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Tax debt help 23. Tax debt help   Interest Expense Table of Contents Introduction Useful Items - You may want to see: Home Mortgage InterestAmount Deductible Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement Investment InterestInvestment Property Allocation of Interest Expense Limit on Deduction Items You Cannot DeductPersonal Interest Allocation of Interest How To ReportMore than one borrower. Tax debt help Mortgage proceeds used for business or investment. Tax debt help Introduction This chapter discusses what interest expenses you can deduct. Tax debt help Interest is the amount you pay for the use of borrowed money. Tax debt help The following are types of interest you can deduct as itemized deductions on Schedule A (Form 1040). Tax debt help Home mortgage interest, including certain points and mortgage insurance premiums. Tax debt help Investment interest. Tax debt help This chapter explains these deductions. Tax debt help It also explains where to deduct other types of interest and lists some types of interest you cannot deduct. Tax debt help Use Table 23-1 to find out where to get more information on various types of interest, including investment interest. Tax debt help Useful Items - You may want to see: Publication 936 Home Mortgage Interest Deduction 550 Investment Income and Expenses Home Mortgage Interest Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). Tax debt help The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Tax debt help You can deduct home mortgage interest if all the following conditions are met. Tax debt help You file Form 1040 and itemize deductions on Schedule A (Form 1040). Tax debt help The mortgage is a secured debt on a qualified home in which you have an ownership interest. Tax debt help (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interest of the lender. Tax debt help The term “qualified home” means your main home or second home. Tax debt help For details, see Publication 936. Tax debt help )  Both you and the lender must intend that the loan be repaid. Tax debt help Amount Deductible In most cases, you can deduct all of your home mortgage interest. Tax debt help How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Tax debt help Fully deductible interest. Tax debt help   If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. Tax debt help (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. Tax debt help )   The three categories are as follows: Mortgages you took out on or before October 13, 1987 (called grandfathered debt). Tax debt help Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). Tax debt help Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). Tax debt help The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. Tax debt help   See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt. Tax debt help    You can use Figure 23-A to check whether your home mortgage interest is fully deductible. Tax debt help Figure 23-A. Tax debt help Is My Home Mortgage Interest Fully Deductible? Please click here for the text description of the image. Tax debt help Figure 23-A. Tax debt help Is My Interest Fully Deductible? Limits on deduction. Tax debt help   You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed earlier. Tax debt help If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct. Tax debt help Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. Tax debt help It also describes certain special situations that may affect your deduction. Tax debt help Late payment charge on mortgage payment. Tax debt help   You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. Tax debt help Mortgage prepayment penalty. Tax debt help   If you pay off your home mortgage early, you may have to pay a penalty. Tax debt help You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. Tax debt help Sale of home. Tax debt help   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of sale. Tax debt help Example. Tax debt help John and Peggy Harris sold their home on May 7. Tax debt help Through April 30, they made home mortgage interest payments of $1,220. Tax debt help The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. Tax debt help Their mortgage interest deduction is $1,270 ($1,220 + $50). Tax debt help Prepaid interest. Tax debt help   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. Tax debt help You can deduct in each year only the interest that qualifies as home mortgage interest for that year. Tax debt help However, there is an exception that applies to points, discussed later. Tax debt help Mortgage interest credit. Tax debt help   You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. Tax debt help Figure the credit on Form 8396, Mortgage Interest Credit. Tax debt help If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. Tax debt help   For more information on the credit, see chapter 37. Tax debt help Ministers' and military housing allowance. Tax debt help   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. Tax debt help Hardest Hit Fund and Emergency Homeowners' Loan Programs. Tax debt help   You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. Tax debt help You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. Tax debt help You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. Tax debt help If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums) and box 5 (real property taxes). Tax debt help However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. Tax debt help Mortgage assistance payments under section 235 of the National Housing Act. Tax debt help   If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. Tax debt help You cannot deduct the interest that is paid for you. Tax debt help No other effect on taxes. Tax debt help   Do not include these mortgage assistance payments in your income. Tax debt help Also, do not use these payments to reduce other deductions, such as real estate taxes. Tax debt help Divorced or separated individuals. Tax debt help   If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. Tax debt help See the discussion of Payments for jointly-owned home in chapter 18. Tax debt help Redeemable ground rents. Tax debt help   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. Tax debt help   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. Tax debt help For more information, see Publication 936. Tax debt help Nonredeemable ground rents. Tax debt help   Payments on a nonredeemable ground rent are not mortgage interest. Tax debt help You can deduct them as rent if they are a business expense or if they are for rental property. Tax debt help Reverse mortgages. Tax debt help   A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. Tax debt help With a reverse mortgage, you retain title to your home. Tax debt help Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. Tax debt help Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Tax debt help Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. Tax debt help Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Publication 936. Tax debt help Rental payments. Tax debt help   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. Tax debt help This is true even if the settlement papers call them interest. Tax debt help You cannot deduct these payments as home mortgage interest. Tax debt help Mortgage proceeds invested in tax-exempt securities. Tax debt help   You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. Tax debt help “Grandfathered debt” and “home equity debt” are defined earlier under Amount Deductible. Tax debt help Refunds of interest. Tax debt help   If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. Tax debt help If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. Tax debt help However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. Tax debt help This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. Tax debt help    If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. Tax debt help For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. Tax debt help   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 12. Tax debt help Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Tax debt help Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Tax debt help A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Tax debt help See Points paid by the seller , later. Tax debt help General Rule You generally cannot deduct the full amount of points in the year paid. Tax debt help Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. Tax debt help See Deduction Allowed Ratably , next. Tax debt help For exceptions to the general rule, see Deduction Allowed in Year Paid , later. Tax debt help Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. Tax debt help You use the cash method of accounting. Tax debt help This means you report income in the year you receive it and deduct expenses in the year you pay them. Tax debt help Most individuals use this method. Tax debt help Your loan is secured by a home. Tax debt help (The home does not need to be your main home. Tax debt help ) Your loan period is not more than 30 years. Tax debt help If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. Tax debt help Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. Tax debt help Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. Tax debt help (You can use Figure 23-B as a quick guide to see whether your points are fully deductible in the year paid. Tax debt help ) Your loan is secured by your main home. Tax debt help (Your main home is the one you ordinarily live in most of the time. Tax debt help ) Paying points is an established business practice in the area where the loan was made. Tax debt help The points paid were not more than the points generally charged in that area. Tax debt help You use the cash method of accounting. Tax debt help This means you report income in the year you receive it and deduct expenses in the year you pay them. Tax debt help (If you want more information about this method, see Accounting Methods in chapter 1. Tax debt help ) The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. Tax debt help The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Tax debt help The funds you provided are not required to have been applied to the points. Tax debt help They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Tax debt help You cannot have borrowed these funds from your lender or mortgage broker. Tax debt help You use your loan to buy or build your main home. Tax debt help The points were computed as a percentage of the principal amount of the mortgage. Tax debt help The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. Tax debt help The points may be shown as paid from either your funds or the seller's. Tax debt help Figure 23-B. Tax debt help Are My Points Fully Deductible This Year? Please click here for the text description of the image. Tax debt help Figure 23-B. Tax debt help Are My Points Fully Deductible This Year? Note. Tax debt help If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. Tax debt help Home improvement loan. Tax debt help   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. Tax debt help Second home. Tax debt help You cannot fully deduct in the year paid points you pay on loans secured by your second home. Tax debt help You can deduct these points only over the life of the loan. Tax debt help Refinancing. Tax debt help   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. Tax debt help This is true even if the new mortgage is secured by your main home. Tax debt help   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Tax debt help You can deduct the rest of the points over the life of the loan. Tax debt help Example 1. Tax debt help In 1998, Bill Fields got a mortgage to buy a home. Tax debt help In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. Tax debt help The mortgage is secured by his home. Tax debt help To get the new loan, he had to pay three points ($3,000). Tax debt help Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. Tax debt help Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. Tax debt help The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Tax debt help Bill's first payment on the new loan was due July 1. Tax debt help He made six payments on the loan in 2013 and is a cash basis taxpayer. Tax debt help Bill used the funds from the new mortgage to repay his existing mortgage. Tax debt help Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. Tax debt help He cannot deduct all of the points in 2013. Tax debt help He can deduct two points ($2,000) ratably over the life of the loan. Tax debt help He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. Tax debt help The other point ($1,000) was a fee for services and is not deductible. Tax debt help Example 2. Tax debt help The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. Tax debt help Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. Tax debt help His deduction is $500 ($2,000 × 25%). Tax debt help Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. Tax debt help This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. Tax debt help The total amount Bill deducts in 2013 is $550 ($500 + $50). Tax debt help Special Situations This section describes certain special situations that may affect your deduction of points. Tax debt help Original issue discount. Tax debt help   If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. Tax debt help This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. Tax debt help Amounts charged for services. Tax debt help   Amounts charged by the lender for specific services connected to the loan are not interest. Tax debt help Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Tax debt help You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Tax debt help Points paid by the seller. Tax debt help   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Tax debt help Treatment by seller. Tax debt help   The seller cannot deduct these fees as interest. Tax debt help But they are a selling expense that reduces the amount realized by the seller. Tax debt help See chapter 15 for information on selling your home. Tax debt help Treatment by buyer. Tax debt help    The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. Tax debt help If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. Tax debt help If any of those tests are not met, the buyer deducts the points over the life of the loan. Tax debt help   For information about basis, see chapter 13. Tax debt help Funds provided are less than points. Tax debt help   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. Tax debt help In addition, you can deduct any points paid by the seller. Tax debt help Example 1. Tax debt help When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Tax debt help You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Tax debt help Of the $1,000 charged for points, you can deduct $750 in the year paid. Tax debt help You spread the remaining $250 over the life of the mortgage. Tax debt help Example 2. Tax debt help The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. Tax debt help In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Tax debt help You spread the remaining $250 over the life of the mortgage. Tax debt help You must reduce the basis of your home by the $1,000 paid by the seller. Tax debt help Excess points. Tax debt help   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. Tax debt help You must spread any additional points over the life of the mortgage. Tax debt help Mortgage ending early. Tax debt help   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. Tax debt help However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Tax debt help Instead, deduct the remaining balance over the term of the new loan. Tax debt help    A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Tax debt help Example. Tax debt help Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. Tax debt help He deducts $200 points per year. Tax debt help Through 2012, Dan has deducted $2,200 of the points. Tax debt help Dan prepaid his mortgage in full in 2013. Tax debt help He can deduct the remaining $800 of points in 2013. Tax debt help Limits on deduction. Tax debt help   You cannot fully deduct points paid on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest . Tax debt help See Publication 936 for details. Tax debt help Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. Tax debt help The insurance must be in connection with home acquisition debt and the insurance contract must have been issued after 2006. Tax debt help Qualified mortgage insurance. Tax debt help   Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). Tax debt help   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. Tax debt help If provided by the Rural Housing Service, it is commonly known as a guarantee fee. Tax debt help These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. Tax debt help Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. Tax debt help Special rules for prepaid mortgage insurance. Tax debt help   Generally, if you paid premiums for qualified mortgage insurance that are allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. Tax debt help You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. Tax debt help No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. Tax debt help This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Tax debt help See the Example below. Tax debt help Example. Tax debt help Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Tax debt help Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Tax debt help Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. Tax debt help Ryan's adjusted gross income (AGI) for 2012 is $76,000. Tax debt help Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2012. Tax debt help For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less. Tax debt help In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). Tax debt help Limit on deduction. Tax debt help   If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. Tax debt help See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. Tax debt help If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Tax debt help Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. Tax debt help You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Tax debt help A governmental unit is a person for purposes of furnishing the statement. Tax debt help The statement for each year should be sent to you by January 31 of the following year. Tax debt help A copy of this form will also be sent to the IRS. Tax debt help The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. Tax debt help However, it should not show any interest that was paid for you by a government agency. Tax debt help As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. Tax debt help However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. Tax debt help See Points , earlier, to determine whether you can deduct points not shown on Form 1098. Tax debt help Prepaid interest on Form 1098. Tax debt help   If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. Tax debt help However, you cannot deduct the prepaid amount for January 2014 in 2013. Tax debt help (See Prepaid interest , earlier. Tax debt help ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. Tax debt help You will include the interest for January 2014 with the other interest you pay for 2014. Tax debt help See How To Report , later. Tax debt help Refunded interest. Tax debt help   If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. Tax debt help See Refunds of interest , earlier. Tax debt help Mortgage insurance premiums. Tax debt help   The amount of mortgage insurance premiums you paid during 2013 may be shown in box 4 of Form 1098. Tax debt help See Mortgage Insurance Premiums, earlier. Tax debt help Investment Interest This section discusses interest expenses you may be able to deduct as an investor. Tax debt help If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Tax debt help You can deduct investment interest subject to the limit discussed later. Tax debt help However, you cannot deduct interest you incurred to produce tax-exempt income. Tax debt help Nor can you deduct interest expenses on straddles. Tax debt help Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. Tax debt help Investment Property Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Tax debt help It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Tax debt help Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Tax debt help Partners, shareholders, and beneficiaries. Tax debt help   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Tax debt help Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. Tax debt help Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Tax debt help The allocation is not affected by the use of property that secures the debt. Tax debt help Limit on Deduction Generally, your deduction for investment interest expense is limited to the amount of your net investment income. Tax debt help You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. Tax debt help The interest carried over is treated as investment interest paid or accrued in that next year. Tax debt help You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. Tax debt help Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Tax debt help Investment income. Tax debt help    This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Tax debt help Investment income does not include Alaska Permanent Fund dividends. Tax debt help It also does not include qualified dividends or net capital gain unless you choose to include them. Tax debt help Choosing to include qualified dividends. Tax debt help   Investment income generally does not include qualified dividends, discussed in chapter 8. Tax debt help However, you can choose to include all or part of your qualified dividends in investment income. Tax debt help   You make this choice by completing Form 4952, line 4g, according to its instructions. Tax debt help   If you choose to include any amount of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. Tax debt help Choosing to include net capital gain. Tax debt help   Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Tax debt help However, you can choose to include all or part of your net capital gain in investment income. Tax debt help    You make this choice by completing Form 4952, line 4g, according to its instructions. Tax debt help   If you choose to include any amount of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. Tax debt help    Before making either choice, consider the overall effect on your tax liability. Tax debt help Compare your tax if you make one or both of these choices with your tax if you do not. Tax debt help Investment income of child reported on parent's return. Tax debt help    Investment income includes the part of your child's interest and dividend income that you choose to report on your return. Tax debt help If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814, Parents' Election To Report Child's Interest and Dividends. Tax debt help Child's qualified dividends. Tax debt help   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. Tax debt help However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Tax debt help   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). Tax debt help Child's Alaska Permanent Fund dividends. Tax debt help   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Tax debt help To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. Tax debt help Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. Tax debt help Subtract the result from the amount on Form 8814, line 12. Tax debt help Child's capital gain distributions. Tax debt help    If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D, line 13, or Form 1040, line 13) generally does not count as investment income. Tax debt help However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Tax debt help   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). Tax debt help Investment expenses. Tax debt help   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Tax debt help Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. Tax debt help Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A, line 27. Tax debt help Losses from passive activities. Tax debt help   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). Tax debt help See Publication 925, Passive Activity and At-Risk Rules, for information about passive activities. Tax debt help Form 4952 Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest. Tax debt help Exception to use of Form 4952. Tax debt help   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Tax debt help Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Tax debt help You do not have any other deductible investment expenses. Tax debt help You have no carryover of investment interest expense from 2012. Tax debt help If you meet all of these tests, you can deduct all of your investment interest. Tax debt help More Information For more information on investment interest, see Interest Expenses in chapter 3 of Publication 550. Tax debt help Items You Cannot Deduct Some interest payments are not deductible. Tax debt help Certain expenses similar to interest also are not deductible. Tax debt help Nondeductible expenses include the following items. Tax debt help Personal interest (discussed later). Tax debt help Service charges (however, see Other Expenses (Line 23) in chapter 28). Tax debt help Annual fees for credit cards. Tax debt help Loan fees. Tax debt help Credit investigation fees. Tax debt help Interest to purchase or carry tax-exempt securities. Tax debt help Penalties. Tax debt help   You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature. Tax debt help Personal Interest Personal interest is not deductible. Tax debt help Personal interest is any interest that is not home mortgage interest, investment interest, business interest, or other deductible interest. Tax debt help It includes the following items. Tax debt help Interest on car loans (unless you use the car for business). Tax debt help Interest on federal, state, or local income tax. Tax debt help Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses. Tax debt help Late payment charges by a public utility. Tax debt help You may be able to deduct interest you pay on a qualified student loan. Tax debt help For details, see Publication 970, Tax Benefits for Education. Tax debt help Allocation of Interest If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to each use. Tax debt help However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used. Tax debt help You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. Tax debt help You do this by tracing disbursements of the debt proceeds to specific uses. Tax debt help For details on how to do this, see chapter 4 of Publication 535. Tax debt help How To Report You must file Form 1040 to deduct any home mortgage interest expense on your tax return. Tax debt help Where you deduct your interest expense generally depends on how you use the loan proceeds. Tax debt help See Table 23-1 for a summary of where to deduct your interest expense. Tax debt help Home mortgage interest and points. Tax debt help   Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. Tax debt help If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. Tax debt help Attach a statement explaining the difference and print “See attached” next to line 10. Tax debt help    Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. Tax debt help If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. Tax debt help The seller must give you this number and you must give the seller your TIN. Tax debt help A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Tax debt help Failure to meet any of these requirements may result in a $50 penalty for each failure. Tax debt help The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. Tax debt help See Social Security Number (SSN) in chapter 1 for more information about TINs. Tax debt help    If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. Tax debt help   Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. Tax debt help More than one borrower. Tax debt help   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. Tax debt help Show how much of the interest each of you paid, and give the name and address of the person who received the form. Tax debt help Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. Tax debt help Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. Tax debt help   Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. Tax debt help You should let each of the other borrowers know what his or her share is. Tax debt help Mortgage proceeds used for business or investment. Tax debt help    If your home mortgage interest deduction is limited, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 23-1. Tax debt help It shows where to deduct the part of your excess interest that is for those activities. Tax debt help Investment interest. Tax debt help    Deduct investment interest, subject to certain limits discussed in Publication 550, on Schedule A (Form 1040), line 14. Tax debt help Amortization of bond premium. Tax debt help   There are various ways to treat the premium you pay to buy taxable bonds. Tax debt help See Bond Premium Amortization in Publication 550. Tax debt help Income-producing rental or royalty interest. Tax debt help   Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040). Tax debt help Example. Tax debt help You rent out part of your home and borrow money to make repairs. Tax debt help You can deduct only the interest payment for the rented part in Part I of Schedule E (Form 1040). Tax debt help Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest. Tax debt help Table 23-1. Tax debt help Where To Deduct Your Interest Expense IF you have . Tax debt help . Tax debt help . Tax debt help THEN deduct it on . Tax debt help . Tax debt help . Tax debt help AND for more information go to . Tax debt help . Tax debt help . Tax debt help deductible student loan interest Form 1040, line 33, or Form 1040A, line 18 Publication 970. Tax debt help deductible home mortgage interest and points reported on Form 1098 Schedule A (Form 1040), line 10 Publication 936. Tax debt help deductible home mortgage interest not reported on Form 1098 Schedule A (Form 1040), line 11 Publication 936. Tax debt help deductible points not reported on Form 1098 Schedule A (Form 1040), line 12 Publication 936. Tax debt help deductible mortgage insurance premiums Schedule A (Form 1040), line 13 Publication 936. Tax debt help deductible investment interest (other than incurred to produce rents or royalties) Schedule A (Form 1040), line 14 Publication 550. Tax debt help deductible business interest (non-farm) Schedule C or C-EZ (Form 1040) Publication 535. Tax debt help deductible farm business interest Schedule F (Form 1040) Publications 225 and 535. Tax debt help deductible interest incurred to produce rents or royalties Schedule E (Form 1040) Publications 527 and 535. Tax debt help personal interest not deductible. Tax debt help Prev  Up  Next   Home   More Online Publications
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Tax debt help 2. Tax debt help   Source of Income Table of Contents Introduction Topics - This chapter discusses: Resident Aliens Nonresident AliensInterest Income Dividends Guarantee of Indebtedness Personal Services Transportation Income Scholarships, Grants, Prizes, and Awards Pensions and Annuities Rents or Royalties Real Property Personal Property Community Income Introduction After you have determined your alien status, you must determine the source of your income. Tax debt help This chapter will help you determine the source of different types of income you may receive during the tax year. Tax debt help This chapter also discusses special rules for married individuals who are domiciled in a country with community property laws. Tax debt help Topics - This chapter discusses: Income source rules, and Community income. Tax debt help Resident Aliens A resident alien's income is generally subject to tax in the same manner as a U. Tax debt help S. Tax debt help citizen. Tax debt help If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U. Tax debt help S. Tax debt help tax return. Tax debt help You must report these amounts from sources within and outside the United States. Tax debt help Nonresident Aliens A nonresident alien usually is subject to U. Tax debt help S. Tax debt help income tax only on U. Tax debt help S. Tax debt help source income. Tax debt help Under limited circumstances, certain foreign source income is subject to U. Tax debt help S. Tax debt help tax. Tax debt help See Foreign Income in chapter 4. Tax debt help The general rules for determining U. Tax debt help S. Tax debt help source income that apply to most nonresident aliens are shown in Table 2-1. Tax debt help The following discussions cover the general rules as well as the exceptions to these rules. Tax debt help Not all items of U. Tax debt help S. Tax debt help source income are taxable. Tax debt help See chapter 3. Tax debt help Interest Income Generally, U. Tax debt help S. Tax debt help source interest income includes the following items. Tax debt help Interest on bonds, notes, or other interest-bearing obligations of U. Tax debt help S. Tax debt help residents or domestic corporations. Tax debt help Interest paid by a domestic or foreign partnership or foreign corporation engaged in a U. Tax debt help S. Tax debt help trade or business at any time during the tax year. Tax debt help Original issue discount. Tax debt help Interest from a state, the District of Columbia, or the U. Tax debt help S. Tax debt help Government. Tax debt help The place or manner of payment is immaterial in determining the source of the income. Tax debt help A substitute interest payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as the interest on the transferred security. Tax debt help Exceptions. Tax debt help   U. Tax debt help S. Tax debt help source interest income does not include the following items. Tax debt help Interest paid by a resident alien or a domestic corporation on obligations issued before August 10, 2010, if for the 3-year period ending with the close of the payer's tax year preceding the interest payment, at least 80% of the payer's total gross income: Is from sources outside the United States, and Is attributable to the active conduct of a trade or business by the individual or corporation in a foreign country or a U. Tax debt help S. Tax debt help possession. Tax debt help However, the interest will be considered U. Tax debt help S. Tax debt help source interest income if either of the following apply. Tax debt help The recipient of the interest is related to the resident alien or domestic corporation. Tax debt help See section 954(d)(3) for the definition of related person. Tax debt help The terms of the obligation are significantly modified after August 9, 2010. Tax debt help Any extension of the term of the obligation is considered a significant modification. Tax debt help Interest paid by a foreign branch of a domestic corporation or a domestic partnership on deposits or withdrawable accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under federal or state law if the interest paid or credited can be deducted by the association. Tax debt help Interest on deposits with a foreign branch of a domestic corporation or domestic partnership, but only if the branch is in the commercial banking business. Tax debt help Dividends In most cases, dividend income received from domestic corporations is U. Tax debt help S. Tax debt help source income. Tax debt help Dividend income from foreign corporations is usually foreign source income. Tax debt help Exceptions to both of these rules are discussed below. Tax debt help A substitute dividend payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as a distribution on the transferred security. Tax debt help Dividend equivalent payments. Tax debt help   U. Tax debt help S. Tax debt help source dividends also include all dividend equivalent payments. Tax debt help Dividend equivalent payments include substitute dividends, payments made pursuant to a specified notional principal contract, and all similar payments that, directly or indirectly, are contingent on or determined by reference to, the payment of a dividend from U. Tax debt help S. Tax debt help sources. Tax debt help    The Internal Revenue Service has issued final regulations that would affect the treatment of dividend equivalent payments and specified notional principal contracts. Tax debt help You can view this regulation at www. Tax debt help irs. Tax debt help gov/irb/2013-52_IRB/ar08. Tax debt help html. Tax debt help First exception. Tax debt help   Dividends received from a domestic corporation are not U. Tax debt help S. Tax debt help source income if the corporation elects to take the American Samoa economic development credit. Tax debt help Second exception. Tax debt help   Part of the dividends received from a foreign corporation is U. Tax debt help S. Tax debt help source income if 25% or more of its total gross income for the 3-year period ending with the close of its tax year preceding the declaration of dividends was effectively connected with a trade or business in the United States. Tax debt help If the corporation was formed less than 3 years before the declaration, use its total gross income from the time it was formed. Tax debt help Determine the part that is U. Tax debt help S. Tax debt help source income by multiplying the dividend by the following fraction. Tax debt help   Foreign corporation's gross income connected with a U. Tax debt help S. Tax debt help trade or business for the 3-year period     Foreign corporation's gross income from all sources for that period   Guarantee of Indebtedness Certain amounts received directly or indirectly, for the provision of a guarantee of indebtedness issued after September 27, 2010, are U. Tax debt help S. Tax debt help source income. Tax debt help They must be paid by a noncorporate resident or U. Tax debt help S. Tax debt help corporation or by any foreign person if the amounts are effectively connected with the conduct of a U. Tax debt help S. Tax debt help trade or business. Tax debt help For more information, see Internal Revenue Code sections 861(a)(9) and 862(a)(9). Tax debt help Personal Services All wages and any other compensation for services performed in the United States are considered to be from sources in the United States. Tax debt help The only exceptions to this rule are discussed in chapter 3 under Employees of foreign persons, organizations, or offices, and under Crew members. Tax debt help If you are an employee and receive compensation for labor or personal services performed both inside and outside the United States, special rules apply in determining the source of the compensation. Tax debt help Compensation (other than certain fringe benefits) is sourced on a time basis. Tax debt help Certain fringe benefits (such as housing and education) are sourced on a geographical basis. Tax debt help Or, you may be permitted to use an alternative basis to determine the source of compensation. Tax debt help See Alternative Basis , later. Tax debt help Multi-level marketing. Tax debt help   Certain companies sell products through a multi-level marketing arrangement, such that an upper-tier distributor, who has sponsored a lower-tier distributor, is entitled to a payment from the company based on certain activities of that lower-tier distributor. Tax debt help Generally, depending on the facts, payments from such multi-level marketing companies to independent (non-employee) distributors (upper-tier distributors) that are based on the sales or purchases of persons whom they have sponsored (lower-tier distributors) constitute income for the performance of personal services in recruiting, training, and supporting the lower-tier distributors. Tax debt help The source of such income is generally based on where the services of the upper-tier distributor are performed, and may, depending on the facts, be considered multi-year compensation, with the source of income determined over the period to which such compensation is attributable. Tax debt help Self-employed individuals. Tax debt help   If you are self-employed, you determine the source of compensation for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. Tax debt help In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. Tax debt help Time Basis Use a time basis to figure your U. Tax debt help S. Tax debt help source compensation (other than the fringe benefits discussed later). Tax debt help Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed services in the United States during the year     Total number of days you performed services during the year   You can use a unit of time less than a day in the above fraction, if appropriate. Tax debt help The time period for which the compensation is made does not have to be a year. Tax debt help Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. Tax debt help Example 1. Tax debt help Christina Brooks, a resident of the Netherlands, worked 240 days for a U. Tax debt help S. Tax debt help company during the tax year. Tax debt help She received $80,000 in compensation. Tax debt help None of it was for fringe benefits. Tax debt help Christina performed services in the United States for 60 days and performed services in the Netherlands for 180 days. Tax debt help Using the time basis for determining the source of compensation, $20,000 ($80,000 × 60/240) is her U. Tax debt help S. Tax debt help source income. Tax debt help Example 2. Tax debt help Rob Waters, a resident of South Africa, is employed by a corporation. Tax debt help His annual salary is $100,000. Tax debt help None of it is for fringe benefits. Tax debt help During the first quarter of the year he worked entirely within the United States. Tax debt help On April 1, Rob was transferred to Singapore for the remainder of the year. Tax debt help Rob is able to establish that the first quarter of the year and the last 3 quarters of the year are two separate, distinct, and continuous periods of time. Tax debt help Accordingly, $25,000 of Rob's annual salary is attributable to the first quarter of the year (. Tax debt help 25 × $100,000). Tax debt help All of it is U. Tax debt help S. Tax debt help source income because he worked entirely within the United States during that quarter. Tax debt help The remaining $75,000 is attributable to the last three quarters of the year. Tax debt help During those quarters, he worked 150 days in Singapore and 30 days in the United States. Tax debt help His periodic performance of services in the United States did not result in distinct, separate, and continuous periods of time. Tax debt help Of this $75,000, $12,500 ($75,000 × 30/180) is U. Tax debt help S. Tax debt help source income. Tax debt help Multi-year compensation. Tax debt help   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. Tax debt help Multi-year compensation is compensation that is included in your income in one tax year but that is attributable to a period that includes two or more tax years. Tax debt help   You determine the period to which the compensation is attributable based on the facts and circumstances of your case. Tax debt help For example, an amount of compensation that specifically relates to a period of time that includes several calendar years is attributable to the entire multi-year period. Tax debt help   The amount of compensation treated as from U. Tax debt help S. Tax debt help sources is figured by multiplying the total multi-year compensation by a fraction. Tax debt help The numerator of the fraction is the number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in the United States in connection with the project. Tax debt help The denominator of the fraction is the total number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in connection with the project. Tax debt help Geographical Basis Compensation you receive as an employee in the form of the following fringe benefits is sourced on a geographical basis. Tax debt help Housing. Tax debt help Education. Tax debt help Local transportation. Tax debt help Tax reimbursement. Tax debt help Hazardous or hardship duty pay as defined in Regulations section 1. Tax debt help 861-4(b)(2)(ii)(D)(5). Tax debt help Moving expense reimbursement. Tax debt help The amount of fringe benefits must be reasonable and you must substantiate them by adequate records or by sufficient evidence. Tax debt help Principal place of work. Tax debt help   The above fringe benefits, except for tax reimbursement and hazardous or hardship duty pay, are sourced based on your principal place of work. Tax debt help Your principal place of work is usually the place where you spend most of your working time. Tax debt help This could be your office, plant, store, shop, or other location. Tax debt help If there is no one place where you spend most of your working time, your main job location is the place where your work is centered, such as where you report for work or are otherwise required to “base” your work. Tax debt help   If you have more than one job at any time, your main job location depends on the facts in each case. Tax debt help The more important factors to be considered are: The total time you spend at each place, The amount of work you do at each place, and How much money you earn at each place. Tax debt help Housing. Tax debt help   The source of a housing fringe benefit is determined based on the location of your principal place of work. Tax debt help A housing fringe benefit includes payments to you or on your behalf (and your family's if your family resides with you) only for the following. Tax debt help Rent. Tax debt help Utilities (except telephone charges). Tax debt help Real and personal property insurance. Tax debt help Occupancy taxes not deductible under section 164 or 216(a). Tax debt help Nonrefundable fees for securing a leasehold. Tax debt help Rental of furniture and accessories. Tax debt help Household repairs. Tax debt help Residential parking. Tax debt help Fair rental value of housing provided in kind by your employer. Tax debt help   A housing fringe benefit does not include: Deductible interest and taxes (including deductible interest and taxes of a tenant-stockholder in a cooperative housing corporation), The cost of buying property, including principal payments on a mortgage, The cost of domestic labor (maids, gardeners, etc. Tax debt help ), Pay television subscriptions, Improvements and other expenses that increase the value or appreciably prolong the life of property, Purchased furniture or accessories, Depreciation or amortization of property or improvements, The value of meals or lodging that you exclude from gross income, or The value of meals or lodging that you deduct as moving expenses. Tax debt help Education. Tax debt help   The source of an education fringe benefit for the education expenses of your dependents is determined based on the location of your principal place of work. Tax debt help An education fringe benefit includes payments only for the following expenses for education at an elementary or secondary school. Tax debt help Tuition, fees, academic tutoring, special needs services for a special needs student, books, supplies, and other equipment. Tax debt help Room and board and uniforms that are required or provided by the school in connection with enrollment or attendance. Tax debt help Local transportation. Tax debt help   The source of a local transportation fringe benefit is determined based on the location of your principal place of work. Tax debt help Your local transportation fringe benefit is the amount that you receive as compensation for local transportation for you or your spouse or dependents at the location of your principal place of work. Tax debt help The amount treated as a local transportation fringe benefit is limited to actual expenses incurred for local transportation and the fair rental value of any employer-provided vehicle used predominantly by you, your spouse, or your dependents for local transportation. Tax debt help Actual expenses do not include the cost (including interest) of any vehicle purchased by you or on your behalf. Tax debt help Tax reimbursement. Tax debt help   The source of a tax reimbursement fringe benefit is determined based on the location of the jurisdiction that imposed the tax for which you are reimbursed. Tax debt help Moving expense reimbursement. Tax debt help   The source of a moving expense reimbursement is generally based on the location of your new principal place of work. Tax debt help However, the source is determined based on the location of your former principal place of work if you provide sufficient evidence that such determination of source is more appropriate under the facts and circumstances of your case. Tax debt help Sufficient evidence generally requires an agreement between you and your employer, or a written statement of company policy, which is reduced to writing before the move and which is entered into or established to induce you or other employees to move to another country. Tax debt help The written statement or agreement must state that your employer will reimburse you for moving expenses that you incur to return to your former principal place of work regardless of whether you continue to work for your employer after returning to that location. Tax debt help It may contain certain conditions upon which the right to reimbursement is determined as long as those conditions set forth standards that are definitely ascertainable and can only be fulfilled prior to, or through completion of, your return move to your former principal place of work. Tax debt help Alternative Basis If you are an employee, you can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your compensation than the time or geographical basis. Tax debt help If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your compensation. Tax debt help Also, if your total compensation from all sources is $250,000 or more, check “Yes” to both questions on line K on page 5 of Form 1040NR, and attach a written statement to your tax return that sets forth all of the following. Tax debt help Your name and social security number (written across the top of the statement). Tax debt help The specific compensation income, or the specific fringe benefit, for which you are using the alternative basis. Tax debt help For each item in (2), the alternative basis of allocation of source used. Tax debt help For each item in (2), a computation showing how the alternative allocation was computed. Tax debt help A comparison of the dollar amount of the U. Tax debt help S. Tax debt help compensation and foreign compensation sourced under both the alternative basis and the time or geographical basis discussed earlier. Tax debt help Transportation Income Transportation income is income from the use of a vessel or aircraft or for the performance of services directly related to the use of any vessel or aircraft. Tax debt help This is true whether the vessel or aircraft is owned, hired, or leased. Tax debt help The term “vessel or aircraft” includes any container used in connection with a vessel or aircraft. Tax debt help All income from transportation that begins and ends in the United States is treated as derived from sources in the United States. Tax debt help If the transportation begins or ends in the United States, 50% of the transportation income is treated as derived from sources in the United States. Tax debt help For transportation income from personal services, 50% of the income is U. Tax debt help S. Tax debt help source income if the transportation is between the United States and a U. Tax debt help S. Tax debt help possession. Tax debt help For nonresident aliens, this only applies to income derived from, or in connection with, an aircraft. Tax debt help For information on how U. Tax debt help S. Tax debt help source transportation income is taxed, see chapter 4. Tax debt help Scholarships, Grants, Prizes, and Awards Generally, the source of scholarships, fellowship grants, grants, prizes, and awards is the residence of the payer regardless of who actually disburses the funds. Tax debt help However, see Activities to be performed outside the United States , later. Tax debt help For example, payments for research or study in the United States made by the United States, a noncorporate U. Tax debt help S. Tax debt help resident, or a domestic corporation, are from U. Tax debt help S. Tax debt help sources. Tax debt help Similar payments from a foreign government or foreign corporation are foreign source payments even though the funds may be disbursed through a U. Tax debt help S. Tax debt help agent. Tax debt help Payments made by an entity designated as a public international organization under the International Organizations Immunities Act are from foreign sources. Tax debt help Activities to be performed outside the United States. Tax debt help   Scholarships, fellowship grants, targeted grants, and achievement awards received by nonresident aliens for activities performed, or to be performed, outside the United States are not U. Tax debt help S. Tax debt help source income. Tax debt help    These rules do not apply to amounts paid as salary or other compensation for services. Tax debt help See Personal Services, earlier, for the source rules that apply. Tax debt help Pensions and Annuities If you receive a pension from a domestic trust for services performed both in and outside the United States, part of the pension payment is from U. Tax debt help S. Tax debt help sources. Tax debt help That part is the amount attributable to earnings of the pension plan and the employer contributions made for services performed in the United States. Tax debt help This applies whether the distribution is made under a qualified or nonqualified stock bonus, pension, profit-sharing, or annuity plan (whether or not funded). Tax debt help If you performed services as an employee of the United States, you may receive a distribution from the U. Tax debt help S. Tax debt help Government under a plan, such as the Civil Service Retirement System, that is treated as a qualified pension plan. Tax debt help Your U. Tax debt help S. Tax debt help source income is the otherwise taxable amount of the distribution that is attributable to your total U. Tax debt help S. Tax debt help Government basic pay other than tax-exempt pay for services performed outside the United States. Tax debt help Rents or Royalties Your U. Tax debt help S. Tax debt help source income includes rent and royalty income received during the tax year from property located in the United States or from any interest in that property. Tax debt help U. Tax debt help S. Tax debt help source income also includes rents or royalties for the use of, or for the privilege of using, in the United States, intangible property such as patents, copyrights, secret processes and formulas, goodwill, trademarks, franchises, and similar property. Tax debt help Real Property Real property is land and buildings and generally anything built on, growing on, or attached to land. Tax debt help Gross income from sources in the United States includes gains, profits, and income from the sale or other disposition of real property located in the United States. Tax debt help Natural resources. Tax debt help   The income from the sale of products of any farm, mine, oil or gas well, other natural deposit, or timber located in the United States and sold in a foreign country, or located in a foreign country and sold in the United States, is partly from sources in the United States. Tax debt help For information on determining that part, see section 1. Tax debt help 863-1(b) of the regulations. Tax debt help Table 2-1. Tax debt help Summary of Source Rules for Income of Nonresident Aliens Item of income Factor determining source Salaries, wages, other compensation Where services performed Business income:   Personal services Where services performed Sale of inventory—purchased Where sold Sale of inventory—produced Allocation Interest Residence of payer Dividends Whether a U. Tax debt help S. Tax debt help or foreign corporation* Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. Tax debt help Where property is used Sale of real property Location of property Sale of personal property Seller's tax home (but see Personal Property , later, for exceptions) Pension distributions attributable to contributions Where services were performed that earned the pension Investment earnings on pension contributions Location of pension trust Sale of natural resources Allocation based on fair market value of product at export terminal. Tax debt help For more information, see section 1. Tax debt help 863-1(b) of the regulations. Tax debt help *Exceptions include: a) Dividends paid by a U. Tax debt help S. Tax debt help corporation are foreign source if the corporation elects the  American Samoa economic development credit. Tax debt help  b) Part of a dividend paid by a foreign corporation is U. Tax debt help S. Tax debt help source if at least 25% of the  corporation's gross income is effectively connected with a U. Tax debt help S. Tax debt help trade or business for the  3 tax years before the year in which the dividends are declared. Tax debt help Personal Property Personal property is property, such as machinery, equipment, or furniture, that is not real property. Tax debt help Gain or loss from the sale or exchange of personal property generally has its source in the United States if you have a tax home in the United States. Tax debt help If you do not have a tax home in the United States, the gain or loss generally is considered to be from sources outside the United States. Tax debt help Tax home. Tax debt help   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. Tax debt help Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual. Tax debt help If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. Tax debt help If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work. Tax debt help Inventory property. Tax debt help   Inventory property is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. Tax debt help Income from the sale of inventory that you purchased is sourced where the property is sold. Tax debt help Generally, this is where title to the property passes to the buyer. Tax debt help For example, income from the sale of inventory in the United States is U. Tax debt help S. Tax debt help source income, whether you purchased it in the United States or in a foreign country. Tax debt help   Income from the sale of inventory property that you produced in the United States and sold outside the United States (or vice versa) is partly from sources in the United States and partly from sources outside the United States. Tax debt help For information on making this allocation, see section 1. Tax debt help 863-3 of the regulations. Tax debt help   These rules apply even if your tax home is not in the United States. Tax debt help Depreciable property. Tax debt help   To determine the source of any gain from the sale of depreciable personal property, you must first figure the part of the gain that is not more than the total depreciation adjustments on the property. Tax debt help You allocate this part of the gain to sources in the United States based on the ratio of U. Tax debt help S. Tax debt help depreciation adjustments to total depreciation adjustments. Tax debt help The rest of this part of the gain is considered to be from sources outside the United States. Tax debt help   For this purpose, “U. Tax debt help S. Tax debt help depreciation adjustments” are the depreciation adjustments to the basis of the property that are allowable in figuring taxable income from U. Tax debt help S. Tax debt help sources. Tax debt help However, if the property is used predominantly in the United States during a tax year, all depreciation deductions allowable for that year are treated as U. Tax debt help S. Tax debt help depreciation adjustments. Tax debt help But there are some exceptions for certain transportation, communications, and other property used internationally. Tax debt help   Gain from the sale of depreciable property that is more than the total depreciation adjustments on the property is sourced as if the property were inventory property, as discussed above. Tax debt help   A loss is sourced in the same way as the depreciation deductions were sourced. Tax debt help However, if the property was used predominantly in the United States, the entire loss reduces U. Tax debt help S. Tax debt help source income. Tax debt help   The basis of property usually means the cost (money plus the fair market value of other property or services) of property you acquire. Tax debt help Depreciation is an amount deducted to recover the cost or other basis of a trade or business asset. Tax debt help The amount you can deduct depends on the property's cost, when you began using the property, how long it will take to recover your cost, and which depreciation method you use. Tax debt help A depreciation deduction is any deduction for depreciation or amortization or any other allowable deduction that treats a capital expenditure as a deductible expense. Tax debt help Intangible property. Tax debt help   Intangible property includes patents, copyrights, secret processes or formulas, goodwill, trademarks, trade names, or other like property. Tax debt help The gain from the sale of amortizable or depreciable intangible property, up to the previously allowable amortization or depreciation deductions, is sourced in the same way as the original deductions were sourced. Tax debt help This is the same as the source rule for gain from the sale of depreciable property. Tax debt help See Depreciable property , earlier, for details on how to apply this rule. Tax debt help   Gain in excess of the amortization or depreciation deductions is sourced in the country where the property is used if the income from the sale is contingent on the productivity, use, or disposition of that property. Tax debt help If the income is not contingent on the productivity, use, or disposition of the property, the income is sourced according to your tax home as discussed earlier. Tax debt help If payments for goodwill do not depend on its productivity, use, or disposition, their source is the country in which the goodwill was generated. Tax debt help Sales through offices or fixed places of business. Tax debt help   Despite any of the earlier rules, if you do not have a tax home in the United States, but you maintain an office or other fixed place of business in the United States, treat the income from any sale of personal property (including inventory property) that is attributable to that office or place of business as U. Tax debt help S. Tax debt help source income. Tax debt help However, this rule does not apply to sales of inventory property for use, disposition, or consumption outside the United States if your office or other fixed place of business outside the United States materially participated in the sale. Tax debt help   If you have a tax home in the United States but maintain an office or other fixed place of business outside the United States, income from sales of personal property, other than inventory, depreciable property, or intangibles, that is attributable to that foreign office or place of business may be treated as U. Tax debt help S. Tax debt help source income. Tax debt help The income is treated as U. Tax debt help S. Tax debt help source income if an income tax of less than 10% of the income from the sale is paid to a foreign country. Tax debt help This rule also applies to losses if the foreign country would have imposed an income tax of less than 10% had the sale resulted in a gain. Tax debt help Community Income If you are married and you or your spouse is subject to the community property laws of a foreign country, a U. Tax debt help S. Tax debt help state, or a U. Tax debt help S. Tax debt help possession, you generally must follow those laws to determine the income of yourself and your spouse for U. Tax debt help S. Tax debt help tax purposes. Tax debt help But you must disregard certain community property laws if: Both you and your spouse are nonresident aliens, or One of you is a nonresident alien and the other is a U. Tax debt help S. Tax debt help citizen or resident and you do not both choose to be treated as U. Tax debt help S. Tax debt help residents as explained in chapter 1. Tax debt help In these cases, you and your spouse must report community income as explained later. Tax debt help Earned income. Tax debt help   Earned income of a spouse, other than trade or business income and a partner's distributive share of partnership income, is treated as the income of the spouse whose services produced the income. Tax debt help That spouse must report all of it on his or her separate return. Tax debt help Trade or business income. Tax debt help   Trade or business income, other than a partner's distributive share of partnership income, is treated as the income of the spouse carrying on the trade or business. Tax debt help That spouse must report all of it on his or her separate return. Tax debt help Partnership income (or loss). Tax debt help   A partner's distributive share of partnership income (or loss) is treated as the income (or loss) of the partner. Tax debt help The partner must report all of it on his or her separate return. Tax debt help Separate property income. Tax debt help   Income derived from the separate property of one spouse (and which is not earned income, trade or business income, or partnership distributive share income) is treated as the income of that spouse. Tax debt help That spouse must report all of it on his or her separate return. Tax debt help Use the appropriate community property law to determine what is separate property. Tax debt help Other community income. Tax debt help   All other community income is treated as provided by the applicable community property laws. Tax debt help Prev  Up  Next   Home   More Online Publications