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Free 1040ez online 5. Free 1040ez online   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. Free 1040ez online S. Free 1040ez online 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. Free 1040ez online S. Free 1040ez online possessions, and How to report deductions. Free 1040ez online 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. Free 1040ez online Items Related to Excluded Income U. Free 1040ez online S. Free 1040ez online citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States. Free 1040ez online 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. Free 1040ez online This includes any expenses, losses, and other normally deductible items that are allocable to the excluded income. Free 1040ez online You can deduct only those expenses connected with earning includible income. Free 1040ez online 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. Free 1040ez online 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. Free 1040ez online 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. Free 1040ez online 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. Free 1040ez online Example. Free 1040ez online In 2012, you had $90,400 of foreign earned income and $9,500 of deductions allocable to your foreign earned income. Free 1040ez online You did not have a housing exclusion. Free 1040ez online 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. Free 1040ez online In 2013, you received a $12,000 bonus for work you did abroad in 2012. Free 1040ez online 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. Free 1040ez online 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. Free 1040ez online 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). Free 1040ez online Exemptions You can claim an exemption for your nonresident alien spouse on your separate return, provided your spouse has no gross income for U. Free 1040ez online S. Free 1040ez online tax purposes and is not the dependent of another U. Free 1040ez online S. Free 1040ez online taxpayer. Free 1040ez online You also can claim exemptions for individuals who qualify as your dependents. Free 1040ez online To be your dependent, the individual must be a U. Free 1040ez online S. Free 1040ez online citizen, U. Free 1040ez online S. Free 1040ez online national, U. Free 1040ez online S. Free 1040ez online resident alien, or a resident of Canada or Mexico for some part of the calendar year in which your tax year begins. Free 1040ez online Children. Free 1040ez online   Children usually are citizens or residents of the same country as their parents. Free 1040ez online If you were a U. Free 1040ez online S. Free 1040ez online citizen when your child was born, your child generally is a U. Free 1040ez online S. Free 1040ez online citizen. Free 1040ez online 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. Free 1040ez online   If you have a legally adopted child who is not a U. Free 1040ez online S. Free 1040ez online citizen, U. Free 1040ez online S. Free 1040ez online resident, or U. Free 1040ez online S. Free 1040ez online national, the child meets the citizen requirement if you are a U. Free 1040ez online S. Free 1040ez online citizen or U. Free 1040ez online S. Free 1040ez online national and the child lived with you as a member of your household all year. Free 1040ez online Social security number. Free 1040ez online   You must include on your return the social security number (SSN) of each dependent for whom you claim an exemption. Free 1040ez online To get a social security number for a dependent, apply at a Social Security office or U. Free 1040ez online S. Free 1040ez online consulate. Free 1040ez online You must provide original or certified copies of documents to verify the dependent's age, identity, and citizenship, and complete Form SS-5. Free 1040ez online   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. Free 1040ez online Print “Died” in column (2) of line 6c of your Form 1040 or Form 1040A. Free 1040ez online   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. Free 1040ez online To apply for an ITIN, file Form W-7 with the IRS. Free 1040ez online It usually takes 6 to 10 weeks to get an ITIN. Free 1040ez online Enter your dependent's ITIN wherever an SSN is requested on your tax return. Free 1040ez online More information. Free 1040ez online   For more information about exemptions, see Publication 501. Free 1040ez online Contributions to Foreign Charitable Organizations If you make contributions directly to a foreign church or other foreign charitable organization, you generally cannot deduct them. Free 1040ez online Exceptions are explained under Canadian, Mexican, and Israeli charities, later. Free 1040ez online You can deduct contributions to a U. Free 1040ez online S. Free 1040ez online organization that transfers funds to a charitable foreign organization if the U. Free 1040ez online S. Free 1040ez online organization controls the use of the funds by the foreign organization or if the foreign organization is just an administrative arm of the U. Free 1040ez online S. Free 1040ez online organization. Free 1040ez online Canadian, Mexican, and Israeli charities. Free 1040ez online   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. Free 1040ez online Generally, you must have income from sources in Canada, Mexico, or Israel, and the organization must meet certain requirements. Free 1040ez online See Publication 597, Information on the United States-Canada Income Tax Treaty, and Publication 526, Charitable Contributions, for more information. Free 1040ez online 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. Free 1040ez online Generally, to be deductible, the moving expenses must have been paid or incurred in connection with starting work at a new job location. Free 1040ez online See Publication 521 for a complete discussion of the deduction for moving expenses and information about moves within the United States. Free 1040ez online Foreign moves. Free 1040ez online   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. Free 1040ez online A foreign move does not include a move back to the United States or its possessions. Free 1040ez online 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. Free 1040ez online 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. Free 1040ez online 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. Free 1040ez online Year to which expense is connected. Free 1040ez online   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. Free 1040ez online 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. Free 1040ez online   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. Free 1040ez online 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. Free 1040ez online 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. Free 1040ez online Amount allocable to excluded income. Free 1040ez online   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. Free 1040ez online 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. Free 1040ez online Example. Free 1040ez online On November 1, 2012, you transfer to Monaco. Free 1040ez online Your tax home is in Monaco, and you are a bona fide resident of Monaco for the entire tax year 2013. Free 1040ez online In 2012, you paid $6,000 for allowable moving expenses for your move from the United States to Monaco. Free 1040ez online You were fully reimbursed (under a nonaccountable plan) for these expenses in the same year. Free 1040ez online The reimbursement is included in your income. Free 1040ez online 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. Free 1040ez online 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. Free 1040ez online 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. Free 1040ez online You have no housing exclusion. Free 1040ez online 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). Free 1040ez online 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. Free 1040ez online The result, $5,562, is your nondeductible amount. Free 1040ez online    You must report the full amount of the moving expense reimbursement in the year in which you received the reimbursement. Free 1040ez online In the preceding example, this year was 2012. Free 1040ez online You attribute the reimbursement to both 2012 and 2013 only to figure the amount of foreign earned income eligible for exclusion for each year. Free 1040ez online Move between foreign countries. Free 1040ez online   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. Free 1040ez online New place of work in U. Free 1040ez online S. Free 1040ez online   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. Free 1040ez online 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. Free 1040ez online Storage expenses. Free 1040ez online   These expenses are attributable to work you do during the year in which you incur the storage expenses. Free 1040ez online You cannot deduct the amount allocable to excluded income. Free 1040ez online 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. Free 1040ez online By then, you should have all the information needed to properly figure the moving expense deduction. Free 1040ez online See Extensions under When To File and Pay in chapter 1. Free 1040ez online 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. Free 1040ez online 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. Free 1040ez online 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. Free 1040ez online 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. Free 1040ez online You cannot claim it on the return for the second year. Free 1040ez online Forms To File Report your moving expenses on Form 3903. Free 1040ez online Report your moving expense deduction on line 26 of Form 1040. Free 1040ez online 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. Free 1040ez online For more information about figuring moving expenses, see Publication 521. Free 1040ez online 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. Free 1040ez online 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. Free 1040ez online Do not reduce your compensation by the foreign housing deduction. Free 1040ez online 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. Free 1040ez online 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. Free 1040ez online Other modifications are also required. Free 1040ez online For more information on IRAs, see Publication 590. Free 1040ez online Taxes of Foreign Countries and U. Free 1040ez online S. Free 1040ez online Possessions You can take either a credit or a deduction for income taxes paid to a foreign country or a U. Free 1040ez online S. Free 1040ez online possession. Free 1040ez online Taken as a deduction, foreign income taxes reduce your taxable income. Free 1040ez online Taken as a credit, foreign income taxes reduce your tax liability. Free 1040ez online You must treat all foreign income taxes the same way. Free 1040ez online If you take a credit for any foreign income taxes, you cannot deduct any foreign income taxes. Free 1040ez online However, you may be able to deduct other foreign taxes. Free 1040ez online See Deduction for Other Foreign Taxes, later. Free 1040ez online There is no rule to determine whether it is to your advantage to take a deduction or a credit for foreign income taxes. Free 1040ez online In most cases, it is to your advantage to take foreign income taxes as a tax credit, which you subtract directly from your U. Free 1040ez online S. Free 1040ez online tax liability, rather than as a deduction in figuring taxable income. Free 1040ez online However, if foreign income taxes were imposed at a high rate and the proportion of foreign income to U. Free 1040ez online S. Free 1040ez online income is small, a lower final tax may result from deducting the foreign income taxes. Free 1040ez online In any event, you should figure your tax liability both ways and then use the one that is better for you. Free 1040ez online 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. Free 1040ez online Foreign income taxes. Free 1040ez online   These are generally income taxes you pay to any foreign country or possession of the United States. Free 1040ez online Foreign income taxes on U. Free 1040ez online S. Free 1040ez online return. Free 1040ez online   Foreign income taxes can only be taken as a credit on Form 1040, line 47, or as an itemized deduction on Schedule A. Free 1040ez online These amounts cannot be included as withheld income taxes on Form 1040, line 62. Free 1040ez online Foreign taxes paid on excluded income. Free 1040ez online   You cannot take a credit or deduction for foreign income taxes paid on earnings you exclude from tax under any of the following. Free 1040ez online Foreign earned income exclusion. Free 1040ez online Foreign housing exclusion. Free 1040ez online Possession exclusion. Free 1040ez online If your wages are completely excluded, you cannot deduct or take a credit for any of the foreign taxes paid on your wages. Free 1040ez online   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. Free 1040ez online 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. Free 1040ez online 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). Free 1040ez online 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). Free 1040ez online   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. Free 1040ez online    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. Free 1040ez online Credit for Foreign Income Taxes If you take the foreign tax credit, you may have to file Form 1116 with Form 1040. Free 1040ez online Form 1116 is used to figure the amount of foreign tax paid or accrued that can be claimed as a foreign tax credit. Free 1040ez online Do not include the amount of foreign tax paid or accrued as withheld federal income taxes on Form 1040, line 62. Free 1040ez online 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. Free 1040ez online The amount for which you can claim a credit is not necessarily the amount withheld by the foreign country. Free 1040ez online 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. Free 1040ez online Subsidies. Free 1040ez online   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. Free 1040ez online 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. Free 1040ez online   Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. Free 1040ez online 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. Free 1040ez online Limit The foreign tax credit is limited to the part of your total U. Free 1040ez online S. Free 1040ez online tax that is in proportion to your taxable income from sources outside the United States compared to your total taxable income. Free 1040ez online The allowable foreign tax credit cannot be more than your actual foreign tax liability. Free 1040ez online Exemption from limit. Free 1040ez online   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. Free 1040ez online Your only foreign source income for the year is passive income (dividends, interest, royalties, etc. Free 1040ez online ) that is reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT). Free 1040ez online 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. Free 1040ez online You elect this procedure. Free 1040ez online If you make this election, you cannot carry back or carry over any unused foreign tax to or from this year. Free 1040ez online Separate limit. Free 1040ez online   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). Free 1040ez online Figuring the limit. Free 1040ez online   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. Free 1040ez online Do not take any excluded amount into account. Free 1040ez online   To determine your taxable income in each category, deduct expenses and losses that are definitely related to that income. Free 1040ez online   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. Free 1040ez online The numerator (top number) of the fraction is your gross foreign income in the separate limit category. Free 1040ez online The denominator (bottom number) of the fraction is your gross income from all sources. Free 1040ez online For this purpose, gross income includes income that is excluded under the foreign earned income provisions but does not include any other exempt income. Free 1040ez online You must use special rules for deducting interest expenses. Free 1040ez online For more information on allocating and apportioning your deductions, see Publication 514. Free 1040ez online Exemptions. Free 1040ez online   Do not take the deduction for exemptions for yourself, your spouse, or your dependents in figuring taxable income for purposes of the limit. Free 1040ez online Recapture of foreign losses. Free 1040ez online   If you have an overall foreign loss and the loss reduces your U. Free 1040ez online S. Free 1040ez online source income (resulting in a reduction of your U. Free 1040ez online S. Free 1040ez online tax liability), you must recapture the loss in later years when you have taxable income from foreign sources. Free 1040ez online This is done by treating a part of your taxable income from foreign sources in later years as U. Free 1040ez online S. Free 1040ez online source income. Free 1040ez online This reduces the numerator of the limiting fraction and the resulting foreign tax credit limit. Free 1040ez online Recapture of domestic losses. Free 1040ez online   If you have an overall domestic loss (resulting in no U. Free 1040ez online S. Free 1040ez online tax liability), you cannot claim a foreign tax credit for taxes paid during that year. Free 1040ez online You must recapture the loss in later years when you have U. Free 1040ez online S. Free 1040ez online source taxable income. Free 1040ez online This is done by treating a part of your taxable income from U. Free 1040ez online S. Free 1040ez online sources in later years as foreign source income. Free 1040ez online This increases the numerator of the limiting fraction and the resulting foreign tax credit limit. Free 1040ez online Foreign tax credit carryback and carryover. Free 1040ez online   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. Free 1040ez online   More information on figuring the foreign tax credit can be found in Publication 514. Free 1040ez online 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). Free 1040ez online You can deduct only foreign income taxes paid on income that is subject to U. Free 1040ez online S. Free 1040ez online tax. Free 1040ez online You cannot deduct foreign taxes paid on earnings you exclude from tax under any of the following. Free 1040ez online Foreign earned income exclusion. Free 1040ez online Foreign housing exclusion. Free 1040ez online Possession exclusion. Free 1040ez online Example. Free 1040ez online You are a U. Free 1040ez online S. Free 1040ez online citizen and qualify to exclude your foreign earned income. Free 1040ez online Your excluded wages in Country X are $70,000 on which you paid income tax of $10,000. Free 1040ez online You received dividends from Country X of $2,000 on which you paid income tax of $600. Free 1040ez online You can deduct the $600 tax payment because the dividends relating to it are subject to U. Free 1040ez online S. Free 1040ez online tax. Free 1040ez online Because you exclude your wages, you cannot deduct the income tax of $10,000. Free 1040ez online If you exclude only a part of your wages, see the earlier discussion under Foreign taxes paid on excluded income. Free 1040ez online Deduction for Other Foreign Taxes You can deduct real property taxes you pay that are imposed on you by a foreign country. Free 1040ez online You take this deduction on Schedule A (Form 1040). Free 1040ez online 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. Free 1040ez online On the other hand, you generally can deduct personal property taxes when you pay them to U. Free 1040ez online S. Free 1040ez online possessions. Free 1040ez online But if you claim the possession exclusion, see Publication 570. Free 1040ez online The deduction for foreign taxes other than foreign income taxes is not related to the foreign tax credit. Free 1040ez online You can take deductions for these miscellaneous foreign taxes and also claim the foreign tax credit for income taxes imposed by a foreign country. Free 1040ez online 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. Free 1040ez online 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. Free 1040ez online 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. Free 1040ez online Enter the amount of the deduction(s) related to excluded income on line 44 of Form 2555. Free 1040ez online If you have itemized deductions related to excluded income, enter on Schedule A (Form 1040) only the part not related to excluded income. Free 1040ez online You figure that amount by subtracting from the total deduction the amount related to excluded income. Free 1040ez online 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. Free 1040ez online Attach a statement to your return showing how you figured the deductible amount. Free 1040ez online Example 1. Free 1040ez online You are a U. Free 1040ez online S. Free 1040ez online citizen employed as an accountant. Free 1040ez online Your tax home is in Germany for the entire tax year. Free 1040ez online You meet the physical presence test. Free 1040ez online Your foreign earned income for the year was $122,000 and your investment income was $10,380. Free 1040ez online After excluding $97,600, your AGI is $34,780. Free 1040ez online 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. Free 1040ez online These expenses are deductible only as miscellaneous deductions on Schedule A (Form 1040). Free 1040ez online You also have $500 of miscellaneous expenses that are not related to your foreign income that you enter on line 23 of Schedule A. Free 1040ez online You must fill out Form 2106. Free 1040ez online On that form, reduce your deductible meal and entertainment expenses by 50% ($250). Free 1040ez online 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. Free 1040ez online You carry the remaining total of $450 to line 21 of Schedule A. Free 1040ez online Add the $450 to the $500 that you have on line 23 and enter the total ($950) on line 24. Free 1040ez online 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. Free 1040ez online Enter $254 on line 27 of Schedule A. Free 1040ez online Example 2. Free 1040ez online You are a U. Free 1040ez online S. Free 1040ez online citizen, have a tax home in Spain, and meet the physical presence test. Free 1040ez online You are self-employed and personal services produce the business income. Free 1040ez online Your gross income was $116,931, business expenses $66,895, and net income (profit) $50,036. Free 1040ez online You choose the foreign earned income exclusion and exclude $97,600 of your gross income. Free 1040ez online Since your excluded income is 83. Free 1040ez online 47% of your total income, 83. Free 1040ez online 47% of your business expenses are not deductible. Free 1040ez online Report your total income and expenses on Schedule C (Form 1040). Free 1040ez online 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. Free 1040ez online 47% × $66,895) business expenses attributable to the exclusion. Free 1040ez online In this situation (Example 2), you cannot use Form 2555-EZ since you had self-employment income and business expenses. Free 1040ez online Example 3. Free 1040ez online Assume in Example 2 that both capital and personal services combine to produce the business income. Free 1040ez online 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. Free 1040ez online Your exclusion of $15,011 is 12. Free 1040ez online 84% of your gross income ($15,011 ÷ $116,931). Free 1040ez online Because you excluded 12. Free 1040ez online 84% of your total income, $8,589 (. Free 1040ez online 1284 x $66,895) of your business expenses is attributable to the excluded income and is not deductible. Free 1040ez online Example 4. Free 1040ez online You are a U. Free 1040ez online S. Free 1040ez online citizen, have a tax home in Brazil, and meet the physical presence test. Free 1040ez online You are self-employed and both capital and personal services combine to produce business income. Free 1040ez online Your gross income was $146,000, business expenses were $172,000, and your net loss was $26,000. Free 1040ez online A reasonable allowance for the services you performed for the business is $77,000. Free 1040ez online Because you incurred a net loss, the earned income limit of 30% of your net profit does not apply. Free 1040ez online The $77,000 is foreign earned income. Free 1040ez online If you choose to exclude the $77,000, you exclude 52. Free 1040ez online 74% of your gross income ($77,000 ÷ $146,000), and 52. Free 1040ez online 74% of your business expenses ($90,713) is attributable to that income and is not deductible. Free 1040ez online Show your total income and expenses on Schedule C (Form 1040). Free 1040ez online On Form 2555, exclude $77,000 and show $90,713 on line 44. Free 1040ez online Subtract line 44 from line 43, and enter the difference as a negative (in parentheses) on line 45. Free 1040ez online 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. Free 1040ez online 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. Free 1040ez online If you had chosen the exclusion in an earlier year, you might want to revoke the choice for this year. Free 1040ez online To do so would mean that you could not claim the exclusion again for the next 5 tax years without IRS approval. Free 1040ez online See Choosing the Exclusion in chapter 4. Free 1040ez online Example 5. Free 1040ez online You are a U. Free 1040ez online S. Free 1040ez online citizen, have a tax home in Panama, and meet the bona fide residence test. Free 1040ez online You have been performing services for clients as a partner in a firm that provides services exclusively in Panama. Free 1040ez online Capital investment is not material in producing the partnership's income. Free 1040ez online Under the terms of the partnership agreement, you are to receive 50% of the net profits. Free 1040ez online The partnership received gross income of $244,000 and incurred operating expenses of $98,250. Free 1040ez online Of the net profits of $145,750, you received $72,875 as your distributive share. Free 1040ez online You choose to exclude $97,600 of your share of the gross income. Free 1040ez online 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 (. Free 1040ez online 80 × $49,125). Free 1040ez online Report $72,875, your distributive share of the partnership net profit, on Schedule E (Form 1040), Supplemental Income and Loss. Free 1040ez online On Form 2555, show $97,600 on line 42 and show $39,300 on line 44. Free 1040ez online Your exclusion on Form 2555 is $58,300. Free 1040ez online 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. Free 1040ez online Prev  Up  Next   Home   More Online Publications
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Powers of Attorney for LLCs

If… And… Then the taxpayer is… Form 2848, POA is…

The LLC is a single member disregarded entity…

(except for employment taxes for which the entity is not considered disregarded; see Treas. Reg. § 301.7701-2(c)(2)(iv)(B))

The business or activity is reporting income and expenses on Form 1040, Schedules C or E… The individual. Spouses cannot sign on behalf of the member/spouse unless a separate POA exists naming the spouse.  Signed by the individual (member) and should include the SSN (and if one exists for employment or excise taxes, the EIN of the LLC.)
The business or activity is reporting income on Form 1041, Trust or Estate Tax Return The trustee, executor or other fiduciary responsible for filing the Form 1041 return; Generally the fiduciary must submit Form 56. Signed by the trustee, executor or fiduciary with the authority to bind the trust or estate, listing the EIN from the Form 1041.

The issue is employment taxes reported on Forms 940/941 series

The LLC business.

Signed by the LLC member.

See Treas. Reg. § 301.7701-2(c)(2)(iv)(B)

The LLC (regardless of number of members) elects to be treated as an association taxable as a corporation… The business is reporting income on Form 1120, U.S. Corporation Tax Return… The corporation Signed by a current corporate officer or employee having the authority to bind the corporation using the corporate EIN. 
The business is reporting income on Form 1120 S, U.S. Income Tax Return for an S Corporation and liability is determined at the corporate level… The corporation Signed by a current corporate officer or employee having the authority to bind the corporation using the corporate EIN. 
The business is reporting income on Form 1120 S, U.S. Income Tax Return for an S Corporation and liability is determined at the shareholder level… The individual shareholder Signed by the shareholder using the SSN (or in the case of a qualifying trust, the trust EIN).

The LLC is a multiple member entity…

Also refer to the TEFRA Rules

The business or activity is reporting on Form 1065, U.S. Return of Partnership Income, is not subject to TEFRA rules and the liability is determined at the partnership level (for example: employment taxes) The partnership  Signed by any manager authorized to act in the name of the partnership (based on state law that LLC manager has the authority to bind the partnership); the partnership uses its EIN. 
The business or activity is reporting on Form 1065, U.S. Return of Partnership Income, is not subject to TEFRA rules and the liability is determined at the partner level (eg: flow through items, distributive shares of income, deductions, credits, etc.)… Each partner separately Signed by each partner using his/her SSN. See flowchart below.
The LLC is a TEFRA partnership and has designated a Tax Matters Partner (TMP) on its return or via Form 13798-L for regular partnership level business The partners Form 2848 is signed by the manager under state law or the TMP. Generally, only a TMP signed POA can extend the period for assessing partners and only a manager signed POA can sign documents for the LLC itself. If the TMP is not a natural person, the attribution for who acts on behalf of that partner/entity signs the POA (for example: the person authorized under state law to sign on behalf of a partnership, officer of a corporation, trustee of a trust, etc.). 
The LLC is a TEFRA partnership and has designated a TMP but involves issues binding non-notice partners or requests for partnership level administrative adjustments The partners Not allowed. Only the TMP can file a partnership-level AAR or sign a settlement agreement binding non-notice partners.
The LLC is a TEFRA partnership and has not designated a TMP The partners A manager under state law or the default TMP under the largest profits interests test. See IRC § 6231(a)(7)(B);Treas. Reg. § 301.6231(a)(7)-2
Page Last Reviewed or Updated: 06-Dec-2013

The Free 1040ez Online

Free 1040ez online 10. Free 1040ez online   Self-Employment (SE) Tax Table of Contents Who Must Pay SE Tax?Special Rules and Exceptions Figuring Earnings Subject to SE Tax Farm Optional Method Using Both Optional Methods Reporting Self-Employment Tax The SE tax rules apply no matter how old you are and even if you are already receiving social security and Medicare benefits. Free 1040ez online Who Must Pay SE Tax? Generally, you must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. Free 1040ez online Use Schedule SE to figure net earnings from self-employment. Free 1040ez online Sole proprietor or independent contractor. Free 1040ez online   If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C or C-EZ (Form 1040) to figure your earnings subject to SE tax. Free 1040ez online SE tax rate. Free 1040ez online    For 2013, the SE tax rate on net earnings is 15. Free 1040ez online 3% (12. Free 1040ez online 4% social security tax plus 2. Free 1040ez online 9% Medicare tax). Free 1040ez online Maximum earnings subject to self-employment tax. Free 1040ez online    Only the first $113,700 of your combined wages, tips, and net earnings in 2013 is subject to any combination of the 12. Free 1040ez online 4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax. Free 1040ez online   All of your combined wages, tips, and net earnings in 2013 are subject to any combination of the 2. Free 1040ez online 9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax. Free 1040ez online   If your wages and tips are subject to either social security or railroad retirement (tier 1) tax, or both, and total at least $113,700, do not pay the 12. Free 1040ez online 4% social security part of the SE tax on any of your net earnings. Free 1040ez online However, you must pay the 2. Free 1040ez online 9% Medicare part of the SE tax on all your net earnings. Free 1040ez online Special Rules and Exceptions Aliens. Free 1040ez online   Generally, resident aliens must pay self-employment tax under the same rules that apply to U. Free 1040ez online S. Free 1040ez online citizens. Free 1040ez online Nonresident aliens are not subject to SE tax unless an international social security agreement in effect determines that they are covered under the U. Free 1040ez online S. Free 1040ez online social security system. Free 1040ez online However, residents of the Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa are subject to self-employment tax, as they are considered U. Free 1040ez online S. Free 1040ez online residents for self-employment tax purposes. Free 1040ez online For more information on aliens, see Publication 519, U. Free 1040ez online S. Free 1040ez online Tax Guide for Aliens. Free 1040ez online Child employed by parent. Free 1040ez online   You are not subject to SE tax if you are under age 18 and you are working for your father or mother. Free 1040ez online Church employee. Free 1040ez online    If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108. Free 1040ez online 28 or more in wages from the church or organization. Free 1040ez online For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Free 1040ez online Fishing crew member. Free 1040ez online   If you are a member of the crew on a boat that catches fish or other water life, your earnings are subject to SE tax if all the following conditions apply. Free 1040ez online You do not get any pay for the work except your share of the catch or a share of the proceeds from the sale of the catch, unless the pay meets all the following conditions. Free 1040ez online The pay is not more than $100 per trip. Free 1040ez online The pay is received only if there is a minimum catch. Free 1040ez online The pay is solely for additional duties (such as mate, engineer, or cook) for which additional cash pay is traditional in the fishing industry. Free 1040ez online You get a share of the catch or a share of the proceeds from the sale of the catch. Free 1040ez online Your share depends on the amount of the catch. Free 1040ez online The boat's operating crew normally numbers fewer than 10 individuals. Free 1040ez online (An operating crew is considered as normally made up of fewer than 10 if the average size of the crew on trips made during the last four calendar quarters is fewer than 10. Free 1040ez online ) Notary public. Free 1040ez online   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ but are not subject to self-employment tax (see the Instructions for Schedule SE (Form 1040)). Free 1040ez online State or local government employee. Free 1040ez online   You are subject to SE tax if you are an employee of a state or local government, are paid solely on a fee basis, and your services are not covered under a federal-state social security agreement. Free 1040ez online Foreign government or international organization employee. Free 1040ez online   You are subject to SE tax if both the following conditions are true. Free 1040ez online You are a U. Free 1040ez online S. Free 1040ez online citizen employed in the United States, Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, or the Virgin Islands by: A foreign government, A wholly-owned agency of a foreign government, or An international organization. Free 1040ez online Your employer is not required to withhold social security and Medicare taxes from your wages. Free 1040ez online U. Free 1040ez online S. Free 1040ez online citizen or resident alien residing abroad. Free 1040ez online    If you are a self-employed U. Free 1040ez online S. Free 1040ez online citizen or resident alien living outside the United States, in most cases you must pay SE tax. Free 1040ez online Do not reduce your foreign earnings from self-employment by your foreign earned income exclusion. Free 1040ez online Exception. Free 1040ez online    The United States has social security agreements with many countries to eliminate double taxation under two social security systems. Free 1040ez online Under these agreements, you generally must only pay social security and Medicare taxes to the country in which you live. Free 1040ez online The country to which you must pay the tax will issue a certificate which serves as proof of exemption from social security tax in the other country. Free 1040ez online   For more information, see the Instructions for Schedule SE (Form 1040). Free 1040ez online More Than One Business If you have earnings subject to SE tax from more than one trade, business, or profession, you must combine the net profit (or loss) from each to determine your total earnings subject to SE tax. Free 1040ez online A loss from one business reduces your profit from another business. Free 1040ez online Community Property Income If any of the income from a trade or business, other than a partnership, is community property income under state law, it is included in the earnings subject to SE tax of the spouse carrying on the trade or business. Free 1040ez online Gain or Loss Do not include in earnings subject to SE tax a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. Free 1040ez online It does not matter whether the disposition is a sale, exchange, or an involuntary conversion. Free 1040ez online Lost Income Payments If you are self-employed and reduce or stop your business activities, any payment you receive from insurance or other sources for the lost business income is included in earnings subject to SE tax. Free 1040ez online If you are not working when you receive the payment, it still relates to your business and is included in earnings subject to SE tax, even though your business is temporarily inactive. Free 1040ez online Figuring Earnings Subject to SE Tax Methods for Figuring Net Earnings There are three ways to figure your net earnings from self-employment. Free 1040ez online The regular method. Free 1040ez online The nonfarm optional method. Free 1040ez online The farm optional method. Free 1040ez online You must use the regular method unless you are eligible to use one or both of the optional methods. Free 1040ez online Why use an optional method?    You may want to use the optional methods (discussed later) when you have a loss or a small net profit and any one of the following applies. Free 1040ez online You want to receive credit for social security benefit coverage. Free 1040ez online You incurred child or dependent care expenses for which you could claim a credit. Free 1040ez online (An optional method may increase your earned income, which could increase your credit. Free 1040ez online ) You are entitled to the earned income credit. Free 1040ez online (An optional method may increase your earned income, which could increase your credit. Free 1040ez online ) You are entitled to the additional child tax credit. Free 1040ez online (An optional method may increase your earned income, which could increase your credit. Free 1040ez online ) Effects of using an optional method. Free 1040ez online   Using an optional method could increase your SE tax. Free 1040ez online Paying more SE tax could result in your getting higher benefits when you retire. Free 1040ez online   If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if you would have had a smaller tax or no tax using the regular method. Free 1040ez online   The optional methods may be used only to figure your SE tax. Free 1040ez online To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax. Free 1040ez online Regular Method Multiply your total earnings subject to SE tax by 92. Free 1040ez online 35% (. Free 1040ez online 9235) to get your net earnings under the regular method. Free 1040ez online See Short Schedule SE, line 4, or Long Schedule SE, line 4a. Free 1040ez online Net earnings figured using the regular method are also called actual net earnings. Free 1040ez online Nonfarm Optional Method Use the nonfarm optional method only for earnings that do not come from farming. Free 1040ez online You may use this method if you meet all the following tests. Free 1040ez online You are self-employed on a regular basis. Free 1040ez online This means that your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. Free 1040ez online The net earnings can be from either farm or nonfarm earnings or both. Free 1040ez online You have used this method less than 5 years. Free 1040ez online (There is a 5-year lifetime limit. Free 1040ez online ) The years do not have to be one after another. Free 1040ez online Your net nonfarm profits were: Less than $5,024, and Less than 72. Free 1040ez online 189% of your gross nonfarm income. Free 1040ez online Net nonfarm profits. Free 1040ez online   Net nonfarm profit generally is the total of the amounts from: Line 31, Schedule C (Form 1040), Line 3, Schedule C-EZ (Form 1040), Box 14, code A, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J1, Schedule K-1 (Form 1065-B). Free 1040ez online   However, you may need to adjust the amount reported on Schedule K-1 if you are a general partner or if it is a loss. Free 1040ez online Gross nonfarm income. Free 1040ez online   Your gross nonfarm income generally is the total of the amounts from: Line 7, Schedule C (Form 1040), Line 1, Schedule C-EZ (Form 1040), Box 14, code C, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J2, Schedule K-1 (Form 1065-B). Free 1040ez online Figuring Nonfarm Net Earnings If you meet the three tests explained earlier, use the following table to figure your net earnings from self-employment under the nonfarm optional method. Free 1040ez online Table 10-1. Free 1040ez online Figuring Nonfarm Net Earnings IF your gross nonfarm income is. Free 1040ez online . Free 1040ez online . Free 1040ez online THEN your net earnings are equal to. Free 1040ez online . Free 1040ez online . Free 1040ez online $6,960 or less Two-thirds of your gross nonfarm income. Free 1040ez online More than $6,960 $4,640 Actual net earnings. Free 1040ez online   Your actual net earnings are 92. Free 1040ez online 35% of your total earnings subject to SE tax (that is, multiply total earnings subject to SE tax by 92. Free 1040ez online 35% (. Free 1040ez online 9235) to get actual net earnings). Free 1040ez online Actual net earnings are equivalent to net earnings figured using the regular method. Free 1040ez online Optional net earnings less than actual net earnings. Free 1040ez online   You cannot use this method to report an amount less than your actual net earnings from self-employment. Free 1040ez online Gross nonfarm income of $6,960 or less. Free 1040ez online   The following examples illustrate how to figure net earnings when gross nonfarm income is $6,960 or less. Free 1040ez online Example 1. Free 1040ez online Net nonfarm profit less than $5,024 and less than 72. Free 1040ez online 189% of gross nonfarm income. Free 1040ez online Ann Green runs a craft business. Free 1040ez online Her actual net earnings from self-employment were $800 in 2011 and $900 in 2012. Free 1040ez online She meets the test for being self-employed on a regular basis. Free 1040ez online She has used the nonfarm optional method less than 5 years. Free 1040ez online Her gross income and net profit in 2013 are as follows: Gross nonfarm income $5,400 Net nonfarm profit $1,200 Ann's actual net earnings for 2013 are $1,108 ($1,200 × . Free 1040ez online 9235). Free 1040ez online Because her net profit is less than $5,024 and less than 72. Free 1040ez online 189% of her gross income, she can use the nonfarm optional method to figure net earnings of $3,600 (2/3 × $5,400). Free 1040ez online Because these net earnings are higher than her actual net earnings, she can report net earnings of $3,600 for 2013. Free 1040ez online Example 2. Free 1040ez online Net nonfarm profit less than $5,024 but not less than 72. Free 1040ez online 189% of gross nonfarm income. Free 1040ez online Assume that in Example 1 Ann's gross income is $1,000 and her net profit is $800. Free 1040ez online She must use the regular method to figure her net earnings. Free 1040ez online She cannot use the nonfarm optional method because her net profit is not less than 72. Free 1040ez online 189% of her gross income. Free 1040ez online Example 3. Free 1040ez online Net loss from a nonfarm business. Free 1040ez online Assume that in Example 1 Ann has a net loss of $700. Free 1040ez online She can use the nonfarm optional method and report $3,600 (2/3 × $5,400) as her net earnings. Free 1040ez online Example 4. Free 1040ez online Nonfarm net earnings less than $400. Free 1040ez online Assume that in Example 1 Ann has gross income of $525 and a net profit of $175. Free 1040ez online In this situation, she would not pay any SE tax under either the regular method or the nonfarm optional method because her net earnings under both methods are less than $400. Free 1040ez online Gross nonfarm income of more than $6,960. Free 1040ez online   The following examples illustrate how to figure net earnings when gross nonfarm income is more than $6,960. Free 1040ez online Example 1. Free 1040ez online Net nonfarm profit less than $5,024 and less than 72. Free 1040ez online 189% of gross nonfarm income. Free 1040ez online John White runs an appliance repair shop. Free 1040ez online His actual net earnings from self-employment were $10,500 in 2011 and $9,500 in 2012. Free 1040ez online He meets the test for being self-employed on a regular basis. Free 1040ez online He has used the nonfarm optional method less than 5 years. Free 1040ez online His gross income and net profit in 2013 are as follows: Gross nonfarm income $12,000 Net nonfarm profit $1,200 John's actual net earnings for 2013 are $1,108 ($1,200 × . Free 1040ez online 9235). Free 1040ez online Because his net profit is less than $5,024 and less than 72. Free 1040ez online 189% of his gross income, he can use the nonfarm optional method to figure net earnings of $4,640. Free 1040ez online Because these net earnings are higher than his actual net earnings, he can report net earnings of $4,640 for 2013. Free 1040ez online Example 2. Free 1040ez online Net nonfarm profit not less than $5,024. Free 1040ez online Assume that in Example 1 John's net profit is $5,400. Free 1040ez online He must use the regular method. Free 1040ez online He cannot use the nonfarm optional method because his net nonfarm profit is not less than $5,024. Free 1040ez online Example 3. Free 1040ez online Net loss from a nonfarm business. Free 1040ez online Assume that in Example 1 John has a net loss of $700. Free 1040ez online He can use the nonfarm optional method and report $4,640 as his net earnings from self-employment. Free 1040ez online Farm Optional Method Use the farm optional method only for earnings from a farming business. Free 1040ez online See Publication 225 for information about this method. Free 1040ez online Using Both Optional Methods If you have both farm and nonfarm earnings, you may be able to use both optional methods to determine your net earnings from self-employment. Free 1040ez online To figure your net earnings using both optional methods, you must: Figure your farm and nonfarm net earnings separately under each method. Free 1040ez online Do not combine farm earnings with nonfarm earnings to figure your net earnings under either method. Free 1040ez online Add the net earnings figured under each method to arrive at your total net earnings from self-employment. Free 1040ez online You can report less than your total actual farm and nonfarm net earnings but not less than actual nonfarm net earnings. Free 1040ez online If you use both optional methods, you can report no more than $4,640 as your combined net earnings from self-employment. Free 1040ez online Example. Free 1040ez online You are a self-employed farmer. Free 1040ez online You also operate a retail grocery store. Free 1040ez online Your gross income, actual net earnings from self-employment, and optional farm and optional nonfarm net earnings from self-employment are shown in Table 10-2. Free 1040ez online Table 10-2. Free 1040ez online Example—Farm and Nonfarm Earnings Income and Earnings Farm Nonfarm Gross income $3,000 $6,000 Actual net earnings $900 $500 Optional net earnings (2/3 of gross income) $2,000 $4,000 Table 10-3 shows four methods or combinations of methods you can use to figure net earnings from self-employment using the farm and nonfarm gross income and actual net earnings shown in Table 10-2. Free 1040ez online Method 1. Free 1040ez online Using the regular method for both farm and nonfarm income. Free 1040ez online Method 2. Free 1040ez online Using the optional method for farm income and the regular method for nonfarm income. Free 1040ez online Method 3. Free 1040ez online Using the regular method for farm income and the optional method for nonfarm income. Free 1040ez online Method 4. Free 1040ez online Using the optional method for both farm and nonfarm income. Free 1040ez online Note. Free 1040ez online Actual net earnings is the same as net earnings figured using the regular method. Free 1040ez online Table 10-3. Free 1040ez online Example—Net Earnings Net Earnings 1 2 3 4 Actual  farm $ 900   $ 900   Optional  farm   $ 2,000   $ 2,000 Actual nonfarm $ 500 $ 500     Optional nonfarm     $4,000 $4,000 Amount you can report: $1,400 $2,500 $4,900 $4,640* *Limited to $4,640 because you used both optional methods. Free 1040ez online Fiscal Year Filer If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. Free 1040ez online Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year. Free 1040ez online Reporting Self-Employment Tax Use Schedule SE (Form 1040) to figure and report your SE tax. Free 1040ez online Then enter the SE tax on line 56 of Form 1040 and attach Schedule SE to Form 1040. Free 1040ez online Most taxpayers can use Section A—Short Schedule SE to figure their SE tax. Free 1040ez online However, certain taxpayers must use Section B—Long Schedule SE. Free 1040ez online If you have to pay SE tax, you must file Form 1040 (with Schedule SE attached) even if you do not otherwise have to file a federal income tax return. Free 1040ez online Joint return. Free 1040ez online   Even if you file a joint return, you cannot file a joint Schedule SE. Free 1040ez online This is true whether one spouse or both spouses have earnings subject to SE tax. Free 1040ez online If both of you have earnings subject to SE tax, each of you must complete a separate Schedule SE. Free 1040ez online However, if one spouse uses the Short Schedule SE and the other spouse has to use the Long Schedule SE, both can use the same form. Free 1040ez online Attach both schedules to the joint return. Free 1040ez online More than one business. Free 1040ez online   If you have more than one trade or business, you must combine the net profit (or loss) from each business to figure your SE tax. Free 1040ez online A loss from one business will reduce your profit from another business. Free 1040ez online File one Schedule SE showing the earnings from self-employment, but file a separate Schedule C, C-EZ, or F for each business. Free 1040ez online Example. Free 1040ez online You are the sole proprietor of two separate businesses. Free 1040ez online You operate a restaurant that made a net profit of $25,000. Free 1040ez online You also have a cabinetmaking business that had a net loss of $500. Free 1040ez online You must file a Schedule C for the restaurant showing your net profit of $25,000 and another Schedule C for the cabinetmaking business showing your net loss of $500. Free 1040ez online You file Schedule SE showing total earnings subject to SE tax of $24,500. Free 1040ez online Prev  Up  Next   Home   More Online Publications