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Free tax h&r block 12. Free tax h&r block   Business Deduction for Work-Related Education Table of Contents What's New Introduction Qualifying Work-Related EducationEducation Required by Employer or by Law Education To Maintain or Improve Skills Education To Meet Minimum Requirements Education That Qualifies You for a New Trade or Business What Expenses Can Be DeductedUnclaimed reimbursement. Free tax h&r block Transportation Expenses Travel Expenses No Double Benefit Allowed How To Treat ReimbursementsAccountable Plans Nonaccountable Plans Deducting Business ExpensesSelf-Employed Persons Employees Performing Artists and Fee-Basis Officials Impairment-Related Work Expenses Recordkeeping Illustrated Example What's New Standard mileage rate. Free tax h&r block  Generally, if you claim a business deduction for work-related education and you drive your car to and from school, the amount you can deduct for miles driven from January 1, 2013 through December 31, 2013, is 56. Free tax h&r block 5 cents per mile. Free tax h&r block For more information, see Transportation Expenses under What Expenses Can Be Deducted, later. Free tax h&r block Introduction This chapter discusses work-related education expenses that you may be able to deduct as business expenses. Free tax h&r block To claim such a deduction, you must: Itemize your deductions on Schedule A (Form 1040 or 1040NR) if you are an employee, File Schedule C (Form 1040), Profit or Loss From Business, Schedule C-EZ (Form 1040), Net Profit From Business, or Schedule F (Form 1040), Profit or Loss From Farming if you are self-employed, and Have expenses for education that meet the requirements discussed under Qualifying Work-Related Education , later. Free tax h&r block What is the tax benefit of taking a business deduction for work-related education. Free tax h&r block   If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Free tax h&r block Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses (except for impairment-related work expenses of disabled individuals) is greater than 2% of your adjusted gross income. Free tax h&r block An itemized deduction reduces the amount of your income subject to tax. Free tax h&r block   If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. Free tax h&r block This reduces the amount of your income subject to both income tax and self-employment tax. Free tax h&r block   Your work-related education expenses may also qualify you for other tax benefits, such as the American opportunity and lifetime learning credits. Free tax h&r block You may qualify for these other benefits even if you do not meet the requirements listed above. Free tax h&r block   Also, your work-related education expenses may qualify you to claim more than one tax benefit. Free tax h&r block Generally, you may claim any number of benefits as long as you use different expenses to figure each one. Free tax h&r block Qualifying Work-Related Education You can deduct the costs of qualifying work-related education as business expenses. Free tax h&r block This is education that meets at least one of the following two tests. Free tax h&r block The education is required by your employer or the law to keep your present salary, status, or job. Free tax h&r block The required education must serve a bona fide business purpose of your employer. Free tax h&r block The education maintains or improves skills needed in your present work. Free tax h&r block However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it: Is needed to meet the minimum educational requirements of your present trade or business, or Is part of a program of study that will qualify you for a new trade or business. Free tax h&r block You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree. Free tax h&r block Use Figure 12-1, Does Your Work-Related Education Qualify as a quick check to see if your education qualifies. Free tax h&r block Education Required by Employer or by Law Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. Free tax h&r block This additional education is qualifying work-related education if all three of the following requirements are met. Free tax h&r block It is required for you to keep your present salary, status, or job, The requirement serves a bona fide business purpose of your employer, and The education is not part of a program that will qualify you for a new trade or business. Free tax h&r block When you get more education than your employer or the law requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in your present work. Free tax h&r block See Education To Maintain or Improve Skills , later. Free tax h&r block Example. Free tax h&r block You are a teacher who has satisfied the minimum requirements for teaching. Free tax h&r block Your employer requires you to take an additional college course each year to keep your teaching job. Free tax h&r block If the courses will not qualify you for a new trade or business, they are qualifying work-related education even if you eventually receive a master's degree and an increase in salary because of this extra education. Free tax h&r block This image is too large to be displayed in the current screen. Free tax h&r block Please click the link to view the image. Free tax h&r block Figure 12-1 Education To Maintain or Improve Skills If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. Free tax h&r block This could include refresher courses, courses on current developments, and academic or vocational courses. Free tax h&r block Example. Free tax h&r block You repair televisions, radios, and stereo systems for XYZ Store. Free tax h&r block To keep up with the latest changes, you take special courses in radio and stereo service. Free tax h&r block These courses maintain and improve skills required in your work. Free tax h&r block Maintaining skills vs. Free tax h&r block qualifying for new job. Free tax h&r block   Education to maintain or improve skills needed in your present work is not qualifying education if it will also qualify you for a new trade or business. Free tax h&r block Education during temporary absence. Free tax h&r block   If you stop working for a year or less in order to get education to maintain or improve skills needed in your present work and then return to the same general type of work, your absence is considered temporary. Free tax h&r block Education that you get during a temporary absence is qualifying work-related education if it maintains or improves skills needed in your present work. Free tax h&r block Example. Free tax h&r block You quit your biology research job to become a full-time biology graduate student for 1 year. Free tax h&r block If you return to work in biology research after completing the courses, the education is related to your present work even if you do not go back to work with the same employer. Free tax h&r block Education during indefinite absence. Free tax h&r block   If you stop work for more than a year, your absence from your job is considered indefinite. Free tax h&r block Education during an indefinite absence, even if it maintains or improves skills needed in the work from which you are absent, is considered to qualify you for a new trade or business. Free tax h&r block Therefore, it is not qualifying work-related education. Free tax h&r block Education To Meet Minimum Requirements Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. Free tax h&r block The minimum educational requirements are determined by: Laws and regulations, Standards of your profession, trade, or business, and Your employer. Free tax h&r block Once you have met the minimum educational requirements that were in effect when you were hired, you do not have to meet any new minimum educational requirements. Free tax h&r block This means that if the minimum requirements change after you were hired, any education you need to meet the new requirements can be qualifying education. Free tax h&r block You have not necessarily met the minimum educational requirements of your trade or business simply because you are already doing the work. Free tax h&r block Example 1. Free tax h&r block You are a full-time engineering student. Free tax h&r block Although you have not received your degree or certification, you work part time as an engineer for a firm that will employ you as a full-time engineer after you finish college. Free tax h&r block Although your college engineering courses improve your skills in your present job, they are also needed to meet the minimum job requirements for a full-time engineer. Free tax h&r block The education is not qualifying work-related education. Free tax h&r block Example 2. Free tax h&r block You are an accountant and you have met the minimum educational requirements of your employer. Free tax h&r block Your employer later changes the minimum educational requirements and requires you to take college courses to keep your job. Free tax h&r block These additional courses can be qualifying work-related education because you have already satisfied the minimum requirements that were in effect when you were hired. Free tax h&r block Requirements for Teachers States or school districts usually set the minimum educational requirements for teachers. Free tax h&r block The requirement is the college degree or the minimum number of college hours usually required of a person hired for that position. Free tax h&r block If there are no requirements, you will have met the minimum educational requirements when you become a faculty member. Free tax h&r block The determination of whether you are a faculty member of an educational institution must be made on the basis of the particular practices of the institution. Free tax h&r block You generally will be considered a faculty member when one or more of the following occurs. Free tax h&r block You have tenure. Free tax h&r block Your years of service count toward obtaining tenure. Free tax h&r block You have a vote in faculty decisions. Free tax h&r block Your school makes contributions for you to a retirement plan other than social security or a similar program. Free tax h&r block Example 1. Free tax h&r block The law in your state requires beginning secondary school teachers to have a bachelor's degree, including 10 professional education courses. Free tax h&r block In addition, to keep the job a teacher must complete a fifth year of training within 10 years from the date of hire. Free tax h&r block If the employing school certifies to the state Department of Education that qualified teachers cannot be found, the school can hire persons with only 3 years of college. Free tax h&r block However, to keep their jobs, these teachers must get a bachelor's degree and the required professional education courses within 3 years. Free tax h&r block Under these facts, the bachelor's degree, whether or not it includes the 10 professional education courses, is considered the minimum educational requirement for qualification as a teacher in your state. Free tax h&r block If you have all the required education except the fifth year, you have met the minimum educational requirements. Free tax h&r block The fifth year of training is qualifying work-related education unless it is part of a program of study that will qualify you for a new trade or business. Free tax h&r block Example 2. Free tax h&r block Assume the same facts as in Example 1 except that you have a bachelor's degree and only six professional education courses. Free tax h&r block The additional four education courses can be qualifying work-related education. Free tax h&r block Although you do not have all the required courses, you have already met the minimum educational requirements. Free tax h&r block Example 3. Free tax h&r block Assume the same facts as in Example 1 except that you are hired with only 3 years of college. Free tax h&r block The courses you take that lead to a bachelor's degree (including those in education) are not qualifying work-related education. Free tax h&r block They are needed to meet the minimum educational requirements for employment as a teacher. Free tax h&r block Example 4. Free tax h&r block You have a bachelor's degree and you work as a temporary instructor at a university. Free tax h&r block At the same time, you take graduate courses toward an advanced degree. Free tax h&r block The rules of the university state that you can become a faculty member only if you get a graduate degree. Free tax h&r block Also, you can keep your job as an instructor only as long as you show satisfactory progress toward getting this degree. Free tax h&r block You have not met the minimum educational requirements to qualify you as a faculty member. Free tax h&r block The graduate courses are not qualifying work-related education. Free tax h&r block Certification in a new state. Free tax h&r block   Once you have met the minimum educational requirements for teachers for your state, you are considered to have met the minimum educational requirements in all states. Free tax h&r block This is true even if you must get additional education to be certified in another state. Free tax h&r block Any additional education you need is qualifying work-related education. Free tax h&r block You have already met the minimum requirements for teaching. Free tax h&r block Teaching in another state is not a new trade or business. Free tax h&r block Example. Free tax h&r block You hold a permanent teaching certificate in State A and are employed as a teacher in that state for several years. Free tax h&r block You move to State B and are promptly hired as a teacher. Free tax h&r block You are required, however, to complete certain prescribed courses to get a permanent teaching certificate in State B. Free tax h&r block These additional courses are qualifying work-related education because the teaching position in State B involves the same general kind of work for which you were qualified in State A. Free tax h&r block Education That Qualifies You for a New Trade or Business Education that is part of a program of study that will qualify you for a new trade or business is not qualifying work-related education. Free tax h&r block This is true even if you do not plan to enter that trade or business. Free tax h&r block If you are an employee, a change of duties that involves the same general kind of work is not a new trade or business. Free tax h&r block Example 1. Free tax h&r block You are an accountant. Free tax h&r block Your employer requires you to get a law degree at your own expense. Free tax h&r block You register at a law school for the regular curriculum that leads to a law degree. Free tax h&r block Even if you do not intend to become a lawyer, the education is not qualifying because the law degree will qualify you for a new trade or business. Free tax h&r block Example 2. Free tax h&r block You are a general practitioner of medicine. Free tax h&r block You take a 2-week course to review developments in several specialized fields of medicine. Free tax h&r block The course does not qualify you for a new profession. Free tax h&r block It is qualifying work- related education because it maintains or improves skills required in your present profession. Free tax h&r block Example 3. Free tax h&r block While working in the private practice of psychiatry, you enter a program to study and train at an accredited psychoanalytic institute. Free tax h&r block The program will lead to qualifying you to practice psychoanalysis. Free tax h&r block The psychoanalytic training does not qualify you for a new profession. Free tax h&r block It is qualifying work-related education because it maintains or improves skills required in your present profession. Free tax h&r block Bar or CPA Review Course Review courses to prepare for the bar examination or the certified public accountant (CPA) examination are not qualifying work-related education. Free tax h&r block They are part of a program of study that can qualify you for a new profession. Free tax h&r block Teaching and Related Duties All teaching and related duties are considered the same general kind of work. Free tax h&r block A change in duties in any of the following ways is not considered a change to a new business. Free tax h&r block Elementary school teacher to secondary school teacher. Free tax h&r block Teacher of one subject, such as biology, to teacher of another subject, such as art. Free tax h&r block Classroom teacher to guidance counselor. Free tax h&r block Classroom teacher to school administrator. Free tax h&r block What Expenses Can Be Deducted If your education meets the requirements described earlier under Qualifying Work-Related Education you can generally deduct your education expenses as business expenses. Free tax h&r block If you are not self-employed, you can deduct business expenses only if you itemize your deductions. Free tax h&r block You cannot deduct expenses related to tax-exempt and excluded income. Free tax h&r block Deductible expenses. Free tax h&r block   The following education expenses can be deducted. Free tax h&r block Tuition, books, supplies, lab fees, and similar items. Free tax h&r block Certain transportation and travel costs. Free tax h&r block Other education expenses, such as costs of research and typing when writing a paper as part of an educational program. Free tax h&r block Nondeductible expenses. Free tax h&r block   You cannot deduct personal or capital expenses. Free tax h&r block For example, you cannot deduct the dollar value of vacation time or annual leave you take to attend classes. Free tax h&r block This amount is a personal expense. Free tax h&r block Unclaimed reimbursement. Free tax h&r block   If you do not claim reimbursement that you are entitled to receive from your employer, you cannot deduct the expenses that apply to that unclaimed reimbursement. Free tax h&r block Example. Free tax h&r block Your employer agrees to pay your education expenses if you file a voucher showing your expenses. Free tax h&r block You do not file a voucher and you do not get reimbursed. Free tax h&r block Because you did not file a voucher, you cannot deduct the expenses on your tax return. Free tax h&r block Transportation Expenses If your education qualifies, you can deduct local transportation costs of going directly from work to school. Free tax h&r block If you are regularly employed and go to school on a temporary basis, you can also deduct the costs of returning from school to home. Free tax h&r block Temporary basis. Free tax h&r block   You go to school on a temporary basis if either of the following situations applies to you. Free tax h&r block Your attendance at school is realistically expected to last 1 year or less and does indeed last for 1 year or less. Free tax h&r block Initially, your attendance at school is realistically expected to last 1 year or less, but at a later date your attendance is reasonably expected to last more than 1 year. Free tax h&r block Your attendance is temporary up to the date you determine it will last more than 1 year. Free tax h&r block If you are in either situation (1) or (2) above, your attendance is not temporary if facts and circumstances indicate otherwise. Free tax h&r block Attendance not on a temporary basis. Free tax h&r block   You do not go to school on a temporary basis if either of the following situations apply to you. Free tax h&r block Your attendance at school is realistically expected to last more than 1 year. Free tax h&r block It does not matter how long you actually attend. Free tax h&r block Initially, your attendance at school is realistically expected to last 1 year or less, but at a later date your attendance is reasonably expected to last more than 1 year. Free tax h&r block Your attendance is not temporary after the date you determine it will last more than 1 year. Free tax h&r block Deductible Transportation Expenses If you are regularly employed and go directly from home to school on a temporary basis, you can deduct the round-trip costs of transportation between your home and school. Free tax h&r block This is true regardless of the location of the school, the distance traveled, or whether you attend school on nonwork days. Free tax h&r block Transportation expenses include the actual costs of bus, subway, cab, or other fares, as well as the costs of using your car. Free tax h&r block Transportation expenses do not include amounts spent for travel, meals, or lodging while you are away from home overnight. Free tax h&r block Example 1. Free tax h&r block You regularly work in a nearby town, and go directly from work to home. Free tax h&r block You also attend school every work night for 3 months to take a course that improves your job skills. Free tax h&r block Since you are attending school on a temporary basis, you can deduct your daily round-trip transportation expenses in going between home and school. Free tax h&r block This is true regardless of the distance traveled. Free tax h&r block Example 2. Free tax h&r block Assume the same facts as in Example 1 except that on certain nights you go directly from work to school and then home. Free tax h&r block You can deduct your transportation expenses from your regular work site to school and then home. Free tax h&r block Example 3. Free tax h&r block Assume the same facts as in Example 1 except that you attend the school for 9 months on Saturdays, nonwork days. Free tax h&r block Since you are attending school on a temporary basis, you can deduct your round-trip transportation expenses in going between home and school. Free tax h&r block Example 4. Free tax h&r block Assume the same facts as in Example 1 except that you attend classes twice a week for 15 months. Free tax h&r block Since your attendance in school is not considered temporary, you cannot deduct your transportation expenses in going between home and school. Free tax h&r block If you go directly from work to school, you can deduct the one-way transportation expenses of going from work to school. Free tax h&r block If you go from work to home to school and return home, your transportation expenses cannot be more than if you had gone directly from work to school. Free tax h&r block Using your car. Free tax h&r block    If you use your car (whether you own or lease it) for transportation to school, you can deduct your actual expenses or use the standard mileage rate to figure the amount you can deduct. Free tax h&r block The standard mileage rate for miles driven from January 1, 2013 through December 31, 2013, is 56. Free tax h&r block 5 cents per mile. Free tax h&r block Whichever method you use, you can also deduct parking fees and tolls. Free tax h&r block See Publication 463, chapter 4, for information on deducting your actual expenses of using a car. Free tax h&r block Travel Expenses You can deduct expenses for travel, meals (see 50% limit on meals , later), and lodging if you travel overnight mainly to obtain qualifying work-related education. Free tax h&r block Travel expenses for qualifying work-related education are treated the same as travel expenses for other employee business purposes. Free tax h&r block For more information, see chapter 1 of Publication 463. Free tax h&r block You cannot deduct expenses for personal activities such as sightseeing, visiting, or entertaining. Free tax h&r block Mainly personal travel. Free tax h&r block   If your travel away from home is mainly personal, you cannot deduct all of your expenses for travel, meals, and lodging. Free tax h&r block You can deduct only your expenses for lodging and 50% of your expenses for meals during the time you attend the qualified educational activities. Free tax h&r block   Whether a trip's purpose is mainly personal or educational depends upon the facts and circumstances. Free tax h&r block An important factor is the comparison of time spent on personal activities with time spent on educational activities. Free tax h&r block If you spend more time on personal activities, the trip is considered mainly educational only if you can show a substantial nonpersonal reason for traveling to a particular location. Free tax h&r block Example 1. Free tax h&r block John works in Newark, New Jersey. Free tax h&r block He traveled to Chicago to take a deductible 1-week course at the request of his employer. Free tax h&r block His main reason for going to Chicago was to take the course. Free tax h&r block While there, he took a sightseeing trip, entertained some friends, and took a side trip to Pleasantville for a day. Free tax h&r block Since the trip was mainly for business, John can deduct his round-trip airfare to Chicago. Free tax h&r block He cannot deduct his transportation expenses of going to Pleasantville. Free tax h&r block He can deduct only the meals (subject to the 50% limit) and lodging connected with his educational activities. Free tax h&r block Example 2. Free tax h&r block Sue works in Boston. Free tax h&r block She went to a university in Michigan to take a course for work. Free tax h&r block The course is qualifying work-related education. Free tax h&r block She took one course, which is one-fourth of a full course load of study. Free tax h&r block She spent the rest of the time on personal activities. Free tax h&r block Her reasons for taking the course in Michigan were all personal. Free tax h&r block Sue's trip is mainly personal because three-fourths of her time is considered personal time. Free tax h&r block She cannot deduct the cost of her round-trip train ticket to Michigan. Free tax h&r block She can deduct one-fourth of the meals (subject to the 50% limit) and lodging costs for the time she attended the university. Free tax h&r block Example 3. Free tax h&r block Dave works in Nashville and recently traveled to California to take a 2-week seminar. Free tax h&r block The seminar is qualifying work-related education. Free tax h&r block While there, he spent an extra 8 weeks on personal activities. Free tax h&r block The facts, including the extra 8-week stay, show that his main purpose was to take a vacation. Free tax h&r block Dave cannot deduct his round-trip airfare or his meals and lodging for the 8 weeks. Free tax h&r block He can deduct only his expenses for meals (subject to the 50% limit) and lodging for the 2 weeks he attended the seminar. Free tax h&r block Cruises and conventions. Free tax h&r block   Certain cruises and conventions offer seminars or courses as part of their itinerary. Free tax h&r block Even if the seminars or courses are work related, your deduction for travel may be limited. Free tax h&r block This applies to: Travel by ocean liner, cruise ship, or other form of luxury water transportation, and Conventions outside the North American area. Free tax h&r block   For a discussion of the limits on travel expense deductions that apply to cruises and conventions, see Luxury Water Travel and Conventions in chapter 1 of Publication 463. Free tax h&r block 50% limit on meals. Free tax h&r block   You can deduct only 50% of the cost of your meals while traveling away from home to obtain qualifying work-related education. Free tax h&r block If you were reimbursed for the meals, see How To Treat Reimbursements , later. Free tax h&r block   Employees must use Form 2106 or Form 2106-EZ to apply the 50% limit. Free tax h&r block Travel as Education You cannot deduct the cost of travel as a form of education even if it is directly related to your duties in your work or business. Free tax h&r block Example. Free tax h&r block You are a French language teacher. Free tax h&r block While on sabbatical leave granted for travel, you traveled through France to improve your knowledge of the French language. Free tax h&r block You chose your itinerary and most of your activities to improve your French language skills. Free tax h&r block You cannot deduct your travel expenses as education expenses. Free tax h&r block This is true even if you spent most of your time learning French by visiting French schools and families, attending movies or plays, and engaging in similar activities. Free tax h&r block No Double Benefit Allowed You cannot do either of the following. Free tax h&r block Deduct work-related education expenses as business expenses if you benefit from these expenses under any other provision of the law, for example, as a tuition and fees deduction. Free tax h&r block Deduct work-related education expenses paid with tax-free scholarship, grant, or employer-provided educational assistance. Free tax h&r block See Adjustments to Qualifying Work-Related Education Expenses, next. Free tax h&r block Adjustments to Qualifying Work-Related Education Expenses If you pay qualifying work-related education expenses with certain tax-free funds, you cannot claim a deduction for those amounts. Free tax h&r block You must reduce the qualifying expenses by the amount of such expenses allocable to the tax-free educational assistance. Free tax h&r block Tax-free educational assistance. Free tax h&r block   This includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions). Free tax h&r block Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Free tax h&r block Amounts that do not reduce qualifying work-related education expenses. Free tax h&r block   Do not reduce the qualifying work-related education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. Free tax h&r block Also, do not reduce the qualifying work-related education expenses by any scholarship or fellowship reported as income on the student's return or any scholarship which, by its terms, cannot be applied to qualifying work-related education expenses. Free tax h&r block How To Treat Reimbursements How you treat reimbursements depends on the arrangement you have with your employer. Free tax h&r block There are two basic types of reimbursement arrangements—accountable plans and nonaccountable plans. Free tax h&r block You can tell the type of plan you are reimbursed under by the way the reimbursement is reported on your Form W-2. Free tax h&r block Note. Free tax h&r block The following rules about reimbursement arrangements also apply to expense allowances received from your employer. Free tax h&r block Accountable Plans To be an accountable plan, your employer's reimbursement arrangement must require you to meet all three of the following rules. Free tax h&r block Your expenses must have a business connection. Free tax h&r block This means your expenses must be deductible under the rules for qualifying work-related education explained earlier. Free tax h&r block You must adequately account to your employer for your expenses within a reasonable period of time. Free tax h&r block You must return any reimbursement or allowance in excess of the expenses accounted for within a reasonable period of time. Free tax h&r block If you are reimbursed under an accountable plan, your employer should not include any reimbursement in your income in box 1 of your Form W-2. Free tax h&r block If your employer included reimbursements in box 1 of your Form W-2 and you meet all three rules for accountable plans, ask your employer for a corrected Form W-2. Free tax h&r block Accountable plan rules not met. Free tax h&r block   Even though you are reimbursed under an accountable plan, some of your expenses may not meet all three rules for accountable plans. Free tax h&r block Those expenses that fail to meet the three rules are treated as having been reimbursed under a Nonaccountable Plan (discussed later). Free tax h&r block Expenses equal reimbursement. Free tax h&r block   Under an accountable plan, if your expenses equal your reimbursement, you do not complete Form 2106 or 2106-EZ. Free tax h&r block Because your expenses and reimbursements are equal, you do not have a deduction. Free tax h&r block Excess expenses. Free tax h&r block   If your expenses are more than your reimbursement, you can deduct your excess expenses. Free tax h&r block This is discussed later, under Deducting Business Expenses . Free tax h&r block Allocating your reimbursements for meals. Free tax h&r block   Because your excess meal expenses are subject to the 50% limit, you must figure them separately from your other expenses. Free tax h&r block If your employer paid you a single amount to cover both meals and other expenses, you must allocate the reimbursement so that you can figure your excess meal expenses separately. Free tax h&r block Make the allocation as follows. Free tax h&r block Divide your meal expenses by your total expenses. Free tax h&r block Multiply your total reimbursement by the result from (1). Free tax h&r block This is the allocated reimbursement for your meal expenses. Free tax h&r block Subtract the amount figured in (2) from your total reimbursement. Free tax h&r block The difference is the allocated reimbursement for your other expenses of qualifying work-related education. Free tax h&r block Example. Free tax h&r block Your employer paid you an expense allowance of $2,000 under an accountable plan. Free tax h&r block The allowance was to cover all of your expenses of traveling away from home to take a 2-week training course for work. Free tax h&r block There was no indication of how much of the reimbursement was for each type of expense. Free tax h&r block Your actual expenses equal $2,500 ($425 for meals + $700 lodging + $150 transportation expenses + $1,225 for books and tuition). Free tax h&r block Using the steps listed above, allocate the reimbursement between the $425 meal expenses and the $2,075 other expenses. Free tax h&r block   1. Free tax h&r block $425 meal expenses  $2,500 total expenses = . Free tax h&r block 17   2. Free tax h&r block $2,000 (reimbursement)×. Free tax h&r block 17     =$340 (allocated reimbursement for meal expenses)   3. Free tax h&r block $2,000 (reimbursement)−$340 (meals)     = $1,660 (allocated reimbursement for other qualifying work-related education expenses) Your excess meal expenses are $85 ($425 − $340) and your excess other expenses are $415 ($2,075 − $1,660). Free tax h&r block After you apply the 50% limit to your meals, you have a deduction for work-related education expenses of $458 (($85 × 50%) + $415). Free tax h&r block Nonaccountable Plans Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a nonaccountable plan with your wages, salary, or other pay and report the total in box 1 of your Form W-2. Free tax h&r block You can deduct your expenses regardless of whether they are more than, less than, or equal to your reimbursement. Free tax h&r block This is discussed later under Deducting Business Expenses . Free tax h&r block An illustrated example of a nonaccountable plan, using Form 2106-EZ, is shown at the end of this chapter. Free tax h&r block Reimbursements for nondeductible expenses. Free tax h&r block   Reimbursements you received for nondeductible expenses are treated as paid under a nonaccountable plan. Free tax h&r block You must include them in your income. Free tax h&r block For example, you must include in your income reimbursements your employer gave you for expenses of education that: You need to meet the minimum educational requirements for your job, or Is part of a program of study that can qualify you for a new trade or business. Free tax h&r block   For more information on accountable and nonaccountable plans, see chapter 6 of Publication 463. Free tax h&r block Deducting Business Expenses Self-employed persons and employees report their business expenses differently. Free tax h&r block The following information explains what forms you must use to deduct the cost of your qualifying work-related education as a business expense. Free tax h&r block Self-Employed Persons If you are self-employed, you must report the cost of your qualifying work-related education on the appropriate form used to report your business income and expenses (generally Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040)). Free tax h&r block If your education expenses include expenses for a car or truck, travel, or meals, report those expenses the same way you report other business expenses for those items. Free tax h&r block See the instructions for the form you file for information on how to complete it. Free tax h&r block Employees If you are an employee, you can deduct the cost of qualifying work-related education only if you: Did not receive (and were not entitled to receive) any reimbursement from your employer, Were reimbursed under a nonaccountable plan (amount is included in box 1 of Form W-2), or Received reimbursement under an accountable plan, but the amount received was less than your expenses for which you claimed reimbursement. Free tax h&r block If either (1) or (2) applies, you can deduct the total qualifying cost. Free tax h&r block If (3) applies, you can deduct only the qualifying costs that were more than your reimbursement. Free tax h&r block In order to deduct the cost of your qualifying work-related education as a business expense, include the amount with your deduction for any other employee business expenses on Schedule A (Form 1040), line 21, or Schedule A (Form 1040NR), line 7. Free tax h&r block (Special rules for expenses of certain performing artists and fee-basis officials and for impairment-related work expenses are explained later. Free tax h&r block ) This deduction (except for impairment-related work expenses of disabled individuals) is subject to the 2%-of-adjusted-gross-income limit that applies to most miscellaneous itemized deductions. Free tax h&r block Form 2106 or 2106-EZ. Free tax h&r block   To figure your deduction for employee business expenses, including qualifying work-related education, you generally must complete Form 2106 or 2106-EZ. Free tax h&r block Form not required. Free tax h&r block   Do not complete either Form 2106 or 2106-EZ if: All reimbursements, if any, are included in box 1 of your Form W-2, and You are not claiming travel, transportation, meal, or entertainment expenses. Free tax h&r block   If you meet both of these requirements, enter the expenses directly on Schedule A (Form 1040), line 21, or Schedule A (Form 1040NR), line 7. Free tax h&r block (Special rules for expenses of certain Performing Artists and Fee-Basis Officials and for Impairment-Related Work Expenses are explained later. Free tax h&r block ) Using Form 2106-EZ. Free tax h&r block   This form is shorter and easier to use than Form 2106. Free tax h&r block Generally, you can use this form if: All reimbursements, if any, are included in box 1 of your Form W-2, and You are using the standard mileage rate if you are claiming vehicle expenses. Free tax h&r block   If you do not meet both of these requirements, use Form 2106. Free tax h&r block Performing Artists and Fee-Basis Officials If you are a qualified performing artist, or a state (or local) government official who is paid in whole or in part on a fee basis, you can deduct the cost of your qualifying work-related education as an adjustment to gross income rather than as an itemized deduction. Free tax h&r block Include the cost of your qualifying work-related education with any other employee business expenses on Form 1040, line 24, or Form 1040NR, line 35. Free tax h&r block You do not have to itemize your deductions on Schedule A (Form 1040 or 1040NR), and, therefore, the deduction is not subject to the 2%-of-adjusted-gross-income limit. Free tax h&r block You must complete Form 2106 or 2106-EZ to figure your deduction even if you meet the requirements described earlier under Form not required . Free tax h&r block For more information on qualified performing artists, see chapter 6 of Publication 463. Free tax h&r block Impairment-Related Work Expenses If you are disabled and have impairment-related work expenses that are necessary for you to be able to get qualifying work-related education, you can deduct these expenses on Schedule A (Form 1040), line 28, or Schedule A (Form 1040NR), line 14. Free tax h&r block They are not subject to the 2%-of-adjusted-gross-income limit. Free tax h&r block To deduct these expenses, you must complete Form 2106 or 2106-EZ even if you meet the requirements described earlier under Form not required . Free tax h&r block For more information on impairment-related work expenses, see chapter 6 of Publication 463. Free tax h&r block Recordkeeping You must keep records as proof of any deduction claimed on your tax return. Free tax h&r block Generally, you should keep your records for 3 years from the date of filing the tax return and claiming the deduction. Free tax h&r block If you are an employee who is reimbursed for expenses and you give your records and documentation to your employer, you do not have to keep duplicate copies of this information. Free tax h&r block However, you should keep your records for a 3-year period if: You claim deductions for expenses that are more than your reimbursement, Your employer does not use adequate accounting procedures to verify expense accounts, You are related to your employer, or Your expenses are reimbursed under a nonaccountable plan. Free tax h&r block Examples of records to keep. Free tax h&r block   If any of the above cases apply to you, you must be able to prove that your expenses are deductible. Free tax h&r block You should keep adequate records or have sufficient evidence that will support your expenses. Free tax h&r block Estimates or approximations do not qualify as proof of an expense. Free tax h&r block Some examples of what can be used to help prove your expenses are: Documents, such as transcripts, course descriptions, catalogs, etc. Free tax h&r block , showing periods of enrollment in educational institutions, principal subjects studied, and descriptions of educational activity. Free tax h&r block Canceled checks and receipts to verify amounts you spent for: Tuition and books, Meals and lodging while away from home overnight for educational purposes, Travel and transportation, and Other education expenses. Free tax h&r block Statements from your employer explaining whether the education was necessary for you to keep your job, salary, or status; how the education helped maintain or improve skills needed in your job; how much reimbursement you received; and, if you are a teacher, the type of certificate and subjects taught. Free tax h&r block Complete information about any scholarship or fellowship grants, including amounts you received during the year. Free tax h&r block Illustrated Example Victor Jones teaches math at a private high school in North Carolina. Free tax h&r block He was selected to attend a 3-week math seminar at a university in California. Free tax h&r block The seminar will improve his skills in his current job and is qualifying work-related education. Free tax h&r block He was reimbursed for his expenses under his employer's nonaccountable plan, so his reimbursement of $2,100 is included in the wages shown in box 1 of his Form W-2. Free tax h&r block Victor will file Form 1040. Free tax h&r block His actual expenses for the seminar are as follows:   Lodging   $1,050     Meals   526     Airfare   550     Taxi fares   50     Tuition and books   400     Total Expenses   $2,576   Victor files Form 2106-EZ with his tax return. Free tax h&r block He shows his expenses for the seminar in Part I of the form. Free tax h&r block He enters $1,650 ($1,050 + $550 + $50) on line 3 to account for his lodging, airfare, and taxi fares. Free tax h&r block He enters $400 on line 4 for his tuition and books. Free tax h&r block On the line provided for total meals and entertainment expenses, Victor enters $526 for meal expenses. Free tax h&r block He multiplies that amount by 50% and enters the result, $263, on line 5. Free tax h&r block On line 6, Victor totals the amounts from lines 3 through 5. Free tax h&r block He carries the total, $2,313, to Schedule A (Form 1040), line 21. Free tax h&r block Since he does not claim any vehicle expenses, Victor leaves Part II blank. Free tax h&r block His filled-in form is shown on the next page. Free tax h&r block This image is too large to be displayed in the current screen. Free tax h&r block Please click the link to view the image. Free tax h&r block Form 2106-EZ for V. Free tax h&r block Jones Prev  Up  Next   Home   More Online Publications
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Federal Interagency Committee on Education

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The Free Tax H&r Block

Free tax h&r block 4. Free tax h&r block   Foreign Earned Income and Housing: Exclusion – Deduction Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Who Qualifies for the Exclusions and the Deduction? RequirementsTax Home in Foreign Country Bona Fide Residence Test Physical Presence Test Waiver of Time Requirements U. Free tax h&r block S. Free tax h&r block Travel Restrictions Foreign Earned Income Foreign Earned Income ExclusionLimit on Excludable Amount Choosing the Exclusion Foreign Housing Exclusion and DeductionHousing Amount Foreign Housing Exclusion Foreign Housing Deduction Married Couples Form 2555 and Form 2555-EZForm 2555-EZ Form 2555 Topics - This chapter discusses: Who qualifies for the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, The requirements that must be met to claim either exclusion or the deduction, How to figure the foreign earned income exclusion, and How to figure the foreign housing exclusion and the foreign housing deduction. Free tax h&r block Useful Items - You may want to see: Publication 519 U. Free tax h&r block S. Free tax h&r block Tax Guide for Aliens 570 Tax Guide for Individuals With Income from U. Free tax h&r block S. Free tax h&r block Possessions 596 Earned Income Credit (EIC) Form (and Instructions) 1040X Amended U. Free tax h&r block S. Free tax h&r block Individual Income Tax Return 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion See chapter 7 for information about getting these publications and forms. Free tax h&r block Who Qualifies for the Exclusions and the Deduction? If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction. Free tax h&r block If you are a U. Free tax h&r block S. Free tax h&r block citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. Free tax h&r block However, you may qualify to exclude from income up to $97,600 of your foreign earnings. Free tax h&r block In addition, you can exclude or deduct certain foreign housing amounts. Free tax h&r block See Foreign Earned Income Exclusion and Foreign Housing Exclusion and Deduction, later. Free tax h&r block You also may be entitled to exclude from income the value of meals and lodging provided to you by your employer. Free tax h&r block See Exclusion of Meals and Lodging, later. Free tax h&r block Requirements To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must meet all three of the following requirements. Free tax h&r block Your tax home must be in a foreign country. Free tax h&r block You must have foreign earned income. Free tax h&r block You must be one of the following. Free tax h&r block A U. Free tax h&r block S. Free tax h&r block citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Free tax h&r block A U. Free tax h&r block S. Free tax h&r block resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Free tax h&r block A U. Free tax h&r block S. Free tax h&r block citizen or a U. Free tax h&r block S. Free tax h&r block resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. Free tax h&r block See Publication 519 to find out if you are a U. Free tax h&r block S. Free tax h&r block resident alien for tax purposes and whether you keep that alien status when you temporarily work abroad. Free tax h&r block If you are a nonresident alien married to a U. Free tax h&r block S. Free tax h&r block citizen or resident alien, and both you and your spouse choose to treat you as a resident alien, you are a resident alien for tax purposes. Free tax h&r block For information on making the choice, see the discussion in chapter 1 under Nonresident Alien Spouse Treated as a Resident . Free tax h&r block Waiver of minimum time requirements. Free tax h&r block   The minimum time requirements for bona fide residence and physical presence can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. Free tax h&r block This is fully explained under Waiver of Time Requirements , later. Free tax h&r block   See Figure 4-A and information in this chapter to determine if you are eligible to claim either exclusion or the deduction. Free tax h&r block Tax Home in Foreign Country To qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, your tax home must be in a foreign country throughout your period of bona fide residence or physical presence abroad. Free tax h&r block Bona fide residence and physical presence are explained later. Free tax h&r block Tax Home Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Free tax h&r block Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. Free tax h&r block Having a “tax home” in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes. Free tax h&r block If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live. Free tax h&r block If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work. Free tax h&r block You are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. Free tax h&r block However, your abode is not necessarily in the United States while you are temporarily in the United States. Free tax h&r block Your abode is also not necessarily in the United States merely because you maintain a dwelling in the United States, whether or not your spouse or dependents use the dwelling. Free tax h&r block “Abode” has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. Free tax h&r block It does not mean your principal place of business. Free tax h&r block “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home. Free tax h&r block ” The location of your abode often will depend on where you maintain your economic, family, and personal ties. Free tax h&r block Example 1. Free tax h&r block You are employed on an offshore oil rig in the territorial waters of a foreign country and work a 28-day on/28-day off schedule. Free tax h&r block You return to your family residence in the United States during your off periods. Free tax h&r block You are considered to have an abode in the United States and do not satisfy the tax home test in the foreign country. Free tax h&r block You cannot claim either of the exclusions or the housing deduction. Free tax h&r block Example 2. Free tax h&r block For several years, you were a marketing executive with a producer of machine tools in Toledo, Ohio. Free tax h&r block In November of last year, your employer transferred you to London, England, for a minimum of 18 months to set up a sales operation for Europe. Free tax h&r block Before you left, you distributed business cards showing your business and home addresses in London. Free tax h&r block You kept ownership of your home in Toledo but rented it to another family. Free tax h&r block You placed your car in storage. Free tax h&r block In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London. Free tax h&r block Shortly after moving, you leased a car and you and your spouse got British driving licenses. Free tax h&r block Your entire family got library cards for the local public library. Free tax h&r block You and your spouse opened bank accounts with a London bank and secured consumer credit. Free tax h&r block You joined a local business league and both you and your spouse became active in the neighborhood civic association and worked with a local charity. Free tax h&r block Your abode is in London for the time you live there. Free tax h&r block You satisfy the tax home test in the foreign country. Free tax h&r block Please click here for the text description of the image. Free tax h&r block Figure 4–A Can I Claim the Exclusion or Deduction? Temporary or Indefinite Assignment The location of your tax home often depends on whether your assignment is temporary or indefinite. Free tax h&r block If you are temporarily absent from your tax home in the United States on business, you may be able to deduct your away-from-home expenses (for travel, meals, and lodging), but you would not qualify for the foreign earned income exclusion. Free tax h&r block If your new work assignment is for an indefinite period, your new place of employment becomes your tax home and you would not be able to deduct any of the related expenses that you have in the general area of this new work assignment. Free tax h&r block If your new tax home is in a foreign country and you meet the other requirements, your earnings may qualify for the foreign earned income exclusion. Free tax h&r block If you expect your employment away from home in a single location to last, and it does last, for 1 year or less, it is temporary unless facts and circumstances indicate otherwise. Free tax h&r block If you expect it to last for more than 1 year, it is indefinite. Free tax h&r block If you expect it to last for 1 year or less, but at some later date you expect it to last longer than 1 year, it is temporary (in the absence of facts and circumstances indicating otherwise) until your expectation changes. Free tax h&r block Once your expectation changes, it is indefinite. Free tax h&r block Foreign Country To meet the bona fide residence test or the physical presence test, you must live in or be present in a foreign country. Free tax h&r block A foreign country includes any territory under the sovereignty of a government other than that of the United States. Free tax h&r block The term “foreign country” includes the country's airspace and territorial waters, but not international waters and the airspace above them. Free tax h&r block It also includes the seabed and subsoil of those submarine areas adjacent to the country's territorial waters over which it has exclusive rights under international law to explore and exploit the natural resources. Free tax h&r block The term “foreign country” does not include Antarctica or U. Free tax h&r block S. Free tax h&r block possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U. Free tax h&r block S. Free tax h&r block Virgin Islands, and Johnston Island. Free tax h&r block For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, the terms “foreign,” “abroad,” and “overseas” refer to areas outside the United States and those areas listed or described in the previous sentence. Free tax h&r block American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands Residence or presence in a U. Free tax h&r block S. Free tax h&r block possession does not qualify you for the foreign earned income exclusion. Free tax h&r block You may, however, qualify for an exclusion of your possession income on your U. Free tax h&r block S. Free tax h&r block return. Free tax h&r block American Samoa. Free tax h&r block   There is a possession exclusion available to individuals who are bona fide residents of American Samoa for the entire tax year. Free tax h&r block Gross income from sources within American Samoa may be eligible for this exclusion. Free tax h&r block Income that is effectively connected with the conduct of a trade or business within American Samoa also may be eligible for this exclusion. Free tax h&r block Use Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, to figure the exclusion. Free tax h&r block Guam and the Commonwealth of the Northern Mariana Islands. Free tax h&r block   An exclusion will be available to residents of Guam and the Commonwealth of the Northern Mariana Islands if, and when, new implementation agreements take effect between the United States and those possessions. Free tax h&r block   For more information, see Publication 570. Free tax h&r block Puerto Rico and U. Free tax h&r block S. Free tax h&r block Virgin Islands Residents of Puerto Rico and the U. Free tax h&r block S. Free tax h&r block Virgin Islands cannot claim the foreign earned income exclusion or the foreign housing exclusion. Free tax h&r block Puerto Rico. Free tax h&r block   Generally, if you are a U. Free tax h&r block S. Free tax h&r block citizen who is a bona fide resident of Puerto Rico for the entire tax year, you are not subject to U. Free tax h&r block S. Free tax h&r block tax on income from Puerto Rican sources. Free tax h&r block This does not include amounts paid for services performed as an employee of the United States. Free tax h&r block However, you are subject to U. Free tax h&r block S. Free tax h&r block tax on your income from sources outside Puerto Rico. Free tax h&r block In figuring your U. Free tax h&r block S. Free tax h&r block tax, you cannot deduct expenses allocable to income not subject to tax. Free tax h&r block Bona Fide Residence Test You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Free tax h&r block You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either: A U. Free tax h&r block S. Free tax h&r block citizen, or A U. Free tax h&r block S. Free tax h&r block resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect. Free tax h&r block You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year. Free tax h&r block If you go to a foreign country to work on a particular job for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country even though you work there for 1 tax year or longer. Free tax h&r block The length of your stay and the nature of your job are only two of the factors to be considered in determining whether you meet the bona fide residence test. Free tax h&r block Bona fide residence. Free tax h&r block   To meet the bona fide residence test, you must have established a bona fide residence in a foreign country. Free tax h&r block   Your bona fide residence is not necessarily the same as your domicile. Free tax h&r block Your domicile is your permanent home, the place to which you always return or intend to return. Free tax h&r block Example. Free tax h&r block You could have your domicile in Cleveland, Ohio, and a bona fide residence in Edinburgh, Scotland, if you intend to return eventually to Cleveland. Free tax h&r block The fact that you go to Scotland does not automatically make Scotland your bona fide residence. Free tax h&r block If you go there as a tourist, or on a short business trip, and return to the United States, you have not established bona fide residence in Scotland. Free tax h&r block But if you go to Scotland to work for an indefinite or extended period and you set up permanent quarters there for yourself and your family, you probably have established a bona fide residence in a foreign country, even though you intend to return eventually to the United States. Free tax h&r block You are clearly not a resident of Scotland in the first instance. Free tax h&r block However, in the second, you are a resident because your stay in Scotland appears to be permanent. Free tax h&r block If your residency is not as clearly defined as either of these illustrations, it may be more difficult to decide whether you have established a bona fide residence. Free tax h&r block Determination. Free tax h&r block   Questions of bona fide residence are determined according to each individual case, taking into account factors such as your intention, the purpose of your trip, and the nature and length of your stay abroad. Free tax h&r block   To meet the bona fide residence test, you must show the Internal Revenue Service (IRS) that you have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Free tax h&r block The IRS decides whether you are a bona fide resident of a foreign country largely on the basis of facts you report on Form 2555. Free tax h&r block IRS cannot make this determination until you file Form 2555. Free tax h&r block Statement to foreign authorities. Free tax h&r block   You are not considered a bona fide resident of a foreign country if you make a statement to the authorities of that country that you are not a resident of that country, and the authorities: Hold that you are not subject to their income tax laws as a resident, or Have not made a final decision on your status. Free tax h&r block Special agreements and treaties. Free tax h&r block   An income tax exemption provided in a treaty or other international agreement will not in itself prevent you from being a bona fide resident of a foreign country. Free tax h&r block Whether a treaty prevents you from becoming a bona fide resident of a foreign country is determined under all provisions of the treaty, including specific provisions relating to residence or privileges and immunities. Free tax h&r block Example 1. Free tax h&r block You are a U. Free tax h&r block S. Free tax h&r block citizen employed in the United Kingdom by a U. Free tax h&r block S. Free tax h&r block employer under contract with the U. Free tax h&r block S. Free tax h&r block Armed Forces. Free tax h&r block You are not subject to the North Atlantic Treaty Status of Forces Agreement. Free tax h&r block You may be a bona fide resident of the United Kingdom. Free tax h&r block Example 2. Free tax h&r block You are a U. Free tax h&r block S. Free tax h&r block citizen in the United Kingdom who qualifies as an “employee” of an armed service or as a member of a “civilian component” under the North Atlantic Treaty Status of Forces Agreement. Free tax h&r block You are not a bona fide resident of the United Kingdom. Free tax h&r block Example 3. Free tax h&r block You are a U. Free tax h&r block S. Free tax h&r block citizen employed in Japan by a U. Free tax h&r block S. Free tax h&r block employer under contract with the U. Free tax h&r block S. Free tax h&r block Armed Forces. Free tax h&r block You are subject to the agreement of the Treaty of Mutual Cooperation and Security between the United States and Japan. Free tax h&r block Being subject to the agreement does not make you a bona fide resident of Japan. Free tax h&r block Example 4. Free tax h&r block You are a U. Free tax h&r block S. Free tax h&r block citizen employed as an “official” by the United Nations in Switzerland. Free tax h&r block You are exempt from Swiss taxation on the salary or wages paid to you by the United Nations. Free tax h&r block This does not prevent you from being a bona fide resident of Switzerland. Free tax h&r block Effect of voting by absentee ballot. Free tax h&r block   If you are a U. Free tax h&r block S. Free tax h&r block citizen living abroad, you can vote by absentee ballot in any election held in the United States without risking your status as a bona fide resident of a foreign country. Free tax h&r block   However, if you give information to the local election officials about the nature and length of your stay abroad that does not match the information you give for the bona fide residence test, the information given in connection with absentee voting will be considered in determining your status, but will not necessarily be conclusive. Free tax h&r block Uninterrupted period including entire tax year. Free tax h&r block   To meet the bona fide residence test, you must reside in a foreign country or countries for an uninterrupted period that includes an entire tax year. Free tax h&r block An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis. Free tax h&r block   During the period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the United States or elsewhere for vacation or business. Free tax h&r block To keep your status as a bona fide resident of a foreign country, you must have a clear intention of returning from such trips, without unreasonable delay, to your foreign residence or to a new bona fide residence in another foreign country. Free tax h&r block Example 1. Free tax h&r block You arrived with your family in Lisbon, Portugal, on November 1, 2011. Free tax h&r block Your assignment is indefinite, and you intend to live there with your family until your company sends you to a new post. Free tax h&r block You immediately established residence there. Free tax h&r block You spent April of 2012 at a business conference in the United States. Free tax h&r block Your family stayed in Lisbon. Free tax h&r block Immediately following the conference, you returned to Lisbon and continued living there. Free tax h&r block On January 1, 2013, you completed an uninterrupted period of residence for a full tax year (2012), and you meet the bona fide residence test. Free tax h&r block Example 2. Free tax h&r block Assume the same facts as in Example 1, except that you transferred back to the United States on December 13, 2012. Free tax h&r block You would not meet the bona fide residence test because your bona fide residence in the foreign country, although it lasted more than a year, did not include a full tax year. Free tax h&r block You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test (discussed later). Free tax h&r block Bona fide resident for part of a year. Free tax h&r block   Once you have established bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year, you are a bona fide resident of that country for the period starting with the date you actually began the residence and ending with the date you abandon the foreign residence. Free tax h&r block Your period of bona fide residence can include an entire tax year plus parts of 2 other tax years. Free tax h&r block Example. Free tax h&r block You were a bona fide resident of Singapore from March 1, 2011, through September 14, 2013. Free tax h&r block On September 15, 2013, you returned to the United States. Free tax h&r block Since you were a bona fide resident of a foreign country for all of 2012, you were also a bona fide resident of a foreign country from March 1, 2011, through the end of 2011 and from January 1, 2013, through September 14, 2013. Free tax h&r block Reassignment. Free tax h&r block   If you are assigned from one foreign post to another, you may or may not have a break in foreign residence between your assignments, depending on the circumstances. Free tax h&r block Example 1. Free tax h&r block You were a resident of Pakistan from October 1, 2012, through November 30, 2013. Free tax h&r block On December 1, 2013, you and your family returned to the United States to wait for an assignment to another foreign country. Free tax h&r block Your household goods also were returned to the United States. Free tax h&r block Your foreign residence ended on November 30, 2013, and did not begin again until after you were assigned to another foreign country and physically entered that country. Free tax h&r block Since you were not a bona fide resident of a foreign country for the entire tax year of 2012 or 2013 you do not meet the bona fide residence test in either year. Free tax h&r block You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test, discussed later. Free tax h&r block Example 2. Free tax h&r block Assume the same facts as in Example 1, except that upon completion of your assignment in Pakistan you were given a new assignment to Turkey. Free tax h&r block On December 1, 2013, you and your family returned to the United States for a month's vacation. Free tax h&r block On January 2, 2014, you arrived in Turkey for your new assignment. Free tax h&r block Because you did not interrupt your bona fide residence abroad, you meet the bona fide residence test. Free tax h&r block Physical Presence Test You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. Free tax h&r block The 330 days do not have to be consecutive. Free tax h&r block Any U. Free tax h&r block S. Free tax h&r block citizen or resident alien can use the physical presence test to qualify for the exclusions and the deduction. Free tax h&r block The physical presence test is based only on how long you stay in a foreign country or countries. Free tax h&r block This test does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad. Free tax h&r block 330 full days. Free tax h&r block   Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during a 12-month period. Free tax h&r block You can count days you spent abroad for any reason. Free tax h&r block You do not have to be in a foreign country only for employment purposes. Free tax h&r block You can be on vacation. Free tax h&r block   You do not meet the physical presence test if illness, family problems, a vacation, or your employer's orders cause you to be present for less than the required amount of time. Free tax h&r block Exception. Free tax h&r block   You can be physically present in a foreign country or countries for less than 330 full days and still meet the physical presence test if you are required to leave a country because of war or civil unrest. Free tax h&r block See Waiver of Time Requirements, later. Free tax h&r block Full day. Free tax h&r block   A full day is a period of 24 consecutive hours, beginning at midnight. Free tax h&r block Travel. Free tax h&r block    When you leave the United States to go directly to a foreign country or when you return directly to the United States from a foreign country, the time you spend on or over international waters does not count toward the 330-day total. Free tax h&r block Example. Free tax h&r block You leave the United States for France by air on June 10. Free tax h&r block You arrive in France at 9:00 a. Free tax h&r block m. Free tax h&r block on June 11. Free tax h&r block Your first full day of physical presence in France is June 12. Free tax h&r block Passing over foreign country. Free tax h&r block   If, in traveling from the United States to a foreign country, you pass over a foreign country before midnight of the day you leave, the first day you can count toward the 330-day total is the day following the day you leave the United States. Free tax h&r block Example. Free tax h&r block You leave the United States by air at 9:30 a. Free tax h&r block m. Free tax h&r block on June 10 to travel to Kenya. Free tax h&r block You pass over western Africa at 11:00 p. Free tax h&r block m. Free tax h&r block on June 10 and arrive in Kenya at 12:30 a. Free tax h&r block m. Free tax h&r block on June 11. Free tax h&r block Your first full day in a foreign country is June 11. Free tax h&r block Change of location. Free tax h&r block   You can move about from one place to another in a foreign country or to another foreign country without losing full days. Free tax h&r block If any part of your travel is not within any foreign country and takes less than 24 hours, you are considered to be in a foreign country during that part of travel. Free tax h&r block Example 1. Free tax h&r block You leave Ireland by air at 11:00 p. Free tax h&r block m. Free tax h&r block on July 6 and arrive in Sweden at 5:00 a. Free tax h&r block m. Free tax h&r block on July 7. Free tax h&r block Your trip takes less than 24 hours and you lose no full days. Free tax h&r block Example 2. Free tax h&r block You leave Norway by ship at 10:00 p. Free tax h&r block m. Free tax h&r block on July 6 and arrive in Portugal at 6:00 a. Free tax h&r block m. Free tax h&r block on July 8. Free tax h&r block Since your travel is not within a foreign country or countries and the trip takes more than 24 hours, you lose as full days July 6, 7, and 8. Free tax h&r block If you remain in Portugal, your next full day in a foreign country is July 9. Free tax h&r block In United States while in transit. Free tax h&r block   If you are in transit between two points outside the United States and are physically present in the United States for less than 24 hours, you are not treated as present in the United States during the transit. Free tax h&r block You are treated as traveling over areas not within any foreign country. Free tax h&r block    Please click here for the text description of the image. Free tax h&r block Figure 4-B How to figure the 12-month period. Free tax h&r block   There are four rules you should know when figuring the 12-month period. Free tax h&r block Your 12-month period can begin with any day of the month. Free tax h&r block It ends the day before the same calendar day, 12 months later. Free tax h&r block Your 12-month period must be made up of consecutive months. Free tax h&r block Any 12-month period can be used if the 330 days in a foreign country fall within that period. Free tax h&r block You do not have to begin your 12-month period with your first full day in a foreign country or end it with the day you leave. Free tax h&r block You can choose the 12-month period that gives you the greatest exclusion. Free tax h&r block In determining whether the 12-month period falls within a longer stay in the foreign country, 12-month periods can overlap one another. Free tax h&r block Example 1. Free tax h&r block You are a construction worker who works on and off in a foreign country over a 20-month period. Free tax h&r block You might pick up the 330 full days in a 12-month period only during the middle months of the time you work in the foreign country because the first few and last few months of the 20-month period are broken up by long visits to the United States. Free tax h&r block Example 2. Free tax h&r block You work in New Zealand for a 20-month period from January 1, 2012, through August 31, 2013, except that you spend 28 days in February 2012 and 28 days in February 2013 on vacation in the United States. Free tax h&r block You are present in New Zealand for at least 330 full days during each of the following two 12-month periods: January 1, 2012 – December 31, 2012 and September 1, 2012 – August 31, 2013. Free tax h&r block By overlapping the 12-month periods in this way, you meet the physical presence test for the whole 20-month period. Free tax h&r block See Figure 4-B, on the previous page. Free tax h&r block Waiver of Time Requirements Both the bona fide residence test and the physical presence test contain minimum time requirements. Free tax h&r block The minimum time requirements can be waived, however, if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. Free tax h&r block You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. Free tax h&r block To qualify for the waiver, you must actually have your tax home in the foreign country and be a bona fide resident of, or be physically present in, the foreign country on or before the beginning date of the waiver. Free tax h&r block Early in 2014, the IRS will publish in the Internal Revenue Bulletin a list of the only countries that qualify for the waiver for 2013 and the effective dates. Free tax h&r block If you left one of the countries on or after the date listed for each country, you can meet the bona fide residence test or physical presence test for 2013 without meeting the minimum time requirement. Free tax h&r block However, in figuring your exclusion, the number of your qualifying days of bona fide residence or physical presence includes only days of actual residence or presence within the country. Free tax h&r block U. Free tax h&r block S. Free tax h&r block Travel Restrictions If you are present in a foreign country in violation of U. Free tax h&r block S. Free tax h&r block law, you will not be treated as a bona fide resident of a foreign country or as physically present in a foreign country while you are in violation of the law. Free tax h&r block Income that you earn from sources within such a country for services performed during a period of violation does not qualify as foreign earned income. Free tax h&r block Your housing expenses within that country (or outside that country for housing your spouse or dependents) while you are in violation of the law cannot be included in figuring your foreign housing amount. Free tax h&r block For 2013, the only country to which travel restrictions applied was Cuba. Free tax h&r block The restrictions applied for the entire year. Free tax h&r block However, individuals working at the U. Free tax h&r block S. Free tax h&r block Naval Base at Guantanamo Bay in Cuba are not in violation of U. Free tax h&r block S. Free tax h&r block law. Free tax h&r block Personal service income earned by individuals at the base is eligible for the foreign earned income exclusion provided the other requirements are met. Free tax h&r block Foreign Earned Income To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income. Free tax h&r block Foreign earned income generally is income you receive for services you perform during a period in which you meet both of the following requirements. Free tax h&r block Your tax home is in a foreign country. Free tax h&r block You meet either the bona fide residence test or the physical presence test. Free tax h&r block To determine whether your tax home is in a foreign country, see Tax Home in Foreign Country, earlier. Free tax h&r block To determine whether you meet either the bona fide residence test or the physical presence test, see Bona Fide Residence Test and Physical Presence Test, earlier. Free tax h&r block Foreign earned income does not include the following amounts. Free tax h&r block The value of meals and lodging that you exclude from your income because the meals and lodging were furnished for the convenience of your employer. Free tax h&r block Pension or annuity payments you receive, including social security benefits (see Pensions and annuities, later). Free tax h&r block Pay you receive as an employee of the U. Free tax h&r block S. Free tax h&r block Government. Free tax h&r block (See U. Free tax h&r block S. Free tax h&r block Government Employees, later. Free tax h&r block ) Amounts you include in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract. Free tax h&r block Any unallowable moving expense deduction that you choose to recapture as explained under Moving Expense Attributable to Foreign Earnings in 2 Years in chapter 5. Free tax h&r block Payments you receive after the end of the tax year following the tax year in which you performed the services that earned the income. Free tax h&r block Earned income. Free tax h&r block   This is pay for personal services performed, such as wages, salaries, or professional fees. Free tax h&r block The list that follows classifies many types of income into three categories. Free tax h&r block The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both. Free tax h&r block For more information on earned and unearned income, see Earned and Unearned Income, later. Free tax h&r block Earned Income Unearned Income Variable Income Salaries and wages Dividends Business profits Commissions Interest Royalties Bonuses Capital gains Rents Professional fees Gambling winnings Scholarships and fellowships Tips Alimony     Social security benefits     Pensions     Annuities     In addition to the types of earned income listed, certain noncash income and allowances or reimbursements are considered earned income. Free tax h&r block Noncash income. Free tax h&r block   The fair market value of property or facilities provided to you by your employer in the form of lodging, meals, or use of a car is earned income. Free tax h&r block Allowances or reimbursements. Free tax h&r block   Earned income includes allowances or reimbursements you receive, such as the following amounts. Free tax h&r block    Cost-of-living allowances. Free tax h&r block Overseas differential. Free tax h&r block Family allowance. Free tax h&r block Reimbursement for education or education allowance. Free tax h&r block Home leave allowance. Free tax h&r block Quarters allowance. Free tax h&r block Reimbursement for moving or moving allowance (unless excluded from income as discussed later in Reimbursement of employee expenses under Earned and Unearned Income). Free tax h&r block Source of Earned Income The source of your earned income is the place where you perform the services for which you received the income. Free tax h&r block Foreign earned income is income you receive for working in a foreign country. Free tax h&r block Where or how you are paid has no effect on the source of the income. Free tax h&r block For example, income you receive for work done in Austria is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City. Free tax h&r block Example. Free tax h&r block You are a U. Free tax h&r block S. Free tax h&r block citizen, a bona fide resident of Canada, and working as a mining engineer. Free tax h&r block Your salary is $76,800 per year. Free tax h&r block You also receive a $6,000 cost-of-living allowance, and a $6,000 education allowance. Free tax h&r block Your employment contract did not indicate that you were entitled to these allowances only while outside the United States. Free tax h&r block Your total income is $88,800. Free tax h&r block You work a 5-day week, Monday through Friday. Free tax h&r block After subtracting your vacation, you have a total of 240 workdays in the year. Free tax h&r block You worked in the United States during the year for 6 weeks (30 workdays). Free tax h&r block The following shows how to figure the part of your income that is for work done in Canada during the year. Free tax h&r block   Number of days worked in Canada during the year (210) × Total income ($88,800) = $77,700     Number of days of work during the year for which payment was made (240)   Your foreign source earned income is $77,700. Free tax h&r block Earned and Unearned Income Earned income was defined earlier as pay for personal services performed. Free tax h&r block Some types of income are not easily identified as earned or unearned income. Free tax h&r block Some of these types of income are further explained here. Free tax h&r block Income from a sole proprietorship or partnership. Free tax h&r block   Income from a business in which capital investment is an important part of producing the income may be unearned income. Free tax h&r block If you are a sole proprietor or partner and your personal services are also an important part of producing the income, the part of the income that represents the value of your personal services will be treated as earned income. Free tax h&r block Capital a factor. Free tax h&r block   If capital investment is an important part of producing income, no more than 30% of your share of the net profits of the business is earned income. Free tax h&r block   If you have no net profits, the part of your gross profit that represents a reasonable allowance for personal services actually performed is considered earned income. Free tax h&r block Because you do not have a net profit, the 30% limit does not apply. Free tax h&r block Example 1. Free tax h&r block You are a U. Free tax h&r block S. Free tax h&r block citizen and meet the bona fide residence test. Free tax h&r block You invest in a partnership based in Cameroon that is engaged solely in selling merchandise outside the United States. Free tax h&r block You perform no services for the partnership. Free tax h&r block At the end of the tax year, your share of the net profits is $80,000. Free tax h&r block The entire $80,000 is unearned income. Free tax h&r block Example 2. Free tax h&r block Assume that in Example 1 you spend time operating the business. Free tax h&r block Your share of the net profits is $80,000; 30% of your share of the profits is $24,000. Free tax h&r block If the value of your services for the year is $15,000, your earned income is limited to the value of your services, $15,000. Free tax h&r block Capital not a factor. Free tax h&r block   If capital is not an income-producing factor and personal services produce the business income, the 30% rule does not apply. Free tax h&r block The entire amount of business income is earned income. Free tax h&r block Example. Free tax h&r block You and Lou Green are management consultants and operate as equal partners in performing services outside the United States. Free tax h&r block Because capital is not an income- producing factor, all the income from the partnership is considered earned income. Free tax h&r block Income from a corporation. Free tax h&r block   The salary you receive from a corporation is earned income only if it represents a reasonable allowance as compensation for work you do for the corporation. Free tax h&r block Any amount over what is considered a reasonable salary is unearned income. Free tax h&r block Example 1. Free tax h&r block You are a U. Free tax h&r block S. Free tax h&r block citizen and an officer and stockholder of a corporation in Honduras. Free tax h&r block You perform no work or service of any kind for the corporation. Free tax h&r block During the tax year you receive a $10,000 “salary” from the corporation. Free tax h&r block The $10,000 clearly is not for personal services and is unearned income. Free tax h&r block Example 2. Free tax h&r block You are a U. Free tax h&r block S. Free tax h&r block citizen and work full time as secretary-treasurer of your corporation. Free tax h&r block During the tax year you receive $100,000 as salary from the corporation. Free tax h&r block If $80,000 is a reasonable allowance as pay for the work you did, then $80,000 is earned income. Free tax h&r block Stock options. Free tax h&r block   You may have earned income if you disposed of stock that you got by exercising a stock option granted to you under an employee stock purchase plan. Free tax h&r block   If your gain on the disposition of stock you got by exercising an option is treated as capital gain, your gain is unearned income. Free tax h&r block   However, if you disposed of the stock less than 2 years after you were granted the option or less than 1 year after you got the stock, part of the gain on the disposition may be earned income. Free tax h&r block It is considered received in the year you disposed of the stock and earned in the year you performed the services for which you were granted the option. Free tax h&r block Any part of the earned income that is due to work you did outside the United States is foreign earned income. Free tax h&r block   See Publication 525, Taxable and Nontaxable Income, for a discussion of the treatment of stock options. Free tax h&r block Pensions and annuities. Free tax h&r block    For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, amounts received as pensions or annuities are unearned income. Free tax h&r block Royalties. Free tax h&r block   Royalties from the leasing of oil and mineral lands and patents generally are a form of rent or dividends and are unearned income. Free tax h&r block   Royalties received by a writer are earned income if they are received: For the transfer of property rights of the writer in the writer's product, or Under a contract to write a book or series of articles. Free tax h&r block Rental income. Free tax h&r block   Generally, rental income is unearned income. Free tax h&r block If you perform personal services in connection with the production of rent, up to 30% of your net rental income can be considered earned income. Free tax h&r block Example. Free tax h&r block Larry Smith, a U. Free tax h&r block S. Free tax h&r block citizen living in Australia, owns and operates a rooming house in Sydney. Free tax h&r block If he is operating the rooming house as a business that requires capital and personal services, he can consider up to 30% of net rental income as earned income. Free tax h&r block On the other hand, if he just owns the rooming house and performs no personal services connected with its operation, except perhaps making minor repairs and collecting rents, none of his net income from the house is considered earned income. Free tax h&r block It is all unearned income. Free tax h&r block Professional fees. Free tax h&r block   If you are engaged in a professional occupation (such as a doctor or lawyer), all fees received in the performance of these services are earned income. Free tax h&r block Income of an artist. Free tax h&r block   Income you receive from the sale of paintings you created is earned income. Free tax h&r block Scholarships and fellowships. Free tax h&r block   Any portion of a scholarship or fellowship grant that is paid to you for teaching, research or other services is considered earned income if you must include it in your gross income. Free tax h&r block If the payer of the grant is required to provide you with a Form W-2, Wage and Tax Statement, these amounts will be listed as wages. Free tax h&r block    Certain scholarship and fellowship income may be exempt under other provisions. Free tax h&r block See Publication 970, Tax Benefits for Education, chapter 1. Free tax h&r block Use of employer's property or facilities. Free tax h&r block   If you receive fringe benefits in the form of the right to use your employer's property or facilities, the fair market value of that right is earned income. Free tax h&r block Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being required to buy or sell, and both having reasonable knowledge of all the necessary facts. Free tax h&r block Example. Free tax h&r block You are privately employed and live in Japan all year. Free tax h&r block You are paid a salary of $6,000 a month. Free tax h&r block You live rent-free in a house provided by your employer that has a fair rental value of $3,000 a month. Free tax h&r block The house is not provided for your employer's convenience. Free tax h&r block You report on the calendar-year, cash basis. Free tax h&r block You received $72,000 salary from foreign sources plus $36,000 fair rental value of the house, or a total of $108,000 of earned income. Free tax h&r block Reimbursement of employee expenses. Free tax h&r block   If you are reimbursed under an accountable plan (defined below) for expenses you incur on your employer's behalf and you have adequately accounted to your employer for the expenses, do not include the reimbursement for those expenses in your earned income. Free tax h&r block   The expenses for which you are reimbursed are not considered allocable (related) to your earned income. Free tax h&r block If expenses and reimbursement are equal, there is nothing to allocate to excluded income. Free tax h&r block If expenses are more than the reimbursement, the unreimbursed expenses are considered to have been incurred in producing earned income and must be divided between your excluded and included income in determining the amount of unreimbursed expenses you can deduct. Free tax h&r block (See chapter 5. Free tax h&r block ) If the reimbursement is more than the expenses, no expenses remain to be divided between excluded and included income and the excess reimbursement must be included in earned income. Free tax h&r block   These rules do not apply to the following individuals. Free tax h&r block Straight-commission salespersons. Free tax h&r block Employees who have arrangements with their employers under which taxes are not withheld on a percentage of the commissions because the employers consider that percentage to be attributable to the employees' expenses. Free tax h&r block Accountable plan. Free tax h&r block   An accountable plan is a reimbursement or allowance arrangement that includes all three of the following rules. Free tax h&r block The expenses covered under the plan must have a business connection. Free tax h&r block The employee must adequately account to the employer for these expenses within a reasonable period of time. Free tax h&r block The employee must return any excess reimbursement or allowance within a reasonable period of time. Free tax h&r block Reimbursement of moving expenses. Free tax h&r block   Reimbursement of moving expenses may be earned income. Free tax h&r block You must include as earned income: Any reimbursements of, or payments for, nondeductible moving expenses, Reimbursements that are more than your deductible expenses and that you do not return to your employer, Any reimbursements made (or treated as made) under a nonaccountable plan (any plan that does not meet the rules listed above for an accountable plan), even if they are for deductible expenses, and Any reimbursement of moving expenses you deducted in an earlier year. Free tax h&r block This section discusses reimbursements that must be included in earned income. Free tax h&r block Publication 521, Moving Expenses, discusses additional rules that apply to moving expense deductions and reimbursements. Free tax h&r block   The rules for determining when the reimbursement is considered earned or where the reimbursement is considered earned may differ somewhat from the general rules previously discussed. Free tax h&r block   Although you receive the reimbursement in one tax year, it may be considered earned for services performed, or to be performed, in another tax year. Free tax h&r block You must report the reimbursement as income on your return in the year you receive it, even if it is considered earned during a different year. Free tax h&r block Move from U. Free tax h&r block S. Free tax h&r block to foreign country. Free tax h&r block   If you move from the United States to a foreign country, your moving expense reimbursement is generally considered pay for future services to be performed at the new location. Free tax h&r block The reimbursement is considered earned solely in the year of the move if you qualify for the exclusion for a period that includes at least 120 days during that tax year. Free tax h&r block   If you are neither a bona fide resident of nor physically present in a foreign country or countries for a period that includes 120 days during the year of the move, a portion of the reimbursement is considered earned in the year of the move and a portion is considered earned in the year following the year of the move. Free tax h&r block To figure the amount earned in the year of the move, multiply the reimbursement by a fraction. Free tax h&r block The numerator (top number) is the number of days in your qualifying period that fall within the year of the move, and the denominator (bottom number) is the total number of days in the year of the move. Free tax h&r block   The difference between the total reimbursement and the amount considered earned in the year of the move is the amount considered earned in the year following the year of the move. Free tax h&r block The part earned in each year is figured as shown in the following example. Free tax h&r block Example. Free tax h&r block You are a U. Free tax h&r block S. Free tax h&r block citizen working in the United States. Free tax h&r block You were told in October 2012 that you were being transferred to a foreign country. Free tax h&r block You arrived in the foreign country on December 15, 2012, and you are a bona fide resident for the remainder of 2012 and all of 2013. Free tax h&r block Your employer reimbursed you $2,000 in January 2013 for the part of the moving expense that you were not allowed to deduct. Free tax h&r block Because you did not qualify for the exclusion under the bona fide residence test for at least 120 days in 2012 (the year of the move), the reimbursement is considered pay for services performed in the foreign country for both 2012 and 2013. Free tax h&r block You figure the part of the reimbursement for services performed in the foreign country in 2012 by multiplying the total reimbursement by a fraction. Free tax h&r block The fraction is the number of days during which you were a bona fide resident in 2012 (the year of the move) divided by 366. Free tax h&r block The remaining part of the reimbursement is for services performed in the foreign country in 2013. Free tax h&r block This computation is used only to determine when the reimbursement is considered earned. Free tax h&r block You would include the amount of the reimbursement in income in 2013, the year you received it. Free tax h&r block Move between foreign countries. Free tax h&r block   If you move between foreign countries, any moving expense reimbursement that you must include in income will be considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days in the year of the move. Free tax h&r block Move to U. Free tax h&r block S. Free tax h&r block   If you move to the United States, the moving expense reimbursement that you must include in income is generally considered to be U. Free tax h&r block S. Free tax h&r block source income. Free tax h&r block   However, if under either an agreement between you and your employer or a statement of company policy that is reduced to writing before your move to the foreign country, your employer will reimburse you for your move back to the United States regardless of whether you continue to work for the employer, the includible reimbursement is considered compensation for past services performed in the foreign country. Free tax h&r block The includible reimbursement is considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days during that year. Free tax h&r block Otherwise, you treat the includible reimbursement as received for services performed in the foreign country in the year of the move and the year immediately before the year of the move. Free tax h&r block   See the discussion under Move from U. Free tax h&r block S. Free tax h&r block to foreign country , earlier, to figure the amount of the includible reimbursement considered earned in the year of the move. Free tax h&r block The amount earned in the year before the year of the move is the difference between the total includible reimbursement and the amount earned in the year of the move. Free tax h&r block Example. Free tax h&r block You are a U. Free tax h&r block S. Free tax h&r block citizen employed in a foreign country. Free tax h&r block You retired from employment with your employer on March 31, 2013, and returned to the United States after having been a bona fide resident of the foreign country for several years. Free tax h&r block A written agreement with your employer entered into before you went abroad provided that you would be reimbursed for your move back to the United States. Free tax h&r block In April 2013, your former employer reimbursed you $4,000 for the part of the cost of your move back to the United States that you were not allowed to deduct. Free tax h&r block Because you were not a bona fide resident of a foreign country or countries for a period that included at least 120 days in 2013 (the year of the move), the includible reimbursement is considered pay for services performed in the foreign country for both 2013 and 2012. Free tax h&r block You figure the part of the moving expense reimbursement for services performed in the foreign country for 2013 by multiplying the total includible reimbursement by a fraction. Free tax h&r block The fraction is the number of days of foreign residence during the year (90) divided by the number of days in the year (365). Free tax h&r block The remaining part of the includible reimbursement is for services performed in the foreign country in 2012. Free tax h&r block You report the amount of the includible reimbursement in 2013, the year you received it. Free tax h&r block    In this example, if you met the physical presence test for a period that included at least 120 days in 2013, the moving expense reimbursement would be considered earned entirely in the year of the move. Free tax h&r block Storage expense reimbursements. Free tax h&r block   If you are reimbursed for storage expenses, the reimbursement is for services you perform during the period of time for which the storage expenses are incurred. Free tax h&r block U. Free tax h&r block S. Free tax h&r block Government Employees For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, foreign earned income does not include any amounts paid by the United States or any of its agencies to its employees. Free tax h&r block This includes amounts paid from both appropriated and nonappropriated funds. Free tax h&r block The following organizations (and other organizations similarly organized and operated under United States Army, Navy, or Air Force regulations) are integral parts of the Armed Forces, agencies, or instrumentalities of the United States. Free tax h&r block United States Armed Forces exchanges. Free tax h&r block Commissioned and noncommissioned officers' messes. Free tax h&r block Armed Forces motion picture services. Free tax h&r block Kindergartens on foreign Armed Forces installations. Free tax h&r block Amounts paid by the United States or its agencies to persons who are not their employees may qualify for exclusion or deduction. Free tax h&r block If you are a U. Free tax h&r block S. Free tax h&r block Government employee paid by a U. Free tax h&r block S. Free tax h&r block agency that assigned you to a foreign government to perform specific services for which the agency is reimbursed by the foreign government, your pay is from the U. Free tax h&r block S. Free tax h&r block Government and does not qualify for exclusion or deduction. Free tax h&r block If you have questions about whether you are an employee or an independent contractor, get Publication 15-A, Employer's Supplemental Tax Guide. Free tax h&r block American Institute in Taiwan. Free tax h&r block   Amounts paid by the American Institute in Taiwan are not foreign earned income for purposes of the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. Free tax h&r block If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U. Free tax h&r block S. Free tax h&r block tax up to the amount that equals tax-exempt allowances received by civilian employees of the U. Free tax h&r block S. Free tax h&r block Government. Free tax h&r block Allowances. Free tax h&r block   Cost-of-living and foreign-area allowances paid under certain acts of Congress to U. Free tax h&r block S. Free tax h&r block civilian officers and employees stationed in Alaska and Hawaii or elsewhere outside the 48 contiguous states and the District of Columbia can be excluded from gross income. Free tax h&r block Post differentials are wages that must be included in gross income, regardless of the act of Congress under which they are paid. Free tax h&r block More information. Free tax h&r block   Publication 516, U. Free tax h&r block S. Free tax h&r block Government Civilian Employees Stationed Abroad, has more information for U. Free tax h&r block S. Free tax h&r block Government employees abroad. Free tax h&r block Exclusion of Meals and Lodging You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met. Free tax h&r block The meals are furnished: On the business premises of your employer, and For the convenience of your employer. Free tax h&r block The lodging is furnished: On the business premises of your employer, For the convenience of your employer, and As a condition of your employment. Free tax h&r block If these conditions are met, do not include the value of the meals or lodging in your income, even if a law or your employment contract says that they are provided as compensation. Free tax h&r block Amounts you do not include in income because of these rules are not foreign earned income. Free tax h&r block If you receive a Form W-2, excludable amounts should not be included in the total reported in box 1 as wages. Free tax h&r block Family. Free tax h&r block   Your family, for this purpose, includes only your spouse and your dependents. Free tax h&r block Lodging. Free tax h&r block   The value of lodging includes the cost of heat, electricity, gas, water, sewer service, and similar items needed to make the lodging fit to live in. Free tax h&r block Business premises of employer. Free tax h&r block   Generally, the business premises of your employer is wherever you work. Free tax h&r block For example, if you work as a housekeeper, meals and lodging provided in your employer's home are provided on the business premises of your employer. Free tax h&r block Similarly, meals provided to cowhands while herding cattle on land leased or owned by their employer are considered provided on the premises of their employer. Free tax h&r block Convenience of employer. Free tax h&r block   Whether meals or lodging are provided for your employer's convenience must be determined from all the facts and circumstances. Free tax h&r block Meals furnished at no charge are considered provided for your employer's convenience if there is a good business reason for providing them, other than to give you more pay. Free tax h&r block   On the other hand, if your employer provides meals to you or your family as a means of giving you more pay, and there is no other business reason for providing them, their value is extra income to you because they are not furnished for the convenience of your employer. Free tax h&r block Condition of employment. Free tax h&r block   Lodging is provided as a condition of employment if you must accept the lodging to properly carry out the duties of your job. Free tax h&r block You must accept lodging to properly carry out your duties if, for example, you must be available for duty at all times or you could not perform your duties if the lodging was not furnished. Free tax h&r block Foreign camps. Free tax h&r block   If the lodging is in a camp located in a foreign country, the camp is considered part of your employer's business premises. Free tax h&r block The camp must be: Provided for your employer's convenience because the place where you work is in a remote area where satisfactory housing is not available to you on the open market within a reasonable commuting distance, Located as close as reasonably possible in the area where you work, and Provided in a common area or enclave that is not available to the general public for lodging or accommodations and that normally houses at least ten employees. Free tax h&r block Foreign Earned Income Exclusion If your tax home is in a foreign country and you meet the bona fide residence test or the physical presence test, you can choose to exclude from your income a limited amount of your foreign earned income. Free tax h&r block Foreign earned income was defined earlier in this chapter. Free tax h&r block You also can choose to exclude from your income a foreign housing amount. Free tax h&r block This is explained later under Foreign Housing Exclusion. Free tax h&r block If you choose to exclude a foreign housing amount, you must figure the foreign housing exclusion before you figure the foreign earned income exclusion. Free tax h&r block Your foreign earned income exclusion is limited to your foreign earned income minus your foreign housing exclusion. Free tax h&r block If you choose to exclude foreign earned income, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. Free tax h&r block This includes any expenses, losses, and other normally deductible items allocable to the excluded income. Free tax h&r block For more information about deductions and credits, see chapter 5 . Free tax h&r block Limit on Excludable Amount You may be able to exclude up to $97,600 of your foreign earned income in 2013. Free tax h&r block You cannot exclude more than the smaller of: $97,600, or Your foreign earned income (discussed earlier) for the tax year minus your foreign housing exclusion (discussed later). Free tax h&r block If both you and your spouse work abroad and each of you meets either the bona fide residence test or the physical presence test, you can each choose the foreign earned income exclusion. Free tax h&r block You do not both need to meet the same test. Free tax h&r block Together, you and your spouse can exclude as much as $195,200. Free tax h&r block Paid in year following work. Free tax h&r block   Generally, you are considered to have earned income in the year in which you do the work for which you receive the income, even if you work in one year but are not paid until the following year. Free tax h&r block If you report your income on a cash basis, you report the income on your return for the year you receive it. Free tax h&r block If you work one year, but are not paid for that work until the next year, the amount you can exclude in the year you are paid is the amount you could have excluded in the year you did the work if you had been paid in that year. Free tax h&r block For an exception to this general rule, see Year-end payroll period, later. Free tax h&r block Example. Free tax h&r block You were a bona fide resident of Brazil for all of 2012 and 2013. Free tax h&r block You report your income on the cash basis. Free tax h&r block In 2012, you were paid $84,200 for work you did in Brazil during that year. Free tax h&r block You excluded all of the $84,200 from your income in 2012. Free tax h&r block In 2013, you were paid $117,300 for your work in Brazil. Free tax h&r block $18,800 was for work you did in 2012 and $98,500 was for work you did in 2013. Free tax h&r block You can exclude $10,900 of the $18,800 from your income in 2013. Free tax h&r block This is the $95,100 maximum exclusion in 2012 minus the $84,200 actually excluded that year. Free tax h&r block You must include the remaining $7,900 in income in 2013 because you could not have excluded that income in 2012 if you had received it that year. Free tax h&r block You can exclude $97,600 of the $98,500 you were paid for work you did in 2013 from your 2013 income. Free tax h&r block Your total foreign earned income exclusion for 2013 is $108,500 ($10,900 for work you did in 2012 and $97,600 for work you did in 2013). Free tax h&r block You would include in your 2013 income $8,800 ($7,900 for the work you did in 2012 and $900 for the work you did in 2013). Free tax h&r block Year-end payroll period. Free tax h&r block   There is an exception to the general rule that income is considered earned in the year you do the work for which you receive the income. Free tax h&r block If you are a cash-basis taxpayer, any salary or wage payment you receive after the end of the year in which you do the work for which you receive the pay is considered earned entirely in the year you receive it if all four of the following apply. Free tax h&r block The period for which the payment is made is a normal payroll period of your employer that regularly applies to you. Free tax h&r block The payroll period includes the last day of your tax year (December 31 if you figure your taxes on a calendar-year basis). Free tax h&r block The payroll period is not longer than 16 days. Free tax h&r block The payday comes at the same time in relation to the payroll period that it would normally come and it comes before the end of the next payroll period. Free tax h&r block Example. Free tax h&r block You are paid twice a month. Free tax h&r block For the normal payroll period that begins on the first of the month and ends on the fifteenth of the month, you are paid on the sixteenth day of the month. Free tax h&r block For the normal payroll period that begins on the sixteenth of the month and ends on the last day of the month, you are paid on the first day of the following month. Free tax h&r block Because all of the above conditions are met, the pay you received on January 1, 2013, is considered earned in 2013. Free tax h&r block Income earned over more than 1 year. Free tax h&r block   Regardless of when you actually receive income, you must apply it to the year in which you earned it in figuring your excludable amount for that year. Free tax h&r block For example, a bonus may be based on work you did over several years. Free tax h&r block You determine the amount of the bonus that is considered earned in a particular year in two steps. Free tax h&r block Divide the bonus by the number of calendar months in the period when you did the work that resulted in the bonus. Free tax h&r block Multiply the result of (1) by the number of months you did the work during the year. Free tax h&r block This is the amount that is subject to the exclusion limit for that tax year. Free tax h&r block Income received more than 1 year after it was earned. Free tax h&r block   You cannot exclude income you receive after the end of the year following the year you do the work to earn it. Free tax h&r block Example. Free tax h&r block   You were a bona fide resident of Sweden for 2011, 2012, and 2013. Free tax h&r block You report your income on the cash basis. Free tax h&r block In 2011, you were paid $69,000 for work you did in Sweden that year and in 2012 you were paid $74,000 for that year's work in Sweden. Free tax h&r block You excluded all the income on your 2011 and 2012 returns. Free tax h&r block   In 2013, you were paid $92,000; $82,000 for your work in Sweden during 2013, and $10,000 for work you did in Sweden in 2011. Free tax h&r block You cannot exclude any of the $10,000 for work done in 2011 because you received it after the end of the year following the year in which you earned it. Free tax h&r block You must include the $10,000 in income. Free tax h&r block You can exclude all of the $82,000 received for work you did in 2013. Free tax h&r block Community income. Free tax h&r block   The maximum exclusion applies separately to the earnings of spouses. Free tax h&r block Ignore any community property laws when you figure your limit on the foreign earned income exclusion. Free tax h&r block Part-year exclusion. Free tax h&r block   If the period for which you qualify for the foreign earned income exclusion includes only part of the year, you must adjust the maximum limit based on the number of qualifying days in the year. Free tax h&r block The number of qualifying days is the number of days in the year within the period on which you both: Have your tax home in a foreign country, and Meet either the bona fide residence test or the physical presence test. Free tax h&r block   For this purpose, you can count as qualifying days all days within a period of 12 consecutive months once you are physically present and have your tax home in a foreign country for 330 full days. Free tax h&r block To figure your maximum exclusion, multiply the maximum excludable amount for the year by the number of your qualifying days in the year, and then divide the result by the number of days in the year. Free tax h&r block Example. Free tax h&r block You report your income on the calendar-year basis and you qualified for the foreign earned income exclusion under the bona fide residence test for 75 days in 2013. Free tax h&r block You can exclude a maximum of 75/365 of $97,600, or $20,055, of your foreign earned income for 2013. Free tax h&r block If you qualify under the bona fide residence test for all of 2014, you can exclude your foreign earned income up to the 2014 limit. Free tax h&r block Physical presence test. Free tax h&r block   Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. Free tax h&r block If you qualify for the foreign earned income exclusion under the physical presence test for part of a year, it is important to carefully choose the 12-month period that will allow the maximum exclusion for that year. Free tax h&r block Example. Free tax h&r block You are physically present and have your tax home in a foreign country for a 16-month period from June 1, 2012, through September 30, 2013, except for 16 days in December 2012 when you were on vacation in the United States. Free tax h&r block You figure the maximum exclusion for 2012 as follows. Free tax h&r block Beginning with June 1, 2012, count forward 330 full days. Free tax h&r block Do not count the 16 days you spent in the United States. Free tax h&r block The 330th day, May 12, 2013, is the last day of a 12-month period. Free tax h&r block Count backward 12 months from May 11, 2013, to find the first day of this 12-month period, May 12, 2012. Free tax h&r block This 12-month period runs from May 12, 2012, through May 11, 2013. Free tax h&r block Count the total days during 2012 that fall within this 12-month period. Free tax h&r block This is 234 days (May 12, 2012 – December 31, 2012). Free tax h&r block Multiply $95,100 (the maximum exclusion for 2012) by the fraction 234/366 to find your maximum exclusion for 2012 ($60,802). Free tax h&r block You figure the maximum exclusion for 2013 in the opposite manner. Free tax h&r block Beginning with your last full day, September 30, 2013, count backward 330 full days. Free tax h&r block Do not count the 16 days you spent in the United States. Free tax h&r block That day, October 20, 2012, is the first day of a 12-month period. Free tax h&r block Count forward 12 months from October 20, 2012, to find the last day of this 12-month period, October 19, 2013. Free tax h&r block This 12-month period runs from October 20, 2012, through October 19, 2013. Free tax h&r block Count the total days during 2013 that fall within this 12-month period. Free tax h&r block This is 292 days (January 1, 2013 – October 19, 2013). Free tax h&r block Multiply $97,600, the maximum limit, by the fraction 292/365 to find your maximum exclusion for 2013 ($78,080). Free tax h&r block Choosing the Exclusion The foreign earned income exclusion is voluntary. Free tax h&r block You can choose the exclusion by completing the appropriate parts of Form 2555. Free tax h&r block When You Can Choose the Exclusion Your initial choice of the exclusion on Form 2555 or Form 2555-EZ generally must be made with one of the following returns. Free tax h&r block A return filed by the due date (including any extensions). Free tax h&r block A return amending a timely-filed return. Free tax h&r block Amended returns generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid. Free tax h&r block A return filed within 1 year from the original due date of the return (determined without regard to any extensions). Free tax h&r block Filing after the above periods. Free tax h&r block   You can choose the exclusion on a return filed after the periods described above if you owe no federal income tax after taking into account the exclusion. Free tax h&r block If you owe federal income tax after taking into account the exclusion, you can choose the exclusion on a return filed after the periods described earlier if you file before the IRS discovers that you failed to choose the exclusion. Free tax h&r block Whether or not you owe federal income tax after taking the exclusion into account, if you file your return after the periods described earlier, you must type or legibly print at the top of the first page of the Form 1040 “Filed pursuant to section 1. Free tax h&r block 911-7(a)(2)(i)(D). Free tax h&r block ” If you owe federal income tax after taking into account the foreign earned income exclusion and the IRS discovered that you failed to choose the exclusion, you may still be able to choose the exclusion. Free tax h&r block You must request a private letter ruling under Income Tax Regulation 301. Free tax h&r block 9100-3 and Revenue Procedure 2013-1, 2013-1 I. Free tax h&r block R. Free tax h&r block B. Free tax h&r block 1, available at www. Free tax h&r block irs. Free tax h&r block gov/irb/2013-01_IRB/ar06. Free tax h&r block html. Free tax h&r block Effect of Choosing the Exclusion Once you choose to exclude your foreign earned income, that choice remains in effect for that year and all later years unless you revoke it. Free tax h&r block Foreign tax credit or deduction. Free tax h&r block