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Www hnr block com 4. Www hnr block com   Unrelated Business Taxable Income Table of Contents IncomeExclusions Dues of Agricultural Organizations and Business Leagues DeductionsDirectly Connected Exploitation of Exempt Activity—Advertising Sales Modifications Partnership Income or Loss S Corporation Income or Loss Special Rules for Foreign Organizations Special Rules for Social Clubs, VEBAs, SUBs, and GLSOsIncome that is set aside. Www hnr block com Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. Www hnr block com Net unrelated income. Www hnr block com Net unrelated loss. Www hnr block com Control. Www hnr block com Income from property financed with qualified 501(c)(3) bonds. Www hnr block com Disposition of property received from taxable subsidiary and used in unrelated business. Www hnr block com Income From Debt-Financed Property Debt-Financed PropertyAcquisition Indebtedness Computation of Debt-Financed Income Deductions for Debt-Financed Property Allocation Rules How to Get Tax Help The term “unrelated business taxable income” generally means the gross income derived from any unrelated trade or business regularly conducted by the exempt organization, less the deductions directly connected with carrying on the trade or business. Www hnr block com If an organization regularly carries on two or more unrelated business activities, its unrelated business taxable income is the total of gross income from all such activities less the total allowable deductions attributable to all the activities. Www hnr block com In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. Www hnr block com Whether a particular item of income or expense falls within any of these modifications or special rules must be determined by all the facts and circumstances in each specific case. Www hnr block com For example, if the organization received a payment termed rent that is in fact a return of profits by a person operating the property for the benefit of the organization, or that is a share of the profits retained by the organization as a partner or joint venturer, the payment is not within the income exclusion for rents, discussed later under Exclusions. Www hnr block com Income Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income. Www hnr block com Exclusions The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income. Www hnr block com Dividends, interest, annuities and other investment income. Www hnr block com   All dividends, interest, annuities, payments with respect to securities loans, income from notional principal contracts, and other income from an exempt organization's ordinary and routine investments that the IRS determines are substantially similar to these types of income are excluded in computing unrelated business taxable income. Www hnr block com Exception for insurance activity income of a controlled foreign corporation. Www hnr block com   This exclusion does not apply to income from certain insurance activities of an exempt organization's controlled foreign corporation. Www hnr block com The income is not excludable dividend income, but instead is unrelated business taxable income to the extent it would be so treated if the exempt organization had earned it directly. Www hnr block com Certain exceptions to this rule apply. Www hnr block com For more information, see section 512(b)(17). Www hnr block com Other exceptions. Www hnr block com   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), to interest or annuities received from a controlled corporation (discussed under Income From Controlled Organizations, later). Www hnr block com Income from lending securities. Www hnr block com   Payments received with respect to a security loan are excluded in computing unrelated business taxable income only if the loan is made under an agreement that:    Provides for the return to the exempt organization of securities identical to the securities loaned, Requires payments to the organization of amounts equivalent to all interest, dividends, and other distributions that the owner of the securities is entitled to receive during the period of the loan, Does not reduce the organization's risk of loss or opportunity for gain on the securities, Contains reasonable procedures to implement the obligation of the borrower to furnish collateral to the organization with a fair market value each business day during the period of the loan in an amount not less than the fair market value of the securities at the close of the preceding business day, and Permits the organization to terminate the loan upon notice of not more than 5 business days. Www hnr block com   Payments with respect to securities loans include: Amounts in respect of dividends, interest, and other distributions, Fees based on the period of time the loan is in effect and the fair market value of the security during that period, Income from collateral security for the loan, and Income from the investment of collateral security. Www hnr block com The payments are considered to be from the securities loaned and not from collateral security or the investment of collateral security from the loans. Www hnr block com Any deductions that are directly connected with collateral security for the loan, or with the investment of collateral security, are considered deductions that are directly connected with the securities loaned. Www hnr block com Royalties. Www hnr block com   Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. Www hnr block com   To be considered a royalty, a payment must relate to the use of a valuable right. Www hnr block com Payments for trademarks, trade names, or copyrights are ordinarily considered royalties. Www hnr block com Similarly, payments for the use of a professional athlete's name, photograph, likeness, or facsimile signature are ordinarily considered royalties. Www hnr block com However, royalties do not include payments for personal services. Www hnr block com Therefore, payments for personal appearances and interviews are not excluded as royalties and must be included in figuring unrelated business taxable income. Www hnr block com   Unrelated business taxable income does not include royalty income received from licensees by an exempt organization that is the legal and beneficial owner of patents assigned to it by inventors for specified percentages of future royalties. Www hnr block com   Mineral royalties are excluded whether measured by production or by gross or taxable income from the mineral property. Www hnr block com However, the exclusion does not apply to royalties that stem from an arrangement whereby the organization owns a working interest in a mineral property and is liable for its share of the development and operating costs under the terms of its agreement with the operator of the property. Www hnr block com To the extent they are not treated as loans under section 636 (relating to income tax treatment of mineral production payments), payments for mineral production are treated in the same manner as royalty payments for the purpose of computing unrelated business taxable income. Www hnr block com To the extent they are treated as loans, any payments for production that are the equivalent of interest are treated as interest and are excluded. Www hnr block com Exceptions. Www hnr block com   This exclusion does not apply to debt-financed income (discussed under Income From Debt-Financed Property, later) or to royalties received from a controlled corporation (discussed under Income From Controlled Organizations, later). Www hnr block com Rents. Www hnr block com   Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. Www hnr block com Rents from personal property are not excluded. Www hnr block com However, special rules apply to “mixed leases” of both real and personal property. Www hnr block com Mixed leases. Www hnr block com   In a mixed lease, all of the rents are excluded if the rents attributable to the personal property are not more than 10% of the total rents under the lease, as determined when the personal property is first placed in service by the lessee. Www hnr block com If the rents attributable to personal property are more than 10% but not more than 50% of the total rents, only the rents attributable to the real property are excluded. Www hnr block com If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable. Www hnr block com   Property is placed in service when the lessee first may use it under the terms of a lease. Www hnr block com For example, property subject to a lease entered into on November 1, for a term starting on January 1 of the next year, is considered placed in service on January 1, regardless of when the lessee first actually uses it. Www hnr block com   If separate leases are entered into for real and personal property and the properties have an integrated use (for example, one or more leases for real property and another lease or leases for personal property to be used on the real property), all the leases will be considered as one lease. Www hnr block com   The rent attributable to the personal property must be recomputed, and the treatment of the rents must be redetermined, if: The rent attributable to all the leased personal property increases by 100% or more because additional or substitute personal property is placed in service, or The lease is modified to change the rent charged (whether or not the amount of rented personal property changes). Www hnr block com Any change in the treatment of rents resulting from the recomputation is effective only for the period beginning with the event that caused the recomputation. Www hnr block com Exception for rents based on net profit. Www hnr block com   The exclusion for rents does not apply if the amount of the rent depends on the income or profits derived by any person from the leased property, other than an amount based on a fixed percentage of the gross receipts or sales. Www hnr block com Exception for income from personal services. Www hnr block com   Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. Www hnr block com Therefore, the exclusion does not apply to transactions such as renting hotel rooms, rooms in boarding houses or tourist homes, and space in parking lots or warehouses. Www hnr block com Other exceptions. Www hnr block com   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), or to interest, annuities, royalties and rents received from a controlled corporation (discussed under Income From Controlled Organizations, later), investment income (dividends, interest, rents, etc. Www hnr block com ) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). Www hnr block com See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information. Www hnr block com Income from research. Www hnr block com   A tax-exempt organization may exclude income from research grants or contracts from unrelated business taxable income. Www hnr block com However, the extent of the exclusion depends on the nature of the organization and the type of research. Www hnr block com   Income from research for the United States, any of its agencies or instrumentalities, or a state or any of its political subdivisions is excluded when computing unrelated business taxable income. Www hnr block com   For a college, university, or hospital, all income from research, whether fundamental or applied, is excluded in computing unrelated business taxable income. Www hnr block com   When an organization is operated primarily to conduct fundamental research (as distinguished from applied research) and the results are freely available to the general public, all income from research performed for any person is excluded in computing unrelated business taxable income. Www hnr block com   The term research, for this purpose, does not include activities of a type normally conducted as an incident to commercial or industrial operations, such as testing or inspecting materials or products, or designing or constructing equipment, buildings, etc. Www hnr block com In addition, the term fundamental research does not include research conducted for the primary purpose of commercial or industrial application. Www hnr block com Gains and losses from disposition of property. Www hnr block com   Also excluded from unrelated business taxable income are gains or losses from the sale, exchange, or other disposition of property other than: Stock in trade or other property of a kind that would properly be includable in inventory if on hand at the close of the tax year, Property held primarily for sale to customers in the ordinary course of a trade or business, or Cutting of timber that an organization has elected to consider as a sale or exchange of the timber. Www hnr block com   It should be noted that the last exception relates only to cut timber. Www hnr block com The sale, exchange, or other disposition of standing timber is excluded from the computation of unrelated business income, unless it constitutes property held for sale to customers in the ordinary course of business. Www hnr block com Lapse or termination of options. Www hnr block com   Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. Www hnr block com The exclusion applies only if the option is written in connection with the exempt organization's investment activities. Www hnr block com Therefore, this exclusion is not available if the organization is engaged in the trade or business of writing options or the options are held by the organization as inventory or for sale to customers in the ordinary course of a trade or business. Www hnr block com Exception. Www hnr block com   This exclusion does not apply to unrelated debt-financed income, discussed later under Income From Debt-Financed Property. Www hnr block com Gain or loss on disposition of certain brownfield property. Www hnr block com   Gain or loss from the qualifying sale, exchange, or other disposition of a qualifying brownfield property (as defined in section 512(b)(19)(C)), which was acquired by the organization after December 31, 2005 and before January 1, 2011, is excluded from unrelated business taxable income and is excepted from the debt-financed rules for such property. Www hnr block com See sections 512(b)(19) and 514(b)(1)(E). Www hnr block com Income from services provided under federal license. Www hnr block com   There is a further exclusion from unrelated business taxable income of income from a trade or business conducted by a religious order or by an educational organization maintained by the order. Www hnr block com   This exclusion applies only if the following requirements are met. Www hnr block com The trade or business must have been operated by the order or by the institution before May 27, 1959. Www hnr block com The trade or business must provide services under a license issued by a federal regulatory agency. Www hnr block com More than 90% of the net income from the business for the tax year must be devoted to religious, charitable, or educational purposes that constitute the basis for the religious order's exemption. Www hnr block com The rates or other charges for these services must be fully competitive with the rates or other charges of similar taxable businesses. Www hnr block com Rates or other charges for these services will be considered as fully competitive if they are neither materially higher nor materially lower than the rates charged by similar businesses operating in the same general area. Www hnr block com Exception. Www hnr block com    This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later). Www hnr block com Member income of mutual or cooperative electric companies. Www hnr block com   Income of a mutual or cooperative electric company described in section 501(c)(12) which is treated as member income under subparagraph (H) of that section is excluded from unrelated business taxable income. Www hnr block com Dues of Agricultural Organizations and Business Leagues Dues received from associate members by organizations exempt under section 501(c)(5) or section 501(c)(6) may be treated as gross income from an unrelated trade or business if the associate member category exists for the principal purpose of producing unrelated business income. Www hnr block com For example, if an organization creates an associate member category solely to allow associate members to purchase insurance through the organization, the associate member dues may be unrelated business income. Www hnr block com Exception. Www hnr block com   Associate member dues received by an agricultural or horticultural organization are not treated as gross income from an unrelated trade or business, regardless of their purpose, if they are not more than the annual limit. Www hnr block com The limit on dues paid by an associate member is $148 for 2011. Www hnr block com   If the required annual dues are more than the limit, the entire amount is treated as income from an unrelated business unless the associate member category was formed or availed of for the principal purpose of furthering the organization's exempt purposes. Www hnr block com Deductions To qualify as allowable deductions in computing unrelated business taxable income, the expenses, depreciation, and similar items generally must be allowable income tax deductions that are directly connected with carrying on an unrelated trade or business. Www hnr block com They cannot be directly connected with excluded income. Www hnr block com For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. Www hnr block com Directly Connected To be directly connected with the conduct of an unrelated business, deductions must have a proximate and primary relationship to carrying on that business. Www hnr block com For an exception, see Expenses attributable to exploitation of exempt activities, later. Www hnr block com Expenses attributable solely to unrelated business. Www hnr block com   Expenses, depreciation, and similar items attributable solely to the conduct of an unrelated business are proximately and primarily related to that business and qualify for deduction to the extent that they are otherwise allowable income tax deductions. Www hnr block com   For example, salaries of personnel employed full-time to conduct the unrelated business and depreciation of a building used entirely in the conduct of that business are deductible to the extent otherwise allowable. Www hnr block com Expenses attributable to dual use of facilities or personnel. Www hnr block com   When facilities or personnel are used both to conduct exempt functions and to conduct an unrelated trade or business, expenses, depreciation, and similar items attributable to the facilities or personnel must be allocated between the two uses on a reasonable basis. Www hnr block com The part of an item allocated to the unrelated trade or business is proximately and primarily related to that business and is allowable as a deduction in computing unrelated business taxable income if the expense is otherwise an allowable income tax deduction. Www hnr block com Example 1. Www hnr block com A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. Www hnr block com The school provides the tennis courts, housing, and dining facilities. Www hnr block com The contracted individual hires the instructors, recruits campers, and provides supervision. Www hnr block com The income the school receives from this activity is from a dual use of the facilities and personnel. Www hnr block com The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. Www hnr block com Example 2. Www hnr block com An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. Www hnr block com The president devotes approximately 10% of his time to the unrelated business. Www hnr block com To figure the organization's unrelated business taxable income, a deduction of $9,000 ($90,000 × 10%) is allowed for the salary paid to its president. Www hnr block com Expenses attributable to exploitation of exempt activities. Www hnr block com   Generally, expenses, depreciation, and similar items attributable to the conduct of an exempt activity are not deductible in computing unrelated business taxable income from an unrelated trade or business that exploits the exempt activity. Www hnr block com (See Exploitation of exempt functions under Not substantially related in chapter 3. Www hnr block com ) This is because they do not have a proximate and primary relationship to the unrelated trade or business, and therefore, they do not qualify as directly connected with that business. Www hnr block com Exception. Www hnr block com   Expenses, depreciation, and similar items may be treated as directly connected with the conduct of the unrelated business if all the following statements are true. Www hnr block com The unrelated business exploits the exempt activity. Www hnr block com The unrelated business is a type normally conducted for profit by taxable organizations. Www hnr block com The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. Www hnr block com The amount treated as directly connected is the smaller of: The excess of these expenses, depreciation, and similar items over the income from, or attributable to, the exempt activity; or The gross unrelated business income reduced by all other expenses, depreciation, and other items that are actually directly connected. Www hnr block com   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. Www hnr block com Exploitation of Exempt Activity—Advertising Sales The sale of advertising in a periodical of an exempt organization that contains editorial material related to the accomplishment of the organization's exempt purpose is an unrelated business that exploits an exempt activity, the circulation and readership of the periodical. Www hnr block com Therefore, in addition to direct advertising costs, exempt activity costs (expenses, depreciation, and similar expenses attributable to the production and distribution of the editorial or readership content) can be treated as directly connected with the conduct of the advertising activity. Www hnr block com (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. Www hnr block com ) Figuring unrelated business taxable income (UBTI). Www hnr block com   The UBTI of an advertising activity is the amount shown in the following chart. Www hnr block com IF gross advertising income is . Www hnr block com . Www hnr block com . Www hnr block com THEN UBTI is . Www hnr block com . Www hnr block com . Www hnr block com More than direct advertising costs The excess advertising income, reduced (but not below zero) by the excess, if any, of readership costs over circulation income. Www hnr block com Equal to or less than direct advertising costs Zero. Www hnr block com   • Circulation income and readership costs are not taken into account. Www hnr block com   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. Www hnr block com   The terms used in the chart are explained in the following discussions. Www hnr block com Periodical Income Gross advertising income. Www hnr block com   This is all the income from the unrelated advertising activities of an exempt organization periodical. Www hnr block com Circulation income. Www hnr block com   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). Www hnr block com It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. Www hnr block com It also includes allocable membership receipts if the right to receive the periodical is associated with a membership or similar status in the organization. Www hnr block com Allocable membership receipts. Www hnr block com   This is the part of membership receipts (dues, fees, or other charges associated with membership) equal to the amount that would have been charged and paid for the periodical if: The periodical was published by a taxable organization, The periodical was published for profit, and The member was an unrelated party dealing with the taxable organization at arm's length. Www hnr block com   The amount used to allocate membership receipts is the amount shown in the following chart. Www hnr block com   For this purpose, the total periodical costs are the sum of the direct advertising costs and the readership costs, explained under Periodical Costs, later. Www hnr block com The cost of other exempt activities means the total expenses incurred by the organization in connection with its other exempt activities, not offset by any income earned by the organization from those activities. Www hnr block com IF . Www hnr block com . Www hnr block com . Www hnr block com THEN the amount used to allocate membership receipts is . Www hnr block com . Www hnr block com . Www hnr block com 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. Www hnr block com The above condition does not apply, and 20% or more of the members pay reduced dues because they do not receive the periodical The reduction in dues for a member not receiving the periodical. Www hnr block com Neither of the above conditions applies The membership receipts multiplied by this fraction:   Total periodical costs Total periodical costs Plus Cost of other exempt activities Example 1. Www hnr block com U is an exempt scientific organization with 10,000 members who pay annual dues of $15. Www hnr block com One of U's activities is publishing a monthly periodical distributed to all of its members. Www hnr block com U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. Www hnr block com Since the nonmember circulation of U's periodical represents one-third (more than 20%) of its total circulation, the subscription price charged to nonmembers is used to determine the part of U's membership receipts allocable to the periodical. Www hnr block com Thus, U's allocable membership receipts are $100,000 ($10 times 10,000 members), and U's total circulation income for the periodical is $150,000 ($100,000 from members plus $50,000 from sales to nonmembers). Www hnr block com Example 2. Www hnr block com Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. Www hnr block com Assume also that U's members may elect not to receive the periodical, in which case their dues are reduced from $15 a year to $6 a year, and that only 3,000 members elect to receive the periodical and pay the full dues of $15 a year. Www hnr block com U's stated subscription price of $9 to members consistently results in an excess of total income (including gross advertising income) attributable to the periodical over total costs of the periodical. Www hnr block com Since the 500 copies of the periodical distributed to nonmembers represent only 14% of the 3,500 copies distributed, the $10 subscription price charged to nonmembers is not used to determine the part of membership receipts allocable to the periodical. Www hnr block com Instead, since 70% of the members elect not to receive the periodical and pay $9 less per year in dues, the $9 price is used to determine the subscription price charged to members. Www hnr block com Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). Www hnr block com U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). Www hnr block com Periodical Costs Direct advertising costs. Www hnr block com   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. Www hnr block com   Examples of allowable deductions under this classification include agency commissions and other direct selling costs, such as transportation and travel expenses, office salaries, promotion and research expenses, and office overhead directly connected with the sale of advertising lineage in the periodical. Www hnr block com Also included are other deductions commonly classified as advertising costs under standard account classifications, such as artwork and copy preparation, telephone, telegraph, postage, and similar costs directly connected with advertising. Www hnr block com   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. Www hnr block com For this purpose, the general account classifications of items includable in mechanical and distribution costs ordinarily employed in business-paper and consumer-publication accounting provide a guide for the computation. Www hnr block com Accordingly, the mechanical and distribution costs include the part of the costs and other expenses of composition, press work, binding, mailing (including paper and wrappers used for mailing), and bulk postage attributable to the advertising lineage of the publication. Www hnr block com   In the absence of specific and detailed records, the part of mechanical and distribution costs attributable to the periodical's advertising lineage can be based on the ratio of advertising lineage to total lineage in the periodical, if this allocation is reasonable. Www hnr block com Readership costs. Www hnr block com   These are all expenses, depreciation, and similar items that are directly connected with the production and distribution of the readership content of the periodical. Www hnr block com Costs partly attributable to other activities. Www hnr block com   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. Www hnr block com When expenses are attributable both to the periodical and to the organization's other activities, an allocation must be made on a reasonable basis. Www hnr block com The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. Www hnr block com Allocations based on dollar receipts from various exempt activities generally are not reasonable since receipts usually do not accurately reflect the costs associated with specific activities that an exempt organization conducts. Www hnr block com Consolidated Periodicals If an exempt organization publishes more than one periodical to produce income, it may treat all of them (but not less than all) as one in determining unrelated business taxable income from selling advertising. Www hnr block com It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. Www hnr block com Consolidated treatment, once adopted, must be followed consistently and is binding. Www hnr block com This treatment can be changed only with the consent of the Internal Revenue Service. Www hnr block com An exempt organization's periodical is published to produce income if: The periodical generates gross advertising income to the organization equal to at least 25% of its readership costs, and Publishing the periodical is an activity engaged in for profit. Www hnr block com Whether the publication of a periodical is an activity engaged in for profit can be determined only by all the facts and circumstances in each case. Www hnr block com The facts and circumstances must show that the organization carries on the activity for economic profit, although there may not be a profit in a particular year. Www hnr block com For example, if an organization begins publishing a new periodical whose total costs exceed total income in the start-up years because of lack of advertising sales, that does not mean that the organization did not have as its objective an economic profit. Www hnr block com The organization may establish that it had this objective by showing it can reasonably expect advertising sales to increase, so that total income will exceed costs within a reasonable time. Www hnr block com Example. Www hnr block com Y, an exempt trade association, publishes three periodicals that it distributes to its members: a weekly newsletter, a monthly magazine, and a quarterly journal. Www hnr block com Both the monthly magazine and the quarterly journal contain advertising that accounts for gross advertising income equal to more than 25% of their respective readership costs. Www hnr block com Similarly, the total income attributable to each periodical has exceeded the total deductions attributable to each periodical for substantially all the years they have been published. Www hnr block com The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. Www hnr block com The newsletter is a service that Y distributes to all of its members in an effort to keep them informed of changes occurring in the business world. Www hnr block com It is not engaged in for profit. Www hnr block com Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. Www hnr block com It may not consolidate the income and deductions from the newsletter with the income and deductions of its other periodicals, since the newsletter is not published for the production of income. Www hnr block com Modifications Net operating loss deduction. Www hnr block com   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. Www hnr block com However, the NOL for any tax year, the carrybacks and carryovers of NOLs, and the NOL deduction are determined without taking into account any amount of income or deduction that has been specifically excluded in computing unrelated business taxable income. Www hnr block com For example, a loss from an unrelated trade or business is not diminished because dividend income was received. Www hnr block com   If this were not done, organizations would, in effect, be taxed on their exempt income, since unrelated business losses then would be offset by dividends, interest, and other excluded income. Www hnr block com This would reduce the loss that could be applied against unrelated business income of prior or future tax years. Www hnr block com Therefore, to preserve the immunity of exempt income, all NOL computations are limited to those items of income and deductions that affect the unrelated business taxable income. Www hnr block com   In line with this concept, an NOL carryback or carryover is allowed only from a tax year for which the organization is subject to tax on unrelated business income. Www hnr block com   For example, if an organization just became subject to the tax last year, its NOL for that year is not a carryback to a prior year when it had no unrelated business taxable income, nor is its NOL carryover to succeeding years reduced by the related income of those prior years. Www hnr block com   However, in determining the span of years for which an NOL may be carried back or forward, the tax years for which the organization is not subject to the tax on unrelated business income are counted. Www hnr block com For example, if an organization was subject to the tax for 2009 and had an NOL for that year, the last tax year to which any part of that loss may be carried over is 2029, regardless of whether the organization was subject to the unrelated business income tax in any of the intervening years. Www hnr block com   For more details on the NOL deduction, including property eligible for an extended carryback period, see sections 172 and 1400N, Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, and Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Www hnr block com Charitable contributions deduction. Www hnr block com   An exempt organization is allowed to deduct its charitable contributions in computing its unrelated business taxable income whether or not the contributions are directly connected with the unrelated business. Www hnr block com   To be deductible, the contribution must be paid to another qualified organization. Www hnr block com For example, an exempt university that operates an unrelated business may deduct a contribution made to another university for educational work, but may not claim a deduction for contributions of amounts spent for carrying out its own educational program. Www hnr block com   For purposes of the deduction, a distribution by a trust made under the trust instrument to a beneficiary, which itself is a qualified organization, is treated the same as a contribution. Www hnr block com Deduction limits. Www hnr block com   An exempt organization that is subject to the unrelated business income tax at corporate rates is allowed a deduction for charitable contributions up to 10% of its unrelated business taxable income computed without regard to the deduction for contributions. Www hnr block com See the Instructions for Form 990-T for more information. Www hnr block com    An exempt trust that is subject to the unrelated business income tax at trust rates generally is allowed a deduction for charitable contributions in the same amounts as allowed for individuals. Www hnr block com However, the limit on the deduction is determined in relation to the trust's unrelated business taxable income computed without regard to the deduction, rather than in relation to adjusted gross income. Www hnr block com   Contributions in excess of the limits just described may be carried over to the next 5 tax years. Www hnr block com A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. Www hnr block com Suspension of deduction limits for farmers and ranchers. Www hnr block com   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. Www hnr block com See the Instructions for Form 990-T for details. Www hnr block com Specific deduction. Www hnr block com   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. Www hnr block com However, the specific deduction is not allowed in computing an NOL or the NOL deduction. Www hnr block com   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. Www hnr block com Exception. Www hnr block com   An exception is provided in the case of a diocese, province of a religious order, or a convention or association of churches that may claim a specific deduction for each parish, individual church, district, or other local unit. Www hnr block com In these cases, the specific deduction for each local unit is limited to the lower of: $1,000, or Gross income derived from an unrelated trade or business regularly conducted by the local unit. Www hnr block com   This exception applies only to parishes, districts, or other local units that are not separate legal entities, but are components of a larger entity (diocese, province, convention, or association) filing Form 990-T. Www hnr block com The parent organization must file a return reporting the unrelated business gross income and related deductions of all units that are not separate legal entities. Www hnr block com The local units cannot file separate returns. Www hnr block com However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. Www hnr block com See Title-holding corporations in chapter 1 for a discussion of the only situation in which more than one legal entity may be included on the same Form 990-T. Www hnr block com Example. Www hnr block com X is an association of churches and is divided into local units A, B, C, and D. Www hnr block com Last year, A, B, C, and D derived gross income of, respectively, $1,200, $800, $1,500, and $700 from unrelated businesses that they regularly conduct. Www hnr block com X may claim a specific deduction of $1,000 with respect to A, $800 with respect to B, $1,000 with respect to C, and $700 with respect to D. Www hnr block com Partnership Income or Loss An organization may have unrelated business income or loss as a member of a partnership, rather than through direct business dealings with the public. Www hnr block com If so, it must treat its share of the partnership income or loss as if it had conducted the business activity in its own capacity as a corporation or trust. Www hnr block com No distinction is made between limited and general partners. Www hnr block com The organization is required to notify the partnership of its tax-exempt status. Www hnr block com Thus, if an organization is a member of a partnership regularly engaged in a trade or business that is an unrelated trade or business with respect to the organization, the organization must include in its unrelated business taxable income its share of the partnership's gross income from the unrelated trade or business (whether or not distributed), and the deductions attributable to it. Www hnr block com The partnership income and deductions to be included in the organization's unrelated business taxable income are figured the same way as any income and deductions from an unrelated trade or business conducted directly by the organization. Www hnr block com The partnership is required to provide the organization this information on Schedule K-1. Www hnr block com Example. Www hnr block com An exempt educational organization is a partner in a partnership that operates a factory. Www hnr block com The partnership also holds stock in a corporation. Www hnr block com The exempt organization must include its share of the gross income from operating the factory in its unrelated business taxable income but may exclude its share of any dividends the partnership received from the corporation. Www hnr block com Different tax years. Www hnr block com   If the exempt organization and the partnership of which it is a member have different tax years, the partnership items that enter into the computation of the organization's unrelated business taxable income must be based on the income and deductions of the partnership for the partnership's tax year that ends within or with the organization's tax year. Www hnr block com S Corporation Income or Loss An organization that owns S corporation stock must take into account its share of the S corporation's income, deductions, or losses in figuring unrelated business taxable income, regardless of the actual source or nature of the income, deductions, and losses. Www hnr block com For example, the organization's share of the S corporation's interest and dividend income will be taxable, even though interest and dividends are normally excluded from unrelated business taxable income. Www hnr block com The organization must also take into account its gain or loss on the sale or other disposition of the S corporation stock in figuring unrelated business taxable income. Www hnr block com Special Rules for Foreign Organizations The unrelated business taxable income of a foreign organization exempt from tax under section 501(a) consists of the organization's: Unrelated business taxable income derived from sources within the United States but not effectively connected with the conduct of a trade or business within the United States, and Unrelated business taxable income effectively connected with the conduct of a trade or business within the United States, whether or not this income is derived from sources within the United States. Www hnr block com To determine whether income realized by a foreign organization is derived from sources within the United States or is effectively connected with the conduct of a trade or business within the United States, see sections 861 through 865 and the related regulations. Www hnr block com Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs The following discussion applies to: Social clubs described in section 501(c)(7), Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9), Supplemental unemployment compensation benefit trusts (SUBs) described in section 501(c)(17), and Group legal services organizations (GLSOs) described in section 501(c)(20). Www hnr block com These organizations must figure unrelated business taxable income under special rules. Www hnr block com Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. Www hnr block com ). Www hnr block com (See Exclusions under Income, earlier. Www hnr block com ) Therefore, they are generally subject to unrelated business income tax on this income. Www hnr block com The unrelated business taxable income of these organizations includes all gross income, less deductions directly connected with the production of that income, except that gross income for this purpose does not include exempt function income. Www hnr block com The dividends received by a corporation are not allowed in computing unrelated business taxable income because it is not an expense incurred in the production of income. Www hnr block com Losses from nonexempt activities. Www hnr block com   Losses from nonexempt activities of these organizations cannot be used to offset investment income unless the activities were undertaken with the intent to make a profit. Www hnr block com Example. Www hnr block com A private golf and country club that is a qualified tax-exempt social club has nonexempt function income from interest and from the sale of food and beverages to nonmembers. Www hnr block com The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. Www hnr block com Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. Www hnr block com Modifications. Www hnr block com   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). Www hnr block com Exempt function income. Www hnr block com   This is gross income from dues, fees, charges or similar items paid by members for goods, facilities, or services to the members or their dependents or guests, to further the organization's exempt purposes. Www hnr block com Exempt function income also includes income set aside for qualified purposes. Www hnr block com Income that is set aside. Www hnr block com   This is income set aside to be used for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. Www hnr block com In addition, for a VEBA, SUB, or GLSO, it is income set aside to provide for the payment of life, sick, accident, or other benefits. Www hnr block com   However, any amounts set aside by a VEBA or SUB that exceed the organization's qualified asset account limit (determined under section 419A) are unrelated business income. Www hnr block com Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. Www hnr block com These rules are explained in section 512(a)(3)(E)(ii). Www hnr block com   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. Www hnr block com In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. Www hnr block com   Set-aside income is generally excluded from gross income only if it is set aside in the tax year in which it is otherwise includible in gross income. Www hnr block com However, income set aside on or before the date for filing Form 990-T, including extensions of time, may, at the election of the organization, be treated as having been set aside in the tax year for which the return was filed. Www hnr block com The income set aside must have been includible in gross income for that earlier year. Www hnr block com Nonrecognition of gain. Www hnr block com   If the organization sells property used directly in performing an exempt function and purchases other property used directly in performing an exempt function, any gain on the sale is recognized only to the extent that the sales price of the old property exceeds the cost of the new property. Www hnr block com The purchase of the new property must be made within 1 year before the date of sale of the old property or within 3 years after the date of sale. Www hnr block com   This rule also applies to gain from an involuntary conversion of the property resulting from its destruction in whole or in part, theft, seizure, requisition, or condemnation. Www hnr block com Special Rules for Veterans' Organizations Unrelated business taxable income of a veterans' organization that is exempt under section 501(c)(19) does not include the net income from insurance business that is properly set aside. Www hnr block com The organization may set aside income from payments received for life, sick, accident, or health insurance for the organization's members or their dependents for the payment of insurance benefits or reasonable costs of insurance administration, or for use exclusively for religious, charitable, scientific, literary, or educational purposes, or the prevention of cruelty to children or animals. Www hnr block com For details, see section 512(a)(4) and the regulations under that section. Www hnr block com Income From Controlled Organizations The exclusions for interest, annuities, royalties, and rents, explained earlier in this chapter under Income, may not apply to a payment of these items received by a controlling organization from its controlled organization. Www hnr block com The payment is included in the controlling organization's unrelated business taxable income to the extent it reduced the net unrelated income (or increased the net unrelated loss) of the controlled organization. Www hnr block com All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. Www hnr block com Excess qualifying specified payments. Www hnr block com   Excess qualifying specified payments received or accrued from a controlled entity are included in a controlling exempt organization's unrelated business taxable income only on the amount that exceeds that which would have been paid or accrued if the payments had been determined under section 482. Www hnr block com Qualifying specified payments means any payments of interest, annuities, royalties, or rents received or accrued from the controlled organization pursuant to a binding written contract in effect on August 17, 2006, or to a contract which is a renewal, under substantially similar terms of a binding written contract in effect on August 17, 2006, and the payments are received or accrued before January 1, 2012. Www hnr block com   If a controlled participant is not required to file a U. Www hnr block com S. Www hnr block com income tax return, the participant must ensure that the copy or copies of the Regulations section 1. Www hnr block com 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. Www hnr block com S. Www hnr block com Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. Www hnr block com S. Www hnr block com Corporation or a Foreign Corporation Engaged in a U. Www hnr block com S. Www hnr block com Trade or Business, or any Form 8865, Return of U. Www hnr block com S. Www hnr block com Persons With Respect to Certain Foreign Partnerships, filed for that participant. Www hnr block com Addition to tax for valuation misstatements. Www hnr block com   Under section 512(b)(13)(E)(ii), the tax imposed on a controlling organization will be increased by 20 percent of the excess qualifying specified payments that are determined with or without any amendments or supplements, whichever is larger. Www hnr block com See section 512(b)(13)(E)(ii) for more information. Www hnr block com Net unrelated income. Www hnr block com   This is: For an exempt organization, its unrelated business taxable income, or For a nonexempt organization, the part of its taxable income that would be unrelated business taxable income if it were exempt and had the same exempt purposes as the controlling organization. Www hnr block com Net unrelated loss. Www hnr block com   This is: For an exempt organization, its NOL, or For a nonexempt organization, the part of its NOL that would be its NOL if it were exempt and had the same exempt purposes as the controlling organization. Www hnr block com Control. Www hnr block com   An organization is controlled if: For a corporation, the controlling organization owns (by vote or value) more than 50% of the stock, For a partnership, the controlling organization owns more than 50% of the profits or capital interests, or For any other organization, the controlling organization owns more than 50% of the beneficial interest. Www hnr block com For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. Www hnr block com   As a result, an exempt parent organization is treated as controlling any subsidiary in which it holds more than 50% of the voting power or value, whether directly (as in the case of a first-tier subsidiary) or indirectly (as in the case of a second-tier subsidiary). Www hnr block com Income from property financed with qualified 501(c)(3) bonds. Www hnr block com If any part of a 501(c)(3) organization's property financed with qualified 501(c)(3) bonds is used in a trade or business of any person other than a section 501(c)(3) organization or a governmental unit, and such use is not consistent with the requirements for qualified 501(c)(3) bonds under section 145, the section 501(c)(3) organization is considered to have received unrelated business income in the amount of the greater of the actual rental income or the fair rental value of the property for the period it is used. Www hnr block com No deduction is allowed for interest on the private activity bond. Www hnr block com See sections 150(b)(3) and (c) for more information. Www hnr block com Disposition of property received from taxable subsidiary and used in unrelated business. Www hnr block com A taxable 80%-owned subsidiary corporation of one or more tax-exempt entities is generally subject to tax on a distribution in liquidation of its assets to its exempt parent (or parents). Www hnr block com The assets are treated as if sold at fair market value. Www hnr block com Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. Www hnr block com S. Www hnr block com and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. Www hnr block com A taxable corporation that transfers substantially all of its assets to a tax-exempt entity in a transaction that otherwise qualifies for nonrecognition treatment must recognize gain on the transaction as if it sold the assets at fair market value. Www hnr block com However, such a transfer is not taxable if it qualifies as a like-kind exchange under section 1031 or an involuntary conversion under section 1033. Www hnr block com In such a case the built-in appreciation is preserved in the replacement property received in the transaction. Www hnr block com A corporation that changes status from taxable to tax-exempt is treated generally as if it transferred all of its assets to a tax-exempt entity immediately before the change in status (thus subjecting it to the tax on a deemed sale for fair market value). Www hnr block com This rule does not apply where the taxable corporation becomes exempt within 3 years of formation, or had previously been exempt and within several years (generally a period of 3 years) regains exemption, unless the principal purpose of the transactions is to avoid the tax on the change in status. Www hnr block com In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. Www hnr block com If the parent later disposes of the property, then any gain (not in excess of the amount not recognized) is included in the parent's unrelated business taxable income. Www hnr block com If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. Www hnr block com Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. Www hnr block com Losses on the transfer of assets to a tax-exempt entity are disallowed if part of a plan with a principal purpose of recognizing losses. Www hnr block com Income From Debt-Financed Property Investment income that would otherwise be excluded from an exempt organization's unrelated business taxable income (see Exclusions under Income earlier) must be included to the extent it is derived from debt-financed property. Www hnr block com The amount of income included is proportionate to the debt on the property. Www hnr block com Debt-Financed Property In general, the term “debt-financed property” means any property held to produce income (including gain from its disposition) for which there is an acquisition indebtedness at any time during the tax year (or during the 12-month period before the date of the property's disposal, if it was disposed of during the tax year). Www hnr block com It includes rental real estate, tangible personal property, and corporate stock. Www hnr block com Acquisition Indebtedness For any debt-financed property, acquisition indebtedness is the unpaid amount of debt incurred by an organization: When acquiring or improving the property, Before acquiring or improving the property if the debt would not have been incurred except for the acquisition or improvement, and After acquiring or improving the property if: The debt would not have been incurred except for the acquisition or improvement, and Incurring the debt was reasonably foreseeable when the property was acquired or improved. Www hnr block com The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. Www hnr block com That an organization may not have foreseen the need to incur a debt before acquiring or improving the property does not necessarily mean that incurring the debt later was not reasonably foreseeable. Www hnr block com Example 1. Www hnr block com Y, an exempt scientific organization, mortgages its laboratory to replace working capital used in remodeling an office building that Y rents to an insurance company for nonexempt purposes. Www hnr block com The debt is acquisition indebtedness since the debt, though incurred after the improvement of the office building, would not have been incurred without the improvement, and the debt was reasonably foreseeable when, to make the improvement, Y reduced its working capital below the amount necessary to continue current operations. Www hnr block com Example 2. Www hnr block com X, an exempt organization, forms a partnership with A and B. Www hnr block com The partnership agreement provides that all three partners will share equally in the profits of the partnership, each will invest $3 million, and X will be a limited partner. Www hnr block com X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. Www hnr block com The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. Www hnr block com The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. Www hnr block com The loan is secured by a mortgage on the entire office building. Www hnr block com By agreement with Y bank, X is not personally liable for payment of the mortgage. Www hnr block com X has acquisition indebtedness of $7 million. Www hnr block com This amount is the $2 million debt X incurred in acquiring the partnership interest, plus the $5 million that is X's allocable part of the partnership's debt incurred to buy the office building (one-third of $15 million). Www hnr block com Example 3. Www hnr block com A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. Www hnr block com The subsidiary used the funds to pay a debt owed to a third party that was previously incurred in acquiring two income-producing office buildings. Www hnr block com Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. Www hnr block com The union has no outstanding debt on the property. Www hnr block com The subsidiary's debt to the union is represented by a demand note on which the subsidiary makes payments whenever it has the available cash. Www hnr block com The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. Www hnr block com Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. Www hnr block com In this situation, the very nature of the title-holding company and the parent-subsidiary relationship shows this debt to be merely a matter of accounting between the two organizations. Www hnr block com Accordingly, the debt is not acquisition indebtedness. Www hnr block com Change in use of property. Www hnr block com   If an organization converts property that is not debt-financed property to a use that results in its treatment as debt-financed property, the outstanding principal debt on the property is thereafter treated as acquisition indebtedness. Www hnr block com Example. Www hnr block com Four years ago a university borrowed funds to acquire an apartment building as housing for married students. Www hnr block com Last year, the university rented the apartment building to the public for nonexempt purposes. Www hnr block com The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. Www hnr block com Continued debt. Www hnr block com   If an organization sells property and, without paying off debt that would be acquisition indebtedness if the property were debt-financed property, buys property that is otherwise debt-financed property, the unpaid debt is acquisition indebtedness for the new property. Www hnr block com This is true even if the original property was not debt-financed property. Www hnr block com Example. Www hnr block com To house its administration offices, an exempt organization bought a building using $600,000 of its own funds and $400,000 of borrowed funds secured by a pledge of its securities. Www hnr block com The office building was not debt-financed property. Www hnr block com The organization later sold the building for $1 million without repaying the $400,000 loan. Www hnr block com It used the sale proceeds to buy an apartment building it rents to the general public. Www hnr block com The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. Www hnr block com Property acquired subject to mortgage or lien. Www hnr block com   If property (other than certain gifts, bequests, and devises) is acquired subject to a mortgage, the outstanding principal debt secured by that mortgage is treated as acquisition indebtedness even if the organization did not assume or agree to pay the debt. Www hnr block com Example. Www hnr block com An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. Www hnr block com The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. Www hnr block com Liens similar to a mortgage. Www hnr block com   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. Www hnr block com A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. Www hnr block com However, when state law provides that a lien for taxes or assessments attaches to property before the taxes or assessments become due and payable, the lien is not treated as a mortgage until after the taxes or assessments have become due and payable and the organization has had an opportunity to pay the lien in accordance with state law. Www hnr block com Liens similar to mortgages include (but are not limited to): Deeds of trust, Conditional sales contracts, Chattel mortgages, Security interests under the Uniform Commercial Code, Pledges, Agreements to hold title in escrow, and Liens for taxes or assessments (other than those discussed earlier in this paragraph). Www hnr block com Exception for property acquired by gift, bequest, or devise. Www hnr block com   If property subject to a mortgage is acquired by gift, bequest, or devise, the outstanding principal debt secured by the mortgage is not treated as acquisition indebtedness during the 10-year period following the date the organization receives the property. Www hnr block com However, this applies to a gift of property only if:    The mortgage was placed on the property more than 5 years before the date the organization received it, and The donor held the property for more than 5 years before the date the organization received it. Www hnr block com   This exception does not apply if an organization assumes and agrees to pay all or part of the debt secured by the mortgage or makes any payment for the equity in the property owned by the donor or decedent (other than a payment under an annuity obligation excluded from the definition of acquisition indebtedness, discussed under Debt That Is Not Acquisition Indebtedness, later). Www hnr block com   Whether an organization has assumed and agreed to pay all or part of a debt in order to acquire the property is determined by the facts and circumstances of each situation. Www hnr block com Modifying existing debt. Www hnr block com   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. Www hnr block com When the principal of the modified debt is more than the outstanding principal of the old debt, the excess is treated as a separate debt. Www hnr block com Extension or renewal. Www hnr block com   In general, any modification or substitution of the terms of a debt by an organization is considered an extension or renewal of the original debt, rather than the start of a new one, to the extent that the outstanding principal of the debt does not increase. Www hnr block com   The following are examples of acts resulting in the extension or renewal of a debt: Substituting liens to secure the debt, Substituting obligees whether or not with the organization's consent, Renewing, extending, or accelerating the payment terms of the debt, and Adding, deleting, or substituting sureties or other primary or secondary obligors. Www hnr block com Debt increase. Www hnr block com   If the outstanding principal of a modified debt is more than that of the unmodified debt, and only part of the refinanced debt is acquisition indebtedness, the payments on the refinanced debt must be allocated between the old debt and the excess. Www hnr block com Example. Www hnr block com An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. Www hnr block com The organization borrows another $100,000, which is not acquisition indebtedness, from the same lender, resulting in a $600,000 note for the total obligation. Www hnr block com A payment of $60,000 on the total obligation would reduce the acquisition indebtedness by $50,000 ($60,000 x $500,000/$600,000) and the excess debt by $10,000. Www hnr block com Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. Www hnr block com These include the following. Www hnr block com Debts incurred in performing an exempt purpose. Www hnr block com Annuity obligations. Www hnr block com Securities loans. Www hnr block com Real property debts of qualified organizations. Www hnr block com Certain Federal financing. Www hnr block com Debt incurred in performing exempt purpose. Www hnr block com   A debt incurred in performing an exempt purpose is not acquisition indebtedness. Www hnr block com For example, acquisition indebtedness does not include the debt an exempt credit union incurs in accepting deposits from its members or the debt an exempt organization incurs in accepting payments from its members to provide them with insurance, retirement, or other benefits. Www hnr block com Annuity obligation. Www hnr block com   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. Www hnr block com It must be the sole consideration (other than a mortgage on property acquired by gift, bequest, or devise that meets the exception discussed under Property acquired subject to mortgage or lien, earlier in this chapter) issued in exchange for the property received. Www hnr block com Its present value, at the time of exchange, must be less than 90% of the value of the prior owner's equity in the property received. Www hnr block com It must be payable over the lives of either one or two individuals living when issued. Www hnr block com It must be payable under a contract that: Does not guarantee a minimum nor specify a maximum number of payments, and Does not provide for any adjustment of the amount of the annuity payments based on the income received from the transferred property or any other property. Www hnr block com Example. Www hnr block com X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. Www hnr block com In return X promises to pay A $6,000 a year for the rest of A's life, with neither a minimum nor maximum number of payments specified. Www hnr block com The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. Www hnr block com The present value of this annuity is $81,156, determined from IRS valuation tables. Www hnr block com Since the value of the annuity is less than 90 percent of A's $100,000 equity in the property transferred and the annuity meets all the other requirements just discussed, the obligation to make annuity payments is not acquisition indebtedness. Www hnr block com Securities loans. Www hnr block com   Acquisition indebtedness does not include an obligation of the exempt organization to return collateral security provided by the borrower of the exempt organization's securities under a securities loan agreement (discussed under Exclusions earlier in this chapter). Www hnr block com This transaction is not treated as the borrowing by the exempt organization of the collateral furnished by the borrower (usually a broker) of the securities. Www hnr block com   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from
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Www hnr block com Publication 3 - Main Content Table of Contents Gross IncomeForeign Source Income Military Spouses Residency Relief Act (MSRRA) Community Property Form W-2 Codes Adjustments to IncomeArmed Forces Reservists Individual Retirement Arrangements Moving Expenses Combat Zone ExclusionCombat Zone Serving in a Combat Zone Amount of Exclusion Alien StatusResident Aliens Nonresident Aliens Dual-Status Aliens Sale of HomePeriod of suspension. Www hnr block com Qualified official extended duty. Www hnr block com ForeclosuresLump Sum Portion of Settlement Payment. Www hnr block com Interest Payment on Lump Sum Portion of Settlement Payment. Www hnr block com Lost Equity Portion of Settlement Payment. Www hnr block com The rules that apply to a lost equity payment you received for the foreclosure of a property that was not your main home are different. Www hnr block com Interest Payment on Lost Equity Portion of Settlement Payment. Www hnr block com Itemized DeductionsEmployee Business Expenses Repayments CreditsFirst-Time Homebuyer Credit Child Tax Credit Earned Income Credit Credit for Excess Social Security Tax Withheld Forgiveness of Decedent's Tax LiabilityCombat Zone Related Forgiveness Terrorist or Military Action Related Forgiveness Claims for Tax Forgiveness Filing ReturnsSame-Sex Marriage Where To File When To File Signing Returns Extension of DeadlinesService That Qualifies for an Extension of Deadline Length of Extension Actions for Which Deadlines Are Extended Deferral of Payment Maximum Rate of Interest How To Get Tax HelpLow Income Taxpayer Clinics Gross Income Members of the Armed Forces receive many different types of pay and allowances. Www hnr block com Some are included in gross income while others are excluded from gross income. Www hnr block com Included items (Table 1) are subject to tax and must be reported on your tax return. Www hnr block com Excluded items (Table 2) are not subject to tax, but may have to be shown on your tax return. Www hnr block com For information on the exclusion of pay for service in a combat zone and other tax benefits for combat zone participants, see Combat Zone Exclusion and Extension of Deadlines , later. Www hnr block com Table 1. Www hnr block com Included Items These items are included in gross income, unless the pay is for service in a combat zone. Www hnr block com Basic pay • Active duty   Bonus pay • Career status   • Attendance at a designated service school     • Enlistment  • Officer   • Back wages     • Overseas extension   • CONUS COLA       • Reenlistment   • Drills         • Reserve training         • Training duty   Other pay  • Accrued leave          • High deployment per diem Special • Aviation career incentives      • Personal money allowances paid to pay • Career sea     high-ranking officers   • Diving duty      • Student loan repayment from programs   • Foreign duty (outside the 48 contiguous     such as the Department of Defense   states and the District of Columbia)     Educational Loan Repayment Program   • Foreign language proficiency     when year's service (requirement) is not   • Hardship duty     attributable to a combat zone   • Hostile fire or imminent danger         • Medical and dental officers   Incentive pay  • Submarine   • Nuclear-qualified officers      • Flight   • Optometry      • Hazardous duty   • Pharmacy      • High altitude/Low Opening (HALO)   • Special compensation for assistance with activities of daily living (SCAADL)         • Special duty assignment pay         • Veterinarian         • Voluntary Separation Incentive       Basic allowance for housing (BAH). Www hnr block com   You can still deduct mortgage interest and real estate taxes on your home if you pay these expenses with your BAH. Www hnr block com Table 2. Www hnr block com Excluded Items The exclusion for certain items applies whether the item is furnished in kind or is a reimbursement or allowance. Www hnr block com There is no exclusion for the personal use of a government-provided vehicle. Www hnr block com Combat  zone pay • Compensation for active service while in a combat zone Note: Limited amount for officers     • Housing and cost-of-living allowances abroad paid by the U. Www hnr block com S. Www hnr block com Government or by a foreign government         • OHA (Overseas Housing Allowance)                     Other pay • Defense counseling         • Disability, including payments received for injuries incurred as a direct result of a terrorist or military action         • Group-term life insurance   Moving • Dislocation   • Professional education   allowances • Military base realignment and   • ROTC educational and subsistence     closure benefit    allowances     (the exclusion is limited as   • State bonus pay for service in a     described above)   combat zone     • Move-in housing   • Survivor and retirement protection     • Moving household and   plan premiums     personal items   • Uniform allowances     • Moving trailers or mobile homes   • Uniforms furnished to enlisted     • Storage   personnel     • Temporary lodging and         temporary lodging expenses                 Travel • Annual round trip for dependent Death • Burial services   allowances students allowances • Death gratuity payments to     • Leave between consecutive   eligible survivors     overseas tours   • Travel of dependents to burial site     • Reassignment in a dependent         restricted status Family • Certain educational expenses for     • Transportation for you or your allowances dependents     dependents during ship overhaul   • Emergencies     or inactivation   • Evacuation to a place of safety     • Per diem   • Separation             In-kind military • Dependent-care assistance program Living • BAH (Basic Allowance for Housing)   benefits • Legal assistance allowances • BAS (Basic Allowance for Subsistence)     • Medical/dental care         • Commissary/exchange discounts         • Space-available travel on government aircraft           Death gratuity. Www hnr block com   Any death gratuity paid to a survivor of a member of the Armed Forces is excluded from gross income. Www hnr block com Differential wage payments. Www hnr block com   Differential wage payments are any payments made by an employer to an individual for a period during which the individual is performing service in the uniformed services while on active duty for a period of more than 30 days and that represent all or a portion of the wages the individual would have received from the employer if the individual was performing services for the employer. Www hnr block com These amounts are taxable and cannot be excluded as combat pay. Www hnr block com Military base realignment and closure benefit. Www hnr block com   Payments made under the Homeowners Assistance Program (HAP) generally are excluded from income. Www hnr block com However, the excludable amount cannot be more than the maximum amount described in subsection (c) of 42 USC 3374 as in effect on November 6, 2009. Www hnr block com Any part of the payment that is more than this limit is included in gross income. Www hnr block com For more information about the HAP, see http://hap. Www hnr block com usace. Www hnr block com army. Www hnr block com mil/Overview. Www hnr block com html. Www hnr block com Qualified reservist distribution (QRD). Www hnr block com   A QRD is a distribution to an individual of all or part of the individual's balance in a cafeteria plan or health flexible spending arrangement if: The individual was a reservist who was ordered or called to active duty for more than 179 days or for an indefinite period, and The distribution is made no sooner than the date the reservist was ordered or called to active duty and no later than the last day reimbursements could otherwise be made under the arrangement for the plan year which includes the date of the order or the call to duty. Www hnr block com A QRD is included in gross income and is subject to employment taxes. Www hnr block com The employer must include the QRD (reduced by after-tax contributions to the health flexible spending arrangement) as wages on Form W-2, Wage and Tax Statement. Www hnr block com Thrift Savings Plan (TSP) distributions. Www hnr block com   If you participate in the Uniformed Services TSP and receive a distribution from your account, the distribution is generally included in your taxable income. Www hnr block com   If your contributions included tax-exempt combat zone pay, the part of the distribution attributable to those contributions is tax exempt. Www hnr block com However, the earnings on the tax-exempt portion of the distribution are taxable. Www hnr block com The TSP will provide a statement showing the taxable and non-taxable portions of the distribution. Www hnr block com Roth Thrift Savings Plan (TSP) balance. Www hnr block com   You may be able to contribute to a designated Roth Account through the TSP known as the Roth TSP. Www hnr block com Roth TSP contributions are after-tax contributions, subject to the same contribution limits as the traditional TSP. Www hnr block com Qualified distributions from a Roth TSP are not included in your income. Www hnr block com For more details, see Thrift Savings Accounts in Part II of Publication 721, Tax Guide to U. Www hnr block com S. Www hnr block com Civil Service Retirement Benefits. Www hnr block com State bonus payments. Www hnr block com   Bonus payments made by a state (or a political subdivision thereof) to a member or former member of the uniformed services of the United States or to a dependent of such member are considered combat pay (and therefore may not be taxable) if the payments are made only because of the member's service in a combat zone. Www hnr block com See Combat Zone , later, for a list of designated combat zones. Www hnr block com Foreign Source Income If you are a U. Www hnr block com S. Www hnr block com citizen with income from sources outside the United States (foreign income), you must report all of that income (except for amounts that U. Www hnr block com S. Www hnr block com law allows you to exclude) on your tax return. Www hnr block com This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2 or a Form 1099. Www hnr block com This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties). Www hnr block com Certain taxpayers can exclude income earned in foreign countries. Www hnr block com For 2013, this exclusion amount can be as much as $97,600. Www hnr block com However, the foreign earned income exclusion does not apply to the wages and salaries of military and civilian employees of the U. Www hnr block com S. Www hnr block com Government. Www hnr block com Employees of the U. Www hnr block com S. Www hnr block com Government include those who work at United States Armed Forces exchanges, commissioned and noncommissioned officers' messes, Armed Forces motion picture services, and similar personnel. Www hnr block com Other foreign income earned by military personnel or their spouses may be eligible for the foreign earned income exclusion. Www hnr block com For more information on the exclusion, see Publication 54. Www hnr block com Residents of American Samoa may be able to exclude income from American Samoa. Www hnr block com This possession exclusion does not apply to wages and salaries of military and civilian employees of the U. Www hnr block com S. Www hnr block com Government. Www hnr block com If you need information on the possession exclusion, see Publication 570, Tax Guide for Individuals With Income From U. Www hnr block com S. Www hnr block com Possessions. Www hnr block com Military Spouses Residency Relief Act (MSRRA) If you are the civilian spouse of an active duty U. Www hnr block com S. Www hnr block com military servicemember and your domicile is the same as the servicemember's, you can choose to keep your prior residence or domicile for tax purposes when you accompany the servicemember spouse, who is relocating under military orders to a new duty station in one of the 50 states, the District of Columbia, or a U. Www hnr block com S. Www hnr block com possession. Www hnr block com See Publication 570 for more information. Www hnr block com Domicile. Www hnr block com   Your domicile is the permanent legal home you intend to use for an indefinite or unlimited period, and to which, when absent, you intend to return. Www hnr block com It is not always where you presently live. Www hnr block com Community Property The pay you earn as a member of the Armed Forces may be subject to community property laws depending on your marital status, your domicile, and the nature of the payment. Www hnr block com The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Www hnr block com Marital status. Www hnr block com   Community property rules apply to married persons whose domicile during the tax year was in a community property state. Www hnr block com The rules may affect your tax liability if you file separate returns or are divorced during the year. Www hnr block com Nevada, Washington, and California domestic partners. Www hnr block com   A registered domestic partner in Nevada, Washington, or California generally must report half the combined income of the individual and his or her domestic partner. Www hnr block com See Form 8958 and Publication 555, Community Property. Www hnr block com Nature of the payment. Www hnr block com   Active duty military pay is subject to community property laws. Www hnr block com Armed Forces retired or retainer pay may be subject to community property laws. Www hnr block com   For more information on community property laws, see Publication 555. Www hnr block com Form W-2 Codes Form W-2 shows your total pay and other compensation and the income tax, social security tax, and Medicare tax that was withheld during the year. Www hnr block com Form W-2 also shows other amounts that you may find important in box 12. Www hnr block com The amounts shown in box 12 are generally preceded by a code. Www hnr block com A list of codes used in box 12 is shown, next. Www hnr block com Form W-2 Reference Guide for Box 12 Codes A Uncollected social security or RRTA J Nontaxable sick pay T Adoption benefits   tax on tips             K 20% excise tax on excess golden V Income from exercise of B Uncollected Medicare tax on tips   parachute payments   nonstatutory stock option(s)             C Taxable cost of group-term life L Substantiated employee business W Employer contributions (including   insurance over $50,000   expense reimbursements   employee contributions through a           cafeteria plan) to an employee's D Elective deferrals under a section M Uncollected social security or RRTA   health savings account (HSA)   401(k) cash or deferred arrangement   tax on taxable cost of group-term life       plan (including a SIMPLE 401(k)   insurance over $50,000 (former Y Deferrals under a section 409A   arrangement)   employees only)   nonqualified deferred           compensation plan E Elective deferrals under a section N Uncollected Medicare tax on taxable       403(b) salary reduction agreement   cost of group-term life insurance Z Income under section 409A on a       over $50,000 (former employees only)   nonqualified deferred F Elective deferrals under a section       compensation plan   408(k)(6) salary reduction SEP P Excludable moving expense           reimbursements paid directly to AA Designated Roth contributions G Elective deferrals and employer   employee   under a section 401(k) plan   contributions (including nonelective           deferrals) to a section 457(b) Q Nontaxable combat pay BB Designated Roth contributions   deferred compensation plan       under a section 403(b) plan     R Employer contributions to an Archer     H Elective deferrals to a section   MSA DD Cost of employer-sponsored   501(c)(18)(D) tax-exempt       health coverage   organization plan S Employee salary reduction contributions under a section 408(p) SIMPLE  EE  Designated Roth contributions under a governmental section 457(b) plan  Note. Www hnr block com For more information on these codes, see your Form(s) W-2. Www hnr block com Adjustments to Income Adjusted gross income is your total income minus certain adjustments. Www hnr block com The following adjustments are of particular interest to members of the Armed Forces. Www hnr block com Armed Forces Reservists If you are a member of a reserve component of the Armed Forces and you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you can deduct your unreimbursed travel expenses as an adjustment to income on line 24 of Form 1040, U. Www hnr block com S. Www hnr block com Individual Income Tax Return, rather than as a miscellaneous itemized deduction. Www hnr block com Include all unreimbursed expenses from the time you leave home until the time you return home. Www hnr block com The deduction is limited to the amount the federal government generally reimburses its employees for travel expenses. Www hnr block com For more information about this limit, see Per Diem and Car Allowances in chapter 6 of Publication 463. Www hnr block com Member of a reserve component. Www hnr block com   You are a member of a reserve component of the Armed Forces if you are in the Army, Navy, Marine Corps, Air Force, or Coast Guard Reserve, the Army National Guard of the United States, the Air National Guard of the United States, or the Reserve Corps of the Public Health Service. Www hnr block com How to report. Www hnr block com   If you have reserve-related travel that takes you more than 100 miles from home, you should first complete Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses. Www hnr block com Then enter on Form 1040, line 24, the part of your expenses, up to the federal rate, included on Form 2106, line 10, or Form 2106-EZ, line 6, that is for reserve-related travel more than 100 miles from your home. Www hnr block com Subtract this amount from the total on Form 2106, line 10, or Form 2106-EZ, line 6, and deduct the balance as an itemized deduction on Schedule A (Form 1040), line 21. Www hnr block com Example. Www hnr block com Captain Harris, a member of the Army Reserve, traveled to a location 220 miles from his home to perform his work in the reserves in April 2013. Www hnr block com He incurred $1,549 of unreimbursed expenses consisting of $249 for mileage (440 miles × 56. Www hnr block com 5 cents per mile), $300 for meals, and $1,000 for lodging. Www hnr block com He also had other deductible mileage expenses of $110 for several trips to a location 20 miles from his home. Www hnr block com Only 50% of his meal expenses are deductible. Www hnr block com He shows his total deductible travel expenses of $1,509 ($249 + $150 (50% of $300) + $1,000 + $110) on Form 2106, line 10. Www hnr block com He enters the $1,399 ($249 + $150 + $1,000) for travel over 100 miles from home on Form 1040, line 24. Www hnr block com He then subtracts that $1,399 from the amount on Form 2106, $1,509, and enters $110 on Schedule A (Form 1040), line 21. Www hnr block com Individual Retirement Arrangements Generally, you can deduct the lesser of the contributions to your traditional individual retirement arrangement (IRA) for the year or the general limit (or spousal IRA limit, if applicable). Www hnr block com However, if you or your spouse was covered by an employer-maintained retirement plan at any time during the year for which contributions were made, you may not be able to deduct all of the contributions. Www hnr block com The Form W-2 you or your spouse receives from an employer has a box used to indicate whether you were covered for the year. Www hnr block com The “Retirement plan” box should have a mark in it if you were covered. Www hnr block com For purposes of a deduction for contributions to a traditional IRA, Armed Forces members (including reservists on active duty for more than 90 days during the year) are considered covered by an employer-maintained retirement plan. Www hnr block com Individuals serving in the U. Www hnr block com S. Www hnr block com Armed Forces or in support of the U. Www hnr block com S. Www hnr block com Armed Forces in designated combat zones have additional time to make a qualified retirement contribution to an IRA. Www hnr block com For more information on this extension of deadline provision, see Extension of Deadlines , later. Www hnr block com For more information on IRAs, see Publication 590. Www hnr block com Combat Pay For IRA purposes, your compensation includes nontaxable combat pay. Www hnr block com This means that even though you do not have to include the combat pay in your gross income, you do include it in your compensation when figuring the limits on contributions and deductions of contributions to IRAs. Www hnr block com Qualified Reservist Distributions A qualified reservist distribution is defined below. Www hnr block com It is not subject to the 10% additional tax on early distributions from certain retirement plans. Www hnr block com Definition. Www hnr block com   A distribution you receive is a qualified reservist distribution if the following requirements are met. Www hnr block com You were ordered or called to active duty after September 11, 2001. Www hnr block com You were ordered or called to active duty for a period of more than 179 days or for an indefinite period because you are a member of a reserve component (see Member of a reserve component , earlier, under Armed Forces Reservists. Www hnr block com ) The distribution is from an IRA or from amounts attributable to elective deferrals under a section 401(k) or 403(b) plan or a similar arrangement. Www hnr block com The distribution was made no earlier than the date of the order or call to active duty and no later than the close of the active duty period. Www hnr block com Qualified Reservist Repayments You may be able to contribute (repay) to an IRA amounts equal to any qualified reservist distributions (defined earlier) you received. Www hnr block com You can make these repayment contributions even if they would cause your total contributions to the IRA to be more than the general limit on contributions. Www hnr block com You make these repayment contributions to an IRA, even if you received the qualified reservist distribution from a section 401(k) or 403(b) plan or a similar arrangement. Www hnr block com Limit. Www hnr block com   Your qualified reservist repayments cannot be more than your qualified reservist distributions. Www hnr block com When repayment contributions can be made. Www hnr block com   You cannot make these repayment contributions after the date that is 2 years after your active duty period ends. Www hnr block com No deduction. Www hnr block com   You cannot deduct qualified reservist repayments. Www hnr block com Figuring your IRA deduction. Www hnr block com   The repayment of qualified reservist distributions does not affect the amount you can deduct as an IRA contribution. Www hnr block com Reporting the repayment. Www hnr block com   If you repay a qualified reservist distribution, include the amount of the repayment with nondeductible contributions on line 1 of Form 8606, Nondeductible IRAs. Www hnr block com Moving Expenses To deduct moving expenses, you generally must meet certain time and distance tests. Www hnr block com However, if you are a member of the Armed Forces on active duty and you move because of a permanent change of station, you do not have to meet these tests. Www hnr block com You can deduct your unreimbursed moving expenses on Form 3903. Www hnr block com Permanent change of station. Www hnr block com   A permanent change of station includes: A move from your home to your first post of active duty, A move from one permanent post of duty to another, and A move from your last post of duty to your home or to a nearer point in the United States. Www hnr block com The move must occur within 1 year of ending your active duty or within the period allowed under the Joint Federal Travel Regulations. Www hnr block com Spouse and dependents. Www hnr block com   If you are the spouse or dependent of a member of the Armed Forces who deserts, is imprisoned, or dies, a permanent change of station for you includes a move to: The member's place of enlistment or induction, Your, or the member's, home of record, or A nearer point in the United States. Www hnr block com   If the military moves you to or from a different location than the member, the moves are treated as a single move to your new main job location. Www hnr block com Services or reimbursements provided by the government. Www hnr block com   Do not include in your income the value of moving and storage services provided by the government because of a permanent change of station. Www hnr block com Similarly, do not include in income amounts received as a dislocation allowance, temporary lodging expense, temporary lodging allowance, or move-in housing allowance. Www hnr block com   Generally, if the total reimbursements or allowances that you receive from the government because of the move are more than your actual moving expenses, the excess is included in your wages on Form W-2. Www hnr block com However, if any reimbursements or allowances (other than dislocation, temporary lodging, temporary lodging expense, or move-in housing allowances) exceed the cost of moving and the excess is not included in your wages on Form W-2, the excess still must be included in gross income on Form 1040, line 7. Www hnr block com   Use Form 3903 to deduct qualified expenses that exceed your reimbursements and allowances (including dislocation, temporary lodging, temporary lodging expense, or move-in housing allowances that are excluded from gross income). Www hnr block com   If you must relocate and your spouse and dependents move to or from a different location, do not include in income reimbursements, allowances, or the value of moving and storage services provided by the government to move you and your spouse and dependents to and from the separate locations. Www hnr block com   Do not deduct any expenses for moving services that were provided by the government. Www hnr block com Also, do not deduct any expenses that were reimbursed by an allowance you did not include in income. Www hnr block com Deductible Moving Expenses If you move because of a permanent change of station, you can deduct the reasonable unreimbursed expenses of moving you and members of your household. Www hnr block com You can deduct expenses (if not reimbursed or furnished in kind) for: Moving household goods and personal effects, and Travel. Www hnr block com Moving household goods and personal effects. Www hnr block com   You can deduct the expenses of moving your household goods and personal effects, including expenses for hauling a trailer, packing, crating, in-transit storage, and insurance. Www hnr block com You cannot deduct expenses for moving furniture or other goods you bought on the way from your old home to your new home. Www hnr block com Storing and insuring household goods and personal effects. Www hnr block com   You can include only the cost of storing and insuring your household goods and personal effects within any period of 30 consecutive days after the day these goods and effects are moved from your former home and before they are delivered to your new home. Www hnr block com Travel. Www hnr block com   You can deduct the expenses of traveling (including lodging but not meals) from your old home to your new home, including car expenses and air fare. Www hnr block com You can deduct as car expenses either: Your actual out-of-pocket expenses such as gas and oil, or The standard mileage rate of 24 cents a mile. Www hnr block com   You can add parking fees and tolls to the amount claimed under either method. Www hnr block com You cannot deduct any expenses for meals. Www hnr block com You cannot deduct the cost of unnecessary side trips or lavish and extravagant lodging. Www hnr block com Member of your household. Www hnr block com   A member of your household is anyone who has both your former home and your new home as his or her main home. Www hnr block com It does not include a tenant or employee unless you can claim that person as a dependent. Www hnr block com Foreign Moves A foreign move is a move from the United States or its possessions to a foreign country or from one foreign country to another foreign country. Www hnr block com A move from a foreign country to the United States or its possessions is not a foreign move. Www hnr block com For a foreign move, the deductible moving expenses described earlier are expanded to include the reasonable expenses of: Moving your household goods and personal effects to and from storage, and Storing these items for part or all of the time the new job location remains your main job location. Www hnr block com The new job location must be outside the United States. Www hnr block com Reporting Moving Expenses Figure moving expense deductions on Form 3903. Www hnr block com Carry the deduction from Form 3903 to Form 1040, line 26. Www hnr block com For more information, see Publication 521 and Form 3903. Www hnr block com Combat Zone Exclusion If you are a member of the U. Www hnr block com S. Www hnr block com Armed Forces who serves in a combat zone (defined later), you can exclude certain pay from your income. Www hnr block com This pay is generally referred to as “combat pay. Www hnr block com ” You do not actually need to show the exclusion on your tax return because income that qualifies for the combat zone exclusion is not included in the wages reported on your Form W-2. Www hnr block com (See Form W-2 , later. Www hnr block com ) The month for which you receive the pay must be a month in which you either served in a combat zone or were hospitalized as a result of wounds, disease, or injury incurred while serving in the combat zone. Www hnr block com You do not have to receive the excluded pay while you are in a combat zone, are hospitalized, or in the same year you served in a combat zone. Www hnr block com If you are an enlisted member, warrant officer, or commissioned warrant officer, you can exclude the following amounts from your income. Www hnr block com (Other officer personnel are discussed under Amount of Exclusion , later. Www hnr block com ) Active duty pay earned in any month you served in a combat zone. Www hnr block com Imminent danger/hostile fire pay. Www hnr block com A reenlistment bonus if the voluntary extension or reenlistment occurs in a month you served in a combat zone. Www hnr block com Pay for accrued leave earned in any month you served in a combat zone. Www hnr block com The Department of Defense must determine that the unused leave was earned during that period. Www hnr block com Pay received for duties as a member of the Armed Forces in clubs, messes, post and station theaters, and other nonappropriated fund activities. Www hnr block com The pay must be earned in a month you served in a combat zone. Www hnr block com Awards for suggestions, inventions, or scientific achievements you are entitled to because of a submission you made in a month you served in a combat zone. Www hnr block com Student loan repayments. Www hnr block com If the entire year of service required to earn the repayment was performed in a combat zone, the entire repayment made because of that year of service is excluded. Www hnr block com If only part of that year of service was performed in a combat zone, only part of the repayment qualifies for exclusion. Www hnr block com For example, if you served in a combat zone for 5 months, 5/12 of your repayment qualifies for exclusion. Www hnr block com Retirement pay and pensions do not qualify for the combat zone exclusion. Www hnr block com Partial (month) service. Www hnr block com   If you serve in a combat zone for any part of one or more days during a particular month, you are entitled to an exclusion for that entire month. Www hnr block com Form W-2. Www hnr block com   The wages shown in box 1 of your 2013 Form W-2 should not include military pay excluded from your income under the combat zone exclusion provisions. Www hnr block com If it does, you will need to get a corrected Form W-2 from your finance office. Www hnr block com   You cannot exclude as combat pay any wages shown in box 1 of Form W-2. Www hnr block com Combat Zone A combat zone is any area the President of the United States designates by Executive Order as an area in which the U. Www hnr block com S. Www hnr block com Armed Forces are engaging or have engaged in combat. Www hnr block com An area usually becomes a combat zone and ceases to be a combat zone on the dates the President designates by Executive Order. Www hnr block com Afghanistan area. Www hnr block com   By Executive Order No. Www hnr block com 13239, Afghanistan (and airspace above) was designated as a combat zone beginning September 19, 2001. Www hnr block com On December 14, 2001, the following countries were certified by the Department of Defense for combat zone tax benefits due to their direct support of military operations in the Afghanistan combat zone. Www hnr block com Djibouti. Www hnr block com Jordan. Www hnr block com Kyrgyzstan. Www hnr block com Pakistan. Www hnr block com Somalia. Www hnr block com Syria. Www hnr block com Tajikistan. Www hnr block com Uzbekistan. Www hnr block com Yemen. Www hnr block com The Philippines. Www hnr block com  Note. Www hnr block com For the Philippines only, the personnel must be deployed in conjunction with Operation Enduring Freedom supporting military operations in the Afghanistan combat zone. Www hnr block com The Kosovo area. Www hnr block com   By Executive Order No. Www hnr block com 13119, the following locations (including airspace above) were designated as a combat zone beginning March 24, 1999. Www hnr block com Federal Republic of Yugoslavia (Serbia/Montenegro). Www hnr block com Albania. Www hnr block com Kosovo. Www hnr block com The Adriatic Sea. Www hnr block com The Ionian Sea—north of the 39th parallel. Www hnr block com Note. Www hnr block com The combat zone designation for Montenegro and Kosovo (previously a province within Serbia) under Executive Order 13119 remains in force even though Montenegro and Kosovo became independent nations since EO 13119 was signed. Www hnr block com Arabian peninsula. Www hnr block com   By Executive Order No. Www hnr block com 12744, the following locations (and airspace above) were designated as a combat zone beginning January 17, 1991. Www hnr block com The Persian Gulf. Www hnr block com The Red Sea. Www hnr block com The Gulf of Oman. Www hnr block com The part of the Arabian Sea that is north of 10 degrees north latitude and west of 68 degrees east longitude. Www hnr block com The Gulf of Aden. Www hnr block com The total land areas of Iraq, Kuwait, Saudi Arabia, Oman, Bahrain, Qatar, and the United Arab Emirates. Www hnr block com Jordan which is in direct support of the Arabian Peninsula. Www hnr block com Serving in a Combat Zone You are considered to be serving in a combat zone if you are either assigned on official temporary duty to a combat zone or you qualify for hostile fire/imminent danger pay while in a combat zone. Www hnr block com Service in a combat zone includes any periods you are absent from duty because of sickness, wounds, or leave. Www hnr block com If, as a result of serving in a combat zone, a person becomes a prisoner of war or is missing in action, that person is considered to be serving in the combat zone so long as he or she keeps that status for military pay purposes. Www hnr block com Hospitalized While Serving in a Combat Zone If you are hospitalized while serving in a combat zone, the wound, disease, or injury causing the hospitalization will be presumed to have been incurred while serving in the combat zone unless there is clear evidence to the contrary. Www hnr block com Example. Www hnr block com You are hospitalized for a specific disease in a combat zone where you have been serving for 3 weeks, and the disease for which you are hospitalized has an incubation period of 2 to 4 weeks. Www hnr block com The disease is presumed to have been incurred while you were serving in the combat zone. Www hnr block com On the other hand, if the incubation period of the disease is 1 year, the disease would not have been incurred while you were serving in the combat zone. Www hnr block com Hospitalized After Leaving a Combat Zone In some cases, the wound, disease, or injury may have been incurred while you were serving in the combat zone, even though you were not hospitalized until after you left. Www hnr block com In that case, you can exclude military pay earned while you are hospitalized as a result of the wound, disease, or injury. Www hnr block com Example. Www hnr block com You were hospitalized for a specific disease 3 weeks after you left the combat zone. Www hnr block com The incubation period of the disease is from 2 to 4 weeks. Www hnr block com The disease is presumed to have been incurred while serving in the combat zone. Www hnr block com Nonqualifying Presence in Combat Zone None of the following types of military service qualify as service in a combat zone. Www hnr block com Presence in a combat zone while on leave from a duty station located outside the combat zone. Www hnr block com Passage over or through a combat zone during a trip between two points that are outside a combat zone. Www hnr block com Presence in a combat zone solely for your personal convenience. Www hnr block com Service Outside Combat Zone Considered Service in Combat Zone Military service outside a combat zone is considered to be performed in a combat zone if: The Department of Defense designates that the service is in direct support of military operations in the combat zone, and The service qualifies you for special military pay for duty subject to hostile fire or imminent danger. Www hnr block com Military pay received for this service will qualify for the combat zone exclusion if all of the requirements (other than service in a combat zone) are met and the pay is verifiable by reference to military pay records. Www hnr block com Amount of Exclusion If you are an enlisted member, warrant officer, or commissioned warrant officer and you serve in a combat zone during any part of a month, you can exclude all of your military pay for that month. Www hnr block com It should not be included in the wages reported on your Form W-2. Www hnr block com You also can exclude military pay earned while you are hospitalized as a result of wounds, disease, or injury incurred in the combat zone. Www hnr block com If you are hospitalized, you cannot exclude any military pay received for any month of service that begins more than 2 years after the end of combat activities in the combat zone. Www hnr block com Your hospitalization does not have to be in the combat zone. Www hnr block com If you are a commissioned officer (other than a commissioned warrant officer), you can exclude your pay according to the rules just discussed. Www hnr block com However, the amount of your exclusion is limited to the highest rate of enlisted pay (plus imminent danger/hostile fire pay you received) for each month during any part of which you served in a combat zone or were hospitalized as a result of your service there. Www hnr block com Alien Status For tax purposes, an alien is an individual who is not a U. Www hnr block com S. Www hnr block com citizen. Www hnr block com An alien is in one of three categories: resident, nonresident, or dual-status. Www hnr block com Placement in the correct category is crucial in determining what income to report and what forms to file. Www hnr block com Under peacetime enlistment rules, you generally cannot enlist in the Armed Forces unless you are a citizen or have been legally admitted to the United States for permanent residence. Www hnr block com If you are an alien enlistee in the Armed Forces, you are probably a resident alien. Www hnr block com If, under an income tax treaty, you are considered a resident of a foreign country, see your base legal officer. Www hnr block com Other aliens who are in the United States only because of military assignments and who have a home outside the United States are nonresident aliens. Www hnr block com Guam and Puerto Rico have special rules. Www hnr block com Residents of those areas should contact their taxing authority with their questions. Www hnr block com Most members of the Armed Forces are U. Www hnr block com S. Www hnr block com citizens or resident aliens. Www hnr block com However, if you have questions about your alien status or the alien status of your dependents or spouse, you should read the information in the following paragraphs and see Publication 519. Www hnr block com Resident Aliens You are considered a resident alien of the United States for tax purposes if you meet either the “green card test” or the “substantial presence test” for the calendar year (January 1–December 31). Www hnr block com If you meet the substantial presence test for 2014, you did not meet either the green card test or the substantial presence test for 2012 or 2013, and you did not choose to be treated as a resident for part of 2012, you may be able to choose to be treated as a U. Www hnr block com S. Www hnr block com resident for part of 2013. Www hnr block com See First-Year Choice in Publication 519. Www hnr block com These tests are explained in Publication 519. Www hnr block com Generally, resident aliens are taxed on their worldwide income and file the same tax forms as U. Www hnr block com S. Www hnr block com citizens. Www hnr block com Treating nonresident alien spouse as resident alien. Www hnr block com   A nonresident alien spouse can be treated as a resident alien if all the following conditions are met. Www hnr block com One spouse is a U. Www hnr block com S. Www hnr block com citizen or resident alien at the end of the tax year. Www hnr block com That spouse is married to the nonresident alien at the end of the tax year. Www hnr block com You both choose to treat the nonresident alien spouse as a resident alien. Www hnr block com Making the choice. Www hnr block com   Both you and your spouse must sign a statement and attach it to your joint return for the first tax year for which the choice applies. Www hnr block com Include in the statement: A declaration that one spouse was a nonresident alien and the other was a U. Www hnr block com S. Www hnr block com citizen or resident alien on the last day of the year, A declaration that both spouses choose to be treated as U. Www hnr block com S. Www hnr block com residents for the entire tax year, and The name, address, and taxpayer identification number (social security number or individual taxpayer identification number) of each spouse. Www hnr block com If the nonresident alien spouse is not eligible to get a social security number, he or she should file Form W-7, Application for IRS Individual Taxpayer Identification Number. Www hnr block com    Once you make this choice, the nonresident alien spouse's worldwide income is subject to U. Www hnr block com S. Www hnr block com tax. Www hnr block com If the nonresident alien spouse has substantial foreign income, there may be no advantage to making this choice. Www hnr block com Ending the choice. Www hnr block com   Once you make this choice, it applies to all later years unless one of the following situations occurs. Www hnr block com You or your spouse revokes the choice. Www hnr block com You or your spouse dies. Www hnr block com You and your spouse become legally separated under a decree of divorce or separate maintenance. Www hnr block com The Internal Revenue Service ends the choice because you or your spouse kept inadequate records. Www hnr block com For specific details on these situations, see Publication 519. Www hnr block com   If the choice is ended for any of these reasons, neither spouse can make the choice for any later year. Www hnr block com Choice not made. Www hnr block com   If you and your nonresident alien spouse do not make this choice: You cannot file a joint return. Www hnr block com You can file as married filing separately, or head of household if you qualify. Www hnr block com You can claim an exemption for your nonresident alien spouse if he or she has no gross income for U. Www hnr block com S. Www hnr block com tax purposes and is not another taxpayer's dependent. Www hnr block com The nonresident alien spouse generally does not have to file a federal income tax return if he or she had no income from sources in the United States. Www hnr block com If a return has to be filed, see the next discussion. Www hnr block com The nonresident alien spouse is not eligible for the earned income credit if he or she has to file a return. Www hnr block com Nonresident Aliens If you are an alien who does not meet the requirements discussed earlier to be a resident alien, you are a nonresident alien. Www hnr block com If you are required to file a federal tax return, you must file either Form 1040NR, U. Www hnr block com S. Www hnr block com Nonresident Alien Income Tax Return, or Form 1040NR-EZ, U. Www hnr block com S. Www hnr block com Income Tax Return for Certain Nonresident Aliens With No Dependents. Www hnr block com See the form instructions for information on who must file and filing status. Www hnr block com If you are a nonresident alien, you generally must pay tax on income from sources in the United States. Www hnr block com Your income from conducting a trade or business in the United States is taxed at graduated U. Www hnr block com S. Www hnr block com tax rates. Www hnr block com Other income from U. Www hnr block com S. Www hnr block com sources is taxed at a flat 30% (or lower treaty) rate. Www hnr block com For example, dividends from a U. Www hnr block com S. Www hnr block com corporation paid to a nonresident alien generally are subject to a 30% (or lower treaty) rate. Www hnr block com Dual-Status Aliens You can be both a nonresident and resident alien during the same tax year. Www hnr block com This usually occurs in the year you arrive in or depart from the United States. Www hnr block com If you are a dual-status alien, you are taxed on income from all sources for the part of the year you are a resident alien. Www hnr block com Generally, for the part of the year you are a nonresident alien, you are taxed only on income from sources in the United States. Www hnr block com Sale of Home You may not have to pay tax on all or part of the gain from the sale of your main home. Www hnr block com Usually, your main home is the one you live in most of the time. Www hnr block com It can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. Www hnr block com You generally can exclude up to $250,000 of gain ($500,000, in most cases, if married filing a joint return) realized on the sale or exchange of a main home in 2013. Www hnr block com The exclusion is allowed each time you sell or exchange a main home, but generally not more than once every 2 years. Www hnr block com To be eligible, during the 5-year period ending on the date of the sale, you must have owned the home for at least 2 years (the ownership test), and lived in the home as your main home for at least 2 years (the use test). Www hnr block com Exception to ownership and use tests. Www hnr block com   You can exclude gain, but the maximum amount of gain you can exclude will be reduced if you do not meet the ownership and use tests due to a move to a new permanent duty station. Www hnr block com 5-year test period suspended. Www hnr block com   You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on qualified official extended duty as a member of the Armed Forces. Www hnr block com This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale. Www hnr block com Example. Www hnr block com David bought and moved into a home in 2005. Www hnr block com He lived in it as his main home for 2½ years. Www hnr block com For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. Www hnr block com He then sold the home at a gain in 2013. Www hnr block com To meet the use test, David chooses to suspend the 5-year test period for the 6 years he was on qualifying official extended duty. Www hnr block com This means he can disregard those 6 years. Www hnr block com Therefore, David's 5-year test period consists of the 5 years before he went on qualifying official extended duty. Www hnr block com He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period. Www hnr block com Period of suspension. Www hnr block com   The period of suspension cannot last more than 10 years. Www hnr block com You cannot suspend the 5-year period for more than one property at a time. Www hnr block com You can revoke your choice to suspend the 5-year period at any time. Www hnr block com Qualified official extended duty. Www hnr block com   You are on qualified official extended duty if you serve on extended duty either: At a duty station at least 50 miles from your main home, or While you live in Government quarters under Government orders. Www hnr block com   You are on extended duty when you are called or ordered to active duty for a period of more than 90 days or for an indefinite period. Www hnr block com Property used for rental or business. Www hnr block com   You may be able to exclude your gain from the sale of a home that you have used as a rental property or for business. Www hnr block com However, you must meet the ownership and use tests discussed in Publication 523. Www hnr block com Nonqualified use. Www hnr block com   If the sale of your main home results in a gain that is allocated to one or more period(s) of nonqualified use, you cannot exclude that gain from your income. Www hnr block com   Nonqualified use means any period after 2008 when neither you nor your spouse (or your former spouse) used the property as a main home, with certain exceptions. Www hnr block com For example, a period of nonqualified use does not include any period (not to exceed a total of 10 years) during which you or your spouse is serving on qualified official extended duty. Www hnr block com Loss. Www hnr block com   You cannot deduct a loss from the sale of your main home. Www hnr block com More information. Www hnr block com   For more information, see Publication 523. Www hnr block com Foreclosures There may be tax consequences as a result of compensation payments for foreclosures. Www hnr block com Payments made for violations of the Service Members Civil Relief Act (SCRA). Www hnr block com   All service members who received a settlement payment reported on a Form 1099 may need to report the amount on their tax return. Www hnr block com Generally, you must include settlement payments in income. Www hnr block com However, the tax treatment of settlement payments will depend on the facts and circumstances. Www hnr block com Lump Sum Portion of Settlement Payment. Www hnr block com    Generally, you must include the lump sum payment in gross income. Www hnr block com In limited circumstances you may be able to exclude part or all of the lump sum payment from gross income. Www hnr block com For example, you may qualify to exclude part or all of the payment from gross income if you can show that the payment was made to reimburse specific nondeductible expenses (such as living expenses) you incurred because of the SCRA violation. Www hnr block com Interest Payment on Lump Sum Portion of Settlement Payment. Www hnr block com    You must include any interest on the lump sum portion of your settlement payment in your income. Www hnr block com Lost Equity Portion of Settlement Payment. Www hnr block com    If you lost your main home in foreclosure, you should treat the lost equity payment as an additional amount you received on the foreclosure of the home. Www hnr block com You will have a gain on the foreclosure only if the sum of the lost equity payment and the value of the main home at foreclosure is more than what you paid for the home. Www hnr block com In many cases, this gain may be excluded from income. Www hnr block com For more information on the rules for excluding all or part of any gain from the sale (including a foreclosure) of a main home, see Pub. Www hnr block com 523, Selling Your Home. Www hnr block com The rules that apply to a lost equity payment you received for the foreclosure of a property that was not your main home are different. Www hnr block com    To find rules for reporting gain or loss on the foreclosure of property that was not your main home, see Pub. Www hnr block com 544, Sales and Other Dispositions of Assets. Www hnr block com Interest Payment on Lost Equity Portion of Settlement Payment. Www hnr block com    You must include any interest on the lost equity portion of your settlement payment in your income. Www hnr block com Itemized Deductions To figure your taxable income, you must subtract either your standard deduction or your itemized deductions from adjusted gross income. Www hnr block com For information on the standard deduction, see Publication 501. Www hnr block com Itemized deductions are figured on Schedule A (Form 1040). Www hnr block com This chapter discusses miscellaneous itemized deductions of particular interest to members of the Armed Forces. Www hnr block com For information on other itemized deductions, see the publications listed below. Www hnr block com Publication 502, Medical and Dental Expenses. Www hnr block com Publication 526, Charitable Contributions. Www hnr block com Publication 547, Casualties, Disasters, and Thefts. Www hnr block com Publication 550, Investment Income and Expenses. Www hnr block com You must reduce the total of most miscellaneous itemized deductions by 2% of your adjusted gross income. Www hnr block com For information on deductions that are not subject to the 2% limit, see Publication 529. Www hnr block com Employee Business Expenses Deductible employee business expenses generally are miscellaneous itemized deductions subject to the 2% limit. Www hnr block com Certain employee business expenses are deductible as adjustments to income. Www hnr block com For information on many employee business expenses, see Publication 463. Www hnr block com Generally, you must file Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, to claim these expenses. Www hnr block com You do not have to file Form 2106 or Form 2106-EZ if you are claiming only unreimbursed expenses for uniforms, professional society dues, and work-related educational expenses (all discussed later). Www hnr block com You can deduct these expenses directly on Schedule A (Form 1040). Www hnr block com Reimbursement. Www hnr block com   Generally, to receive advances, reimbursements, or other allowances from the government, you must adequately account for your expenses and return any excess reimbursement. Www hnr block com Your reimbursed expenses are not deductible. Www hnr block com   If your expenses are more than your reimbursement, the excess expenses are deductible (subject to the 2% limit) if you can prove them. Www hnr block com You must file Form 2106 to report these expenses. Www hnr block com   You can use the shorter Form 2106-EZ if you meet all three of the following conditions. Www hnr block com You are an employee deducting expenses related to your job. Www hnr block com You were not reimbursed by your employer for your expenses. Www hnr block com (Amounts included in box 1 of Form W-2 are not considered reimbursements. Www hnr block com ) If you claim car expenses, you use the standard mileage rate. Www hnr block com    For 2013, the standard mileage rate is 56. Www hnr block com 5 cents a mile for all business miles driven. Www hnr block com This rate is adjusted periodically. Www hnr block com Travel Expenses You can deduct unreimbursed travel expenses only if they are incurred while you are traveling away from home. Www hnr block com If you are a member of the U. Www hnr block com S. Www hnr block com Armed Forces on a permanent duty assignment overseas, you are not traveling away from home. Www hnr block com You cannot deduct your expenses for meals and lodging while at your permanent duty station. Www hnr block com You cannot deduct these expenses even if you have to maintain a home in the United States for your family members who are not allowed to accompany you overseas. Www hnr block com A naval officer assigned to permanent duty aboard a ship that has regular eating and living facilities has a home aboard ship for travel expense purposes. Www hnr block com To be deductible, your travel expenses must be work related. Www hnr block com You cannot deduct any expenses for personal travel, such as visits to family while on furlough, leave, or liberty. Www hnr block com Away from home. Www hnr block com   Home is your permanent duty station (which can be a ship or base), regardless of where you or your family live. Www hnr block com You are away from home if you are away from your permanent duty station substantially longer than an ordinary day's work and you need to get sleep or rest to meet the demands of your work while away from home. Www hnr block com   Examples of deductible travel expenses include: Expenses for business-related meals (generally limited to 50% of your unreimbursed cost), lodging, taxicabs, business telephone calls, tips, laundry, and dry cleaning while you are away from home on temporary duty or temporary additional duty, and Expenses of carrying out official business while on “No Cost” orders. Www hnr block com    You cannot deduct any expenses for travel away from home if the temporary assignment in a single location is realistically expected to last (and does in fact last) for more than 1 year. Www hnr block com This rule may not apply if you are participating in a federal crime investigation or prosecution. Www hnr block com For more information, see Publication 463 and the Form 2106 instructions. Www hnr block com Transportation Expenses These expenses include the ordinary and necessary costs of: Getting from one workplace to another when you are not away from home, Going to a business meeting away from your regular workplace, and Getting from your home to a temporary workplace when you have a regular place of work. Www hnr block com These expenses include the costs of transportation by air, bus, rail, taxi, and driving and maintaining your car. Www hnr block com Transportation expenses incurred while traveling away from home are included with your travel expenses, discussed earlier. Www hnr block com However, if you use your car while traveling away from home overnight, see the rules in chapter 4 of Publication 463 to figure your car expense deduction. Www hnr block com If you must go from one workplace to another while on duty (for example, as a courier or to attend meetings) without being away from home, your unreimbursed transportation expenses are deductible. Www hnr block com However, the expenses of getting to and from your regular place of work (commuting) are not deductible. Www hnr block com Temporary work location. Www hnr block com   If you have one or more regular places of business away from your home and you commute to a temporary work location in the same trade or business, you can deduct the expenses of the daily round-trip transportation between your home and the temporary location. Www hnr block com   Generally, if your employment at a work location is realistically expected to last (and does in fact last) for 1 year or less, the employment is temporary. Www hnr block com   If your employment at a work location is realistically expected to last for more than 1 year or if there is no realistic expectation that the employment will last for 1 year or less, the employment is not temporary, regardless of whether it actually lasts for more than 1 year. Www hnr block com If employment at a work location initially is realistically expected to last for 1 year or less, but at some later date the employment is realistically expected to last more than 1 year, that employment will be treated as temporary (unless there are facts and circumstances that would indicate otherwise) until your expectation changes. Www hnr block com    If you do not have a regular place of business, but you ordinarily work in the metropolitan area where you live, you can deduct daily transportation expenses between your home and a temporary work site outside your metropolitan area. Www hnr block com However, you cannot deduct daily transportation costs between your home and temporary work sites within your metropolitan area. Www hnr block com These are nondeductible commuting costs. Www hnr block com Armed Forces reservists. Www hnr block com   A meeting of an Armed Forces reserve unit is a second place of business if the meeting is held on a day on which you work at your regular job. Www hnr block com You can deduct the expense of getting from one workplace to the other. Www hnr block com You usually cannot deduct the expense if the reserve meeting is held on a day on which you do not work at your regular job. Www hnr block com In this case, your transportation generally is a nondeductible commuting expense. Www hnr block com However, you can deduct your transportation expenses if the location of the meeting is temporary and you have one or more regular places of work. Www hnr block com   If you ordinarily work in a particular metropolitan area but not at any specific location and the reserve meeting is held at a temporary location outside that metropolitan area, you can deduct your transportation expenses. Www hnr block com If you travel away from home overnight to attend a guard or reserve meeting, you can deduct your travel expenses. Www hnr block com See Armed Forces Reservists under Adjustments to Income, earlier. Www hnr block com Uniforms You usually cannot deduct the expenses for uniform cost and upkeep. Www hnr block com Generally, you must wear uniforms when on duty and you are allowed to wear them when off duty. Www hnr block com If military regulations prohibit you from wearing certain uniforms when off duty, you can deduct the cost and upkeep of the uniforms, but you must reduce your expenses by any allowance or reimbursement you receive. Www hnr block com Unreimbursed expenses for the cost and upkeep of the following articles are deductible. Www hnr block com Military battle dress uniforms and utility uniforms that you cannot wear when off duty. Www hnr block com Articles not replacing regular clothing, including insignia of rank, corps devices, epaulets, aiguillettes, and swords. Www hnr block com Reservists' uniforms if you can wear the uniform only while performing duties as a reservist. Www hnr block com Professional Dues You can deduct unreimbursed dues paid to professional societies directly related to your military position. Www hnr block com However, you cannot deduct amounts paid to an officers' club or a noncommissioned officers' club. Www hnr block com Example. Www hnr block com Lieutenant Margaret Allen, an electrical engineer at Maxwell Air Force Base, can deduct professional dues paid to the American Society of Electrical Engineers. Www hnr block com Educational Expenses You can deduct the unreimbursed costs of qualifying work-related education. Www hnr block com This is education that meets at least one of the following two tests. Www hnr block com The education is required by your employer or the law to keep your present salary, status, or job. Www hnr block com The required education must serve a bona fide business purpose of your employer. Www hnr block com The education maintains or improves skills needed in your present work. Www hnr block com However, even if the education meets one or both of the above tests, it is not qualifying education if it: Is needed to meet the minimum educational requirements of your present trade or business, or Is part of a program of study that will qualify you for a new trade or business. Www hnr block com You can deduct the expenses for qualifying work-related education even if the education could lead to a degree. Www hnr block com Example 1. Www hnr block com Lieutenant Colonel Mason has a degree in financial management and is in charge of base finances at her post of duty. Www hnr block com She took an advanced finance course. Www hnr block com She already meets the minimum qualifications for her job. Www hnr block com By taking the course, she is improving skills in her current position. Www hnr block com The course does not qualify her for a new trade or business. Www hnr block com She can deduct educational expenses that are more than the educational allowance she received. Www hnr block com Example 2. Www hnr block com Major Williams worked in the military base legal office as a legal intern. Www hnr block com He was placed in excess leave status by his employer to attend law school. Www hnr block com He paid all his educational expenses and was not reimbursed. Www hnr block com After obtaining his law degree, he passed the state bar exam and worked as a judge advocate. Www hnr block com His educational expenses are not deductible because the law degree qualified him for a new trade or business, even though the education maintained and improved his skills in his work. Www hnr block com Travel to obtain education. Www hnr block com   If your work-related education qualifies, you can deduct the costs of travel, including meals (subject to the 50% limit), and lodging, if the main purpose of the trip is to obtain the education. Www hnr block com   You cannot deduct the cost of travel that is itself a form of education, even if it is directly related to your duties in your work or business. Www hnr block com Transportation for education. Www hnr block com   If your work-related education qualifies for a deduction, you can deduct the costs of transportation to obtain that education. Www hnr block com However, you cannot deduct the cost of services provided in kind, such as base-provided transportation to or from class. Www hnr block com Transportation expenses include the actual costs of bus, subway, cab, or other fares, as well as the costs of using your car. Www hnr block com   If you need more information on educational expenses, see Publication 970. Www hnr block com Repayments If you had to repay to your employer an amount that you included in your income in an earlier year, you may be able to deduct the repaid amount from your income for the year in which you repaid it. Www hnr block com Repayment of $3,000 or less. Www hnr block com   If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. Www hnr block com If you reported it as wages, deduct it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23. Www hnr block com Repayment over $3,000. Www hnr block com   If the amount you repaid was more than $3,000, see Repayments in Publication 525. Www hnr block com Credits After you have figured your taxable income and tax liability, you can determine if you are entitled to any tax credits. Www hnr block com This publication discusses the first-time homebuyer credit, child tax credit, earned income credit, and credit for excess social security tax withheld. Www hnr block com For information on other credits, see your tax form instructions. Www hnr block com First-Time Homebuyer Credit The first-time homebuyer credit is not available for homes purchased after 2011. Www hnr block com In 2011, this credit had already expired for most taxpayers, however, certain members of the uniformed services and Foreign Service and certain employees of the intelligence community could claim the credit for homes purchased in 2011. Www hnr block com If you bought the home (and claimed the credit) after 2008, you generally must repay the credit if you dispose of the home or the home stops being your main home within the 36-month period beginning on the purchase date. Www hnr block com If the home continues to be your main home for at least 36 months beginning on the purchase date, you do not have to repay any of the credit. Www hnr block com If you bought your home in 2008, you generally must repay the credit over a 15-year period in 15 equal installments. Www hnr block com For more information, see Form 5405, Repayment of the First-Time Homebuyer Credit, and its instructions. Www hnr block com Child Tax Credit The child tax credit is a credit that may reduce your tax by as much as $1,000 for each of your qualifying children. Www hnr block com The additional child tax credit is a credit you may be able to take if you are not able to claim the full amount of the child tax credit. Www hnr block com The child tax credit is not the same as the credit for child and dependent care expenses. Www hnr block com See Publication 503 for information on the credit for child and dependent care expenses. Www hnr block com Qualifying Child A qualifying child for purposes of the child tax credit is a child who: Is your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew), Was under age 17 at the end of 2013, Did not provide over half of his or her own support for 2013, Lived with you for more than half of 2013 (see Exceptions to time lived with you, later), Is claimed as a dependent on your return, Does not file a joint return for the year (or files it only as a claim for refund), and Was a U. Www hnr block com S. Www hnr block com citizen, a U. Www hnr block com S. Www hnr block com national, or a U. Www hnr block com S. Www hnr block com resident alien. Www hnr block com If the child was adopted, see Adopted child . Www hnr block com For each qualifying child you must check the box on Form 1040 or Form 1040A, line 6c, column (4). Www hnr block com Exceptions to time lived with you. Www hnr block com   A child is considered to have lived with you for all of 2013 if the child was born or died in 2013 and your home was this child's home for the entire time he or she was alive. Www hnr block com Temporary absences by you or the child for special circumstances, such as school, vacation, business, medical care, military service, or detention in a juvenile facility, count as time the child lived with you. Www hnr block com   There are also exceptions for kidnapped children and children of divorced or separated parents. Www hnr block com For details, see Publication 501. Www hnr block com Qualifying child of more than one person. Www hnr block com   A special rule applies if your qualifying child is the qualifying child of more than one person. Www hnr block com For details, see Publication 501. Www hnr block com Adopted child. Www hnr block com   An adopted child is always treated as your own child. Www hnr block com An adopted child includes a child lawfully placed with you for legal adoption. Www hnr block com   If you are a U. Www hnr block com S. Www hnr block com citizen or U. Www hnr block com S. Www hnr block com national and your adopted child lived with you as a member of your household all year, that child meets condition (7) above to be a qualifying child for the child tax credit. Www hnr block com Amount of Credit The maximum amount you can claim for the credit is $1,000 for each qualifying child. Www hnr block com Limits on the credit. Www hnr block com   You must reduce your child tax credit if either (1) or (2), below, applies. Www hnr block com The amount on Form 1040, line 46, or Form 1040A, line 28, is less than the credit. Www hnr block com If the amount is zero, you cannot take this credit because there is no tax to reduce. Www hnr block com However, you may be able to take the additional child tax credit. Www hnr block com See Additional Child Tax Credit , later. Www hnr block com Your modified adjusted gross income (AGI) is more than the amount shown below for your filing status. Www hnr block com Married filing jointly — $110,000. Www hnr block com Single, head of household,  or qualifying widow(er) — $75,000. Www hnr block com Married filing separately — $55,000. Www hnr block com Modified AGI. Www hnr block com   For purposes of the child tax credit, your modified AGI is the amount on Form 1040, line 38, or Form 1040A, line 22, plus the following amounts that may apply to you. Www hnr block com Any amount excluded from income because of the exclusion of income from Puerto Rico. Www hnr block com Any amount on line 45 or line 50 of Form 2555, Foreign Earned Income. Www hnr block com Any amount on line 18 of Form 2555-EZ, Foreign Earned Income Exclusion. Www hnr block com Any amount on line 15 of Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa. Www hnr block com   If you do not have any of the above, your modified AGI is the same as your AGI. Www hnr block com Claiming the Credit To claim the child tax credit, you must file Form 1040 or Form 1040A. Www hnr block com For more information on the child tax credit, see the instructions for Form 1040 or Form 1040A. Www hnr block com Also attach Schedule 8812, Child Tax Credit, if required. Www hnr block com Additional Child Tax Credit This credit is for certain individuals who get less than the full amount of the child tax credit. Www hnr block com The additional child tax credit may give you a refund even if you do not owe any tax. Www hnr block com For more information, see the instructions for Form 1040 or Form 1040A, and Schedule 8812. Www hnr block com Earned Income Credit The earned income credit (EIC) is a cr