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Free Efile Taxes

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

Free efile taxes Publication 517 - Main Content Table of Contents Social Security CoverageCoverage of Members of the Clergy Coverage of Religious Workers (Church Employees) U. Free efile taxes S. Free efile taxes Citizens and Resident and Nonresident Aliens Ministerial ServicesMinisters Members of Religious Orders Christian Science Practitioners and Readers Exemption From Self-Employment (SE) TaxMembers of the Clergy Members of Recognized Religious Sects Self-Employment Tax: Figuring Net EarningsRegular Method Nonfarm Optional Method Income Tax: Income and ExpensesIncome Items Expense Items Income Tax Withholding and Estimated Tax Filing Your Return Retirement Savings ArrangementsDeducting contributions to tax-sheltered annuity plans. Free efile taxes Full-time student. Free efile taxes Adjusted gross income. Free efile taxes More information. Free efile taxes Earned Income Credit Comprehensive ExampleForm W-2 From Church Form W-2 From College Schedule C-EZ (Form 1040) Form 2106-EZ Schedule A (Form 1040) Schedule SE (Form 1040) Form 1040 Attachment 1 Attachment 2 How To Get Tax HelpLow Income Taxpayer Clinics Social Security Coverage This section gives information about which system (SECA or FICA) is used to collect social security and Medicare taxes from members of the clergy (ministers, members of a religious order, and Christian Science practitioners and readers) and religious workers (church employees). Free efile taxes Coverage of Members of the Clergy The services you perform in the exercise of your ministry, of the duties required by your religious order, or of your profession as a Christian Science practitioner or reader are covered by social security and Medicare under SECA. Free efile taxes Your earnings for these ministerial services (defined later) are subject to self-employment (SE) tax unless one of the following applies. Free efile taxes You are a member of a religious order who has taken a vow of poverty. Free efile taxes You ask the Internal Revenue Service (IRS) for an exemption from SE tax for your services and the IRS approves your request. Free efile taxes See Exemption From Self-Employment (SE) Tax , later. Free efile taxes You are subject only to the social security laws of a foreign country under the provisions of a social security agreement between the United States and that country. Free efile taxes For more information, see Bilateral Social Security (Totalization) Agreements in Publication 54. Free efile taxes Your earnings that are not from ministerial services may be subject to social security tax under FICA or SECA according to the rules that apply to taxpayers in general. Free efile taxes See Ministerial Services , later. Free efile taxes Ministers If you are a minister of a church, your earnings for the services you perform in your capacity as a minister are subject to SE tax, even if you perform these services as an employee of that church. Free efile taxes However, you can request that the IRS grant you an exemption, as discussed under Exemption From Self-Employment (SE) Tax , later. Free efile taxes For the specific services covered, see Ministerial Services , later. Free efile taxes Ministers defined. Free efile taxes   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Free efile taxes Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. Free efile taxes   If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes. Free efile taxes Employment status for other tax purposes. Free efile taxes   Even though all of your income from performing ministerial services is subject to self-employment tax for social security tax purposes, you may be an employee for income tax or retirement plan purposes in performing those same services. Free efile taxes For income tax or retirement plan purposes, your income earned as an employee will be considered wages. Free efile taxes Common-law employee. Free efile taxes   Under common-law rules, you are considered either an employee or a self-employed person. Free efile taxes Generally, you are an employee if you perform services for someone who has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. Free efile taxes For more information about the common-law rules, see Publication 15-A, Employer's Supplemental Tax Guide. Free efile taxes   If a congregation employs you and pays you a salary, you are generally a common-law employee and income from the exercise of your ministry is wages for income tax purposes. Free efile taxes However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are not wages; such amounts are self-employment income for both income tax purposes and social security tax purposes. Free efile taxes Example. Free efile taxes A church hires and pays you a salary to perform ministerial services subject to its control. Free efile taxes Under the common-law rules, you are an employee of the church while performing those services. Free efile taxes Form SS-8. Free efile taxes   If you are not certain whether you are an employee or a self-employed person, you can get a determination from the IRS by filing Form SS-8. Free efile taxes Members of Religious Orders If you are a member of a religious order who has not taken a vow of poverty, your earnings for ministerial services you perform as a member of the order are subject to SE tax. Free efile taxes See Ministerial Services , later. Free efile taxes However, you can request that the IRS grant you an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Free efile taxes Vow of poverty. Free efile taxes   If you are a member of a religious order and have taken a vow of poverty, you are already exempt from paying SE tax on your earnings for ministerial services you perform as an agent of your church or its agencies. Free efile taxes You do not need to request a separate exemption. Free efile taxes For income tax purposes, the earnings are tax free to you. Free efile taxes Your earnings are considered the income of the religious order. Free efile taxes Services covered under FICA at the election of the order. Free efile taxes   However, even if you have taken a vow of poverty, the services you perform for your church or its agencies may be covered under social security. Free efile taxes Your services are covered if your order, or an autonomous subdivision of the order, elects social security coverage for its current and future vow-of-poverty members. Free efile taxes   The order or subdivision elects coverage by filing Form SS-16. Free efile taxes The election may cover certain vow-of-poverty members for a retroactive period of up to 20 calendar quarters before the quarter in which it files the certificate. Free efile taxes If the election is made, the order or subdivision pays both the employer's and employee's share of the tax. Free efile taxes You do not pay any of the FICA tax. Free efile taxes Services performed outside the order. Free efile taxes   Even if you are a member of a religious order who has taken a vow of poverty and the order requires you to turn over amounts you earn, your earnings are subject to federal income tax and either SE tax or FICA tax (including estimated tax payments and/or withholding) if you: Are self-employed or an employee of an organization outside your religious community, and Perform work not required by, or done on behalf of, the order. Free efile taxes   In these cases, your income from self-employment or as an employee of that outside organization is taxable to you directly. Free efile taxes You may, however, be able to take a charitable deduction for the amount you turn over to the order. Free efile taxes See Publication 526, Charitable Contributions. Free efile taxes Rulings. Free efile taxes   Organizations and individuals may request rulings from the IRS on whether they are religious orders, or members of a religious order, respectively, for FICA tax, SE tax, and federal income tax withholding purposes. Free efile taxes To request a ruling, follow the procedures in Revenue Procedure 2014-1, 2014-1 I. Free efile taxes R. Free efile taxes B. Free efile taxes 1, available at www. Free efile taxes irs. Free efile taxes gov/irb/2014-1_IRB/ar05. Free efile taxes html. Free efile taxes Christian Science Practitioners and Readers Generally, your earnings from services you perform in your profession as a Christian Science practitioner or reader are subject to SE tax. Free efile taxes However, you can request an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Free efile taxes Practitioners. Free efile taxes   Christian Science practitioners are members in good standing of the Mother Church, The First Church of Christ, Scientist, in Boston, Massachusetts, who practice healing according to the teachings of Christian Science. Free efile taxes State law specifically exempts Christian Science practitioners from licensing requirements. Free efile taxes   Some Christian Science practitioners also are Christian Science teachers or lecturers. Free efile taxes Income from teaching or lecturing is considered the same as income from their work as practitioners. Free efile taxes Readers. Free efile taxes   For tax purposes, Christian Science readers are considered the same as ordained, commissioned, or licensed ministers. Free efile taxes Coverage of Religious Workers (Church Employees) If you are a religious worker (a church employee) and are not in one of the classes already discussed, your wages are generally subject to social security and Medicare tax under FICA, not SECA. Free efile taxes Some exceptions are discussed next. Free efile taxes Election by Church To Exclude Its Employees From FICA Coverage Churches and qualified church-controlled organizations (church organizations) that are opposed for religious reasons to the payment of social security and Medicare taxes can elect to exclude their employees from FICA coverage. Free efile taxes If your employer makes this election, it does not pay the employer's portion of the FICA taxes or withhold from your pay your portion of the FICA taxes. Free efile taxes Instead, your wages are subject to SECA and you must pay SE tax on your wages if they exceed $108. Free efile taxes 28 during the tax year. Free efile taxes However, you can request an exemption from SE tax if you are a member of a recognized religious sect, as discussed below. Free efile taxes Churches and church organizations make this election by filing two copies of Form 8274. Free efile taxes For more information about making this election, see Form 8274. Free efile taxes Election by Certain Church Employees Who Are Opposed to Social Security and Medicare You may be able to choose to be exempt from social security and Medicare taxes, including the SE tax, if you are a member of a recognized religious sect or division and work for a church (or church-controlled nonprofit division) that does not pay the employer's part of the social security tax on wages. Free efile taxes This exemption does not apply to your service, if any, as a minister of a church or as a member of a religious order. Free efile taxes Make this choice by filing Form 4029. Free efile taxes See Requesting Exemption—Form 4029 , later, under Members of Recognized Religious Sects. Free efile taxes U. Free efile taxes S. Free efile taxes Citizens and Resident and Nonresident Aliens To be covered under the SE tax provisions (SECA), individuals generally must be citizens or resident aliens of the United States. Free efile taxes Nonresident aliens are not covered under SECA unless a social security agreement in effect between the United States and the foreign country determines that you are covered under the U. Free efile taxes S. Free efile taxes social security system. Free efile taxes To determine your alien status, see Publication 519, U. Free efile taxes S. Free efile taxes Tax Guide for Aliens. Free efile taxes Residents of Puerto Rico, the U. Free efile taxes S. Free efile taxes Virgin Islands, Guam, the CNMI, and American Samoa. Free efile taxes   If you are a resident of one of these U. Free efile taxes S. Free efile taxes possessions but not a U. Free efile taxes S. Free efile taxes citizen, for SE tax purposes you are treated the same as a citizen or resident alien of the United States. Free efile taxes For information on figuring the tax, see Self-Employment Tax: Figuring Net Earnings , later. Free efile taxes Ministerial Services Ministerial services, in general, are the services you perform in the exercise of your ministry, in the exercise of your duties as required by your religious order, or in the exercise of your profession as a Christian Science practitioner or reader. Free efile taxes Income you receive for performing ministerial services is subject to SE tax unless you have an exemption as explained later. Free efile taxes Even if you have an exemption, only the income you receive for performing ministerial services is exempt. Free efile taxes The exemption does not apply to any other income. Free efile taxes The following discussions provide more detailed information on ministerial services of ministers, members of a religious order, and Christian Science practitioners and readers. Free efile taxes Ministers Most services you perform as a minister, priest, rabbi, etc. Free efile taxes , are ministerial services. Free efile taxes These services include: Performing sacerdotal functions, Conducting religious worship, and Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination. Free efile taxes You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization's activities. Free efile taxes A religious organization is under the authority of a religious body that is a church or denomination if it is organized for and dedicated to carrying out the principles of a faith according to the requirements governing the creation of institutions of the faith. Free efile taxes Services for nonreligious organizations. Free efile taxes   Your services for a nonreligious organization are ministerial services if the services are assigned or designated by your church. Free efile taxes Assigned or designated services qualify even if they do not involve performing sacerdotal functions or conducting religious worship. Free efile taxes   If your services are not assigned or designated by your church, they are ministerial services only if they involve performing sacerdotal functions or conducting religious worship. Free efile taxes Services that are not part of your ministry. Free efile taxes   Income from services you perform as an employee that are not ministerial services is subject to social security and Medicare tax withholding under FICA (not SECA) under the rules that apply to employees in general. Free efile taxes The following are not ministerial services. Free efile taxes Services you perform for nonreligious organizations other than the services stated above. Free efile taxes Services you perform as a duly ordained, commissioned, or licensed minister of a church as an employee of the United States, the District of Columbia, a foreign government, or any of their political subdivisions. Free efile taxes These services are not ministerial services even if you are performing sacerdotal functions or conducting religious worship. Free efile taxes (For example, if you perform services as a chaplain in the Armed Forces of the United States, those services are not ministerial services. Free efile taxes ) Services you perform in a government-owned and operated hospital. Free efile taxes (These services are considered performed by a government employee, not by a minister as part of the ministry. Free efile taxes ) However, services that you perform at a church-related hospital or health and welfare institution, or a private nonprofit hospital, are considered to be part of the ministry and are considered ministerial services. Free efile taxes Books or articles. Free efile taxes   Writing religious books or articles is considered to be in the exercise of your ministry and is considered a ministerial service. Free efile taxes   This rule also applies to members of religious orders and to Christian Science practitioners and readers. Free efile taxes Members of Religious Orders Services you perform as a member of a religious order in the exercise of duties required by the order are ministerial services. Free efile taxes The services are considered ministerial because you perform them as an agent of the order. Free efile taxes For example, if the order directs you to perform services for another agency of the supervising church or an associated institution, you are considered to perform the services as an agent of the order. Free efile taxes However, if the order directs you to work outside the order, this employment will not be considered a duty required by the order unless: Your services are the kind that are ordinarily performed by members of the order, and Your services are part of the duties that must be exercised for, or on behalf of, the religious order as its agent. Free efile taxes Effect of employee status. Free efile taxes   Ordinarily, if your services are not considered directed or required of you by the order, you and the outside party for whom you work are considered employee and employer. Free efile taxes In this case, your earnings from the services are taxed under the rules that apply to employees in general, not under the rules for services provided as agent for the order. Free efile taxes This result is true even if you have taken a vow of poverty. Free efile taxes Example. Free efile taxes Pat Brown and Chris Green are members of a religious order and have taken vows of poverty. Free efile taxes They renounce all claims to their earnings. Free efile taxes The earnings belong to the order. Free efile taxes Pat is a licensed attorney. Free efile taxes The superiors of the order instructed her to get a job with a law firm. Free efile taxes Pat joined a law firm as an employee and, as she requested, the firm made the salary payments directly to the order. Free efile taxes Chris is a secretary. Free efile taxes The superiors of the order instructed him to accept a job with the business office of the church that supervises the order. Free efile taxes Chris took the job and gave all his earnings to the order. Free efile taxes Pat's services are not duties required by the order. Free efile taxes Her earnings are subject to social security and Medicare tax under FICA and to federal income tax. Free efile taxes Chris' services are duties required by the order. Free efile taxes He is acting as an agent of the order and not as an employee of a third party. Free efile taxes He does not include the earnings in gross income, and they are not subject to income tax withholding or to social security and Medicare tax under FICA or SECA. Free efile taxes Christian Science Practitioners and Readers Services you perform as a Christian Science practitioner or reader in the exercise of your profession are ministerial services. Free efile taxes Amounts you receive for performing these services are generally subject to SE tax. Free efile taxes You may request an exemption from SE tax, discussed next, which applies only to those services. Free efile taxes Exemption From Self-Employment (SE) Tax You can request an exemption from SE tax if you are a member of the clergy (minister, member of a religious order, or Christian Science practitioner or reader) or a member of a recognized religious sect. Free efile taxes Generally, members of religious orders who have taken a vow of poverty are already exempt from paying SE tax, as discussed earlier under Members of Religious Orders under Social Security Coverage. Free efile taxes They do not have to request the exemption. Free efile taxes Who cannot be exempt. Free efile taxes   You cannot be exempt from SE tax if you made one of the following elections to be covered under social security. Free efile taxes These elections are irrevocable. Free efile taxes You elected to be covered under social security by filing Form 2031, Revocation of Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners, for your 1986, 1987, 2000, or 2001 tax year. Free efile taxes You elected before 1968 to be covered under social security for your ministerial services. Free efile taxes Requesting exemption. Free efile taxes    Table 2, earlier, briefly summarizes the procedure for requesting exemption from the SE tax. Free efile taxes More detailed explanations follow. Free efile taxes If you are a minister, member of a religious order, or Christian Science practitioner, an approved exemption only applies to earnings you receive for ministerial services, discussed earlier. Free efile taxes It does not apply to any other self-employment income. Free efile taxes Table 2. Free efile taxes The Self-Employment Tax Exemption Application and Approval Process   Who Can Apply Members of the Clergy Members of Recognized  Religious Sects How File Form 4361 File Form 4029 When File by the due date (including extensions) of your income tax return for the second tax year in which you had at least $400 of net earnings from self-employment (at least part from ministerial services) File anytime Approval If approved, you will receive an approved copy of Form 4361 If approved, you will receive an approved copy of Form 4029 Effective Date For all tax years after 1967 in which you have at least $400 of net earnings from self-employment For all tax years beginning with the first year you meet the eligibility requirements discussed later Members of the Clergy To claim the exemption from SE tax, you must meet all of the following conditions. Free efile taxes You file Form 4361, described below under Requesting Exemption—Form 4361 . Free efile taxes You are conscientiously opposed to public insurance because of your individual religious considerations (not because of your general conscience), or you are opposed because of the principles of your religious denomination. Free efile taxes You file for other than economic reasons. Free efile taxes You inform the ordaining, commissioning, or licensing body of your church or order that you are opposed to public insurance if you are a minister or a member of a religious order (other than a vow-of-poverty member). Free efile taxes This requirement does not apply to Christian Science practitioners or readers. Free efile taxes You establish that the organization that ordained, commissioned, or licensed you, or your religious order, is a tax-exempt religious organization. Free efile taxes You establish that the organization is a church or a convention or association of churches. Free efile taxes You did not make an election discussed earlier under Who cannot be exempt . Free efile taxes You sign and return the statement the IRS mails to you to certify that you are requesting an exemption based on the grounds listed on the statement. Free efile taxes Requesting Exemption—Form 4361 To request exemption from SE tax, file Form 4361 in triplicate (original and two copies) with the IRS. Free efile taxes The IRS will return to you a copy of the Form 4361 that you filed indicating whether it has approved your exemption. Free efile taxes If it is approved, keep the approved copy of Form 4361 in your permanent records. Free efile taxes When to file. Free efile taxes   File Form 4361 by the date your income tax return is due, including extensions, for the second tax year in which both of the following are true. Free efile taxes You have net earnings from self-employment of at least $400. Free efile taxes Any part of those net earnings was from ministerial services you performed as a: Minister, Member of a religious order, or Christian Science practitioner or reader. Free efile taxes The 2 years do not have to be consecutive tax years. Free efile taxes    The approval process can take some time, so you should file Form 4361 as soon as possible. Free efile taxes Example 1. Free efile taxes Rev. Free efile taxes Lawrence Jaeger, a clergyman ordained in 2013, has net self-employment earnings as a minister of $450 in 2013 and $500 in 2014. Free efile taxes He must file his application for exemption by the due date, including extensions, for his 2014 income tax return. Free efile taxes However, if Rev. Free efile taxes Jaeger does not receive IRS approval for an exemption by April 15, 2015, his SE tax for 2014 is due by that date. Free efile taxes Example 2. Free efile taxes Rev. Free efile taxes Louise Wolfe has only $300 in net self-employment earnings as a minister in 2013, but earned more than $400 in 2012 and expects to earn more than $400 in 2014. Free efile taxes She must file her application for exemption by the due date, including extensions, for her 2014 income tax return. Free efile taxes However, if she does not receive IRS approval for an exemption by April 15, 2015, her SE tax for 2014 is due by that date. Free efile taxes Example 3. Free efile taxes In 2011, Rev. Free efile taxes David Moss was ordained a minister and had $700 in net self-employment earnings as a minister. Free efile taxes In 2012, he received $1,000 as a minister, but his related expenses were over $1,000. Free efile taxes Therefore, he had no net self-employment earnings as a minister in 2012. Free efile taxes Also in 2012, he opened a book store and had $8,000 in net self-employment earnings from the store. Free efile taxes In 2013, he had net self-employment earnings of $1,500 as a minister and $10,000 net self-employment earnings from the store. Free efile taxes Rev. Free efile taxes Moss had net earnings from self-employment in 2011 and 2013 that were $400 or more each year, and part of the self-employment earnings in each of those years was for his services as a minister. Free efile taxes Thus, he must file his application for exemption by the due date, including extensions, for his 2013 income tax return. Free efile taxes Death of individual. Free efile taxes   The right to file an application for exemption ends with an individual's death. Free efile taxes A surviving spouse, executor, or administrator cannot file an exemption application for a deceased clergy member. Free efile taxes Effective date of exemption. Free efile taxes   An approved exemption is effective for all tax years after 1967 in which you have $400 or more of net earnings from self-employment and any part of those earnings is for services as a member of the clergy. Free efile taxes Once the exemption is approved, it is irrevocable. Free efile taxes Example. Free efile taxes Rev. Free efile taxes Trudy Austin, ordained in 2010, had $400 or more in net self-employment earnings as a minister in both 2010 and 2013. Free efile taxes She files an application for exemption on February 20, 2014. Free efile taxes If an exemption is granted, it is effective for 2010 and the following years. Free efile taxes Refunds of SE tax. Free efile taxes   If, after receiving an approved Form 4361, you find that you overpaid SE tax, you can file a claim for refund on Form 1040X. Free efile taxes Generally, for a refund, you must file Form 1040X within 3 years from the date you filed the return or within 2 years from the date you paid the tax, whichever is later. Free efile taxes A return you filed, or tax you paid, before the due date is considered to have been filed or paid on the due date. Free efile taxes   If you file a claim after the 3-year period but within 2 years from the time you paid the tax, the credit or refund will not be more than the tax you paid within the 2 years immediately before you file the claim. Free efile taxes Members of Recognized Religious Sects If you are a member of a recognized religious sect, or a division of a recognized religious sect, you can apply for an exemption from payment of social security and Medicare taxes on both your self-employment income and the wages you earn from an employer who also has an exemption. Free efile taxes Exception. Free efile taxes   If you received social security benefits or payments, or anyone else received these benefits or payments based on your wages or self-employment income, you cannot apply. Free efile taxes However, if you pay your benefits back, you may be considered for exemption. Free efile taxes Contact your local Social Security Administration office to find out the amount you must pay back. Free efile taxes Eligibility requirements. Free efile taxes   To claim this exemption from SE tax, all the following requirements must be met. Free efile taxes You must file Form 4029, discussed later under Requesting Exemption—Form 4029 . Free efile taxes As a follower of the established teachings of the sect or division, you must be conscientiously opposed to accepting benefits of any private or public insurance that makes payments for death, disability, old age, retirement, or medical care, or provides services for medical care. Free efile taxes You must waive all rights to receive any social security payment or benefit and agree that no benefits or payments will be made to anyone else based on your wages and self-employment income. Free efile taxes The Commissioner of Social Security must determine that: Your sect or division has the established teachings as described in (2) above, It is the practice, and has been for a substantial period of time, for members of the sect or division to provide for their dependent members in a manner that is reasonable in view of the members' general level of living, and The sect or division has existed at all times since December 31, 1950. Free efile taxes Requesting Exemption—Form 4029 To request the exemption, file Form 4029 in triplicate (original and two copies) with the Social Security Administration at the address shown on the form. Free efile taxes The sect or division must complete part of the form. Free efile taxes The IRS will return to you a copy of the Form 4029 that you filed indicating whether it has approved your exemption. Free efile taxes If it is approved, keep the approved copy of Form 4029 in your permanent records. Free efile taxes When to file. Free efile taxes   You can file Form 4029 at any time. Free efile taxes   If you have an approved exemption from SE tax and for some reason that approved exemption ended, you must file a new Form 4029 if you subsequently meet the eligibility requirements, discussed earlier. Free efile taxes See Effective date of exemption next for information on when the newly approved exemption would become effective. Free efile taxes    If you have a previously approved exemption from SE tax and you change membership to another recognized religious sect, without any change to your eligibility requirements, then you do not need to file a new Form 4029. Free efile taxes Effective date of exemption. Free efile taxes   An approved exemption from SE tax generally is effective for all tax years beginning with the first year you meet the eligibility requirements discussed earlier. Free efile taxes (For example, if you meet the eligibility requirements in 2011, you file Form 4029 in 2012, and the IRS approves your exemption in 2013, your exemption is effective for tax year 2011 and all later years. Free efile taxes )   The exemption will end if you fail to meet the eligibility requirements or if the Commissioner of Social Security determines that the sect or division fails to meet them. Free efile taxes You must notify the IRS within 60 days if you are no longer a member of the religious group, or if you no longer follow the established teachings of this group. Free efile taxes The exemption will end for the tax year where you or your sect/division first fails to meet the eligibility requirements. Free efile taxes Refunds of SE tax paid. Free efile taxes    To get a refund of any SE tax you paid while the exemption was in effect, file Form 1040X. Free efile taxes For information on filing this form, see Refunds of SE tax under Requesting Exemption—Form 4361, earlier. Free efile taxes Exemption From FICA Taxes Generally, under FICA, the employer and the employee each pay half of the social security and Medicare tax. Free efile taxes Both the employee and the employer, if they meet the eligibility requirements discussed earlier, can apply to be exempt from their share of FICA taxes on wages paid by the employer to the employee. Free efile taxes A partnership in which each partner holds a religious exemption from social security and Medicare is an employer for this purpose. Free efile taxes If the employer's application is approved, the exemption will apply only to FICA taxes on wages paid to employees who also received an approval of identical applications. Free efile taxes Information for employers. Free efile taxes   If you have an approved Form 4029 and you have an employee who has an approved Form 4029, do not report wages you paid to the employee as social security and Medicare wages. Free efile taxes   If you have an employee who does not have an approved Form 4029, you must withhold the employee's share of social security and Medicare taxes and pay the employer's share. Free efile taxes Form W-2. Free efile taxes   When preparing a Form W-2 for an employee with an approved Form 4029, enter “Form 4029” in box 14, “Other. Free efile taxes ” Do not make any entries in boxes 3, 4, 5, or 6. Free efile taxes Forms 941, 943, and 944. Free efile taxes   If both you and your employee have received approved Forms 4029, do not include these exempt wages on the following forms. Free efile taxes Instead, follow the instructions given below. Free efile taxes Form 941, Employer's QUARTERLY Federal Tax Return: check the box on line 4 and enter “Form 4029” in the empty space below the check box. Free efile taxes Form 943, Employer's Annual Federal Tax Return for Agricultural Employees: enter “Form 4029” on the dotted line next to the lines 2 and 4 entry spaces. Free efile taxes Form 944, Employer's ANNUAL Federal Tax Return: check the box on line 3 and enter “Form 4029” in the empty space below the check box. Free efile taxes Effective date. Free efile taxes   An approved exemption from FICA becomes effective on the first day of the first calendar quarter after the quarter in which you file Form 4029. Free efile taxes The exemption will end on the last day of the calendar quarter before the quarter in which the employer, employee, sect, or division fails to meet the requirements. Free efile taxes Self-Employment Tax: Figuring Net Earnings There are two methods for figuring your net earnings from self-employment as a member of the clergy or a religious worker. Free efile taxes Regular method. Free efile taxes Nonfarm optional method. Free efile taxes You may find Worksheets 1 through 4 helpful in figuring your net earnings from self-employment. Free efile taxes Blank worksheets are in the back of this publication, after the Comprehensive Example. Free efile taxes Regular Method Most people use the regular method. Free efile taxes Under this method, figure your net earnings from self-employment by totaling your gross income for services you performed as a minister, a member of a religious order who has not taken a vow of poverty, or a Christian Science practitioner or reader. Free efile taxes Then, subtract your allowable business deductions and multiply the difference by 92. Free efile taxes 35% (. Free efile taxes 9235). Free efile taxes Use Schedule SE (Form 1040) to figure your net earnings and SE tax. Free efile taxes If you are an employee of a church that elected to exclude you from FICA coverage, figure net earnings by multiplying your church wages shown on Form W-2 by 92. Free efile taxes 35% (. Free efile taxes 9235). Free efile taxes Do not reduce your wages by any business deductions when making this computation. Free efile taxes Use Schedule SE (Form 1040), Section B, to figure your net earnings and SE tax. Free efile taxes If you have an approved exemption, or you are automatically exempt, do not include the income or deductions from ministerial services in figuring your net earnings from self-employment. Free efile taxes Amounts included in gross income. Free efile taxes   To figure your net earnings from self-employment (on Schedule SE (Form 1040)), include in gross income: Salaries and fees for your ministerial services (discussed earlier), Offerings you receive for marriages, baptisms, funerals, masses, etc. Free efile taxes , The value of meals and lodging provided to you, your spouse, and your dependents for your employer's convenience, The fair rental value of a parsonage provided to you (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities) paid to you, and Any amount a church pays toward your income tax or SE tax, other than withholding the amount from your salary. Free efile taxes This amount is also subject to income tax. Free efile taxes   For the income tax treatment of items (2) and (4), see Income Tax: Income and Expenses , later. Free efile taxes Example. Free efile taxes Pastor Roger Adams receives an annual salary of $39,000 as a full-time minister. Free efile taxes The $39,000 includes $5,000 that is designated as a rental allowance to pay utilities. Free efile taxes His church owns a parsonage that has a fair rental value of $12,000 per year. Free efile taxes The church gives Pastor Adams the use of the parsonage. Free efile taxes He is not exempt from SE tax. Free efile taxes He must include $51,000 ($39,000 plus $12,000) when figuring his net earnings for SE tax purposes. Free efile taxes The results would be the same if, instead of the use of the parsonage and receipt of the rental allowance for utilities, Pastor Adams had received an annual salary of $51,000 of which $17,000 ($5,000 plus $12,000) per year was designated as a rental allowance. Free efile taxes Overseas duty. Free efile taxes   Your net earnings from self-employment are determined without any foreign earned income exclusion or the foreign housing exclusion or deduction if you are a U. Free efile taxes S. Free efile taxes citizen or resident alien serving abroad and living in a foreign country. Free efile taxes   For information on excluding foreign earned income or the foreign housing amount, see Publication 54. Free efile taxes Example. Free efile taxes Diane Jones was the minister of a U. Free efile taxes S. Free efile taxes church in Mexico. Free efile taxes She earned $35,000 in that position and was able to exclude it all for income tax purposes under the foreign earned income exclusion. Free efile taxes The United States does not have a social security agreement with Mexico, so Mrs. Free efile taxes Jones is subject to U. Free efile taxes S. Free efile taxes SE tax and must include $35,000 when figuring net earnings from self-employment. Free efile taxes Specified U. Free efile taxes S. Free efile taxes possessions. Free efile taxes    The exclusion from gross income for amounts derived from American Samoa or Puerto Rico does not apply in computing net earnings from self-employment. Free efile taxes Also see Residents of Puerto Rico, the U. Free efile taxes S. Free efile taxes Virgin Islands, Guam, the CNMI, and American Samoa , earlier, under U. Free efile taxes S. Free efile taxes Citizens and Resident and Nonresident Aliens. Free efile taxes Amounts not included in gross income. Free efile taxes   Do not include the following amounts in gross income when figuring your net earnings from self-employment. Free efile taxes Offerings that others made to the church. Free efile taxes Contributions by your church to a tax-sheltered annuity plan set up for you, including any salary reduction contributions (elective deferrals) that are not included in your gross income. Free efile taxes Pension payments or retirement allowances you receive for your past ministerial services. Free efile taxes The rental value of a parsonage or a parsonage allowance provided to you after you retire. Free efile taxes Allowable deductions. Free efile taxes   When figuring your net earnings from self-employment, deduct all your expenses related to your ministerial services performed as a self-employed person. Free efile taxes These are ministerial expenses you incurred while working other than as a common-law employee of the church. Free efile taxes They include expenses incurred in performing marriages and baptisms, and in delivering speeches. Free efile taxes Deduct these expenses on Schedule C or C-EZ (Form 1040), and carry the net amount to line 2 of Schedule SE (Form 1040), Section A or B. Free efile taxes   Wages earned as a common-law employee (explained earlier) of a church are generally subject to self-employment tax unless an exemption is requested, as discussed earlier under Exemption From Self-Employment (SE) Tax . Free efile taxes Subtract any allowable expenses (including unreimbursed employee business expenses) from those wages, include the net amount on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Free efile taxes Do not complete Schedule C or C-EZ (Form 1040). Free efile taxes However, for income tax purposes, the expenses are allowed only as an itemized deduction on Schedule A (Form 1040) to the extent they exceed 2% of adjusted gross income. Free efile taxes Employee reimbursement arrangements. Free efile taxes   If you received an advance, allowance, or reimbursement for your employee expenses, how you report this amount and your employee expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan. Free efile taxes Ask your employer if you are not sure if it reimburses you using an accountable or a nonaccountable plan. Free efile taxes Accountable plans. Free efile taxes   To be an accountable plan, your employer's reimbursement arrangement must include all three of the following rules. Free efile taxes Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. Free efile taxes You must adequately account to your employer for these expenses within a reasonable period of time. Free efile taxes You must return any excess reimbursement or allowance within a reasonable period of time. Free efile taxes   The reimbursement is not reported on your Form W-2. Free efile taxes Generally, if your expenses equal your reimbursement, you have no deduction. Free efile taxes If your expenses are more than your reimbursement, you can deduct your excess expenses for SE tax and income tax purposes. Free efile taxes Nonaccountable plan. Free efile taxes   A nonaccountable plan is a reimbursement arrangement that does not meet all three of the rules listed under Accountable plans above. Free efile taxes In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan. Free efile taxes Excess reimbursements you fail to return to your employer. Free efile taxes Reimbursement of nondeductible expenses related to your employer's business. Free efile taxes   Your employer will combine any reimbursement paid to you under a nonaccountable plan with your wages, salary, or other compensation and report the combined total in box 1 of your Form W-2. Free efile taxes Since reimbursements under a nonaccountable plan are included in your gross income, you can deduct your related expenses (for SE tax and income tax purposes) regardless of whether they are more than, less than, or equal to your reimbursement. Free efile taxes   For more information on accountable and nonaccountable plans, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Free efile taxes Married Couple Missionary Team If both spouses are duly ordained, commissioned, or licensed ministers of a church and have an agreement that each will perform specific services for which they are paid jointly or separately, they must divide the self-employment income according to the agreement. Free efile taxes If the agreement is with one spouse only and the other spouse is not paid for any specific duties, amounts received for their services are included only in the self-employment income of the spouse having the agreement. Free efile taxes Earnings Subject to SE Tax For 2013, the maximum net earnings from self-employment subject to social security (old age, survivors, and disability insurance) tax is $113,700 minus any wages and tips you earned that were subject to social security tax. Free efile taxes The tax rate for the social security part is 12. Free efile taxes 4%. Free efile taxes In addition, all of your net earnings are subject to the Medicare (hospital insurance) part of the SE tax. Free efile taxes This tax rate is 2. Free efile taxes 9%. Free efile taxes The combined self-employment tax rate is 15. Free efile taxes 3%. Free efile taxes Additional Medicare Tax. Free efile taxes   Beginning in 2013, a 0. Free efile taxes 9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 for any other filing status. Free efile taxes Medicare wages and self-employment income are combined to determine if income exceeds the threshold. Free efile taxes A self-employment loss is not considered for purposes of this tax. Free efile taxes RRTA compensation is separately compared to the threshold. Free efile taxes For more information, see Form 8959, Additional Medicare Tax, and its separate instructions. Free efile taxes Nonfarm Optional Method You may be able to use the nonfarm optional method for figuring your net earnings from self-employment. Free efile taxes In general, the nonfarm optional method is intended to permit continued coverage for social security and Medicare purposes when your income for the tax year is low. Free efile taxes You may use the nonfarm optional method if you meet all the following tests. Free efile taxes You are self-employed on a regular basis. Free efile taxes You meet this test if your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. Free efile taxes The net earnings can be from either farm or nonfarm earnings or both. Free efile taxes You have used this method less than 5 prior years. Free efile taxes (There is a 5-year lifetime limit. Free efile taxes ) The years do not have to be consecutive. Free efile taxes Your net nonfarm profits were: Less than $5,024, and Less than 72. Free efile taxes 189% of your gross nonfarm income. Free efile taxes If you meet all three tests, use Table 3 to figure your net earnings from self-employment under the nonfarm optional method. Free efile taxes Table 3. Free efile taxes Figuring Nonfarm Net Earnings IF your gross nonfarm income is . Free efile taxes . Free efile taxes . Free efile taxes THEN your net earnings are equal to . Free efile taxes . Free efile taxes . Free efile taxes $6,960 or less Two-thirds of your gross nonfarm income. Free efile taxes More than $6,960 $4,640. Free efile taxes Actual net earnings. Free efile taxes   Multiply your total earnings subject to SE tax by 92. Free efile taxes 35% (. Free efile taxes 9235) to get actual net earnings. Free efile taxes Actual net earnings are equivalent to net earnings under the “Regular Method. Free efile taxes ” More information. Free efile taxes   For more information on the nonfarm optional method, see Publication 334, Tax Guide for Small Business, and the Schedule SE (Form 1040) instructions. Free efile taxes Income Tax: Income and Expenses Some income and expense items are treated the same for both income tax and SE tax purposes and some are treated differently. Free efile taxes Note. Free efile taxes For purposes of this section, references to members of the clergy are only to ministers or members of a religious order. Free efile taxes Income Items The tax treatment of offerings and fees, outside earnings, rental allowances, rental value of a parsonage, earnings of members of religious orders, and foreign earned income is discussed here. Free efile taxes Offerings and Fees If you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc. Free efile taxes , in addition to your salary. Free efile taxes If the offering is made to the religious institution, it is not taxable to you. Free efile taxes Outside Earnings If you are a member of a religious organization and you give your outside earnings to the organization, you still must include the earnings in your income. Free efile taxes However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. Free efile taxes For more information, see Publication 526. Free efile taxes Exclusion of Rental Allowance and Fair Rental Value of a Parsonage Ordained, commissioned, or licensed ministers of the gospel may be able to exclude from income tax the rental allowance or fair rental value of a parsonage that is provided to them as pay for their services. Free efile taxes Services include: Ministerial services, discussed earlier, Administrative duties and teaching at theological seminaries, and The ordinary duties of a minister performed as an employee of the United States (other than as a chaplain in the Armed Forces), a state, possession, political subdivision, or the District of Columbia. Free efile taxes This exclusion applies only for income tax purposes. Free efile taxes It does not apply for SE tax purposes, as discussed earlier under Amounts included in gross income under Self-Employment Tax: Figuring Net Earnings. Free efile taxes Designation requirement. Free efile taxes   The church or organization that employs you must officially designate the payment as a housing allowance before it makes the payment. Free efile taxes It must designate a definite amount. Free efile taxes It cannot determine the amount of the housing allowance at a later date. Free efile taxes If the church or organization does not officially designate a definite amount as a housing allowance, you must include your total salary in your income. Free efile taxes   If you are employed and paid by a local congregation, a resolution by a national church agency of your denomination does not effectively designate a housing allowance for you. Free efile taxes The local congregation must officially designate the part of your salary that is a housing allowance. Free efile taxes However, a resolution of a national church agency can designate your housing allowance if you are directly employed by the national agency. Free efile taxes Rental allowances. Free efile taxes   If you receive in your salary an amount officially designated as a rental allowance (including an amount to pay utility costs), you can exclude the allowance from your gross income if: You use the amount to provide or rent a home, and The amount is not more than reasonable pay for your services. Free efile taxes   The amount you exclude cannot be more than the fair rental value of the home, including furnishings, plus the cost of utilities. Free efile taxes Fair rental value of parsonage. Free efile taxes   You can exclude from gross income the fair rental value of a house or parsonage, including utilities, furnished to you as part of your earnings. Free efile taxes However, the exclusion cannot be more than the reasonable pay for your services. Free efile taxes If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost. Free efile taxes Example. Free efile taxes Rev. Free efile taxes Joanna Baker is a full-time minister. Free efile taxes The church allows her to use a parsonage that has an annual fair rental value of $24,000. Free efile taxes The church pays her an annual salary of $67,000, of which $7,500 is designated for utility costs. Free efile taxes Her actual utility costs during the year were $7,000. Free efile taxes For income tax purposes, Rev. Free efile taxes Baker excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility costs). Free efile taxes She will report $60,000 ($59,500 salary plus $500 of unused utility allowance). Free efile taxes Her income for SE tax purposes, however, is $91,000 ($67,000 salary + $24,000 fair rental value of the parsonage). Free efile taxes Home ownership. Free efile taxes   If you own your home and you receive as part of your salary a housing or rental allowance, you may exclude from gross income the smallest of: The amount actually used to provide a home, The amount officially designated as a rental allowance, or The fair rental value of the home, including furnishings, utilities, garage, etc. Free efile taxes Excess rental allowance. Free efile taxes   You must include in gross income the amount of any rental allowance that is more than the smallest of: Your reasonable salary, The fair rental value of the home plus utilities, or The amount actually used to provide a home. Free efile taxes   Include in the total on Form 1040, line 7. Free efile taxes On the dotted line next to line 7, enter “Excess allowance” and the amount. Free efile taxes You may deduct the home mortgage interest and real estate taxes paid on your home even though you pay all or part of those expenses with funds you get through a tax-free rental or parsonage allowance. Free efile taxes However, you can only deduct these expenses as itemized deductions on Schedule A (Form 1040). Free efile taxes Retired ministers. Free efile taxes   If you are a retired minister, you can exclude from your gross income the rental value of a home (plus utilities) furnished to you by your church as a part of your pay for past services, or the part of your pension that was designated as a rental allowance. Free efile taxes However, a minister's surviving spouse cannot exclude the rental value unless the rental value is for ministerial services he or she performs or performed. Free efile taxes Teachers or administrators. Free efile taxes   If you are a minister employed as a teacher or administrator by a church school, college, or university, you are performing ministerial services for purposes of the housing exclusion. Free efile taxes However, if you perform services as a teacher or administrator on the faculty of a nonchurch college, you cannot exclude from your income a housing allowance or the value of a home that the college provides to you. Free efile taxes    If you live in faculty lodging as an employee of an educational institution or academic health center, all or part of the value of that lodging may be nontaxable under a different rule. Free efile taxes In Publication 525, see Faculty lodging in the discussion on meals and lodging under Fringe Benefits. Free efile taxes   If you serve as a minister of music or minister of education, or serve in an administrative or other function of your religious organization, but are not authorized to perform substantially all of the religious duties of an ordained minister in your church (even if you are commissioned as a minister of the gospel), the housing exclusion does not apply to you. Free efile taxes Theological students. Free efile taxes   If you are a theological student serving a required internship as a part-time or assistant pastor, you cannot exclude a parsonage or rental allowance from your income unless you are ordained, commissioned, or licensed as a minister. Free efile taxes Traveling evangelists. Free efile taxes   You can exclude a designated rental allowance from out-of-town churches if you meet all of the following requirements. Free efile taxes You are an ordained minister. Free efile taxes You perform ministerial services at churches located away from your community. Free efile taxes You actually use the rental allowance to maintain your permanent home. Free efile taxes Cantors. Free efile taxes   If you have a bona fide commission and your congregation employs you on a full-time basis to perform substantially all the religious functions of the Jewish faith, you can exclude a rental allowance from your gross income. Free efile taxes Earnings—Members of Religious Orders Your earnings may be exempt from both income tax and SE tax if you are a member of a religious order who: Has taken a vow of poverty, Receives earnings for services performed as an agent of the order and in the exercise of duties required by the order, and Renounces the earnings and gives them to the order. Free efile taxes See Members of Religious Orders , earlier, under Social Security Coverage. Free efile taxes Foreign Earned Income Certain income may be exempt from income tax if you work in a foreign country or in a specified U. Free efile taxes S. Free efile taxes possession. Free efile taxes Publication 54 discusses the foreign earned income exclusion. Free efile taxes Publication 570, Tax Guide for Individuals With Income From U. Free efile taxes S. Free efile taxes Possessions, covers the rules for taxpayers with income from U. Free efile taxes S. Free efile taxes possessions. Free efile taxes You can get these free publications from the Internal Revenue Service at IRS. Free efile taxes gov or from most U. Free efile taxes S. Free efile taxes Embassies or consulates. Free efile taxes Expense Items The tax treatment of ministerial trade or business expenses, expenses allocable to tax-free income, and health insurance costs is discussed here. Free efile taxes Ministerial Trade or Business Expenses as an Employee When you figure your income tax, you must itemize your deductions on Schedule A (Form 1040) to claim allowable deductions for ministerial trade or business expenses incurred while working as an employee. Free efile taxes You also may have to file Form 2106, Employee Business Expenses (or Form 2106-EZ, Unreimbursed Employee Business Expenses). Free efile taxes You claim these expenses as miscellaneous itemized deductions that are subject to the 2%-of-adjusted-gross-income (AGI) limit. Free efile taxes See Publication 529 for more information on this limit. Free efile taxes However, you cannot deduct any of your employee business expenses that are allocable to tax-free income (discussed next). Free efile taxes Expenses Allocable to Tax-Free Income If you receive a rental or parsonage allowance that is exempt from income tax (tax free), you must allocate a portion of the expenses of operating your ministry to that tax-free income. Free efile taxes You cannot deduct the portion of your expenses that you allocate to your tax-free rental or parsonage allowance. Free efile taxes Exception. Free efile taxes   This rule does not apply to your deductions for home mortgage interest or real estate taxes on your home. Free efile taxes Figuring the allocation. Free efile taxes   Figure the portion of your otherwise deductible expenses that you cannot deduct (because you must allocate that portion to tax-free income) by multiplying the expenses by the following fraction:      Tax-free rental or parsonage allowance     All income (taxable and tax free) earned from your ministry           When figuring the allocation, include the income and expenses related to the ministerial duties you perform both as an employee and as a self-employed person. Free efile taxes    Reduce your otherwise deductible expenses only in figuring your income tax, not your SE tax. Free efile taxes Example. Free efile taxes Rev. Free efile taxes Charles Ashford received $40,000 in earnings for ministerial services consisting of a $28,000 salary for ministerial services performed as an employee, $2,000 for weddings and baptisms performed as a self-employed person, and a $10,000 tax-free parsonage allowance. Free efile taxes He incurred $4,000 of unreimbursed expenses connected with his earnings for ministerial services. Free efile taxes $3,500 of the $4,000 is for employee expenses related to his ministerial salary, and $500 is related to the weddings and baptisms he performed as a self-employed person. Free efile taxes Rev. Free efile taxes Ashford figures the nondeductible (tax-free) portion of expenses related to his ministerial salary as follows: ($10,000 ÷ $40,000) x $3,500 = $875   Rev. Free efile taxes Ashford figures the nondeductible (tax-free) portion of expenses related to his wedding and baptism income as follows: ($10,000 ÷ $40,000) x $500 = $125 Required statement. Free efile taxes   If you receive a tax-free rental or parsonage allowance and have ministerial expenses, attach a statement to your tax return. Free efile taxes The statement must contain all of the following information. Free efile taxes A list of each item of taxable ministerial income by source (such as wages, salary, weddings, baptisms, etc. Free efile taxes ) plus the amount. Free efile taxes A list of each item of tax-free ministerial income by source (parsonage allowance) plus the amount. Free efile taxes A list of each item of otherwise deductible ministerial expenses plus the amount. Free efile taxes How you figured the nondeductible part of your otherwise deductible expenses. Free efile taxes A statement that the other deductions claimed on your tax return are not allocable to your tax-free income. Free efile taxes   See the attachments prepared for the Comprehensive Example , later. Free efile taxes Following the example, you will find blank worksheets for your own use. Free efile taxes Health Insurance Costs of Self-Employed Ministers If you are self-employed, you may be able to deduct the amount you paid in 2013 for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents. Free efile taxes If you qualify, you can take this deduction as an adjustment to income on Form 1040, line 29. Free efile taxes See the Instructions for Form 1040 to figure your deduction. Free efile taxes The following special rules apply to the self-employed health insurance deduction. Free efile taxes You cannot take a medical expense deduction on Schedule A (Form 1040) for any expenses you claim for purposes of the self-employed health insurance deduction. Free efile taxes You cannot take the deduction for any month you are eligible to participate in a subsidized plan of your (or your spouse's) employer. Free efile taxes The deduction cannot exceed your net earnings from the business under which the insurance plan is established. Free efile taxes Your net earnings under this rule do not include the income you earned as a common-law employee (discussed earlier) of a church. Free efile taxes More information. Free efile taxes   For more information about the self-employed health insurance deduction, see chapter 6 in Publication 535. Free efile taxes Deduction for SE Tax You can deduct one-half of your SE tax in figuring adjusted gross income. Free efile taxes This is an income tax deduction only, on Form 1040, line 27. Free efile taxes Do not claim this deduction in figuring net earnings from self-employment subject to SE tax. Free efile taxes Income Tax Withholding and Estimated Tax The federal income tax is a pay-as-you-go tax. Free efile taxes You must pay the tax as you earn or receive income during the year. Free efile taxes An employee usually has income tax withheld from his or her wages or salary. Free efile taxes However, your salary is not subject to federal income tax withholding if both of the following conditions apply. Free efile taxes You are a duly ordained, commissioned, or licensed minister, a member of a religious order (who has not taken a vow of poverty), or a Christian Science practitioner or reader. Free efile taxes Your salary is for ministerial services (see Ministerial Services , earlier). Free efile taxes If your salary is not subject to withholding, or if you do not pay enough tax through withholding, you may need to make estimated tax payments to avoid penalties for not paying enough tax as you earn your income. Free efile taxes You generally must make estimated tax payments if you expect to owe taxes, including SE tax, of $1,000 or more, when you file your return. Free efile taxes Determine your estimated tax by using the worksheets in Publication 505, Tax Withholding and Estimated Tax. Free efile taxes Pay the entire estimated tax for 2014 or the first installment by April 15, 2014. Free efile taxes See Form 1040-ES for the different payment methods. Free efile taxes The April 15 date applies whether or not your tax home and your abode are outside the United States and Puerto Rico. Free efile taxes For more information, see chapter 2 of Publication 505. Free efile taxes If you perform your services as a common-law employee of the church and your salary is not subject to income tax withholding, you can enter into a voluntary withholding agreement with the church to cover any income and SE tax that may be due. Free efile taxes Filing Your Return You must file an income tax return for 2013 if your gross income was at least the amount shown in the third column of Table 4 above. Free efile taxes Table 4. Free efile taxes 2013 Filing Requirements for Most Taxpayers IF your filing status is . Free efile taxes . Free efile taxes . Free efile taxes AND at the end of 2013 you were* . Free efile taxes . Free efile taxes . Free efile taxes THEN file a return if your gross income** was at least . Free efile taxes . Free efile taxes . Free efile taxes single under age 65 65 or older   $10,000 $11,500   married filing jointly*** under 65 (both spouses) 65 or older (one spouse) 65 or older (both spouses)   $20,000  $21,200  $22,400   married filing separately any age   $3,900   head of household under 65 65 or older   $12,850 $14,350   qualifying widow(er) with dependent child under 65 65 or older   $16,100  $17,300   * If you were born on January 1, 1949, you are considered to be age 65 at the end of 2013. Free efile taxes ** Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Free efile taxes Do not include any social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time in 2013, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). Free efile taxes If (a) or (b) applies, see the instructions for Form 1040, lines 20a and 20b, to figure the taxable part of social security benefits you must include in gross income. Free efile taxes Gross income includes gains, but not losses, reported on Form 8949 or Schedule D (Form 1040). Free efile taxes Gross income from a business means, for example, the amount on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. Free efile taxes But, in figuring gross income, do not reduce your income by any losses, including any loss on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. Free efile taxes *** If you did not live with your spouse at the end of 2013 (or on the date your spouse died) and your gross income was at least $3,900, you must file a return regardless of your age. Free efile taxes Additional requirements. Free efile taxes   Even if your income was less than the amount shown in Table 4, you must file an income tax return on Form 1040, and attach a completed Schedule SE (Form 1040), if:    You are not exempt from SE tax, and you have net earnings from self-employment (discussed earlier under Self-Employment Tax: Figuring Net Earnings ) of $400 or more in the tax year, You are exempt from SE tax on earnings from ministerial services and you have $400 or more of other net earnings subject to SE tax, or You had wages of $108. Free efile taxes 28 or more from an electing church or church-controlled organization (see Coverage of Religious Workers (Church Employees) , earlier, under Social Security Coverage). Free efile taxes Self-employment tax. Free efile taxes   If you are liable for SE tax, you must file Schedule SE (Form 1040) with your return. Free efile taxes   If you filed Form 4361 and did not receive approval from the IRS, you must pay SE tax on your ministerial earnings, as explained earlier. Free efile taxes You should report ministerial earnings and expenses from nonemployee ministerial services on Schedule C or C-EZ (Form 1040). Free efile taxes You should then carry the net amount over to line 2 of Schedule SE (Form 1040), Section A or B. Free efile taxes However, if you were a duly ordained minister who was an employee of a church and you must pay SE tax on the wages you earned for those services, do not report those wages on Schedule C or C-EZ (Form 1040). Free efile taxes Instead, report those wages less any allowable expenses (including any unreimbursed employee business expenses), on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Free efile taxes Note. Free efile taxes For income tax purposes, the unreimbursed employee business expenses that you incurred as an employee of the church and subtracted from your wages on line 2 of Schedule SE (Form 1040) are allowed only as an itemized deduction on Schedule A (Form 1040) if they exceed 2% of your adjusted gross income. Free efile taxes You cannot deduct these expenses on Schedule C or C-EZ (Form 1040) as a trade or business expense. Free efile taxes Exemption from SE tax. Free efile taxes   If you filed Form 4361 and received IRS approval not to be taxed on your ministerial earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). Free efile taxes Instead, enter “Exempt—Form 4361” on the dotted line next to Form 1040, line 56. Free efile taxes However, if you had net earnings from another trade or business of $400 or more subject to SE tax, see line A at the top of Schedule SE (Form 1040), Section B. Free efile taxes    If you filed Form 4029 and received IRS approval not to be taxed on those earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). Free efile taxes Instead, enter “Exempt—Form 4029” on the dotted line next to Form 1040, line 56. Free efile taxes More information. Free efile taxes   For more information on filing your return, including when and where to file it, see the Instructions for Form 1040. Free efile taxes Retirement Savings Arrangements Retirement savings arrangements are plans that offer you a tax-favored way to save for your retirement. Free efile taxes You generally can deduct your contributions to the plan. Free efile taxes Your contributions and the earnings on them are not taxed until they are distributed. Free efile taxes Retirement plans for the self-employed. Free efile taxes   To set up one of the following plans you must be self-employed. Free efile taxes SEP (simplified employee pension) plan. Free efile taxes SIMPLE (savings incentive match plan for employees) plan. Free efile taxes Qualified retirement plan (also called a Keogh or H. Free efile taxes R. Free efile taxes 10 plan). Free efile taxes   The common-law rules determine whether you are an employee or a self-employed person for purposes of setting up a retirement plan. Free efile taxes See Employment status for other tax purposes under Coverage of Members of the Clergy, earlier. Free efile taxes This result is true even if your compensation for ministerial services (defined earlier) is subject to SE tax. Free efile taxes   For example, if a congregation pays you a salary for performing ministerial services and you are subject to the congregation's control, you generally are a common-law employee. Free efile taxes You are not a self-employed person for purposes of setting up a retirement plan. Free efile taxes This result is true even if your salary is subject to SE tax. Free efile taxes   On the other hand, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services that you report on Schedule C or C-EZ (Form 1040), are earnings from self-employment for all tax purposes. Free efile taxes   For more information on establishing a SEP, SIMPLE, or qualified retirement plan, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Free efile taxes Individual retirement arrangements (IRAs). Free efile taxes   The traditional IRA and the Roth IRA are two individual retirement arrangements you can use to save money for your retirement. Free efile taxes Generally, your maximum contribution for 2013 to either of these plans (or to a combination of the two) is the smaller of your taxable compensation or $5,500 ($6,500 if you are age 50 or older). Free efile taxes   However, your maximum contribution to a Roth IRA will be further reduced or eliminated if your adjusted gross income is above a certain amount. Free efile taxes You cannot deduct Roth IRA contributions, but if you satisfy certain requirements, all earnings in the Roth IRA are tax free and neither your nondeductible contributions nor any earnings on them are taxable when distributed. Free efile taxes   If you contribute to a traditional IRA, your contribution may be deductible. Free efile taxes However, your deduction may be reduced or eliminated if you or your spouse is covered by an employer retirement plan (including, but not limited to, a SEP, SIMPLE, or qualified retirement plan). Free efile taxes   For more information on IRAs, see Publication 590. Free efile taxes Tax-sheltered annuity plans. Free efile taxes   Church employees, members of religious orders, and duly ordained, commissioned, or licensed ministers working as ministers or chaplains can participate in tax-sheltered annuity (403(b)) plans. Free efile taxes For more