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H&r Block Advantage

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H&r Block Advantage

H&r block advantage 9. H&r block advantage   Dispositions of Property Used in Farming Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. H&r block advantage Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sale Other Dispositions Other GainsExceptions. H&r block advantage Amount to report as ordinary income. H&r block advantage Applicable percentage. H&r block advantage Amount to report as ordinary income. H&r block advantage Applicable percentage. H&r block advantage Introduction When you dispose of property used in your farm business, your taxable gain or loss is usually treated as ordinary income (which is taxed at the same rates as wages and interest income) or capital gain (which is generally taxed at lower rates) under the rules for section 1231 transactions. H&r block advantage When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. H&r block advantage Any gain remaining after applying the depreciation recapture rules is a section 1231 gain, which may be taxed as a capital gain. H&r block advantage Gains and losses from property used in farming are reported on Form 4797, Sales of Business Property. H&r block advantage Table 9-1 contains examples of items reported on Form 4797 and refers to the part of that form on which they first should be reported. H&r block advantage Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Other gains Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. H&r block advantage Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (explained below). H&r block advantage Their treatment as ordinary or capital gains depends on whether you have a net gain or a net loss from all of your section 1231 transactions in the tax year. H&r block advantage Table 9-1. H&r block advantage Where to First Report Certain Items on Form 4797 Type of property Held 1 year  or less Held more than  1 year 1 Depreciable trade or business property:       a Sold or exchanged at a gain Part II Part III (1245, 1250)   b Sold or exchanged at a loss Part II Part I 2 Farmland held less than 10 years for which soil, water, or land clearing expenses were deducted:       a Sold at a gain Part II Part III (1252)   b Sold at a loss Part II Part I 3 All other farmland Part II Part I 4 Disposition of cost-sharing payment property described in section 126 Part II Part III (1255) 5 Cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 24 mos. H&r block advantage Held 24 mos. H&r block advantage  or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised cattle and horses sold at a gain Part II Part I 6 Livestock other than cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 12 mos. H&r block advantage Held 12 mos. H&r block advantage   or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised livestock sold at a gain Part II Part I If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). H&r block advantage Do not take that gain into account as section 1231 gain. H&r block advantage Section 1231 transactions. H&r block advantage   Gain or loss on the following transactions is subject to section 1231 treatment. H&r block advantage Sale or exchange of cattle and horses. H&r block advantage The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 24 months or longer. H&r block advantage Sale or exchange of other livestock. H&r block advantage This livestock must be held for draft, breeding, dairy, or sporting purposes and held for 12 months or longer. H&r block advantage Other livestock includes hogs, mules, sheep, goats, donkeys, and other fur-bearing animals. H&r block advantage Other livestock does not include poultry. H&r block advantage Sale or exchange of depreciable personal property. H&r block advantage This property must be used in your business and held longer than 1 year. H&r block advantage Generally, property held for the production of rents or royalties is considered to be used in a trade or business. H&r block advantage Examples of depreciable personal property include farm machinery and trucks. H&r block advantage It also includes amortizable section 197 intangibles. H&r block advantage Sale or exchange of real estate. H&r block advantage This property must be used in your business and held longer than 1 year. H&r block advantage Examples are your farm or ranch (including barns and sheds). H&r block advantage Sale or exchange of unharvested crops. H&r block advantage The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person, and the land must have been held longer than 1 year. H&r block advantage You cannot keep any right or option to reacquire the land directly or indirectly (other than a right customarily incident to a mortgage or other security transaction). H&r block advantage Growing crops sold with a leasehold on the land, even if sold to the same person in a single transaction, are not included. H&r block advantage Distributive share of partnership gains and losses. H&r block advantage Your distributive share must be from the sale or exchange of property listed above and held longer than 1 year (or for the required period for certain livestock). H&r block advantage Cutting or disposal of timber. H&r block advantage Special rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange, or you enter into a cutting contract, as described in chapter 8 under Timber . H&r block advantage Condemnation. H&r block advantage The condemned property (defined in chapter 11) must have been held longer than 1 year. H&r block advantage It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. H&r block advantage It cannot be property held for personal use. H&r block advantage Casualty or theft. H&r block advantage The casualty or theft must have affected business property, property held for the production of rents or royalties, or investment property (such as notes and bonds). H&r block advantage You must have held the property longer than 1 year. H&r block advantage However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. H&r block advantage Section 1231 does not apply to personal casualty gains and losses. H&r block advantage See chapter 11 for information on how to treat those gains and losses. H&r block advantage If the property is not held for the required holding period, the transaction is not subject to section 1231 treatment, and any gain or loss is ordinary income reported in Part II of Form 4797. H&r block advantage See Table 9-1. H&r block advantage Property for sale to customers. H&r block advantage   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. H&r block advantage If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. H&r block advantage Treatment as ordinary or capital. H&r block advantage   To determine the treatment of section 1231 gains and losses, combine all of your section 1231 gains and losses for the year. H&r block advantage If you have a net section 1231 loss, it is an ordinary loss. H&r block advantage If you have a net section 1231 gain, it is ordinary income up to your nonrecaptured section 1231 losses from previous years, explained next. H&r block advantage The rest, if any, is long-term capital gain. H&r block advantage Nonrecaptured section 1231 losses. H&r block advantage   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain by treating the gain as ordinary income. H&r block advantage These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. H&r block advantage Example. H&r block advantage In 2013, Ben has a $2,000 net section 1231 gain. H&r block advantage To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. H&r block advantage From 2008 through 2012 he had the following section 1231 gains and losses. H&r block advantage Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800   Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. H&r block advantage 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 His remaining net section 1231 loss from 2010 is completely recaptured in 2013. H&r block advantage Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if it is otherwise nontaxable) as ordinary income. H&r block advantage To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. H&r block advantage For more information, see chapter 3 of Publication 544. H&r block advantage Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable. H&r block advantage Any recognized gain that is more than the part that is ordinary income is a section 1231 gain. H&r block advantage See Treatment as ordinary or capital under Section 1231 Gains and Losses , earlier. H&r block advantage Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. H&r block advantage Personal property (either tangible or intangible). H&r block advantage Other tangible property (except buildings and their structural components) used as any of the following. H&r block advantage See Buildings and structural components below. H&r block advantage An integral part of manufacturing, production, or extraction, or of furnishing certain services. H&r block advantage A research facility in any of the activities in (a). H&r block advantage A facility in any of the activities in (a) above, for the bulk storage of fungible commodities (discussed later). H&r block advantage That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. H&r block advantage Amortization of certified pollution control facilities. H&r block advantage The section 179 expense deduction. H&r block advantage Deduction for clean-fuel vehicles and certain refueling property. H&r block advantage Expenditures to remove architectural and transportation barriers to the handicapped and elderly. H&r block advantage Certain reforestation expenditures (as described under Reforestation Costs in chapter 7. H&r block advantage Single purpose agricultural (livestock) or horticultural structures. H&r block advantage Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. H&r block advantage Buildings and structural components. H&r block advantage   Section 1245 property does not include buildings and structural components. H&r block advantage The term building includes a house, barn, warehouse, or garage. H&r block advantage The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. H&r block advantage   Do not treat a structure that is essentially machinery or equipment as a building or structural component. H&r block advantage Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. H&r block advantage   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. H&r block advantage Structures such as oil and gas storage tanks, grain storage bins, and silos are not treated as buildings, but as section 1245 property. H&r block advantage Facility for bulk storage of fungible commodities. H&r block advantage   This is a facility used mainly for the bulk storage of fungible commodities. H&r block advantage Bulk storage means storage of a commodity in a large mass before it is used. H&r block advantage For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. H&r block advantage To be fungible, a commodity must be such that one part may be used in place of another. H&r block advantage Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. H&r block advantage The depreciation (which includes any section 179 deduction claimed) and amortization allowed or allowable on the property. H&r block advantage The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). H&r block advantage For any other disposition of section 1245 property, ordinary income is the lesser of (1) above or the amount by which its fair market value (FMV) is more than its adjusted basis. H&r block advantage For details, see chapter 3 of Publication 544. H&r block advantage Use Part III of Form 4797 to figure the ordinary income part of the gain. H&r block advantage Depreciation claimed on other property or claimed by other taxpayers. H&r block advantage   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. H&r block advantage Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. H&r block advantage For details on exchanges of property that are not taxable, see Like-Kind Exchanges in chapter 8. H&r block advantage Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift and part of the transfer is a sale or exchange). H&r block advantage Example. H&r block advantage Jeff Free paid $120,000 for a tractor in 2012. H&r block advantage On February 23, 2013, he traded it for a chopper and paid an additional $30,000. H&r block advantage To figure his depreciation deduction on the chopper for the current year, Jeff continues to use the basis of the tractor as he would have before the trade. H&r block advantage Jeff can also depreciate the additional $30,000 for the chopper. H&r block advantage Depreciation and amortization. H&r block advantage   Depreciation and amortization deductions that must be recaptured as ordinary income include (but are not limited to) the following items. H&r block advantage See Depreciation Recapture in chapter 3 of Publication 544 for more details. H&r block advantage Ordinary depreciation deductions. H&r block advantage Section 179 deduction (see chapter 7). H&r block advantage Any special depreciation allowance. H&r block advantage Amortization deductions for all the following costs. H&r block advantage Acquiring a lease. H&r block advantage Lessee improvements. H&r block advantage Pollution control facilities. H&r block advantage Reforestation expenses. H&r block advantage Section 197 intangibles. H&r block advantage Qualified disaster expenses. H&r block advantage Franchises, trademarks, and trade names acquired before August 11, 1993. H&r block advantage Example. H&r block advantage You file your returns on a calendar year basis. H&r block advantage In February 2011, you bought and placed in service for 100% use in your farming business a light-duty truck (5-year property) that cost $10,000. H&r block advantage You used the half-year convention and your MACRS deductions for the truck were $1,500 in 2011 and $2,550 in 2012. H&r block advantage You did not claim the section 179 expense deduction for the truck. H&r block advantage You sold it in May 2013 for $7,000. H&r block advantage The MACRS deduction in 2013, the year of sale, is $893 (½ of $1,785). H&r block advantage Figure the gain treated as ordinary income as follows. H&r block advantage 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $1,500 + $2,550 + $893) 4,943   4) Adjusted basis (subtract line 3 from line 2) $5,057 5) Gain realized (subtract line 4 from line 1) 1,943 6) Gain treated as ordinary income (lesser of line 3 or line 5) $1,943 Depreciation allowed or allowable. H&r block advantage   You generally use the greater of the depreciation allowed or allowable when figuring the part of gain to report as ordinary income. H&r block advantage If, in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. H&r block advantage If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. H&r block advantage This treatment applies only when figuring what part of the gain is treated as ordinary income under the rules for section 1245 depreciation recapture. H&r block advantage Disposition of plants and animals. H&r block advantage   If you elect not to use the uniform capitalization rules (see chapter 6), you must treat any plant you produce as section 1245 property. H&r block advantage If you have a gain on the property's disposition, you must recapture the pre-productive expenses you would have capitalized if you had not made the election by treating the gain, up to the amount of these expenses, as ordinary income. H&r block advantage For section 1231 transactions, show these expenses as depreciation on Form 4797, Part III, line 22. H&r block advantage For plant sales that are reported on Schedule F (1040), Profit or Loss From Farming, this recapture rule does not change the reporting of income because the gain is already ordinary income. H&r block advantage You can use the farm-price method or the unit-livestock-price method discussed in  chapter 2 to figure these expenses. H&r block advantage Example. H&r block advantage Janet Maple sold her apple orchard in 2013 for $80,000. H&r block advantage Her adjusted basis at the time of sale was $60,000. H&r block advantage She bought the orchard in 2006, but the trees did not produce a crop until 2009. H&r block advantage Her pre-productive expenses were $6,000. H&r block advantage She elected not to use the uniform capitalization rules. H&r block advantage Janet must treat $6,000 of the gain as ordinary income. H&r block advantage Section 1250 Property Section 1250 property includes all real property subject to an allowance for depreciation that is not and never has been section 1245 property. H&r block advantage It includes buildings and structural components that are not section 1245 property (discussed earlier). H&r block advantage It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. H&r block advantage A fee simple interest in land is not section 1250 property because, like land, it is not depreciable. H&r block advantage Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable. H&r block advantage To determine the additional depreciation on section 1250 property, see Depreciation Recapture in chapter 3 of Publication 544. H&r block advantage You will not have additional depreciation if any of the following apply to the property disposed of. H&r block advantage You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method and you have held the property longer than 1 year. H&r block advantage You chose the alternate ACRS (straight line) method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. H&r block advantage The property was nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made) and you held it longer than 1 year. H&r block advantage These properties are depreciated using the straight line method. H&r block advantage Installment Sale If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. H&r block advantage This applies even if no payments are received in that year. H&r block advantage If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. H&r block advantage For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. H&r block advantage If you dispose of more than one asset in a single transaction, you must separately figure the gain on each asset so that it may be properly reported. H&r block advantage To do this, allocate the selling price and the payments you receive in the year of sale to each asset. H&r block advantage Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. H&r block advantage For more information on installment sales, see chapter 10. H&r block advantage Other Dispositions Chapter 3 of Publication 544 discusses the tax treatment of the following transfers of depreciable property. H&r block advantage By gift. H&r block advantage At death. H&r block advantage In like-kind exchanges. H&r block advantage In involuntary conversions. H&r block advantage Publication 544 also explains how to handle a single transaction involving multiple properties. H&r block advantage Other Gains This section discusses gain on the disposition of farmland for which you were allowed either of the following. H&r block advantage Deductions for soil and water conservation expenditures (section 1252 property). H&r block advantage Exclusions from income for certain cost sharing payments (section 1255 property). H&r block advantage Section 1252 property. H&r block advantage   If you disposed of farmland you held more than 1 year and less than 10 years at a gain and you were allowed deductions for soil and water conservation expenses for the land, as discussed in chapter 5, you must treat part of the gain as ordinary income and treat the balance as section 1231 gain. H&r block advantage Exceptions. H&r block advantage   Do not treat gain on the following transactions as gain on section 1252 property. H&r block advantage Disposition of farmland by gift. H&r block advantage Transfer of farm property at death (except for income in respect of a decedent). H&r block advantage For more information, see Regulations section 1. H&r block advantage 1252-2. H&r block advantage Amount to report as ordinary income. H&r block advantage   You report as ordinary income the lesser of the following amounts. H&r block advantage Your gain (determined by subtracting the adjusted basis from the amount realized from a sale, exchange, or involuntary conversion, or the FMV for all other dispositions). H&r block advantage The total deductions allowed for soil and water conservation expenses multiplied by the applicable percentage, discussed next. H&r block advantage Applicable percentage. H&r block advantage   The applicable percentage is based on the length of time you held the land. H&r block advantage If you dispose of your farmland within 5 years after the date you acquired it, the percentage is 100%. H&r block advantage If you dispose of the land within the 6th through 9th year after you acquired it, the applicable percentage is reduced by 20% a year for each year or part of a year you hold the land after the 5th year. H&r block advantage If you dispose of the land 10 or more years after you acquired it, the percentage is 0%, and the entire gain is a section 1231 gain. H&r block advantage Example. H&r block advantage You acquired farmland on January 19, 2005. H&r block advantage On October 3, 2013, you sold the land at a $30,000 gain. H&r block advantage Between January 1 and October 3, 2013, you incur soil and water conservation expenditures of $15,000 for the land that are fully deductible in 2013. H&r block advantage The applicable percentage is 40% since you sold the land within the 8th year after you acquired it. H&r block advantage You treat $6,000 (40% of $15,000) of the $30,000 gain as ordinary income and the $24,000 balance as a section 1231 gain. H&r block advantage Section 1255 property. H&r block advantage   If you receive certain cost-sharing payments on property and you exclude those payments from income (as discussed in chapter 3), you may have to treat part of any gain as ordinary income and treat the balance as a section 1231 gain. H&r block advantage If you chose not to exclude these payments, you will not have to recognize ordinary income under this provision. H&r block advantage Amount to report as ordinary income. H&r block advantage   You report as ordinary income the lesser of the following amounts. H&r block advantage The applicable percentage of the total excluded cost-sharing payments. H&r block advantage The gain on the disposition of the property. H&r block advantage You do not report ordinary income under this rule to the extent the gain is recognized as ordinary income under sections 1231 through 1254, 1256, and 1257. H&r block advantage However, if applicable, gain reported under this rule must be reported regardless of any contrary provisions (including nonrecognition provisions) under any other section. H&r block advantage Applicable percentage. H&r block advantage   The applicable percentage of the excluded cost-sharing payments to be reported as ordinary income is based on the length of time you hold the property after receiving the payments. H&r block advantage If the property is held less than 10 years after you receive the payments, the percentage is 100%. H&r block advantage After 10 years, the percentage is reduced by 10% a year, or part of a year, until the rate is 0%. H&r block advantage Form 4797, Part III. H&r block advantage   Use Form 4797, Part III, to figure the ordinary income part of a gain from the sale, exchange, or involuntary conversion of section 1252 property and section 1255 property. H&r block advantage Prev  Up  Next   Home   More Online Publications
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The H&r Block Advantage

H&r block advantage 4. H&r block advantage   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. H&r block advantage S. H&r block advantage 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. H&r block advantage Useful Items - You may want to see: Publication 519 U. H&r block advantage S. H&r block advantage Tax Guide for Aliens 570 Tax Guide for Individuals With Income from U. H&r block advantage S. H&r block advantage Possessions 596 Earned Income Credit (EIC) Form (and Instructions) 1040X Amended U. H&r block advantage S. H&r block advantage 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. H&r block advantage 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. H&r block advantage If you are a U. H&r block advantage S. H&r block advantage citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. H&r block advantage However, you may qualify to exclude from income up to $97,600 of your foreign earnings. H&r block advantage In addition, you can exclude or deduct certain foreign housing amounts. H&r block advantage See Foreign Earned Income Exclusion and Foreign Housing Exclusion and Deduction, later. H&r block advantage You also may be entitled to exclude from income the value of meals and lodging provided to you by your employer. H&r block advantage See Exclusion of Meals and Lodging, later. H&r block advantage 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. H&r block advantage Your tax home must be in a foreign country. H&r block advantage You must have foreign earned income. H&r block advantage You must be one of the following. H&r block advantage A U. H&r block advantage S. H&r block advantage citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. H&r block advantage A U. H&r block advantage S. H&r block advantage 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. H&r block advantage A U. H&r block advantage S. H&r block advantage citizen or a U. H&r block advantage S. H&r block advantage 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. H&r block advantage See Publication 519 to find out if you are a U. H&r block advantage S. H&r block advantage resident alien for tax purposes and whether you keep that alien status when you temporarily work abroad. H&r block advantage If you are a nonresident alien married to a U. H&r block advantage S. H&r block advantage 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. H&r block advantage For information on making the choice, see the discussion in chapter 1 under Nonresident Alien Spouse Treated as a Resident . H&r block advantage Waiver of minimum time requirements. H&r block advantage   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. H&r block advantage This is fully explained under Waiver of Time Requirements , later. H&r block advantage   See Figure 4-A and information in this chapter to determine if you are eligible to claim either exclusion or the deduction. H&r block advantage 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. H&r block advantage Bona fide residence and physical presence are explained later. H&r block advantage 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. H&r block advantage Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. H&r block advantage Having a “tax home” in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes. H&r block advantage 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. H&r block advantage 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. H&r block advantage 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. H&r block advantage However, your abode is not necessarily in the United States while you are temporarily in the United States. H&r block advantage 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. H&r block advantage “Abode” has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. H&r block advantage It does not mean your principal place of business. H&r block advantage “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home. H&r block advantage ” The location of your abode often will depend on where you maintain your economic, family, and personal ties. H&r block advantage Example 1. H&r block advantage 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. H&r block advantage You return to your family residence in the United States during your off periods. H&r block advantage You are considered to have an abode in the United States and do not satisfy the tax home test in the foreign country. H&r block advantage You cannot claim either of the exclusions or the housing deduction. H&r block advantage Example 2. H&r block advantage For several years, you were a marketing executive with a producer of machine tools in Toledo, Ohio. H&r block advantage 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. H&r block advantage Before you left, you distributed business cards showing your business and home addresses in London. H&r block advantage You kept ownership of your home in Toledo but rented it to another family. H&r block advantage You placed your car in storage. H&r block advantage In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London. H&r block advantage Shortly after moving, you leased a car and you and your spouse got British driving licenses. H&r block advantage Your entire family got library cards for the local public library. H&r block advantage You and your spouse opened bank accounts with a London bank and secured consumer credit. H&r block advantage 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. H&r block advantage Your abode is in London for the time you live there. H&r block advantage You satisfy the tax home test in the foreign country. H&r block advantage Please click here for the text description of the image. H&r block advantage 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. H&r block advantage 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. H&r block advantage 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. H&r block advantage 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. H&r block advantage 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. H&r block advantage If you expect it to last for more than 1 year, it is indefinite. H&r block advantage 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. H&r block advantage Once your expectation changes, it is indefinite. H&r block advantage 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. H&r block advantage A foreign country includes any territory under the sovereignty of a government other than that of the United States. H&r block advantage The term “foreign country” includes the country's airspace and territorial waters, but not international waters and the airspace above them. H&r block advantage 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. H&r block advantage The term “foreign country” does not include Antarctica or U. H&r block advantage S. H&r block advantage possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U. H&r block advantage S. H&r block advantage Virgin Islands, and Johnston Island. H&r block advantage 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. H&r block advantage American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands Residence or presence in a U. H&r block advantage S. H&r block advantage possession does not qualify you for the foreign earned income exclusion. H&r block advantage You may, however, qualify for an exclusion of your possession income on your U. H&r block advantage S. H&r block advantage return. H&r block advantage American Samoa. H&r block advantage   There is a possession exclusion available to individuals who are bona fide residents of American Samoa for the entire tax year. H&r block advantage Gross income from sources within American Samoa may be eligible for this exclusion. H&r block advantage Income that is effectively connected with the conduct of a trade or business within American Samoa also may be eligible for this exclusion. H&r block advantage Use Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, to figure the exclusion. H&r block advantage Guam and the Commonwealth of the Northern Mariana Islands. H&r block advantage   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. H&r block advantage   For more information, see Publication 570. H&r block advantage Puerto Rico and U. H&r block advantage S. H&r block advantage Virgin Islands Residents of Puerto Rico and the U. H&r block advantage S. H&r block advantage Virgin Islands cannot claim the foreign earned income exclusion or the foreign housing exclusion. H&r block advantage Puerto Rico. H&r block advantage   Generally, if you are a U. H&r block advantage S. H&r block advantage citizen who is a bona fide resident of Puerto Rico for the entire tax year, you are not subject to U. H&r block advantage S. H&r block advantage tax on income from Puerto Rican sources. H&r block advantage This does not include amounts paid for services performed as an employee of the United States. H&r block advantage However, you are subject to U. H&r block advantage S. H&r block advantage tax on your income from sources outside Puerto Rico. H&r block advantage In figuring your U. H&r block advantage S. H&r block advantage tax, you cannot deduct expenses allocable to income not subject to tax. H&r block advantage 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. H&r block advantage You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either: A U. H&r block advantage S. H&r block advantage citizen, or A U. H&r block advantage S. H&r block advantage resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect. H&r block advantage You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year. H&r block advantage 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. H&r block advantage 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. H&r block advantage Bona fide residence. H&r block advantage   To meet the bona fide residence test, you must have established a bona fide residence in a foreign country. H&r block advantage   Your bona fide residence is not necessarily the same as your domicile. H&r block advantage Your domicile is your permanent home, the place to which you always return or intend to return. H&r block advantage Example. H&r block advantage You could have your domicile in Cleveland, Ohio, and a bona fide residence in Edinburgh, Scotland, if you intend to return eventually to Cleveland. H&r block advantage The fact that you go to Scotland does not automatically make Scotland your bona fide residence. H&r block advantage 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. H&r block advantage 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. H&r block advantage You are clearly not a resident of Scotland in the first instance. H&r block advantage However, in the second, you are a resident because your stay in Scotland appears to be permanent. H&r block advantage 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. H&r block advantage Determination. H&r block advantage   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. H&r block advantage   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. H&r block advantage 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. H&r block advantage IRS cannot make this determination until you file Form 2555. H&r block advantage Statement to foreign authorities. H&r block advantage   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. H&r block advantage Special agreements and treaties. H&r block advantage   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. H&r block advantage 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. H&r block advantage Example 1. H&r block advantage You are a U. H&r block advantage S. H&r block advantage citizen employed in the United Kingdom by a U. H&r block advantage S. H&r block advantage employer under contract with the U. H&r block advantage S. H&r block advantage Armed Forces. H&r block advantage You are not subject to the North Atlantic Treaty Status of Forces Agreement. H&r block advantage You may be a bona fide resident of the United Kingdom. H&r block advantage Example 2. H&r block advantage You are a U. H&r block advantage S. H&r block advantage 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. H&r block advantage You are not a bona fide resident of the United Kingdom. H&r block advantage Example 3. H&r block advantage You are a U. H&r block advantage S. H&r block advantage citizen employed in Japan by a U. H&r block advantage S. H&r block advantage employer under contract with the U. H&r block advantage S. H&r block advantage Armed Forces. H&r block advantage You are subject to the agreement of the Treaty of Mutual Cooperation and Security between the United States and Japan. H&r block advantage Being subject to the agreement does not make you a bona fide resident of Japan. H&r block advantage Example 4. H&r block advantage You are a U. H&r block advantage S. H&r block advantage citizen employed as an “official” by the United Nations in Switzerland. H&r block advantage You are exempt from Swiss taxation on the salary or wages paid to you by the United Nations. H&r block advantage This does not prevent you from being a bona fide resident of Switzerland. H&r block advantage Effect of voting by absentee ballot. H&r block advantage   If you are a U. H&r block advantage S. H&r block advantage 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. H&r block advantage   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. H&r block advantage Uninterrupted period including entire tax year. H&r block advantage   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. H&r block advantage An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis. H&r block advantage   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. H&r block advantage 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. H&r block advantage Example 1. H&r block advantage You arrived with your family in Lisbon, Portugal, on November 1, 2011. H&r block advantage Your assignment is indefinite, and you intend to live there with your family until your company sends you to a new post. H&r block advantage You immediately established residence there. H&r block advantage You spent April of 2012 at a business conference in the United States. H&r block advantage Your family stayed in Lisbon. H&r block advantage Immediately following the conference, you returned to Lisbon and continued living there. H&r block advantage 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. H&r block advantage Example 2. H&r block advantage Assume the same facts as in Example 1, except that you transferred back to the United States on December 13, 2012. H&r block advantage 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. H&r block advantage You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test (discussed later). H&r block advantage Bona fide resident for part of a year. H&r block advantage   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. H&r block advantage Your period of bona fide residence can include an entire tax year plus parts of 2 other tax years. H&r block advantage Example. H&r block advantage You were a bona fide resident of Singapore from March 1, 2011, through September 14, 2013. H&r block advantage On September 15, 2013, you returned to the United States. H&r block advantage 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. H&r block advantage Reassignment. H&r block advantage   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. H&r block advantage Example 1. H&r block advantage You were a resident of Pakistan from October 1, 2012, through November 30, 2013. H&r block advantage On December 1, 2013, you and your family returned to the United States to wait for an assignment to another foreign country. H&r block advantage Your household goods also were returned to the United States. H&r block advantage 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. H&r block advantage 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. H&r block advantage You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test, discussed later. H&r block advantage Example 2. H&r block advantage 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. H&r block advantage On December 1, 2013, you and your family returned to the United States for a month's vacation. H&r block advantage On January 2, 2014, you arrived in Turkey for your new assignment. H&r block advantage Because you did not interrupt your bona fide residence abroad, you meet the bona fide residence test. H&r block advantage 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. H&r block advantage The 330 days do not have to be consecutive. H&r block advantage Any U. H&r block advantage S. H&r block advantage citizen or resident alien can use the physical presence test to qualify for the exclusions and the deduction. H&r block advantage The physical presence test is based only on how long you stay in a foreign country or countries. H&r block advantage 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. H&r block advantage 330 full days. H&r block advantage   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. H&r block advantage You can count days you spent abroad for any reason. H&r block advantage You do not have to be in a foreign country only for employment purposes. H&r block advantage You can be on vacation. H&r block advantage   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. H&r block advantage Exception. H&r block advantage   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. H&r block advantage See Waiver of Time Requirements, later. H&r block advantage Full day. H&r block advantage   A full day is a period of 24 consecutive hours, beginning at midnight. H&r block advantage Travel. H&r block advantage    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. H&r block advantage Example. H&r block advantage You leave the United States for France by air on June 10. H&r block advantage You arrive in France at 9:00 a. H&r block advantage m. H&r block advantage on June 11. H&r block advantage Your first full day of physical presence in France is June 12. H&r block advantage Passing over foreign country. H&r block advantage   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. H&r block advantage Example. H&r block advantage You leave the United States by air at 9:30 a. H&r block advantage m. H&r block advantage on June 10 to travel to Kenya. H&r block advantage You pass over western Africa at 11:00 p. H&r block advantage m. H&r block advantage on June 10 and arrive in Kenya at 12:30 a. H&r block advantage m. H&r block advantage on June 11. H&r block advantage Your first full day in a foreign country is June 11. H&r block advantage Change of location. H&r block advantage   You can move about from one place to another in a foreign country or to another foreign country without losing full days. H&r block advantage 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. H&r block advantage Example 1. H&r block advantage You leave Ireland by air at 11:00 p. H&r block advantage m. H&r block advantage on July 6 and arrive in Sweden at 5:00 a. H&r block advantage m. H&r block advantage on July 7. H&r block advantage Your trip takes less than 24 hours and you lose no full days. H&r block advantage Example 2. H&r block advantage You leave Norway by ship at 10:00 p. H&r block advantage m. H&r block advantage on July 6 and arrive in Portugal at 6:00 a. H&r block advantage m. H&r block advantage on July 8. H&r block advantage 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. H&r block advantage If you remain in Portugal, your next full day in a foreign country is July 9. H&r block advantage In United States while in transit. H&r block advantage   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. H&r block advantage You are treated as traveling over areas not within any foreign country. H&r block advantage    Please click here for the text description of the image. H&r block advantage Figure 4-B How to figure the 12-month period. H&r block advantage   There are four rules you should know when figuring the 12-month period. H&r block advantage Your 12-month period can begin with any day of the month. H&r block advantage It ends the day before the same calendar day, 12 months later. H&r block advantage Your 12-month period must be made up of consecutive months. H&r block advantage Any 12-month period can be used if the 330 days in a foreign country fall within that period. H&r block advantage 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. H&r block advantage You can choose the 12-month period that gives you the greatest exclusion. H&r block advantage In determining whether the 12-month period falls within a longer stay in the foreign country, 12-month periods can overlap one another. H&r block advantage Example 1. H&r block advantage You are a construction worker who works on and off in a foreign country over a 20-month period. H&r block advantage 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. H&r block advantage Example 2. H&r block advantage 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. H&r block advantage 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. H&r block advantage By overlapping the 12-month periods in this way, you meet the physical presence test for the whole 20-month period. H&r block advantage See Figure 4-B, on the previous page. H&r block advantage Waiver of Time Requirements Both the bona fide residence test and the physical presence test contain minimum time requirements. H&r block advantage 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. H&r block advantage You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. H&r block advantage 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. H&r block advantage 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. H&r block advantage 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. H&r block advantage 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. H&r block advantage U. H&r block advantage S. H&r block advantage Travel Restrictions If you are present in a foreign country in violation of U. H&r block advantage S. H&r block advantage 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. H&r block advantage 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. H&r block advantage 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. H&r block advantage For 2013, the only country to which travel restrictions applied was Cuba. H&r block advantage The restrictions applied for the entire year. H&r block advantage However, individuals working at the U. H&r block advantage S. H&r block advantage Naval Base at Guantanamo Bay in Cuba are not in violation of U. H&r block advantage S. H&r block advantage law. H&r block advantage Personal service income earned by individuals at the base is eligible for the foreign earned income exclusion provided the other requirements are met. H&r block advantage 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. H&r block advantage Foreign earned income generally is income you receive for services you perform during a period in which you meet both of the following requirements. H&r block advantage Your tax home is in a foreign country. H&r block advantage You meet either the bona fide residence test or the physical presence test. H&r block advantage To determine whether your tax home is in a foreign country, see Tax Home in Foreign Country, earlier. H&r block advantage 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. H&r block advantage Foreign earned income does not include the following amounts. H&r block advantage 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. H&r block advantage Pension or annuity payments you receive, including social security benefits (see Pensions and annuities, later). H&r block advantage Pay you receive as an employee of the U. H&r block advantage S. H&r block advantage Government. H&r block advantage (See U. H&r block advantage S. H&r block advantage Government Employees, later. H&r block advantage ) Amounts you include in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract. H&r block advantage 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. H&r block advantage Payments you receive after the end of the tax year following the tax year in which you performed the services that earned the income. H&r block advantage Earned income. H&r block advantage   This is pay for personal services performed, such as wages, salaries, or professional fees. H&r block advantage The list that follows classifies many types of income into three categories. H&r block advantage The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both. H&r block advantage For more information on earned and unearned income, see Earned and Unearned Income, later. H&r block advantage 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. H&r block advantage Noncash income. H&r block advantage   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. H&r block advantage Allowances or reimbursements. H&r block advantage   Earned income includes allowances or reimbursements you receive, such as the following amounts. H&r block advantage    Cost-of-living allowances. H&r block advantage Overseas differential. H&r block advantage Family allowance. H&r block advantage Reimbursement for education or education allowance. H&r block advantage Home leave allowance. H&r block advantage Quarters allowance. H&r block advantage Reimbursement for moving or moving allowance (unless excluded from income as discussed later in Reimbursement of employee expenses under Earned and Unearned Income). H&r block advantage Source of Earned Income The source of your earned income is the place where you perform the services for which you received the income. H&r block advantage Foreign earned income is income you receive for working in a foreign country. H&r block advantage Where or how you are paid has no effect on the source of the income. H&r block advantage 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. H&r block advantage Example. H&r block advantage You are a U. H&r block advantage S. H&r block advantage citizen, a bona fide resident of Canada, and working as a mining engineer. H&r block advantage Your salary is $76,800 per year. H&r block advantage You also receive a $6,000 cost-of-living allowance, and a $6,000 education allowance. H&r block advantage Your employment contract did not indicate that you were entitled to these allowances only while outside the United States. H&r block advantage Your total income is $88,800. H&r block advantage You work a 5-day week, Monday through Friday. H&r block advantage After subtracting your vacation, you have a total of 240 workdays in the year. H&r block advantage You worked in the United States during the year for 6 weeks (30 workdays). H&r block advantage The following shows how to figure the part of your income that is for work done in Canada during the year. H&r block advantage   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. H&r block advantage Earned and Unearned Income Earned income was defined earlier as pay for personal services performed. H&r block advantage Some types of income are not easily identified as earned or unearned income. H&r block advantage Some of these types of income are further explained here. H&r block advantage Income from a sole proprietorship or partnership. H&r block advantage   Income from a business in which capital investment is an important part of producing the income may be unearned income. H&r block advantage 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. H&r block advantage Capital a factor. H&r block advantage   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. H&r block advantage   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. H&r block advantage Because you do not have a net profit, the 30% limit does not apply. H&r block advantage Example 1. H&r block advantage You are a U. H&r block advantage S. H&r block advantage citizen and meet the bona fide residence test. H&r block advantage You invest in a partnership based in Cameroon that is engaged solely in selling merchandise outside the United States. H&r block advantage You perform no services for the partnership. H&r block advantage At the end of the tax year, your share of the net profits is $80,000. H&r block advantage The entire $80,000 is unearned income. H&r block advantage Example 2. H&r block advantage Assume that in Example 1 you spend time operating the business. H&r block advantage Your share of the net profits is $80,000; 30% of your share of the profits is $24,000. H&r block advantage 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. H&r block advantage Capital not a factor. H&r block advantage   If capital is not an income-producing factor and personal services produce the business income, the 30% rule does not apply. H&r block advantage The entire amount of business income is earned income. H&r block advantage Example. H&r block advantage You and Lou Green are management consultants and operate as equal partners in performing services outside the United States. H&r block advantage Because capital is not an income- producing factor, all the income from the partnership is considered earned income. H&r block advantage Income from a corporation. H&r block advantage   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. H&r block advantage Any amount over what is considered a reasonable salary is unearned income. H&r block advantage Example 1. H&r block advantage You are a U. H&r block advantage S. H&r block advantage citizen and an officer and stockholder of a corporation in Honduras. H&r block advantage You perform no work or service of any kind for the corporation. H&r block advantage During the tax year you receive a $10,000 “salary” from the corporation. H&r block advantage The $10,000 clearly is not for personal services and is unearned income. H&r block advantage Example 2. H&r block advantage You are a U. H&r block advantage S. H&r block advantage citizen and work full time as secretary-treasurer of your corporation. H&r block advantage During the tax year you receive $100,000 as salary from the corporation. H&r block advantage If $80,000 is a reasonable allowance as pay for the work you did, then $80,000 is earned income. H&r block advantage Stock options. H&r block advantage   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. H&r block advantage   If your gain on the disposition of stock you got by exercising an option is treated as capital gain, your gain is unearned income. H&r block advantage   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. H&r block advantage 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. H&r block advantage Any part of the earned income that is due to work you did outside the United States is foreign earned income. H&r block advantage   See Publication 525, Taxable and Nontaxable Income, for a discussion of the treatment of stock options. H&r block advantage Pensions and annuities. H&r block advantage    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. H&r block advantage Royalties. H&r block advantage   Royalties from the leasing of oil and mineral lands and patents generally are a form of rent or dividends and are unearned income. H&r block advantage   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. H&r block advantage Rental income. H&r block advantage   Generally, rental income is unearned income. H&r block advantage 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. H&r block advantage Example. H&r block advantage Larry Smith, a U. H&r block advantage S. H&r block advantage citizen living in Australia, owns and operates a rooming house in Sydney. H&r block advantage 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. H&r block advantage 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. H&r block advantage It is all unearned income. H&r block advantage Professional fees. H&r block advantage   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. H&r block advantage Income of an artist. H&r block advantage   Income you receive from the sale of paintings you created is earned income. H&r block advantage Scholarships and fellowships. H&r block advantage   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. H&r block advantage 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. H&r block advantage    Certain scholarship and fellowship income may be exempt under other provisions. H&r block advantage See Publication 970, Tax Benefits for Education, chapter 1. H&r block advantage Use of employer's property or facilities. H&r block advantage   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. H&r block advantage 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. H&r block advantage Example. H&r block advantage You are privately employed and live in Japan all year. H&r block advantage You are paid a salary of $6,000 a month. H&r block advantage You live rent-free in a house provided by your employer that has a fair rental value of $3,000 a month. H&r block advantage The house is not provided for your employer's convenience. H&r block advantage You report on the calendar-year, cash basis. H&r block advantage 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. H&r block advantage Reimbursement of employee expenses. H&r block advantage   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. H&r block advantage   The expenses for which you are reimbursed are not considered allocable (related) to your earned income. H&r block advantage If expenses and reimbursement are equal, there is nothing to allocate to excluded income. H&r block advantage 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. H&r block advantage (See chapter 5. H&r block advantage ) 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. H&r block advantage   These rules do not apply to the following individuals. H&r block advantage Straight-commission salespersons. H&r block advantage 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. H&r block advantage Accountable plan. H&r block advantage   An accountable plan is a reimbursement or allowance arrangement that includes all three of the following rules. H&r block advantage The expenses covered under the plan must have a business connection. H&r block advantage The employee must adequately account to the employer for these expenses within a reasonable period of time. H&r block advantage The employee must return any excess reimbursement or allowance within a reasonable period of time. H&r block advantage Reimbursement of moving expenses. H&r block advantage   Reimbursement of moving expenses may be earned income. H&r block advantage 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. H&r block advantage This section discusses reimbursements that must be included in earned income. H&r block advantage Publication 521, Moving Expenses, discusses additional rules that apply to moving expense deductions and reimbursements. H&r block advantage   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. H&r block advantage   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. H&r block advantage 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. H&r block advantage Move from U. H&r block advantage S. H&r block advantage to foreign country. H&r block advantage   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. H&r block advantage 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. H&r block advantage   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. H&r block advantage To figure the amount earned in the year of the move, multiply the reimbursement by a fraction. H&r block advantage 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. H&r block advantage   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. H&r block advantage The part earned in each year is figured as shown in the following example. H&r block advantage Example. H&r block advantage You are a U. H&r block advantage S. H&r block advantage citizen working in the United States. H&r block advantage You were told in October 2012 that you were being transferred to a foreign country. H&r block advantage 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. H&r block advantage Your employer reimbursed you $2,000 in January 2013 for the part of the moving expense that you were not allowed to deduct. H&r block advantage 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. H&r block advantage You figure the part of the reimbursement for services performed in the foreign country in 2012 by multiplying the total reimbursement by a fraction. H&r block advantage 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. H&r block advantage The remaining part of the reimbursement is for services performed in the foreign country in 2013. H&r block advantage This computation is used only to determine when the reimbursement is considered earned. H&r block advantage You would include the amount of the reimbursement in income in 2013, the year you received it. H&r block advantage Move between foreign countries. H&r block advantage   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. H&r block advantage Move to U. H&r block advantage S. H&r block advantage   If you move to the United States, the moving expense reimbursement that you must include in income is generally considered to be U. H&r block advantage S. H&r block advantage source income. H&r block advantage   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. H&r block advantage 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. H&r block advantage 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. H&r block advantage   See the discussion under Move from U. H&r block advantage S. H&r block advantage to foreign country , earlier, to figure the amount of the includible reimbursement considered earned in the year of the move. H&r block advantage 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. H&r block advantage Example. H&r block advantage You are a U. H&r block advantage S. H&r block advantage citizen employed in a foreign country. H&r block advantage 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. H&r block advantage 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. H&r block advantage 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. H&r block advantage 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. H&r block advantage 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. H&r block advantage The fraction is the number of days of foreign residence during the year (90) divided by the number of days in the year (365). H&r block advantage The remaining part of the includible reimbursement is for services performed in the foreign country in 2012. H&r block advantage You report the amount of the includible reimbursement in 2013, the year you received it. H&r block advantage    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. H&r block advantage Storage expense reimbursements. H&r block advantage   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. H&r block advantage U. H&r block advantage S. H&r block advantage 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. H&r block advantage This includes amounts paid from both appropriated and nonappropriated funds. H&r block advantage 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. H&r block advantage United States Armed Forces exchanges. H&r block advantage Commissioned and noncommissioned officers' messes. H&r block advantage Armed Forces motion picture services. H&r block advantage Kindergartens on foreign Armed Forces installations. H&r block advantage Amounts paid by the United States or its agencies to persons who are not their employees may qualify for exclusion or deduction. H&r block advantage If you are a U. H&r block advantage S. H&r block advantage Government employee paid by a U. H&r block advantage S. H&r block advantage 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. H&r block advantage S. H&r block advantage Government and does not qualify for exclusion or deduction. H&r block advantage If you have questions about whether you are an employee or an independent contractor, get Publication 15-A, Employer's Supplemental Tax Guide. H&r block advantage American Institute in Taiwan. H&r block advantage   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. H&r block advantage If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U. H&r block advantage S. H&r block advantage tax up to the amount that equals tax-exempt allowances received by civilian employees of the U. H&r block advantage S. H&r block advantage Government. H&r block advantage Allowances. H&r block advantage   Cost-of-living and foreign-area allowances paid under certain acts of Congress to U. H&r block advantage S. H&r block advantage 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. H&r block advantage Post differentials are wages that must be included in gross income, regardless of the act of Congress under which they are paid. H&r block advantage More information. H&r block advantage   Publication 516, U. H&r block advantage S. H&r block advantage Government Civilian Employees Stationed Abroad, has more information for U. H&r block advantage S. H&r block advantage Government employees abroad. H&r block advantage 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. H&r block advantage The meals are furnished: On the business premises of your employer, and For the convenience of your employer. H&r block advantage The lodging is furnished: On the business premises of your employer, For the convenience of your employer, and As a condition of your employment. H&r block advantage 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. H&r block advantage Amounts you do not include in income because of these rules are not foreign earned income. H&r block advantage If you receive a Form W-2, excludable amounts should not be included in the total reported in box 1 as wages. H&r block advantage Family. H&r block advantage   Your family, for this purpose, includes only your spouse and your dependents. H&r block advantage Lodging. H&r block advantage   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. H&r block advantage Business premises of employer. H&r block advantage   Generally, the business premises of your employer is wherever you work. H&r block advantage 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. H&r block advantage 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. H&r block advantage Convenience of employer. H&r block advantage   Whether meals or lodging are provided for your employer's convenience must be determined from all the facts and circumstances. H&r block advantage 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. H&r block advantage   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. H&r block advantage Condition of employment. H&r block advantage   Lodging is provided as a condition of employment if you must accept the lodging to properly carry out the duties of your job. H&r block advantage 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. H&r block advantage Foreign camps. H&r block advantage   If the lodging is in a camp located in a foreign country, the camp is considered part of your employer's business premises. H&r block advantage 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. H&r block advantage 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. H&r block advantage Foreign earned income was defined earlier in this chapter. H&r block advantage You also can choose to exclude from your income a foreign housing amount. H&r block advantage This is explained later under Foreign Housing Exclusion. H&r block advantage If you choose to exclude a foreign housing amount, you must figure the foreign housing exclusion before you figure the foreign earned income exclusion. H&r block advantage Your foreign earned income exclusion is limited to your foreign earned income minus your foreign housing exclusion. H&r block advantage 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. H&r block advantage This includes any expenses, losses, and other normally deductible items allocable to the excluded income. H&r block advantage For more information about deductions and credits, see chapter 5 . H&r block advantage Limit on Excludable Amount You may be able to exclude up to $97,600 of your foreign earned income in 2013. H&r block advantage 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). H&r block advantage 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. H&r block advantage You do not both need to meet the same test. H&r block advantage Together, you and your spouse can exclude as much as $195,200. H&r block advantage Paid in year following work. H&r block advantage   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. H&r block advantage If you report your income on a cash basis, you report the income on your return for the year you receive it. H&r block advantage 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. H&r block advantage For an exception to this general rule, see Year-end payroll period, later. H&r block advantage Example. H&r block advantage You were a bona fide resident of Brazil for all of 2012 and 2013. H&r block advantage You report your income on the cash basis. H&r block advantage In 2012, you were paid $84,200 for work you did in Brazil during that year. H&r block advantage You excluded all of the $84,200 from your income in 2012. H&r block advantage In 2013, you were paid $117,300 for your work in Brazil. H&r block advantage $18,800 was for work you did in 2012 and $98,500 was for work you did in 2013. H&r block advantage You can exclude $10,900 of the $18,800 from your income in 2013. H&r block advantage This is the $95,100 maximum exclusion in 2012 minus the $84,200 actually excluded that year. H&r block advantage 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. H&r block advantage You can exclude $97,600 of the $98,500 you were paid for work you did in 2013 from your 2013 income. H&r block advantage 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). H&r block advantage 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). H&r block advantage Year-end payroll period. H&r block advantage   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. H&r block advantage 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. H&r block advantage The period for which the payment is made is a normal payroll period of your employer that regularly applies to you. H&r block advantage The payroll period includes the last day of your tax year (December 31 if you figure your taxes on a calendar-year basis). H&r block advantage The payroll period is not longer than 16 days. H&r block advantage 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. H&r block advantage Example. H&r block advantage You are paid twice a month. H&r block advantage 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. H&r block advantage 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. H&r block advantage Because all of the above conditions are met, the pay you received on January 1, 2013, is considered earned in 2013. H&r block advantage Income earned over more than 1 year. H&r block advantage   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. H&r block advantage For example, a bonus may be based on work you did over several years. H&r block advantage You determine the amount of the bonus that is considered earned in a particular year in two steps. H&r block advantage Divide the bonus by the number of calendar months in the period when you did the work that resulted in the bonus. H&r block advantage Multiply the result of (1) by the number of months you did the work during the year. H&r block advantage This is the amount that is subject to the exclusion limit for that tax year. H&r block advantage Income received more than 1 year after it was earned. H&r block advantage   You cannot exclude income you receive after the end of the year following the year you do the work to earn it. H&r block advantage Example. H&r block advantage   You were a bona fide resident of Sweden for 2011, 2012, and 2013. H&r block advantage You report your income on the cash basis. H&r block advantage 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. H&r block advantage You excluded all the income on your 2011 and 2012 returns. H&r block advantage   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. H&r block advantage 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. H&r block advantage You must include the $10,000 in income. H&r block advantage You can exclude all of the $82,000 received for work you did in 2013. H&r block advantage Community income. H&r block advantage   The maximum exclusion applies separately to the earnings of spouses. H&r block advantage Ignore any community property laws when you figure your limit on the foreign earned income exclusion. H&r block advantage Part-year exclusion. H&r block advantage   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. H&r block advantage 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. H&r block advantage   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. H&r block advantage 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. H&r block advantage Example. H&r block advantage 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. H&r block advantage You can exclude a maximum of 75/365 of $97,600, or $20,055, of your foreign earned income for 2013. H&r block advantage 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. H&r block advantage Physical presence test. H&r block advantage   Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. H&r block advantage 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. H&r block advantage Example. H&r block advantage 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. H&r block advantage You figure the maximum exclusion for 2012 as follows. H&r block advantage Beginning with June 1, 2012, count forward 330 full days. H&r block advantage Do not count the 16 days you spent in the United States. H&r block advantage The 330th day, May 12, 2013, is the last day of a 12-month period. H&r block advantage Count backward 12 months from May 11, 2013, to find the first day of this 12-month period, May 12, 2012. H&r block advantage This 12-month period runs from May 12, 2012, through May 11, 2013. H&r block advantage Count the total days during 2012 that fall within this 12-month period. H&r block advantage This is 234 days (May 12, 2012 – December 31, 2012). H&r block advantage Multiply $95,100 (the maximum exclusion for 2012) by the fraction 234/366 to find your maximum exclusion for 2012 ($60,802). H&r block advantage You figure the maximum exclusion for 2013 in the opposite manner. H&r block advantage Beginning with your last full day, September 30, 2013, count backward 330 full days. H&r block advantage Do not count the 16 days you spent in the United States. H&r block advantage That day, October 20, 2012, is the first day of a 12-month period. H&r block advantage Count forward 12 months from October 20, 2012, to find the last day of this 12-month period, October 19, 2013. H&r block advantage This 12-month period runs from October 20, 2012, through October 19, 2013. H&r block advantage Count the total days during 2013 that fall within this 12-month period. H&r block advantage This is 292 days (January 1, 2013 – October 19, 2013). H&r block advantage Multiply $97,600, the maximum limit, by the fraction 292/365 to find your maximum exclusion for 2013 ($78,080). H&r block advantage Choosing the Exclusion The foreign earned income exclusion is voluntary. H&r block advantage You can choose the exclusion by completing the appropriate parts of Form 2555. H&r block advantage 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. H&r block advantage A return filed by the due date (including any extensions). H&r block advantage A return amending a timely-filed return. H&r block advantage 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. H&r block advantage A return filed within 1 year from the original due date of the return (determined without regard to any extensions). H&r block advantage Filing after the above periods. H&r block advantage   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. H&r block advantage 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. H&r block advantage 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. H&r block advantage 911-7(a)(2)(i)(D). H&r block advantage ” 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. H&r block advantage You must request a private letter ruling under Income Tax Regulation 301. H&r block advantage 9100-3 and Revenue Procedure 2013-1, 2013-1 I. H&r block advantage R. H&r block advantage B. H&r block advantage 1, available at www. H&r block advantage irs. H&r block advantage gov/irb/2013-01_IRB/ar06. H&r block advantage html. H&r block advantage 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. H&r block advantage Foreign tax credit or deduction. H&r block advantage