performed in the foreign country in 2012 by multiplying the total reimbursement by a fraction. Form 1040nr The fraction is the number of days during which you were a bona fide resident in 2012 (the year of the move) divided by 366. Form 1040nr The remaining part of the reimbursement is for services performed in the foreign country in 2013. Form 1040nr This computation is used only to determine when the reimbursement is considered earned. Form 1040nr You would include the amount of the reimbursement in income in 2013, the year you received it. Form 1040nr Move between foreign countries. Form 1040nr   If you move between foreign countries, any moving expense reimbursement that you must include in income will be considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days in the year of the move. Form 1040nr Move to U. Form 1040nr S. Form 1040nr   If you move to the United States, the moving expense reimbursement that you must include in income is generally considered to be U. Form 1040nr S. Form 1040nr source income. Form 1040nr   However, if under either an agreement between you and your employer or a statement of company policy that is reduced to writing before your move to the foreign country, your employer will reimburse you for your move back to the United States regardless of whether you continue to work for the employer, the includible reimbursement is considered compensation for past services performed in the foreign country. Form 1040nr The includible reimbursement is considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days during that year. Form 1040nr Otherwise, you treat the includible reimbursement as received for services performed in the foreign country in the year of the move and the year immediately before the year of the move. Form 1040nr   See the discussion under Move from U. Form 1040nr S. Form 1040nr to foreign country , earlier, to figure the amount of the includible reimbursement considered earned in the year of the move. Form 1040nr The amount earned in the year before the year of the move is the difference between the total includible reimbursement and the amount earned in the year of the move. Form 1040nr Example. Form 1040nr You are a U. Form 1040nr S. Form 1040nr citizen employed in a foreign country. Form 1040nr You retired from employment with your employer on March 31, 2013, and returned to the United States after having been a bona fide resident of the foreign country for several years. Form 1040nr A written agreement with your employer entered into before you went abroad provided that you would be reimbursed for your move back to the United States. Form 1040nr In April 2013, your former employer reimbursed you $4,000 for the part of the cost of your move back to the United States that you were not allowed to deduct. Form 1040nr Because you were not a bona fide resident of a foreign country or countries for a period that included at least 120 days in 2013 (the year of the move), the includible reimbursement is considered pay for services performed in the foreign country for both 2013 and 2012. Form 1040nr You figure the part of the moving expense reimbursement for services performed in the foreign country for 2013 by multiplying the total includible reimbursement by a fraction. Form 1040nr The fraction is the number of days of foreign residence during the year (90) divided by the number of days in the year (365). Form 1040nr The remaining part of the includible reimbursement is for services performed in the foreign country in 2012. Form 1040nr You report the amount of the includible reimbursement in 2013, the year you received it. Form 1040nr    In this example, if you met the physical presence test for a period that included at least 120 days in 2013, the moving expense reimbursement would be considered earned entirely in the year of the move. Form 1040nr Storage expense reimbursements. Form 1040nr   If you are reimbursed for storage expenses, the reimbursement is for services you perform during the period of time for which the storage expenses are incurred. Form 1040nr U. Form 1040nr S. Form 1040nr Government Employees For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, foreign earned income does not include any amounts paid by the United States or any of its agencies to its employees. Form 1040nr This includes amounts paid from both appropriated and nonappropriated funds. Form 1040nr The following organizations (and other organizations similarly organized and operated under United States Army, Navy, or Air Force regulations) are integral parts of the Armed Forces, agencies, or instrumentalities of the United States. Form 1040nr United States Armed Forces exchanges. Form 1040nr Commissioned and noncommissioned officers' messes. Form 1040nr Armed Forces motion picture services. Form 1040nr Kindergartens on foreign Armed Forces installations. Form 1040nr Amounts paid by the United States or its agencies to persons who are not their employees may qualify for exclusion or deduction. Form 1040nr If you are a U. Form 1040nr S. Form 1040nr Government employee paid by a U. Form 1040nr S. Form 1040nr agency that assigned you to a foreign government to perform specific services for which the agency is reimbursed by the foreign government, your pay is from the U. Form 1040nr S. Form 1040nr Government and does not qualify for exclusion or deduction. Form 1040nr If you have questions about whether you are an employee or an independent contractor, get Publication 15-A, Employer's Supplemental Tax Guide. Form 1040nr American Institute in Taiwan. Form 1040nr   Amounts paid by the American Institute in Taiwan are not foreign earned income for purposes of the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. Form 1040nr If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U. Form 1040nr S. Form 1040nr tax up to the amount that equals tax-exempt allowances received by civilian employees of the U. Form 1040nr S. Form 1040nr Government. Form 1040nr Allowances. Form 1040nr   Cost-of-living and foreign-area allowances paid under certain acts of Congress to U. Form 1040nr S. Form 1040nr civilian officers and employees stationed in Alaska and Hawaii or elsewhere outside the 48 contiguous states and the District of Columbia can be excluded from gross income. Form 1040nr Post differentials are wages that must be included in gross income, regardless of the act of Congress under which they are paid. Form 1040nr More information. Form 1040nr   Publication 516, U. Form 1040nr S. Form 1040nr Government Civilian Employees Stationed Abroad, has more information for U. Form 1040nr S. Form 1040nr Government employees abroad. Form 1040nr Exclusion of Meals and Lodging You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met. Form 1040nr The meals are furnished: On the business premises of your employer, and For the convenience of your employer. Form 1040nr The lodging is furnished: On the business premises of your employer, For the convenience of your employer, and As a condition of your employment. Form 1040nr If these conditions are met, do not include the value of the meals or lodging in your income, even if a law or your employment contract says that they are provided as compensation. Form 1040nr Amounts you do not include in income because of these rules are not foreign earned income. Form 1040nr If you receive a Form W-2, excludable amounts should not be included in the total reported in box 1 as wages. Form 1040nr Family. Form 1040nr   Your family, for this purpose, includes only your spouse and your dependents. Form 1040nr Lodging. Form 1040nr   The value of lodging includes the cost of heat, electricity, gas, water, sewer service, and similar items needed to make the lodging fit to live in. Form 1040nr Business premises of employer. Form 1040nr   Generally, the business premises of your employer is wherever you work. Form 1040nr For example, if you work as a housekeeper, meals and lodging provided in your employer's home are provided on the business premises of your employer. Form 1040nr Similarly, meals provided to cowhands while herding cattle on land leased or owned by their employer are considered provided on the premises of their employer. Form 1040nr Convenience of employer. Form 1040nr   Whether meals or lodging are provided for your employer's convenience must be determined from all the facts and circumstances. Form 1040nr Meals furnished at no charge are considered provided for your employer's convenience if there is a good business reason for providing them, other than to give you more pay. Form 1040nr   On the other hand, if your employer provides meals to you or your family as a means of giving you more pay, and there is no other business reason for providing them, their value is extra income to you because they are not furnished for the convenience of your employer. Form 1040nr Condition of employment. Form 1040nr   Lodging is provided as a condition of employment if you must accept the lodging to properly carry out the duties of your job. Form 1040nr You must accept lodging to properly carry out your duties if, for example, you must be available for duty at all times or you could not perform your duties if the lodging was not furnished. Form 1040nr Foreign camps. Form 1040nr   If the lodging is in a camp located in a foreign country, the camp is considered part of your employer's business premises. Form 1040nr The camp must be: Provided for your employer's convenience because the place where you work is in a remote area where satisfactory housing is not available to you on the open market within a reasonable commuting distance, Located as close as reasonably possible in the area where you work, and Provided in a common area or enclave that is not available to the general public for lodging or accommodations and that normally houses at least ten employees. Form 1040nr Foreign Earned Income Exclusion If your tax home is in a foreign country and you meet the bona fide residence test or the physical presence test, you can choose to exclude from your income a limited amount of your foreign earned income. Form 1040nr Foreign earned income was defined earlier in this chapter. Form 1040nr You also can choose to exclude from your income a foreign housing amount. Form 1040nr This is explained later under Foreign Housing Exclusion. Form 1040nr If you choose to exclude a foreign housing amount, you must figure the foreign housing exclusion before you figure the foreign earned income exclusion. Form 1040nr Your foreign earned income exclusion is limited to your foreign earned income minus your foreign housing exclusion. Form 1040nr If you choose to exclude foreign earned income, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. Form 1040nr This includes any expenses, losses, and other normally deductible items allocable to the excluded income. Form 1040nr For more information about deductions and credits, see chapter 5 . Form 1040nr Limit on Excludable Amount You may be able to exclude up to $97,600 of your foreign earned income in 2013. Form 1040nr You cannot exclude more than the smaller of: $97,600, or Your foreign earned income (discussed earlier) for the tax year minus your foreign housing exclusion (discussed later). Form 1040nr If both you and your spouse work abroad and each of you meets either the bona fide residence test or the physical presence test, you can each choose the foreign earned income exclusion. Form 1040nr You do not both need to meet the same test. Form 1040nr Together, you and your spouse can exclude as much as $195,200. Form 1040nr Paid in year following work. Form 1040nr   Generally, you are considered to have earned income in the year in which you do the work for which you receive the income, even if you work in one year but are not paid until the following year. Form 1040nr If you report your income on a cash basis, you report the income on your return for the year you receive it. Form 1040nr If you work one year, but are not paid for that work until the next year, the amount you can exclude in the year you are paid is the amount you could have excluded in the year you did the work if you had been paid in that year. Form 1040nr For an exception to this general rule, see Year-end payroll period, later. Form 1040nr Example. Form 1040nr You were a bona fide resident of Brazil for all of 2012 and 2013. Form 1040nr You report your income on the cash basis. Form 1040nr In 2012, you were paid $84,200 for work you did in Brazil during that year. Form 1040nr You excluded all of the $84,200 from your income in 2012. Form 1040nr In 2013, you were paid $117,300 for your work in Brazil. Form 1040nr $18,800 was for work you did in 2012 and $98,500 was for work you did in 2013. Form 1040nr You can exclude $10,900 of the $18,800 from your income in 2013. Form 1040nr This is the $95,100 maximum exclusion in 2012 minus the $84,200 actually excluded that year. Form 1040nr You must include the remaining $7,900 in income in 2013 because you could not have excluded that income in 2012 if you had received it that year. Form 1040nr You can exclude $97,600 of the $98,500 you were paid for work you did in 2013 from your 2013 income. Form 1040nr Your total foreign earned income exclusion for 2013 is $108,500 ($10,900 for work you did in 2012 and $97,600 for work you did in 2013). Form 1040nr You would include in your 2013 income $8,800 ($7,900 for the work you did in 2012 and $900 for the work you did in 2013). Form 1040nr Year-end payroll period. Form 1040nr   There is an exception to the general rule that income is considered earned in the year you do the work for which you receive the income. Form 1040nr If you are a cash-basis taxpayer, any salary or wage payment you receive after the end of the year in which you do the work for which you receive the pay is considered earned entirely in the year you receive it if all four of the following apply. Form 1040nr The period for which the payment is made is a normal payroll period of your employer that regularly applies to you. Form 1040nr The payroll period includes the last day of your tax year (December 31 if you figure your taxes on a calendar-year basis). Form 1040nr The payroll period is not longer than 16 days. Form 1040nr The payday comes at the same time in relation to the payroll period that it would normally come and it comes before the end of the next payroll period. Form 1040nr Example. Form 1040nr You are paid twice a month. Form 1040nr For the normal payroll period that begins on the first of the month and ends on the fifteenth of the month, you are paid on the sixteenth day of the month. Form 1040nr For the normal payroll period that begins on the sixteenth of the month and ends on the last day of the month, you are paid on the first day of the following month. Form 1040nr Because all of the above conditions are met, the pay you received on January 1, 2013, is considered earned in 2013. Form 1040nr Income earned over more than 1 year. Form 1040nr   Regardless of when you actually receive income, you must apply it to the year in which you earned it in figuring your excludable amount for that year. Form 1040nr For example, a bonus may be based on work you did over several years. Form 1040nr You determine the amount of the bonus that is considered earned in a particular year in two steps. Form 1040nr Divide the bonus by the number of calendar months in the period when you did the work that resulted in the bonus. Form 1040nr Multiply the result of (1) by the number of months you did the work during the year. Form 1040nr This is the amount that is subject to the exclusion limit for that tax year. Form 1040nr Income received more than 1 year after it was earned. Form 1040nr   You cannot exclude income you receive after the end of the year following the year you do the work to earn it. Form 1040nr Example. Form 1040nr   You were a bona fide resident of Sweden for 2011, 2012, and 2013. Form 1040nr You report your income on the cash basis. Form 1040nr In 2011, you were paid $69,000 for work you did in Sweden that year and in 2012 you were paid $74,000 for that year's work in Sweden. Form 1040nr You excluded all the income on your 2011 and 2012 returns. Form 1040nr   In 2013, you were paid $92,000; $82,000 for your work in Sweden during 2013, and $10,000 for work you did in Sweden in 2011. Form 1040nr You cannot exclude any of the $10,000 for work done in 2011 because you received it after the end of the year following the year in which you earned it. Form 1040nr You must include the $10,000 in income. Form 1040nr You can exclude all of the $82,000 received for work you did in 2013. Form 1040nr Community income. Form 1040nr   The maximum exclusion applies separately to the earnings of spouses. Form 1040nr Ignore any community property laws when you figure your limit on the foreign earned income exclusion. Form 1040nr Part-year exclusion. Form 1040nr   If the period for which you qualify for the foreign earned income exclusion includes only part of the year, you must adjust the maximum limit based on the number of qualifying days in the year. Form 1040nr The number of qualifying days is the number of days in the year within the period on which you both: Have your tax home in a foreign country, and Meet either the bona fide residence test or the physical presence test. Form 1040nr   For this purpose, you can count as qualifying days all days within a period of 12 consecutive months once you are physically present and have your tax home in a foreign country for 330 full days. Form 1040nr To figure your maximum exclusion, multiply the maximum excludable amount for the year by the number of your qualifying days in the year, and then divide the result by the number of days in the year. Form 1040nr Example. Form 1040nr You report your income on the calendar-year basis and you qualified for the foreign earned income exclusion under the bona fide residence test for 75 days in 2013. Form 1040nr You can exclude a maximum of 75/365 of $97,600, or $20,055, of your foreign earned income for 2013. Form 1040nr If you qualify under the bona fide residence test for all of 2014, you can exclude your foreign earned income up to the 2014 limit. Form 1040nr Physical presence test. Form 1040nr   Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. Form 1040nr If you qualify for the foreign earned income exclusion under the physical presence test for part of a year, it is important to carefully choose the 12-month period that will allow the maximum exclusion for that year. Form 1040nr Example. Form 1040nr You are physically present and have your tax home in a foreign country for a 16-month period from June 1, 2012, through September 30, 2013, except for 16 days in December 2012 when you were on vacation in the United States. Form 1040nr You figure the maximum exclusion for 2012 as follows. Form 1040nr Beginning with June 1, 2012, count forward 330 full days. Form 1040nr Do not count the 16 days you spent in the United States. Form 1040nr The 330th day, May 12, 2013, is the last day of a 12-month period. Form 1040nr Count backward 12 months from May 11, 2013, to find the first day of this 12-month period, May 12, 2012. Form 1040nr This 12-month period runs from May 12, 2012, through May 11, 2013. Form 1040nr Count the total days during 2012 that fall within this 12-month period. Form 1040nr This is 234 days (May 12, 2012 – December 31, 2012). Form 1040nr Multiply $95,100 (the maximum exclusion for 2012) by the fraction 234/366 to find your maximum exclusion for 2012 ($60,802). Form 1040nr You figure the maximum exclusion for 2013 in the opposite manner. Form 1040nr Beginning with your last full day, September 30, 2013, count backward 330 full days. Form 1040nr Do not count the 16 days you spent in the United States. Form 1040nr That day, October 20, 2012, is the first day of a 12-month period. Form 1040nr Count forward 12 months from October 20, 2012, to find the last day of this 12-month period, October 19, 2013. Form 1040nr This 12-month period runs from October 20, 2012, through October 19, 2013. Form 1040nr Count the total days during 2013 that fall within this 12-month period. Form 1040nr This is 292 days (January 1, 2013 – October 19, 2013). Form 1040nr Multiply $97,600, the maximum limit, by the fraction 292/365 to find your maximum exclusion for 2013 ($78,080). Form 1040nr Choosing the Exclusion The foreign earned income exclusion is voluntary. Form 1040nr You can choose the exclusion by completing the appropriate parts of Form 2555. Form 1040nr When You Can Choose the Exclusion Your initial choice of the exclusion on Form 2555 or Form 2555-EZ generally must be made with one of the following returns. Form 1040nr A return filed by the due date (including any extensions). Form 1040nr A return amending a timely-filed return. Form 1040nr Amended returns generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid. Form 1040nr A return filed within 1 year from the original due date of the return (determined without regard to any extensions). Form 1040nr Filing after the above periods. Form 1040nr   You can choose the exclusion on a return filed after the periods described above if you owe no federal income tax after taking into account the exclusion. Form 1040nr If you owe federal income tax after taking into account the exclusion, you can choose the exclusion on a return filed after the periods described earlier if you file before the IRS discovers that you failed to choose the exclusion. Form 1040nr Whether or not you owe federal income tax after taking the exclusion into account, if you file your return after the periods described earlier, you must type or legibly print at the top of the first page of the Form 1040 “Filed pursuant to section 1. Form 1040nr 911-7(a)(2)(i)(D). Form 1040nr ” If you owe federal income tax after taking into account the foreign earned income exclusion and the IRS discovered that you failed to choose the exclusion, you may still be able to choose the exclusion. Form 1040nr You must request a private letter ruling under Income Tax Regulation 301. Form 1040nr 9100-3 and Revenue Procedure 2013-1, 2013-1 I. Form 1040nr R. Form 1040nr B. Form 1040nr 1, available at www. Form 1040nr irs. Form 1040nr gov/irb/2013-01_IRB/ar06. Form 1040nr html. Form 1040nr Effect of Choosing the Exclusion Once you choose to exclude your foreign earned income, that choice remains in effect for that year and all later years unless you revoke it. Form 1040nr Foreign tax credit or deduction. Form 1040nr