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2006 Tax Software

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2006 Tax Software

2006 tax software Publication 721 - Introductory Material Table of Contents Reminders IntroductionOrdering forms and publications. 2006 tax software Tax questions. 2006 tax software Useful Items - You may want to see: Reminders Future developments. 2006 tax software  For the latest information about developments related to Publication 721, such as legislation enacted after it was published, go to www. 2006 tax software IRS. 2006 tax software gov/pub721. 2006 tax software Phased retirement. 2006 tax software   The new phased retirement program was signed into law by the Moving Ahead for Progress in the 21st Century Act and will be available for retirement eligible individuals once the regulations for this program are effective. 2006 tax software This new program will allow eligible employees to begin receiving annuity payments while working part-time. 2006 tax software For more information, go to the Office of Personnel Management (OPM) website at www. 2006 tax software opm. 2006 tax software gov. 2006 tax software Roth Thrift Savings Plan (TSP) balance. 2006 tax software  You may be able to contribute to a designated Roth account through the TSP known as the Roth TSP. 2006 tax software Roth TSP contributions are after-tax contributions, subject to the same contribution limits as the traditional TSP. 2006 tax software Qualified distributions from a Roth TSP are not included in your income. 2006 tax software See Thrift Savings Plan in Part II for more information. 2006 tax software Rollovers. 2006 tax software  You can roll over certain amounts from the CSRS, FERS, or TSP, to a tax-sheltered annuity plan (403(b) plan) or a state or local government section 457 deferred compensation plan. 2006 tax software See Rollover Rules in Part II. 2006 tax software Rollovers by surviving spouse. 2006 tax software  You may be able to roll over a distribution you receive as the surviving spouse of a deceased employee or retiree into a qualified retirement plan or an IRA. 2006 tax software See Rollover Rules in Part II. 2006 tax software Thrift Savings Plan (TSP) beneficiary participant accounts. 2006 tax software  If you are the spouse beneficiary of a decedent's TSP account, you have the option of leaving the death benefit payment in a TSP account in your own name (a beneficiary participant account). 2006 tax software The amounts in the beneficiary participant account are neither taxable or reportable until you choose to make a withdrawal, or otherwise receive a distribution from the account. 2006 tax software Benefits for public safety officer's survivors. 2006 tax software  A survivor annuity received by the spouse, former spouse, or child of a public safety officer killed in the line of duty generally will be excluded from the recipient's income. 2006 tax software For more information, see Dependents of public safety officers in Part IV. 2006 tax software Uniformed services Thrift Savings Plan (TSP) accounts. 2006 tax software  If you have a uniformed services TSP account, it may include contributions from combat zone pay. 2006 tax software This pay is tax-exempt and contributions attributable to that pay are tax-exempt when they are distributed from the uniformed services TSP account. 2006 tax software However, any earnings on those contributions are subject to tax when they are distributed. 2006 tax software The statement you receive from the TSP will separately state the total amount of your distribution and the amount of your taxable distribution for the year. 2006 tax software If you have both a civilian and a uniformed services TSP account, you should apply the rules discussed in this publication separately to each account. 2006 tax software You can get more information from the TSP website, www. 2006 tax software tsp. 2006 tax software gov, or the TSP Service Office. 2006 tax software Photographs of missing children. 2006 tax software  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. 2006 tax software Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. 2006 tax software You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. 2006 tax software Introduction This publication explains how the federal income tax rules apply to civil service retirement benefits received by retired federal employees (including those disabled) or their survivors. 2006 tax software These benefits are paid primarily under the Civil Service Retirement System (CSRS) or the Federal Employees' Retirement System (FERS). 2006 tax software Tax rules for annuity benefits. 2006 tax software   Part of the annuity benefits you receive is a tax-free recovery of your contributions to the CSRS or FERS. 2006 tax software The rest of your benefits are taxable. 2006 tax software If your annuity starting date is after November 18, 1996, you must use the Simplified Method to figure the taxable and tax-free parts. 2006 tax software If your annuity starting date is before November 19, 1996, you generally could have chosen to use the Simplified Method or the General Rule. 2006 tax software See Part II, Rules for Retirees . 2006 tax software Thrift Savings Plan. 2006 tax software   The Thrift Savings Plan (TSP) provides federal employees with the same savings and tax benefits that many private employers offer their employees. 2006 tax software This plan is similar to private sector 401(k) plans. 2006 tax software You can defer tax on part of your pay by having it contributed to your traditional balance in the plan. 2006 tax software The contributions and earnings on them are not taxed until they are distributed to you. 2006 tax software Also the TSP offers a Roth TSP option. 2006 tax software Contributions to this type of balance are after tax and qualified distributions from the account are tax free. 2006 tax software See Thrift Savings Plan in Part II. 2006 tax software Comments and suggestions. 2006 tax software   We welcome your comments about this publication and your suggestions for future editions. 2006 tax software   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. 2006 tax software NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. 2006 tax software Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. 2006 tax software   You can send your comments from www. 2006 tax software irs. 2006 tax software gov/formspubs/. 2006 tax software Click on “More Information” and then on “Comment on Tax Forms and Publications”. 2006 tax software   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. 2006 tax software Ordering forms and publications. 2006 tax software   Visit www. 2006 tax software irs. 2006 tax software gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. 2006 tax software Internal Revenue Service 1201 N. 2006 tax software Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. 2006 tax software   If you have a tax question, check the information available on IRS. 2006 tax software gov or call 1-800-829-1040. 2006 tax software We cannot answer tax questions sent to either of the above addresses. 2006 tax software Useful Items - You may want to see: Publication 524 Credit for the Elderly or the Disabled 575 Pension and Annuity Income 590 Individual Retirement Arrangements (IRAs) 939 General Rule for Pensions and Annuities Form (and Instructions) CSA 1099R Statement of Annuity Paid CSF 1099R Statement of Survivor Annuity Paid W-4P Withholding Certificate for Pension or Annuity Payments 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 2006 tax software 5329 Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts See How To Get Tax Help near the end of this publication for information about getting publications and forms. 2006 tax software Prev  Up  Next   Home   More Online Publications
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2006 tax software 5. 2006 tax software   Exemptions, Deductions, and Credits Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Items Related to Excluded Income Exemptions Contributions to Foreign Charitable Organizations Moving ExpensesAllocation of Moving Expenses Forms To File Contributions to Individual Retirement Arrangements Taxes of Foreign Countries and U. 2006 tax software S. 2006 tax software PossessionsCredit for Foreign Income Taxes Deduction for Foreign Income Taxes Deduction for Other Foreign Taxes How To Report Deductions Topics - This chapter discusses: The rules concerning items related to excluded income, Exemptions, Contributions to foreign charitable organizations, Moving expenses, Contributions to individual retirement arrangements (IRAs), Taxes of foreign countries and U. 2006 tax software S. 2006 tax software possessions, and How to report deductions. 2006 tax software Useful Items - You may want to see: Publication 501 Exemptions, Standard Deduction, and Filing Information 514 Foreign Tax Credit for Individuals 521 Moving Expenses 523 Selling Your Home 590 Individual Retirement Arrangements (IRAs) 597 Information on the United States—Canada Income Tax Treaty Form (and Instructions) 1116 Foreign Tax Credit 2106 Employee Business Expenses 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion 3903 Moving Expenses Schedule A (Form 1040) Itemized Deductions Schedule C (Form 1040) Profit or Loss From Business SS-5 Application for a Social Security Card W-7 Application for IRS Individual Taxpayer Identification Number See chapter 7 for information about getting these publications and forms. 2006 tax software Items Related to Excluded Income U. 2006 tax software S. 2006 tax software citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States. 2006 tax software If you choose to exclude foreign earned income or housing amounts, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. 2006 tax software This includes any expenses, losses, and other normally deductible items that are allocable to the excluded income. 2006 tax software You can deduct only those expenses connected with earning includible income. 2006 tax software These rules apply only to items definitely related to the excluded earned income and they do not apply to other items that are not definitely related to any particular type of gross income. 2006 tax software These rules do not apply to items such as: Personal exemptions, Qualified retirement contributions, Alimony payments, Charitable contributions, Medical expenses, Mortgage interest, or Real estate taxes on your personal residence. 2006 tax software For purposes of these rules, your housing deduction is not treated as allocable to your excluded income, but the deduction for self- employment tax is. 2006 tax software If you receive foreign earned income in a tax year after the year in which you earned it, you may have to file an amended return for the earlier year to properly adjust the amounts of deductions, credits, or exclusions allocable to your foreign earned income and housing exclusions. 2006 tax software Example. 2006 tax software In 2012, you had $90,400 of foreign earned income and $9,500 of deductions allocable to your foreign earned income. 2006 tax software You did not have a housing exclusion. 2006 tax software Because you excluded all of your foreign earned income, you would not have been able to claim any of the deductions on your 2012 return. 2006 tax software In 2013, you received a $12,000 bonus for work you did abroad in 2012. 2006 tax software You can exclude $4,700 of the bonus because the limit on the foreign earned income exclusion for 2012 was $95,100 and you have already excluded $90,400. 2006 tax software Since you must include $7,300 of the bonus ($12,000 − $4,700) for work you did in 2012 in income, you can file an amended return for 2012 to claim $677 of the deductions. 2006 tax software This is the deductions allocable to the foreign earned income ($9,500) multiplied by the includible portion of the foreign earned income ($7,300) and divided by the total foreign earned income for 2012 ($102,400). 2006 tax software Exemptions You can claim an exemption for your nonresident alien spouse on your separate return, provided your spouse has no gross income for U. 2006 tax software S. 2006 tax software tax purposes and is not the dependent of another U. 2006 tax software S. 2006 tax software taxpayer. 2006 tax software You also can claim exemptions for individuals who qualify as your dependents. 2006 tax software To be your dependent, the individual must be a U. 2006 tax software S. 2006 tax software citizen, U. 2006 tax software S. 2006 tax software national, U. 2006 tax software S. 2006 tax software resident alien, or a resident of Canada or Mexico for some part of the calendar year in which your tax year begins. 2006 tax software Children. 2006 tax software   Children usually are citizens or residents of the same country as their parents. 2006 tax software If you were a U. 2006 tax software S. 2006 tax software citizen when your child was born, your child generally is a U. 2006 tax software S. 2006 tax software citizen. 2006 tax software This is true even if the child's other parent is a nonresident alien, the child was born in a foreign country, and the child lives abroad with the other parent. 2006 tax software   If you have a legally adopted child who is not a U. 2006 tax software S. 2006 tax software citizen, U. 2006 tax software S. 2006 tax software resident, or U. 2006 tax software S. 2006 tax software national, the child meets the citizen requirement if you are a U. 2006 tax software S. 2006 tax software citizen or U. 2006 tax software S. 2006 tax software national and the child lived with you as a member of your household all year. 2006 tax software Social security number. 2006 tax software   You must include on your return the social security number (SSN) of each dependent for whom you claim an exemption. 2006 tax software To get a social security number for a dependent, apply at a Social Security office or U. 2006 tax software S. 2006 tax software consulate. 2006 tax software You must provide original or certified copies of documents to verify the dependent's age, identity, and citizenship, and complete Form SS-5. 2006 tax software   If you do not have an SSN for a child who was born in 2013 and died in 2013, attach a copy of the child's birth certificate to your tax return. 2006 tax software Print “Died” in column (2) of line 6c of your Form 1040 or Form 1040A. 2006 tax software   If your dependent is a nonresident alien who is not eligible to get a social security number, you must list the dependent's individual taxpayer identification number (ITIN) instead of an SSN. 2006 tax software To apply for an ITIN, file Form W-7 with the IRS. 2006 tax software It usually takes 6 to 10 weeks to get an ITIN. 2006 tax software Enter your dependent's ITIN wherever an SSN is requested on your tax return. 2006 tax software More information. 2006 tax software   For more information about exemptions, see Publication 501. 2006 tax software Contributions to Foreign Charitable Organizations If you make contributions directly to a foreign church or other foreign charitable organization, you generally cannot deduct them. 2006 tax software Exceptions are explained under Canadian, Mexican, and Israeli charities, later. 2006 tax software You can deduct contributions to a U. 2006 tax software S. 2006 tax software organization that transfers funds to a charitable foreign organization if the U. 2006 tax software S. 2006 tax software organization controls the use of the funds by the foreign organization or if the foreign organization is just an administrative arm of the U. 2006 tax software S. 2006 tax software organization. 2006 tax software Canadian, Mexican, and Israeli charities. 2006 tax software   Under the income tax treaties with Canada, Mexico and Israel, you may be able to deduct contributions to certain Canadian, Mexican, and Israeli charitable organizations. 2006 tax software Generally, you must have income from sources in Canada, Mexico, or Israel, and the organization must meet certain requirements. 2006 tax software See Publication 597, Information on the United States-Canada Income Tax Treaty, and Publication 526, Charitable Contributions, for more information. 2006 tax software Moving Expenses If you moved to a new home in 2013 because of your job or business, you may be able to deduct the expenses of your move. 2006 tax software Generally, to be deductible, the moving expenses must have been paid or incurred in connection with starting work at a new job location. 2006 tax software See Publication 521 for a complete discussion of the deduction for moving expenses and information about moves within the United States. 2006 tax software Foreign moves. 2006 tax software   A foreign move is a move in connection with the start of work at a new job location outside the United States and its possessions. 2006 tax software A foreign move does not include a move back to the United States or its possessions. 2006 tax software Allocation of Moving Expenses When your new place of work is in a foreign country, your moving expenses are directly connected with the income earned in that foreign country. 2006 tax software If you exclude all or part of the income that you earn at the new location under the foreign earned income exclusion or the foreign housing exclusion, you cannot deduct the part of your moving expense that is allocable to the excluded income. 2006 tax software Also, you cannot deduct the part of the moving expense related to the excluded income for a move from a foreign country to the United States if you receive a reimbursement that you are able to treat as compensation for services performed in the foreign country. 2006 tax software Year to which expense is connected. 2006 tax software   The moving expense is connected with earning the income (including reimbursements, as discussed in chapter 4 under Reimbursement of moving expenses ) either entirely in the year of the move or in 2 years. 2006 tax software It is connected with earning the income entirely in the year of the move if you qualify for the foreign earned income exclusion under the bona fide residence test or physical presence test for at least 120 days during that tax year. 2006 tax software   If you do not qualify under either the bona fide residence test or the physical presence test for at least 120 days during the year of the move, the expense is connected with earning the income in 2 years. 2006 tax software The moving expense is connected with the year of the move and the following year if the move is from the United States to a foreign country. 2006 tax software The moving expense is connected with the year of the move and the preceding year if the move is from a foreign country to the United States. 2006 tax software Amount allocable to excluded income. 2006 tax software   To figure the amount of your moving expense that is allocable to your excluded foreign earned income (and not deductible), you must multiply your total moving expense deduction by a fraction. 2006 tax software The numerator (top number) of the fraction is the total of your excluded foreign earned income and housing amounts for both years and the denominator (bottom number) of the fraction is your total foreign earned income for both years. 2006 tax software Example. 2006 tax software On November 1, 2012, you transfer to Monaco. 2006 tax software Your tax home is in Monaco, and you are a bona fide resident of Monaco for the entire tax year 2013. 2006 tax software In 2012, you paid $6,000 for allowable moving expenses for your move from the United States to Monaco. 2006 tax software You were fully reimbursed (under a nonaccountable plan) for these expenses in the same year. 2006 tax software The reimbursement is included in your income. 2006 tax software Your only other income consists of $16,000 wages earned in 2012 after the date of your move, and $100,100 wages earned in Monaco for 2013. 2006 tax software Because you did not meet the bona fide residence test for at least 120 days during 2012, the year of the move, the moving expenses are for services you performed in both 2012 and the following year, 2013. 2006 tax software Your total foreign earned income for both years is $122,100, consisting of $16,000 wages for 2012, $100,100 wages for 2013, and $6,000 moving expense reimbursement for both years. 2006 tax software You have no housing exclusion. 2006 tax software The total amount you can exclude is $113,190, consisting of the $97,600 full-year exclusion for 2013 and a $15,590 part-year exclusion for 2012 ($95,100 times the fraction of 60 qualifying bona fide residence days over 366 total days in the year). 2006 tax software To find the part of your moving expenses that is not deductible, multiply your $6,000 total expenses by the fraction $113,190 over $122,100. 2006 tax software The result, $5,562, is your nondeductible amount. 2006 tax software    You must report the full amount of the moving expense reimbursement in the year in which you received the reimbursement. 2006 tax software In the preceding example, this year was 2012. 2006 tax software You attribute the reimbursement to both 2012 and 2013 only to figure the amount of foreign earned income eligible for exclusion for each year. 2006 tax software Move between foreign countries. 2006 tax software   If you move between foreign countries, your moving expense is allocable to income earned in the year of the move if you qualified under either the bona fide residence test or the physical presence test for a period that includes at least 120 days in the year of the move. 2006 tax software New place of work in U. 2006 tax software S. 2006 tax software   If your new place of work is in the United States, the deductible moving expenses are directly connected with the income earned in the United States. 2006 tax software If you treat a reimbursement from your employer as foreign earned income (see the discussion in chapter 4), you must allocate deductible moving expenses to foreign earned income. 2006 tax software Storage expenses. 2006 tax software   These expenses are attributable to work you do during the year in which you incur the storage expenses. 2006 tax software You cannot deduct the amount allocable to excluded income. 2006 tax software Moving Expense Attributable to Foreign Earnings in 2 Years If your moving expense deduction is attributable to your foreign earnings in 2 years (the year of the move and the following year), you should request an extension of time to file your return for the year of the move until after the end of the second year. 2006 tax software By then, you should have all the information needed to properly figure the moving expense deduction. 2006 tax software See Extensions under When To File and Pay in chapter 1. 2006 tax software If you do not request an extension, you should figure the part of the moving expense that you cannot deduct because it is allocable to the foreign earned income you are excluding. 2006 tax software You do this by multiplying the moving expense by a fraction, the numerator (top number) of which is your excluded foreign earned income for the year of the move, and the denominator (bottom number) of which is your total foreign earned income for the year of the move. 2006 tax software Once you know your foreign earnings and exclusion for the following year, you must either: Adjust the moving expense deduction by filing an amended return for the year of the move, or Recapture any additional unallowable amount as income on your return for the following year. 2006 tax software If, after you make the final computation, you have an additional amount of allowable moving expense deduction, you can claim this only on an amended return for the year of the move. 2006 tax software You cannot claim it on the return for the second year. 2006 tax software Forms To File Report your moving expenses on Form 3903. 2006 tax software Report your moving expense deduction on line 26 of Form 1040. 2006 tax software If you must reduce your moving expenses by the amount allocable to excluded income (as explained later under How To Report Deductions ), attach a statement to your return showing how you figured this amount. 2006 tax software For more information about figuring moving expenses, see Publication 521. 2006 tax software Contributions to Individual Retirement Arrangements Contributions to your individual retirement arrangements (IRAs) that are traditional IRAs or Roth IRAs are generally limited to the lesser of $5,500 ($6,500 if 50 or older) or your compensation that is includible in your gross income for the tax year. 2006 tax software In determining compensation for this purpose, do not take into account amounts you exclude under either the foreign earned income exclusion or the foreign housing exclusion. 2006 tax software Do not reduce your compensation by the foreign housing deduction. 2006 tax software If you are covered by an employer retirement plan at work, your deduction for your contributions to your traditional IRAs is generally limited based on your modified adjusted gross income. 2006 tax software This is your adjusted gross income figured without taking into account the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. 2006 tax software Other modifications are also required. 2006 tax software For more information on IRAs, see Publication 590. 2006 tax software Taxes of Foreign Countries and U. 2006 tax software S. 2006 tax software Possessions You can take either a credit or a deduction for income taxes paid to a foreign country or a U. 2006 tax software S. 2006 tax software possession. 2006 tax software Taken as a deduction, foreign income taxes reduce your taxable income. 2006 tax software Taken as a credit, foreign income taxes reduce your tax liability. 2006 tax software You must treat all foreign income taxes the same way. 2006 tax software If you take a credit for any foreign income taxes, you cannot deduct any foreign income taxes. 2006 tax software However, you may be able to deduct other foreign taxes. 2006 tax software See Deduction for Other Foreign Taxes, later. 2006 tax software There is no rule to determine whether it is to your advantage to take a deduction or a credit for foreign income taxes. 2006 tax software In most cases, it is to your advantage to take foreign income taxes as a tax credit, which you subtract directly from your U. 2006 tax software S. 2006 tax software tax liability, rather than as a deduction in figuring taxable income. 2006 tax software However, if foreign income taxes were imposed at a high rate and the proportion of foreign income to U. 2006 tax software S. 2006 tax software income is small, a lower final tax may result from deducting the foreign income taxes. 2006 tax software In any event, you should figure your tax liability both ways and then use the one that is better for you. 2006 tax software You can make or change your choice within 10 years from the due date for filing the tax return on which you are entitled to take either the deduction or the credit. 2006 tax software Foreign income taxes. 2006 tax software   These are generally income taxes you pay to any foreign country or possession of the United States. 2006 tax software Foreign income taxes on U. 2006 tax software S. 2006 tax software return. 2006 tax software   Foreign income taxes can only be taken as a credit on Form 1040, line 47, or as an itemized deduction on Schedule A. 2006 tax software These amounts cannot be included as withheld income taxes on Form 1040, line 62. 2006 tax software Foreign taxes paid on excluded income. 2006 tax software   You cannot take a credit or deduction for foreign income taxes paid on earnings you exclude from tax under any of the following. 2006 tax software Foreign earned income exclusion. 2006 tax software Foreign housing exclusion. 2006 tax software Possession exclusion. 2006 tax software If your wages are completely excluded, you cannot deduct or take a credit for any of the foreign taxes paid on your wages. 2006 tax software   If only part of your wages is excluded, you cannot deduct or take a credit for the foreign income taxes allocable to the excluded part. 2006 tax software You find the taxes allocable to your excluded wages by applying a fraction to the foreign taxes paid on foreign earned income received during the tax year. 2006 tax software The numerator (top number) of the fraction is your excluded foreign earned income received during the tax year minus deductible expenses allocable to that income (not including the foreign housing deduction). 2006 tax software The denominator (bottom number) of the fraction is your total foreign earned income received during the tax year minus all deductible expenses allocable to that income (including the foreign housing deduction). 2006 tax software   If foreign law taxes both earned income and some other type of income and the taxes on the other type cannot be separated, the denominator of the fraction is the total amount of income subject to foreign tax minus deductible expenses allocable to that income. 2006 tax software    If you take a foreign tax credit for tax on income you could have excluded under your choice to exclude foreign earned income or your choice to exclude foreign housing costs, one or both of the choices may be considered revoked. 2006 tax software Credit for Foreign Income Taxes If you take the foreign tax credit, you may have to file Form 1116 with Form 1040. 2006 tax software Form 1116 is used to figure the amount of foreign tax paid or accrued that can be claimed as a foreign tax credit. 2006 tax software Do not include the amount of foreign tax paid or accrued as withheld federal income taxes on Form 1040, line 62. 2006 tax software The foreign income tax for which you can claim a credit is the amount of legal and actual tax liability you pay or accrue during the year. 2006 tax software The amount for which you can claim a credit is not necessarily the amount withheld by the foreign country. 2006 tax software You cannot take a foreign tax credit for income tax you paid to a foreign country that would be refunded by the foreign country if you made a claim for refund. 2006 tax software Subsidies. 2006 tax software   If a foreign country returns your foreign tax payments to you in the form of a subsidy, you cannot claim a foreign tax credit based on these payments. 2006 tax software This rule applies to a subsidy provided by any means that is determined, directly or indirectly, by reference to the amount of tax, or to the base used to figure the tax. 2006 tax software   Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. 2006 tax software A credit is also not allowed if the subsidy is given to a person related to you, or persons who participated in a transaction or a related transaction with you. 2006 tax software Limit The foreign tax credit is limited to the part of your total U. 2006 tax software S. 2006 tax software tax that is in proportion to your taxable income from sources outside the United States compared to your total taxable income. 2006 tax software The allowable foreign tax credit cannot be more than your actual foreign tax liability. 2006 tax software Exemption from limit. 2006 tax software   You will not be subject to this limit and will not have to file Form 1116 if you meet all three of the following requirements. 2006 tax software Your only foreign source income for the year is passive income (dividends, interest, royalties, etc. 2006 tax software ) that is reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT). 2006 tax software Your foreign taxes for the year that qualify for the credit are not more than $300 ($600 if you are filing a joint return) and are reported on a payee statement. 2006 tax software You elect this procedure. 2006 tax software If you make this election, you cannot carry back or carry over any unused foreign tax to or from this year. 2006 tax software Separate limit. 2006 tax software   You must figure the limit on a separate basis with regard to “passive category income” and “general category income” (see the instructions for Form 1116). 2006 tax software Figuring the limit. 2006 tax software   In figuring taxable income in each category, you take into account only the amount that you must include in income on your federal tax return. 2006 tax software Do not take any excluded amount into account. 2006 tax software   To determine your taxable income in each category, deduct expenses and losses that are definitely related to that income. 2006 tax software   Other expenses (such as itemized deductions or the standard deduction) not definitely related to specific items of income must be apportioned to the foreign income in each category by multiplying them by a fraction. 2006 tax software The numerator (top number) of the fraction is your gross foreign income in the separate limit category. 2006 tax software The denominator (bottom number) of the fraction is your gross income from all sources. 2006 tax software For this purpose, gross income includes income that is excluded under the foreign earned income provisions but does not include any other exempt income. 2006 tax software You must use special rules for deducting interest expenses. 2006 tax software For more information on allocating and apportioning your deductions, see Publication 514. 2006 tax software Exemptions. 2006 tax software   Do not take the deduction for exemptions for yourself, your spouse, or your dependents in figuring taxable income for purposes of the limit. 2006 tax software Recapture of foreign losses. 2006 tax software   If you have an overall foreign loss and the loss reduces your U. 2006 tax software S. 2006 tax software source income (resulting in a reduction of your U. 2006 tax software S. 2006 tax software tax liability), you must recapture the loss in later years when you have taxable income from foreign sources. 2006 tax software This is done by treating a part of your taxable income from foreign sources in later years as U. 2006 tax software S. 2006 tax software source income. 2006 tax software This reduces the numerator of the limiting fraction and the resulting foreign tax credit limit. 2006 tax software Recapture of domestic losses. 2006 tax software   If you have an overall domestic loss (resulting in no U. 2006 tax software S. 2006 tax software tax liability), you cannot claim a foreign tax credit for taxes paid during that year. 2006 tax software You must recapture the loss in later years when you have U. 2006 tax software S. 2006 tax software source taxable income. 2006 tax software This is done by treating a part of your taxable income from U. 2006 tax software S. 2006 tax software sources in later years as foreign source income. 2006 tax software This increases the numerator of the limiting fraction and the resulting foreign tax credit limit. 2006 tax software Foreign tax credit carryback and carryover. 2006 tax software   The amount of foreign income tax not allowed as a credit because of the limit can be carried back 1 year and carried forward 10 years. 2006 tax software   More information on figuring the foreign tax credit can be found in Publication 514. 2006 tax software Deduction for Foreign Income Taxes Instead of taking the foreign tax credit, you can deduct foreign income taxes as an itemized deduction on Schedule A (Form 1040). 2006 tax software You can deduct only foreign income taxes paid on income that is subject to U. 2006 tax software S. 2006 tax software tax. 2006 tax software You cannot deduct foreign taxes paid on earnings you exclude from tax under any of the following. 2006 tax software Foreign earned income exclusion. 2006 tax software Foreign housing exclusion. 2006 tax software Possession exclusion. 2006 tax software Example. 2006 tax software You are a U. 2006 tax software S. 2006 tax software citizen and qualify to exclude your foreign earned income. 2006 tax software Your excluded wages in Country X are $70,000 on which you paid income tax of $10,000. 2006 tax software You received dividends from Country X of $2,000 on which you paid income tax of $600. 2006 tax software You can deduct the $600 tax payment because the dividends relating to it are subject to U. 2006 tax software S. 2006 tax software tax. 2006 tax software Because you exclude your wages, you cannot deduct the income tax of $10,000. 2006 tax software If you exclude only a part of your wages, see the earlier discussion under Foreign taxes paid on excluded income. 2006 tax software Deduction for Other Foreign Taxes You can deduct real property taxes you pay that are imposed on you by a foreign country. 2006 tax software You take this deduction on Schedule A (Form 1040). 2006 tax software You cannot deduct other foreign taxes, such as personal property taxes, unless you incurred the expenses in a trade or business or in the production of income. 2006 tax software On the other hand, you generally can deduct personal property taxes when you pay them to U. 2006 tax software S. 2006 tax software possessions. 2006 tax software But if you claim the possession exclusion, see Publication 570. 2006 tax software The deduction for foreign taxes other than foreign income taxes is not related to the foreign tax credit. 2006 tax software You can take deductions for these miscellaneous foreign taxes and also claim the foreign tax credit for income taxes imposed by a foreign country. 2006 tax software How To Report Deductions If you exclude foreign earned income or housing amounts, how you show your deductions on your tax return and how you figure the amount allocable to your excluded income depends on whether the expenses are used in figuring adjusted gross income (Form 1040, line 38) or are itemized deductions. 2006 tax software If you have deductions used in figuring adjusted gross income, enter the total amount for each of these items on the appropriate lines and schedules of Form 1040. 2006 tax software Generally, you figure the amount of a deduction related to the excluded income by multiplying the deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 2006 tax software Enter the amount of the deduction(s) related to excluded income on line 44 of Form 2555. 2006 tax software If you have itemized deductions related to excluded income, enter on Schedule A (Form 1040) only the part not related to excluded income. 2006 tax software You figure that amount by subtracting from the total deduction the amount related to excluded income. 2006 tax software Generally, you figure the amount that is related to the excluded income by multiplying the total deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 2006 tax software Attach a statement to your return showing how you figured the deductible amount. 2006 tax software Example 1. 2006 tax software You are a U. 2006 tax software S. 2006 tax software citizen employed as an accountant. 2006 tax software Your tax home is in Germany for the entire tax year. 2006 tax software You meet the physical presence test. 2006 tax software Your foreign earned income for the year was $122,000 and your investment income was $10,380. 2006 tax software After excluding $97,600, your AGI is $34,780. 2006 tax software You had unreimbursed business expenses of $2,500 for travel and entertainment in earning your foreign income, of which $500 was for meals and entertainment. 2006 tax software These expenses are deductible only as miscellaneous deductions on Schedule A (Form 1040). 2006 tax software You also have $500 of miscellaneous expenses that are not related to your foreign income that you enter on line 23 of Schedule A. 2006 tax software You must fill out Form 2106. 2006 tax software On that form, reduce your deductible meal and entertainment expenses by 50% ($250). 2006 tax software You must reduce the remaining $2,250 of travel and entertainment expenses by 80% ($1,800) because you excluded 80% ($97,600/$122,000) of your foreign earned income. 2006 tax software You carry the remaining total of $450 to line 21 of Schedule A. 2006 tax software Add the $450 to the $500 that you have on line 23 and enter the total ($950) on line 24. 2006 tax software On line 26 of Schedule A, enter $696, which is 2% of your adjusted gross income of $34,780 (line 38, Form 1040) and subtract it from the amount on line 24. 2006 tax software Enter $254 on line 27 of Schedule A. 2006 tax software Example 2. 2006 tax software You are a U. 2006 tax software S. 2006 tax software citizen, have a tax home in Spain, and meet the physical presence test. 2006 tax software You are self-employed and personal services produce the business income. 2006 tax software Your gross income was $116,931, business expenses $66,895, and net income (profit) $50,036. 2006 tax software You choose the foreign earned income exclusion and exclude $97,600 of your gross income. 2006 tax software Since your excluded income is 83. 2006 tax software 47% of your total income, 83. 2006 tax software 47% of your business expenses are not deductible. 2006 tax software Report your total income and expenses on Schedule C (Form 1040). 2006 tax software On Form 2555 you will show the following: Line 20a, $116,931, gross income, Lines 42 and 43, $97,600, foreign earned income exclusion, and Line 44, $55,837 (83. 2006 tax software 47% × $66,895) business expenses attributable to the exclusion. 2006 tax software In this situation (Example 2), you cannot use Form 2555-EZ since you had self-employment income and business expenses. 2006 tax software Example 3. 2006 tax software Assume in Example 2 that both capital and personal services combine to produce the business income. 2006 tax software No more than 30% of your net income, or $15,011, assuming that this amount is a reasonable allowance for your services, is considered earned and can be excluded. 2006 tax software Your exclusion of $15,011 is 12. 2006 tax software 84% of your gross income ($15,011 ÷ $116,931). 2006 tax software Because you excluded 12. 2006 tax software 84% of your total income, $8,589 (. 2006 tax software 1284 x $66,895) of your business expenses is attributable to the excluded income and is not deductible. 2006 tax software Example 4. 2006 tax software You are a U. 2006 tax software S. 2006 tax software citizen, have a tax home in Brazil, and meet the physical presence test. 2006 tax software You are self-employed and both capital and personal services combine to produce business income. 2006 tax software Your gross income was $146,000, business expenses were $172,000, and your net loss was $26,000. 2006 tax software A reasonable allowance for the services you performed for the business is $77,000. 2006 tax software Because you incurred a net loss, the earned income limit of 30% of your net profit does not apply. 2006 tax software The $77,000 is foreign earned income. 2006 tax software If you choose to exclude the $77,000, you exclude 52. 2006 tax software 74% of your gross income ($77,000 ÷ $146,000), and 52. 2006 tax software 74% of your business expenses ($90,713) is attributable to that income and is not deductible. 2006 tax software Show your total income and expenses on Schedule C (Form 1040). 2006 tax software On Form 2555, exclude $77,000 and show $90,713 on line 44. 2006 tax software Subtract line 44 from line 43, and enter the difference as a negative (in parentheses) on line 45. 2006 tax software Because this amount is negative, enter it as a positive (no parentheses) on line 21, Form 1040, and combine it with your other income to arrive at total income on line 22 of Form 1040. 2006 tax software In this situation (Example 4), you would probably not want to choose the foreign earned income exclusion if this was the first year you were eligible. 2006 tax software If you had chosen the exclusion in an earlier year, you might want to revoke the choice for this year. 2006 tax software To do so would mean that you could not claim the exclusion again for the next 5 tax years without IRS approval. 2006 tax software See Choosing the Exclusion in chapter 4. 2006 tax software Example 5. 2006 tax software You are a U. 2006 tax software S. 2006 tax software citizen, have a tax home in Panama, and meet the bona fide residence test. 2006 tax software You have been performing services for clients as a partner in a firm that provides services exclusively in Panama. 2006 tax software Capital investment is not material in producing the partnership's income. 2006 tax software Under the terms of the partnership agreement, you are to receive 50% of the net profits. 2006 tax software The partnership received gross income of $244,000 and incurred operating expenses of $98,250. 2006 tax software Of the net profits of $145,750, you received $72,875 as your distributive share. 2006 tax software You choose to exclude $97,600 of your share of the gross income. 2006 tax software Because you exclude 80% ($97,600 ÷ $122,000) of your share of the gross income, you cannot deduct $39,300, 80% of your share of the operating expenses (. 2006 tax software 80 × $49,125). 2006 tax software Report $72,875, your distributive share of the partnership net profit, on Schedule E (Form 1040), Supplemental Income and Loss. 2006 tax software On Form 2555, show $97,600 on line 42 and show $39,300 on line 44. 2006 tax software Your exclusion on Form 2555 is $58,300. 2006 tax software In this situation (Example 5), you cannot use Form 2555-EZ since you had earned income other than salaries and wages and you had business expenses. 2006 tax software Prev  Up  Next   Home   More Online Publications