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

Under the Affordable Care Act, the Federal government, State governments, insurers, employers, and individuals share the responsibility for health insurance coverage beginning in 2014. Many people already have qualifying health insurance coverage (called minimum essential coverage) and do not need to do anything more than maintain that coverage.

The individual shared responsibility provision requires you and each member of your family to either:

  • Have minimum essential coverage, or
  • Have an exemption from the responsibility to have minimum essential coverage, or
  • Make a shared responsibility payment when you file your 2014 federal income tax return in 2015.  

You will report minimum essential coverage, report exemptions, or make any individual shared responsibility payment when you file your 2014 federal income tax return in 2015.

Minimum Essential Coverage

 

If you and your family need to acquire minimum essential coverage, you may have several options.  They include:

  • Health insurance coverage provided by your employer,
  • Health insurance purchased through the Health Insurance Marketplace in the area where you live, where you may qualify for financial assistance,
  • Coverage provided under a government-sponsored program for which you are eligible (including Medicare, Medicaid, and health care programs for veterans),
  • Health insurance purchased directly from an insurance company, and
  • Other health insurance coverage that is recognized by the Department of Health & Human Services as minimum essential coverage.

U.S. citizens who are residents of a foreign country for an entire year, and residents of U.S. territories, are deemed to have minimum essential coverage. See questions 11 and 12 of our Questions and Answers for more information.  

For purposes of the individual shared responsibility payment, you are considered to have minimum essential coverage for the entire month as long as you have minimum essential coverage for at least one day during that month. For example, if you start a new job on June 26 and are covered under your employer’s health coverage starting on that day, you’re treated as having coverage for the entire month of June. Similarly, if you’re eligible for an exemption for any one day of a month, you’re treated as exempt for the entire month.

For more information about minimum essential coverage, check this minimum essential coverage chart and see questions 14-20 of our Questions and Answers.  

You can learn more at HealthCare.gov about which health insurance options are available to you, how to purchase health insurance coverage, and how to get financial assistance with the cost of insurance. If you purchase health insurance through the Marketplace and you meet certain requirements, you may be eligible for a premium tax credit to help pay your premiums. Learn more about the premium tax credit. The deadline for the initial open enrollment period is March 31, 2014. You may also qualify for a special enrollment period (e.g., you move to a different state). See HealthCare.gov to learn about special enrollment periods.

Exemptions

 

You may be exempt from the requirement to maintain minimum essential coverage and thus will not have to make a shared responsibility payment when you file your 2014 federal income tax return in 2015, if you meet certain criteria.

You may be exempt if you:

  • Have no affordable coverage options because the minimum amount you must pay for the annual premiums is more than eight percent of your household income,
  • Have a gap in coverage for less than three consecutive months, or
  • Qualify for an exemption for one of several other reasons, including having a hardship that prevents you from obtaining coverage, or belonging to a group explicitly exempt from the requirement.

Because of the Affordable Care Act, more Americans have access to coverage that is affordable. However, if there is no coverage available to you and your family that costs less than eight percent of your household income, you can qualify for an exemption.  

An exemption applies to individuals who purchase their insurance through the Marketplace during the initial enrollment period for 2014, which runs through March 31, 2014. This hardship exemption will apply from January 1, 2014, until the start of your health care coverage, which if you enroll between March 16 and March 31 would generally be May 1. (See this HHS Question and Answer  for more information.) Another hardship exemption may apply if you have been notified that your health insurance policy will not be renewed and you consider the other plans available to you unaffordable. (See this HHS guidance and Questions and Answers  for more information.)

How you get an exemption depends upon the type of exemption for which you are eligible. You can obtain some exemptions only from the Marketplace, others only from the IRS, and yet others from either the Marketplace or the IRS. 

Learn more about exemptions in this chart and in questions 21-24 of our Questions and Answers. Also, see Healthcare.gov for more information on hardship exemptions.

Reporting Coverage or Exemptions

 

The individual shared responsibility provision goes into effect in 2014. You won’t need to report minimum essential coverage or exemptions or make any individual shared responsibility payment until you file your 2014 federal income tax return in 2015. Information will be made available later about how to report your coverage or exemption (or make a payment) on your 2014 income tax return.

Making a Payment

 

If you or any of your dependents don’t have minimum essential coverage and don’t have an exemption, you will need to make an individual shared responsibility payment on your tax return. It is important to remember that choosing to make the individual shared responsibility payment instead of purchasing minimum essential coverage means you will also have to pay the entire cost of all your medical care. You won't be protected from the kind of very high medical bills that can sometimes lead to bankruptcy.

If you must make an individual shared responsibility payment, the annual payment amount is the greater of a percentage of your household income or a flat dollar amount, but is capped at the national average premium for a bronze level health plan available through the Marketplace. You will owe 1/12th of the annual payment for each month you or your dependent(s) don’t have either coverage or an exemption.

For 2014, the annual payment amount is:

  • The greater of:
    • 1 percent of your household income that is above the tax return filing threshold for your filing status, or
    • Your family's flat dollar amount, which is $95 per adult and $47.50 per child, limited to a family maximum of $285,
  • But capped at the cost of the national average premium for a bronze level health plan available through the Marketplace in 2014.

Check out these basic examples of the payment calculation and the federal tax filing requirement thresholds. For more detailed examples, see the individual shared responsibility provision final regulations.

The percentages and flat dollar amounts increase over the first three years. In 2015, the income percentage increases to 2 percent of household income and the flat dollar amount increases to $325 per adult ($162.50 per child under 18). In 2016, these figures increase to 2.5 percent of household income and $695 per adult ($347.50 per child under 18). After 2016, these figures increase with inflation. 

Information will be made available later about how you will account for the payment on your 2014 federal income tax return filed in 2015.

More Information

 

More detailed information about the individual shared responsibility provision is available in our Questions and Answers. The Department of the Treasury and the IRS have issued the following legal guidance related to the individual shared responsibility provision, including detailed examples of the payment calculation:

  • Final regulations on the individual shared responsibility provision.
  • Notice 2013-42, which provides transition relief from the individual shared responsibility provision for employees and their families who are eligible to enroll in employer-sponsored health plans with a plan year other than a calendar year if the plan year begins in 2013 and ends in 2014.
  • Proposed regulations on minimum essential coverage and other rules regarding the shared responsibility provision.
  • Notice 2014-10, which provides transition relief for individuals enrolled in coverage under certain limited-benefit Medicaid and TRICARE programs that are not minimum essential coverage.

Additional information on exemptions and minimum essential coverage is available in final regulations issued by the Department of Health & Human Services.

Page Last Reviewed or Updated: 25-Mar-2014

The Freetax

Freetax 12. Freetax   How To Get Tax Help Table of Contents Low Income Taxpayer Clinics Whether it's help with a tax issue, preparing your tax return or a need for a free publication or form, get the help you need the way you want it: online, use a smart phone, call or walk in to an IRS office or volunteer site near you. Freetax Free help with your tax return. Freetax   You can get free help preparing your return nationwide from IRS-certified volunteers. Freetax The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. Freetax The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Freetax Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. Freetax In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own return with help from an IRS-certified volunteer. Freetax To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS. Freetax gov, download the IRS2Go app, or call 1-800-906-9887. Freetax   As part of the TCE program, AARP offers the Tax-Aide counseling program. Freetax To find the nearest AARP Tax-Aide site, visit AARP's website at www. Freetax aarp. Freetax org/money/taxaide or call 1-888-227-7669. Freetax For more information on these programs, go to IRS. Freetax gov and enter “VITA” in the search box. Freetax Internet. Freetax    IRS. Freetax gov and IRS2Go are ready when you are —24 hours a day, 7 days a week. Freetax Download the free IRS2Go app from the iTunes app store or from Google Play. Freetax Use it to check your refund status, order transcripts of your tax returns or tax account, watch the IRS YouTube channel, get IRS news as soon as it's released to the public, subscribe to filing season updates or daily tax tips, and follow the IRS Twitter news feed, @IRSnews, to get the latest federal tax news, including information about tax law changes and important IRS programs. Freetax Check the status of your 2013 refund with the Where's My Refund? application on IRS. Freetax gov or download the IRS2Go app and select the Refund Status option. Freetax The IRS issues more than 9 out of 10 refunds in less than 21 days. Freetax Using these applications, you can start checking on the status of your return within 24 hours after we receive your e-filed return or 4 weeks after you mail a paper return. Freetax You will also be given a personalized refund date as soon as the IRS processes your tax return and approves your refund. Freetax The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. Freetax Use the Interactive Tax Assistant (ITA) to research your tax questions. Freetax No need to wait on the phone or stand in line. Freetax The ITA is available 24 hours a day, 7 days a week, and provides you with a variety of tax information related to general filing topics, deductions, credits, and income. Freetax When you reach the response screen, you can print the entire interview and the final response for your records. Freetax New subject areas are added on a regular basis. Freetax  Answers not provided through ITA may be found in Tax Trails, one of the Tax Topics on IRS. Freetax gov which contain general individual and business tax information or by searching the IRS Tax Map, which includes an international subject index. Freetax You can use the IRS Tax Map, to search publications and instructions by topic or keyword. Freetax The IRS Tax Map integrates forms and publications into one research tool and provides single-point access to tax law information by subject. Freetax When the user searches the IRS Tax Map, they will be provided with links to related content in existing IRS publications, forms and instructions, questions and answers, and Tax Topics. Freetax Coming this filing season, you can immediately view and print for free all 5 types of individual federal tax transcripts (tax returns, tax account, record of account, wage and income statement, and certification of non-filing) using Get Transcript. Freetax You can also ask the IRS to mail a return or an account transcript to you. Freetax Only the mail option is available by choosing the Tax Records option on the IRS2Go app by selecting Mail Transcript on IRS. Freetax gov or by calling 1-800-908-9946. Freetax Tax return and tax account transcripts are generally available for the current year and the past three years. Freetax Determine if you are eligible for the EITC and estimate the amount of the credit with the Earned Income Tax Credit (EITC) Assistant. Freetax Visit Understanding Your IRS Notice or Letter to get answers to questions about a notice or letter you received from the IRS. Freetax If you received the First Time Homebuyer Credit, you can use the First Time Homebuyer Credit Account Look-up tool for information on your repayments and account balance. Freetax Check the status of your amended return using Where's My Amended Return? Go to IRS. Freetax gov and enter Where's My Amended Return? in the search box. Freetax You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. Freetax It can take up to 3 weeks from the date you mailed it to show up in our system. Freetax Make a payment using one of several safe and convenient electronic payment options available on IRS. Freetax gov. Freetax Select the Payment tab on the front page of IRS. Freetax gov for more information. Freetax Determine if you are eligible and apply for an online payment agreement, if you owe more tax than you can pay today. Freetax Figure your income tax withholding with the IRS Withholding Calculator on IRS. Freetax gov. Freetax Use it if you've had too much or too little withheld, your personal situation has changed, you're starting a new job or you just want to see if you're having the right amount withheld. Freetax Determine if you might be subject to the Alternative Minimum Tax by using the Alternative Minimum Tax Assistant on IRS. Freetax gov. Freetax Request an Electronic Filing PIN by going to IRS. Freetax gov and entering Electronic Filing PIN in the search box. Freetax Download forms, instructions and publications, including accessible versions for people with disabilities. Freetax Locate the nearest Taxpayer Assistance Center (TAC) using the Office Locator tool on IRS. Freetax gov, or choose the Contact Us option on the IRS2Go app and search Local Offices. Freetax An employee can answer questions about your tax account or help you set up a payment plan. Freetax Before you visit, check the Office Locator on IRS. Freetax gov, or Local Offices under Contact Us on IRS2Go to confirm the address, phone number, days and hours of operation, and the services provided. Freetax If you have a special need, such as a disability, you can request an appointment. Freetax Call the local number listed in the Office Locator, or look in the phone book under United States Government, Internal Revenue Service. Freetax Apply for an Employer Identification Number (EIN). Freetax Go to IRS. Freetax gov and enter Apply for an EIN in the search box. Freetax Read the Internal Revenue Code, regulations, or other official guidance. Freetax Read Internal Revenue Bulletins. Freetax Sign up to receive local and national tax news and more by email. Freetax Just click on “subscriptions” above the search box on IRS. Freetax gov and choose from a variety of options. Freetax Phone. Freetax    You can call the IRS, or you can carry it in your pocket with the IRS2Go app on your smart phone or tablet. Freetax Download the free IRS2Go app from the iTunes app store or from Google Play. Freetax Call to locate the nearest volunteer help site, 1-800-906-9887 or you can use the VITA Locator Tool on IRS. Freetax gov, or download the IRS2Go app. Freetax Low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers can get free help with their tax return from the nationwide Volunteer Income Tax Assistance (VITA) program. Freetax The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Freetax Most VITA and TCE sites offer free electronic filing. Freetax Some VITA and TCE sites provide IRS-certified volunteers who can help prepare your tax return. Freetax Through the TCE program, AARP offers the Tax-Aide counseling program; call 1-888-227-7669 to find the nearest Tax-Aide location. Freetax Call the automated Where's My Refund? information hotline to check the status of your 2013 refund 24 hours a day, 7 days a week at 1-800-829-1954. Freetax If you e-file, you can start checking on the status of your return within 24 hours after the IRS receives your tax return or 4 weeks after you've mailed a paper return. Freetax The IRS issues more than 9 out of 10 refunds in less than 21 days. Freetax Where's My Refund? will give you a personalized refund date as soon as the IRS processes your tax return and approves your refund. Freetax Before you call this automated hotline, have your 2013 tax return handy so you can enter your social security number, your filing status, and the exact whole dollar amount of your refund. Freetax The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. Freetax Note, the above information is for our automated hotline. Freetax Our live phone and walk-in assistors can research the status of your refund only if it's been 21 days or more since you filed electronically or more than 6 weeks since you mailed your paper return. Freetax Call the Amended Return Hotline, 1-866-464-2050, to check the status of your amended return. Freetax You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. Freetax It can take up to 3 weeks from the date you mailed it to show up in our system. Freetax Call 1-800-TAX-FORM (1-800-829-3676) to order current-year forms, instructions, publications, and prior-year forms and instructions (limited to 5 years). Freetax You should receive your order within 10 business days. Freetax Call TeleTax, 1-800-829-4477, to listen to pre-recorded messages covering general and business tax information. Freetax If, between January and April 15, you still have questions about the Form 1040, 1040A, or 1040EZ (like filing requirements, dependents, credits, Schedule D, pensions and IRAs or self-employment taxes), call 1-800-829-1040. Freetax Call using TTY/TDD equipment, 1-800-829-4059 to ask tax questions or order forms and publications. Freetax The TTY/TDD telephone number is for people who are deaf, hard of hearing, or have a speech disability. Freetax These individuals can also contact the IRS through relay services such as the Federal Relay Service. Freetax Walk-in. Freetax   You can find a selection of forms, publications and services — in-person. Freetax Products. Freetax You can walk in to some post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Freetax Some IRS offices, libraries, and city and county government offices have a collection of products available to photocopy from reproducible proofs. Freetax Services. Freetax You can walk in to your local TAC for face-to-face tax help. Freetax An employee can answer questions about your tax account or help you set up a payment plan. Freetax Before visiting, use the Office Locator tool on IRS. Freetax gov, or choose the Contact Us option on the IRS2Go app and search Local Offices for days and hours of operation, and services provided. Freetax   Please contact the office for times when assistance will be available. Freetax Mail. Freetax   You can send your order for forms, instructions, and publications to the address below. Freetax You should receive a response within 10 business days after your request is received. Freetax Internal Revenue Service 1201 N. Freetax Mitsubishi Motorway Bloomington, IL 61705-6613   Taxpayer Advocate Service. Freetax   The Taxpayer Advocate Service Is here to help you. Freetax The Taxpayer Advocate Service (TAS) is your voice at the IRS. Freetax Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights. Freetax   What can TAS do for you? We can offer you free help with IRS problems that you can't resolve on your own. Freetax We know this process can be confusing, but the worst thing you can do is nothing at all! TAS can help if you can't resolve your tax problem and: Your problem is causing financial difficulties for you, your family, or your business. Freetax You face (or your business is facing) an immediate threat of adverse action. Freetax You've tried repeatedly to contact the IRS but no one has responded, or the IRS hasn't responded by the date promised. Freetax   If you qualify for our help, you'll be assigned to one advocate who'll be with you at every turn and will do everything possible to resolve your problem. Freetax Here's why we can help: TAS is an independent organization within the IRS. Freetax Our advocates know how to work with the IRS. Freetax Our services are free and tailored to meet your needs. Freetax We have offices in every state, the District of Columbia, and Puerto Rico. Freetax   How can you reach us? If you think TAS can help you, call your local advocate, whose number is in your local directory and at Taxpayer Advocate, or call us toll-free at 1-877-777-4778. Freetax  TAS also works to resolve large-scale, systemic problems that affect many taxpayers. Freetax If you know of one of these broad issues, please report it to us through our Systemic Advocacy Management System. Freetax Low Income Taxpayer Clinics Low Income Taxpayer Clinics (LITCs) serve individuals whose income is below a certain level and need to resolve tax problems such as audits, appeals and tax collection disputes. Freetax Some clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Freetax Visit Taxpayer Advocate or see IRS Publication 4134, Low Income Taxpayer Clinic List. Freetax Prev  Up  Next   Home   More Online Publications