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Turbotax 2006

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Turbotax 2006

Turbotax 2006 Publication 1212 - Main Content Table of Contents Definitions Debt Instruments on the OID List Debt Instruments Not on the OID List Information for Brokers and Other MiddlemenShort-Term Obligations Redeemed at Maturity Long-Term Debt Instruments Certificates of Deposit Bearer Bonds and Coupons Backup Withholding Information for Owners of OID Debt InstrumentsExceptions. Turbotax 2006 Adjustment for premium. Turbotax 2006 Adjustment for acquisition premium. Turbotax 2006 Adjustment for market discount. Turbotax 2006 Form 1099-OID How To Report OID Figuring OID on Long-Term Debt Instruments Figuring OID on Stripped Bonds and Coupons How To Get Tax HelpLow Income Taxpayer Clinics Definitions The following terms are used throughout this publication. Turbotax 2006 “Original issue discount” is defined first. Turbotax 2006 The other terms are listed alphabetically. Turbotax 2006 Original issue discount (OID). Turbotax 2006   OID is a form of interest. Turbotax 2006 It is the excess of a debt instrument's stated redemption price at maturity over its issue price (acquisition price for a stripped bond or coupon). Turbotax 2006 Zero coupon bonds and debt instruments that pay no stated interest until maturity are examples of debt instruments that have OID. Turbotax 2006 Accrual period. Turbotax 2006   An accrual period is an interval of time used to measure OID. Turbotax 2006 The length of an accrual period can be 6 months, a year, or some other period, depending on when the debt instrument was issued. Turbotax 2006 Acquisition premium. Turbotax 2006   Acquisition premium is the excess of a debt instrument's adjusted basis immediately after purchase, including purchase at original issue, over the debt instrument's adjusted issue price at that time. Turbotax 2006 A debt instrument does not have acquisition premium, however, if the debt instrument was purchased at a premium. Turbotax 2006 See Premium, later. Turbotax 2006 Adjusted issue price. Turbotax 2006   The adjusted issue price of a debt instrument at the beginning of an accrual period is used to figure the OID allocable to that period. Turbotax 2006 In general, the adjusted issue price at the beginning of the debt instrument's first accrual period is its issue price. Turbotax 2006 The adjusted issue price at the beginning of any subsequent accrual period is the sum of the issue price and all the OID includible in income before that accrual period minus any payment previously made on the debt instrument, other than a payment of qualified stated interest. Turbotax 2006 Debt instrument. Turbotax 2006   The term “debt instrument” means any instrument or contractual arrangement that constitutes indebtedness under general principles of federal income tax law (including, for example, a bond, debenture, note, certificate, or other evidence of indebtedness). Turbotax 2006 It generally does not include an annuity contract. Turbotax 2006 Issue price. Turbotax 2006   For debt instruments listed in Section I-A and Section I-B, the issue price generally is the initial offering price to the public (excluding bond houses and brokers) at which a substantial amount of these instruments was sold. Turbotax 2006 Market discount. Turbotax 2006   Market discount arises when a debt instrument purchased in the secondary market has decreased in value since its issue date, generally because of an increase in interest rates. Turbotax 2006 An OID debt instrument has market discount if your adjusted basis in the debt instrument immediately after you acquired it (usually its purchase price) was less than the debt instrument's issue price plus the total OID that accrued before you acquired it. Turbotax 2006 The market discount is the difference between the issue price plus accrued OID and your adjusted basis. Turbotax 2006 Premium. Turbotax 2006   A debt instrument is purchased at a premium if its adjusted basis immediately after purchase is greater than the total of all amounts payable on the debt instrument after the purchase date, other than qualified stated interest. Turbotax 2006 The premium is the excess of the adjusted basis over the payable amounts. Turbotax 2006 See Publication 550 for information on the tax treatment of bond premium. Turbotax 2006 Qualified stated interest. Turbotax 2006   In general, qualified stated interest is stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually over the term of the debt instrument at a single fixed rate. Turbotax 2006 Stated redemption price at maturity. Turbotax 2006   A debt instrument's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on the debt instrument other than qualified stated interest. Turbotax 2006 Yield to maturity (YTM). Turbotax 2006   In general, the YTM is the discount rate that, when used in figuring the present value of all principal and interest payments, produces an amount equal to the issue price of the debt instrument. Turbotax 2006 The YTM is generally shown on the face of the debt instrument or in the literature you receive from your broker. Turbotax 2006 If you do not have this information, consult your broker, tax advisor, or the issuer. Turbotax 2006 Debt Instruments on the OID List The OID list on the IRS website can be used by brokers and other middlemen to prepare information returns. Turbotax 2006 If you own a listed debt instrument, you generally should not rely on the information in the OID list to determine (or compare) the OID to be reported on your tax return. Turbotax 2006 The OID amounts listed are figured without reference to the price or date at which you acquired the debt instrument. Turbotax 2006 For information about determining the OID to be reported on your tax return, see the instructions for figuring OID under Information for Owners of OID Debt Instruments, later. Turbotax 2006 The following discussions explain what information is contained in each section of the list. Turbotax 2006 Section I. Turbotax 2006   This section contains publicly offered, long-term debt instruments. Turbotax 2006 Section I-A: Corporate Debt Instruments Issued Before 1985. Turbotax 2006 Section I-B: Corporate Debt Instruments Issued After 1984. Turbotax 2006 Section I-C: Inflation-Indexed Debt Instruments. Turbotax 2006 For each publicly offered debt instrument in Section I, the list contains the following information. Turbotax 2006 The name of the issuer. Turbotax 2006 The Committee on Uniform Security Identification Procedures (CUSIP) number. Turbotax 2006 The issue date. Turbotax 2006 The maturity date. Turbotax 2006 The issue price expressed as a percent of principal or of stated redemption price at maturity. Turbotax 2006 The annual stated or coupon interest rate. Turbotax 2006 (This rate is shown as 0. Turbotax 2006 00 if no annual interest payments are provided. Turbotax 2006 ) The yield to maturity will be added to Section I-B for bonds issued after December 31, 2006. Turbotax 2006 The total OID accrued up to January 1 of a calendar year. Turbotax 2006 (This information is not available for every instrument. Turbotax 2006 ) For long-term debt instruments issued after July 1, 1982, the daily OID for the accrual periods falling in a calendar year and a subsequent year. Turbotax 2006 The total OID per $1,000 of principal or maturity value for a calendar year and a subsequent year. Turbotax 2006 Section II. Turbotax 2006   This section contains stripped coupons and principal components of U. Turbotax 2006 S. Turbotax 2006 Treasury and Government-Sponsored Enterprise debt instruments. Turbotax 2006 These stripped components are available through the Department of the Treasury's Separate Trading of Registered Interest and Principal of Securities (STRIPS) program and government-sponsored enterprises such as the Resolution Funding Corporation. Turbotax 2006 This section also includes debt instruments backed by U. Turbotax 2006 S. Turbotax 2006 Treasury securities that represent ownership interests in those securities. Turbotax 2006   The obligations listed in Section II are arranged by maturity date. Turbotax 2006 The amounts listed are the total OID for a calendar year per $1,000 of redemption price. Turbotax 2006 Section III. Turbotax 2006   This section contains short-term discount obligations. Turbotax 2006 Section III-A: Short-Term U. Turbotax 2006 S. Turbotax 2006 Treasury Bills. Turbotax 2006 Section III-B: Federal Home Loan Banks. Turbotax 2006 Section III-C: Federal National Mortgage Association. Turbotax 2006 Section III-D: Federal Farm Credit Banks. Turbotax 2006 Section III-E: Federal Home Loan Mortgage Corporation. Turbotax 2006 Section III-F: Federal Agricultural Mortgage Corporation. Turbotax 2006    Information that supplements Section III-A is available on the Internet at http://www. Turbotax 2006 treasurydirect. Turbotax 2006 gov/tdhome. Turbotax 2006 htm. Turbotax 2006   The short-term obligations listed in this section are arranged by maturity date. Turbotax 2006 For each obligation, the list contains the CUSIP number, maturity date, issue date, issue price (expressed as a percent of principal), and discount to be reported as interest for a calendar year per $1,000 of redemption price. Turbotax 2006 Brokers and other middlemen should rely on the issue price information in Section III only if they are unable to determine the price actually paid by the owner. Turbotax 2006 Debt Instruments Not on the OID List The list of debt instruments discussed earlier does not contain the following items. Turbotax 2006 U. Turbotax 2006 S. Turbotax 2006 savings bonds. Turbotax 2006 Certificates of deposit and other face-amount certificates issued at a discount, including syndicated certificates of deposit. Turbotax 2006 Obligations issued by tax-exempt organizations. Turbotax 2006 OID debt instruments that matured or were entirely called by the issuer before the tables were posted on the IRS website. Turbotax 2006 Mortgage-backed securities and mortgage participation certificates. Turbotax 2006 Long-term OID debt instruments issued before May 28, 1969. Turbotax 2006 Short-term obligations, other than the obligations listed in Section III. Turbotax 2006 Debt instruments issued at a discount by states or their political subdivisions. Turbotax 2006 REMIC regular interests and CDOs. Turbotax 2006 Commercial paper and banker's acceptances issued at a discount. Turbotax 2006 Obligations issued at a discount by individuals. Turbotax 2006 Foreign obligations not traded in the United States and obligations not issued in the United States. Turbotax 2006 Information for Brokers and Other Middlemen The following discussions contain specific instructions for brokers and middlemen who hold or redeem a debt instrument for the owner. Turbotax 2006 In general, you must file a Form 1099 for the debt instrument if the interest or OID to be included in the owner's income for a calendar year totals $10 or more. Turbotax 2006 You also must file a Form 1099 if you were required to deduct and withhold tax, even if the interest or OID is less than $10. Turbotax 2006 See Backup Withholding, later. Turbotax 2006 If you must file a Form 1099, furnish a copy to the owner of the debt instrument by January 31 in the year it is due. Turbotax 2006 File all your Forms 1099 with the IRS, accompanied by Form 1096, by February 28 in the year it is due (March 31 if you file electronically). Turbotax 2006 Electronic payee statements. Turbotax 2006   You can issue Form 1099-OID electronically with the consent of the recipient. Turbotax 2006 More information. Turbotax 2006   For more information, including penalties for failure to file (or furnish) required information returns or statements, see the General Instructions for Certain Information Returns (Forms 1098, 1099, 3921, 3922, 5498, and W-2G) for the appropriate calendar year. Turbotax 2006 Short-Term Obligations Redeemed at Maturity If you redeem a short-term discount obligation for the owner at maturity, you must report the discount as interest on Form 1099-INT. Turbotax 2006 To figure the discount, use the purchase price shown on the owner's copy of the purchase confirmation receipt or similar record, or the price shown in your transaction records. Turbotax 2006 If you sell the obligation for the owner before maturity, you must file Form 1099-B to reflect the gross proceeds to the seller. Turbotax 2006 Do not report the accrued discount to the date of sale on either Form 1099-INT or Form 1099-OID. Turbotax 2006 If the owner's purchase price cannot be determined, figure the discount as if the owner had purchased the obligation at its original issue price. Turbotax 2006 A special rule is used to determine the original issue price for information reporting on U. Turbotax 2006 S. Turbotax 2006 Treasury bills (T-bills) listed in Section III-A. Turbotax 2006 Under this rule, you treat as the original issue price of the T-bill the noncompetitive (weighted average of accepted auction bids) discount price for the longest-maturity T-bill maturing on the same date as the T-bill being redeemed. Turbotax 2006 This noncompetitive discount price is the issue price (expressed as a percent of principal) shown in Section III-A. Turbotax 2006 A similar rule is used to figure the discount on short-term discount obligations issued by the organizations listed in Section III-B through Section III-F. Turbotax 2006 Example 1. Turbotax 2006 There are 13-week and 26-week T-bills maturing on the same date as the T-bill being redeemed. Turbotax 2006 The price actually paid by the owner cannot be established by owner or middleman records. Turbotax 2006 You treat as the issue price of the T-bill the noncompetitive discount price (expressed as a percent of principal) shown in Section III-A for a 26-week bill maturing on the same date as the T-bill redeemed. Turbotax 2006 The interest you report on Form 1099-INT is the OID (per $1,000 of principal) shown in Section III-A for that obligation. Turbotax 2006 Long-Term Debt Instruments If you hold a long-term OID debt instrument as a nominee for the true owner, you generally must file Form 1099-OID. Turbotax 2006 For this purpose, you can rely on Section I of the OID list to determine the following information. Turbotax 2006 Whether a debt instrument has OID. Turbotax 2006 The OID to be reported on the Form 1099-OID. Turbotax 2006 In general, you must report OID on publicly offered, long-term debt instruments listed in Section I. Turbotax 2006 You also can report OID on other long-term debt instruments. Turbotax 2006 Form 1099-OID. Turbotax 2006   On Form 1099-OID for a calendar year show the following information. Turbotax 2006 Box 1. Turbotax 2006 The OID for the actual dates the owner held the debt instruments during a calendar year. Turbotax 2006 To determine this amount, see Figuring OID, next. Turbotax 2006 Box 2. Turbotax 2006 The qualified stated interest paid or credited during the calendar year. Turbotax 2006 Interest reported here is not reported on Form 1099-INT. Turbotax 2006 The qualified stated interest on Treasury inflation-protected securities may be reported on Form 1099-INT in box 3 instead. Turbotax 2006 Box 3. Turbotax 2006 Any interest or principal forfeited because of an early withdrawal that the owner can deduct from gross income. Turbotax 2006 Do not reduce the amounts in boxes 1 and 2 by the forfeiture. Turbotax 2006 Box 4. Turbotax 2006 Any backup withholding for this debt instrument. Turbotax 2006 Box 7. Turbotax 2006 The CUSIP number, if any. Turbotax 2006 If there is no CUSIP number, give a description of the debt instrument, including the abbreviation for the stock exchange, the abbreviation used by the stock exchange for the issuer, the coupon rate, and the year of maturity (for example, NYSE XYZ 12. Turbotax 2006 50 2006). Turbotax 2006 If the issuer of the debt instrument is other than the payer, show the name of the issuer in this box. Turbotax 2006 Box 8. Turbotax 2006 The OID on a U. Turbotax 2006 S. Turbotax 2006 Treasury obligation for the part of the year the owner held the debt instrument. Turbotax 2006 Box 9. Turbotax 2006 Investment expenses passed on to holders of a single-class REMIC. Turbotax 2006 Boxes 10-12. Turbotax 2006 Use to report any state income tax withheld for this debt instrument. Turbotax 2006 Figuring OID. Turbotax 2006   You can determine the OID on a long-term debt instrument by using either of the following. Turbotax 2006 Section I of the OID list. Turbotax 2006 The income tax regulations. Turbotax 2006 Using Section I. Turbotax 2006   If the owner held the debt instrument for the entire calendar year, report the OID shown in Section I for the calendar year. Turbotax 2006 Because OID is listed for each $1,000 of stated redemption price at maturity, you must adjust the listed amount to reflect the debt instrument's actual stated redemption price at maturity. Turbotax 2006 For example, if the debt instrument's stated redemption price at maturity is $500, report one-half the listed OID. Turbotax 2006   If the owner held the debt instrument for less than the entire calendar year, figure the OID to report as follows. Turbotax 2006 Look up the daily OID for the first accrual period in the calendar year during which the owner held the debt instrument. Turbotax 2006 Multiply the daily OID by the number of days the owner held the debt instrument during that accrual period. Turbotax 2006 Repeat steps (1) and (2) for any remaining accrual periods for the year during which the owner held the debt instrument. Turbotax 2006 Add the results in steps (2) and (3) to determine the owner's OID per $1,000 of stated redemption price at maturity. Turbotax 2006 If necessary, adjust the OID in (4) to reflect the debt instrument's stated redemption price at maturity. Turbotax 2006 Report the result on Form 1099-OID in box 1. Turbotax 2006 Using the income tax regulations. Turbotax 2006   Instead of using Section I to figure OID, you can use the regulations under sections 1272 through 1275 of the Internal Revenue Code. Turbotax 2006 For example, under the regulations, you can use monthly accrual periods in figuring OID for a debt instrument issued after April 3, 1994, that provides for monthly payments. Turbotax 2006 (If you use Section I-B, the OID is figured using 6-month accrual periods. Turbotax 2006 )   For a general explanation of the rules for figuring OID under the regulations, see Figuring OID on Long-Term Debt Instruments under Information for Owners of OID Debt Instruments, later. Turbotax 2006 Certificates of Deposit If you hold a bank certificate of deposit (CD) as a nominee, you must determine whether the CD has OID and any OID includible in the income of the owner. Turbotax 2006 You must file an information return showing the reportable interest and OID, if any, on the CD. Turbotax 2006 These rules apply whether or not you sold the CD to the owner. Turbotax 2006 Report OID on a CD in the same way as OID on other debt instruments. Turbotax 2006 See Short-Term Obligations Redeemed at Maturity and Long-Term Debt Instruments, earlier. Turbotax 2006 Bearer Bonds and Coupons If a coupon from a bearer bond is presented to you for collection before the bond matures, you generally must report the interest on Form 1099-INT. Turbotax 2006 However, do not report the interest if either of the following apply. Turbotax 2006 You hold the bond as a nominee for the true owner. Turbotax 2006 The payee is a foreign person. Turbotax 2006 See Payments to foreign person under Backup Withholding, later. Turbotax 2006 Because you cannot assume the presenter of the coupon also owns the bond, you should not report OID on the bond on Form 1099-OID. Turbotax 2006 The coupon may have been “stripped” (separated) from the bond and separately purchased. Turbotax 2006 However, if a long-term bearer bond on the OID list is presented to you for redemption upon call or maturity, you should prepare a Form 1099-OID showing the OID for that calendar year, as well as any coupon interest payments collected at the time of redemption. Turbotax 2006 Backup Withholding If you report OID on Form 1099-OID or interest on Form 1099-INT for a calendar year, you may be required to apply backup withholding to the reportable payment at a rate of 28%. Turbotax 2006 The backup withholding is deducted at the time a cash payment is made. Turbotax 2006 See Pub. Turbotax 2006 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), for more information. Turbotax 2006 Backup withholding generally applies in the following situations. Turbotax 2006 The payee does not give you a taxpayer identification number (TIN). Turbotax 2006 The IRS notifies you that the payee gave an incorrect TIN. Turbotax 2006 The IRS notifies you that the payee is subject to backup withholding due to payee underreporting. Turbotax 2006 For debt instruments acquired after 1983: The payee does not certify, under penalties of perjury, that he or she is not subject to backup withholding under (3), or The payee does not certify, under penalties of perjury, that the TIN given is correct. Turbotax 2006 However, for short-term discount obligations (other than government obligations), bearer bonds and coupons, and U. Turbotax 2006 S. Turbotax 2006 savings bonds, backup withholding applies only if the payee does not give you a TIN or gives you an obviously incorrect number for a TIN. Turbotax 2006 Short-term obligations. Turbotax 2006   Backup withholding applies to OID on a short-term obligation only when the OID is paid at maturity. Turbotax 2006 However, backup withholding applies to any interest payable before maturity when the interest is paid or credited. Turbotax 2006   If the owner of a short-term obligation at maturity is not the original owner and can establish the purchase price of the obligation, the amount subject to backup withholding must be determined by treating the purchase price as the issue price. Turbotax 2006 However, you can choose to disregard that price if it would require significant manual intervention in the computer or recordkeeping system used for the obligation. Turbotax 2006 If the purchase price of a listed obligation is not established or is disregarded, you must use the issue price shown in Section III. Turbotax 2006 Long-term obligations. Turbotax 2006   If no cash payments are made on a long-term obligation before maturity, backup withholding applies only at maturity. Turbotax 2006 The amount subject to backup withholding is the OID includible in the owner's gross income for the calendar year when the obligation matures. Turbotax 2006 The amount to be withheld is limited to the cash paid. Turbotax 2006 Registered long-term obligations with cash payments. Turbotax 2006   If a registered long-term obligation has cash payments before maturity, backup withholding applies when a cash payment is made. Turbotax 2006 The amount subject to backup withholding is the total of the qualified stated interest (defined earlier under Definitions) and OID includible in the owner's gross income for the calendar year when the payment is made. Turbotax 2006 If more than one cash payment is made during the year, the OID subject to withholding for the year must be allocated among the expected cash payments in the ratio that each bears to the total of the expected cash payments. Turbotax 2006 For any payment, the required withholding is limited to the cash paid. Turbotax 2006 Payee not the original owner. Turbotax 2006   If the payee is not the original owner of the obligation, the OID subject to backup withholding is the OID includible in the gross income of all owners during the calendar year (without regard to any amount paid by the new owner at the time of transfer). Turbotax 2006 The amount subject to backup withholding at maturity of a listed obligation must be determined using the issue price shown in Section I. Turbotax 2006 Bearer long-term obligations with cash payments. Turbotax 2006   If a bearer long-term obligation has cash payments before maturity, backup withholding applies when the cash payments are made. Turbotax 2006 For payments before maturity, the amount subject to withholding is the qualified stated interest (defined earlier under Definitions) includible in the owner's gross income for the calendar year. Turbotax 2006 For a payment at maturity, the amount subject to withholding is only the total of any qualified stated interest paid at maturity and the OID includible in the owner's gross income for the calendar year when the obligation matures. Turbotax 2006 The required withholding at maturity is limited to the cash paid. Turbotax 2006 Sales and redemptions. Turbotax 2006   If you report the gross proceeds from a sale, exchange, or redemption of a debt instrument on Form 1099-B for a calendar year, you may be required to withhold 28% of the amount reported. Turbotax 2006 Backup withholding applies in the following situations. Turbotax 2006 The payee does not give you a TIN. Turbotax 2006 The IRS notifies you that the payee gave an incorrect TIN. Turbotax 2006 For debt instruments held in an account opened after 1983, the payee does not certify, under penalties of perjury, that the TIN given is correct. Turbotax 2006 Payments outside the United States to U. Turbotax 2006 S. Turbotax 2006 person. Turbotax 2006   The requirements for backup withholding and information reporting apply to payments of OID and interest made outside the United States to a U. Turbotax 2006 S. Turbotax 2006 person, a controlled foreign corporation, or a foreign person at least 50% of whose income for the preceding 3-year period is effectively connected with the conduct of a U. Turbotax 2006 S. Turbotax 2006 trade or business. Turbotax 2006 Payments to foreign person. Turbotax 2006   The following discussions explain the rules for backup withholding and information reporting on payments to foreign persons. Turbotax 2006 U. Turbotax 2006 S. Turbotax 2006 -source amount. Turbotax 2006   Backup withholding and information reporting are not required for payments of U. Turbotax 2006 S. Turbotax 2006 -source OID, interest, or proceeds from a sale or redemption of an OID instrument if the payee has given you proof (generally the appropriate Form W-8 or an acceptable substitute) that the payee is a foreign person. Turbotax 2006 A U. Turbotax 2006 S. Turbotax 2006 resident is not a foreign person. Turbotax 2006 For proof of the payee's foreign status, you can rely on the appropriate Form W-8 or on documentary evidence for payments made outside the United States to an offshore account or, in case of broker proceeds, a sale effected outside the United States. Turbotax 2006 Receipt of the appropriate Form W-8 does not relieve you from information reporting and backup withholding if you actually know the payee is a U. Turbotax 2006 S. Turbotax 2006 person. Turbotax 2006   For information about the 28% withholding tax that may apply to payments of U. Turbotax 2006 S. Turbotax 2006 -source OID or interest to foreign persons, see Publication 515. Turbotax 2006 Foreign-source amount. Turbotax 2006   Backup withholding and information reporting are not required for payments of foreign-source OID and interest made outside the United States. Turbotax 2006 However, if the payments are made inside the United States, the requirements for backup withholding and information reporting will apply unless the payee has given you the appropriate Form W-8 or acceptable substitute as proof that the payee is a foreign person. Turbotax 2006 More information. Turbotax 2006   For more information about backup withholding and information reporting on foreign-source amounts or payments to foreign persons, see Regulations section 1. Turbotax 2006 6049-5. Turbotax 2006 Information for Owners of OID Debt Instruments This section is for persons who prepare their own tax returns. Turbotax 2006 It discusses the income tax rules for figuring and reporting OID on long-term debt instruments. Turbotax 2006 It also includes a similar discussion for stripped bonds and coupons, such as zero coupon bonds available through the Department of the Treasury's STRIPS program and government-sponsored enterprises such as the Resolution Funding Corporation. Turbotax 2006 However, the information provided does not cover every situation. Turbotax 2006 More information can be found in the regulations under sections 1271 through 1275 of the Internal Revenue Code. Turbotax 2006 Including OID in income. Turbotax 2006   Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer. Turbotax 2006 Exceptions. Turbotax 2006   The rules for including OID in income as it accrues generally do not apply to the following debt instruments. Turbotax 2006 U. Turbotax 2006 S. Turbotax 2006 savings bonds. Turbotax 2006 Tax-exempt obligations. Turbotax 2006 (However, see Tax-Exempt Bonds and Coupons, later. Turbotax 2006 ) Obligations issued by individuals before March 2, 1984. Turbotax 2006 Loans of $10,000 or less between individuals who are not in the business of lending money. Turbotax 2006 (The dollar limit includes outstanding prior loans by the lender to the borrower. Turbotax 2006 ) This exception does not apply if a principal purpose of the loan is to avoid any federal tax. Turbotax 2006   See chapter 1 of Publication 550 for information about the rules for these and other types of discounted debt instruments, such as short-term and market discount obligations. Turbotax 2006 Publication 550 also discusses rules for holders of REMIC interests and CDOs. Turbotax 2006 De minimis rule. Turbotax 2006   You can treat OID as zero if the total OID on a debt instrument is less than one-fourth of 1% (. Turbotax 2006 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. Turbotax 2006 Debt instruments with de minimis OID are not listed in this publication. Turbotax 2006 There are special rules to determine the de minimis amount in the case of debt instruments that provide for more than one payment of principal. Turbotax 2006 Also, the de minimis rules generally do not apply to tax-exempt obligations. Turbotax 2006 Example 2. Turbotax 2006 You bought at issuance a 10-year debt instrument with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. Turbotax 2006 One-fourth of 1% of $1,000 (the stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. Turbotax 2006 Under the de minimis rule, you can treat the OID as zero because the $20 discount is less than $25. Turbotax 2006 Example 3. Turbotax 2006 Assume the same facts as Example 2, except the debt instrument was issued at $950. Turbotax 2006 You must report part of the $50 OID each year because it is more than $25. Turbotax 2006 Choice to report all interest as OID. Turbotax 2006   Generally, you can choose to treat all interest on a debt instrument acquired after April 3, 1994, as OID and include it in gross income by using the constant yield method. Turbotax 2006 See Constant yield method under Debt Instruments Issued After 1984, later, for more information. Turbotax 2006   For this choice, interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount, and unstated interest, as adjusted by any amortizable bond premium or acquisition premium. Turbotax 2006 For more information, see Regulations section 1. Turbotax 2006 1272-3. Turbotax 2006 Purchase after date of original issue. Turbotax 2006   A debt instrument you purchased after the date of original issue may have premium, acquisition premium, or market discount. Turbotax 2006 If so, the OID reported to you on Form 1099-OID may have to be adjusted. Turbotax 2006 For more information, see Showing an OID adjustment under How To Report OID, later. Turbotax 2006 The following rules generally do not apply to contingent payment debt instruments. Turbotax 2006 Adjustment for premium. Turbotax 2006   If your debt instrument (other than an inflation-indexed debt instrument) has premium, do not report any OID as ordinary income. Turbotax 2006 Your adjustment is the total OID shown on your Form 1099-OID. Turbotax 2006 Adjustment for acquisition premium. Turbotax 2006   If your debt instrument has acquisition premium, reduce the OID you report. Turbotax 2006 Your adjustment is the difference between the OID shown on your Form 1099-OID and the reduced OID amount figured using the rules explained later under Figuring OID on Long-Term Debt Instruments. Turbotax 2006 Adjustment for market discount. Turbotax 2006   If your debt instrument has market discount that you choose to include in income currently, increase the OID you report. Turbotax 2006 Your adjustment is the accrued market discount for the year. Turbotax 2006 See Market Discount Bonds in chapter 1 of Publication 550 for information on how to figure accrued market discount and include it in your income currently and for other information about market discount bonds. Turbotax 2006 If you choose to use the constant yield method to figure accrued market discount, also see Figuring OID on Long-Term Debt Instruments, later. Turbotax 2006 The constant yield method of figuring accrued OID, explained in those discussions under Constant yield method, is also used to figure accrued market discount. Turbotax 2006 For more information concerning premium or market discount on an inflation-indexed debt instrument, see Regulations section 1. Turbotax 2006 1275-7. Turbotax 2006 Sale, exchange, or redemption. Turbotax 2006   Generally, you treat your gain or loss from the sale, exchange, or redemption of a discounted debt instrument as a capital gain or loss if you held the debt instrument as a capital asset. Turbotax 2006 If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. Turbotax 2006 Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040). Turbotax 2006   Your gain or loss is the difference between the amount you realized on the sale, exchange, or redemption and your basis in the debt instrument. Turbotax 2006 Your basis, generally, is your cost increased by the OID you have included in income each year you held it. Turbotax 2006 In general, to determine your gain or loss on a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. Turbotax 2006   See chapter 4 of Publication 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments. Turbotax 2006 Example 4. Turbotax 2006 Larry, a calendar year taxpayer, bought a corporate debt instrument at original issue for $86,235. Turbotax 2006 00 on November 1 of Year 1. Turbotax 2006 The 15-year debt instrument matures on October 31 of Year 16 at a stated redemption price of $100,000. Turbotax 2006 The debt instrument provides for semiannual payments of interest at 10%. Turbotax 2006 Assume the debt instrument is a capital asset in Larry's hands. Turbotax 2006 The debt instrument has $13,765. Turbotax 2006 00 of OID ($100,000 stated redemption price at maturity minus $86,235. Turbotax 2006 00 issue price). Turbotax 2006 Larry sold the debt instrument for $90,000 on November 1 of Year 4. Turbotax 2006 Including the OID he will report for the period he held the debt instrument in Year 4, Larry has included $4,556. Turbotax 2006 00 of OID in income and has increased his basis by that amount to $90,791. Turbotax 2006 00. Turbotax 2006 Larry has realized a loss of $791. Turbotax 2006 00. Turbotax 2006 All of Larry's loss is capital loss. Turbotax 2006 Form 1099-OID The issuer of the debt instrument (or your broker, if you purchased or held the debt instrument through a broker) should give you a copy of Form 1099-OID or a similar statement if the accrued OID for the calendar year is $10 or more and the term of the debt instrument is more than 1 year. Turbotax 2006 Form 1099-OID shows all OID income in box 1 except OID on a U. Turbotax 2006 S. Turbotax 2006 Treasury obligation, which is shown in box 8. Turbotax 2006 It also shows, in box 2, any qualified stated interest you must include in income. Turbotax 2006 (However, any qualified stated interest on Treasury inflation-protected securities can be reported on Form 1099-INT in box 3. Turbotax 2006 ) A copy of Form 1099-OID will be sent to the IRS. Turbotax 2006 Do not attach your copy to your tax return. Turbotax 2006 Keep it for your records. Turbotax 2006 If you are required to file a tax return and you receive Form 1099-OID showing taxable amounts, you must report these amounts on your return. Turbotax 2006 A 20% accuracy-related penalty may be charged for underpayment of tax due to either negligence or disregard of rules and regulations or substantial understatement of tax. Turbotax 2006 Form 1099-OID not received. Turbotax 2006   If you held an OID debt instrument for a calendar year but did not receive a Form 1099-OID, refer to the discussions under Figuring OID on Long-Term Debt Instruments, later, for information on the OID you must report. Turbotax 2006 Refiguring OID. Turbotax 2006   You must refigure the OID shown on Form 1099-OID, in box 1 or box 8, to determine the proper amount to include in income if one of the following applies. Turbotax 2006 You bought the debt instrument at a premium or at an acquisition premium. Turbotax 2006 The debt instrument is a stripped bond or coupon (including zero coupon bonds backed by U. Turbotax 2006 S. Turbotax 2006 Treasury securities). Turbotax 2006 The debt instrument is a contingent payment or inflation-indexed debt instrument. Turbotax 2006 See the discussions under Figuring OID on Long-Term Debt Instruments or Figuring OID on Stripped Bonds and Coupons, later, for the specific computations. Turbotax 2006 Refiguring interest. Turbotax 2006   If you disposed of a debt instrument or acquired it from another holder between interest dates, see the discussion under Bonds Sold Between Interest Dates in chapter 1 of Publication 550 for information about refiguring the interest shown on Form 1099-OID in box 2. Turbotax 2006 Nominee. Turbotax 2006   If you are the holder of an OID debt instrument and you receive a Form 1099-OID that shows your taxpayer identification number and includes amounts belonging to another person, you are considered a “nominee. Turbotax 2006 ” You must file another Form 1099-OID for each actual owner, showing the OID for the owner. Turbotax 2006 Show the owner of the debt instrument as the “recipient” and you as the “payer. Turbotax 2006 ”   Complete Form 1099-OID and Form 1096 and file the forms with the Internal Revenue Service Center for your area. Turbotax 2006 You must also give a copy of the Form 1099-OID to the actual owner. Turbotax 2006 However, you are not required to file a nominee return to show amounts belonging to your spouse. Turbotax 2006 See the Form 1099 instructions for more information. Turbotax 2006   When preparing your tax return, follow the instructions under Showing an OID adjustment in the next discussion. Turbotax 2006 How To Report OID Generally, you report your taxable interest and OID income on the interest line of Form 1040EZ, Form 1040A, or Form 1040. Turbotax 2006 Form 1040 or Form 1040A required. Turbotax 2006   You must use Form 1040 or Form 1040A (you cannot use Form 1040EZ) under either of the following conditions. Turbotax 2006 You received a Form 1099-OID as a nominee for the actual owner. Turbotax 2006 Your total interest and OID income for the year was more than $1,500. Turbotax 2006 Form 1040 required. Turbotax 2006   You must use Form 1040 (you cannot use Form 1040A or Form 1040EZ) if you are reporting more or less OID than the amount shown on Form 1099-OID, other than because you are a nominee. Turbotax 2006 For example, if you paid a premium or an acquisition premium when you purchased the debt instrument, you must use Form 1040 because you will report less OID than shown on Form 1099-OID. Turbotax 2006 Also, you must use Form 1040 if you were charged an early withdrawal penalty. Turbotax 2006 Where to report. Turbotax 2006   List each payer's name (if a brokerage firm gave you a Form 1099, list the brokerage firm as the payer) and the amount received from each payer on Form 1040A, Schedule B, Part I, line 1, or Form 1040, Schedule B, line 1. Turbotax 2006 Include all OID and periodic interest shown on any Form 1099-OID, boxes 1, 2, and 8, you received for the tax year. Turbotax 2006 Also include any other OID and interest income for which you did not receive a Form 1099. Turbotax 2006 Showing an OID adjustment. Turbotax 2006   If you use Form 1040 to report more or less OID than shown on Form 1099-OID, list the full OID on Schedule B, Part I, line 1, and follow the instructions under 1 or 2, next. Turbotax 2006   If you use Form 1040A to report the OID shown on a Form 1099-OID you received as a nominee for the actual owner, list the full OID on Schedule B, Part I, line 1 and follow the instructions under 1. Turbotax 2006 If the OID, as adjusted, is less than the amount shown on Form 1099-OID, show the adjustment as follows. Turbotax 2006 Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Turbotax 2006 Below the subtotal, write “Nominee Distribution” or “OID Adjustment” and show the OID you are not required to report. Turbotax 2006 Subtract that OID from the subtotal and enter the result on line 2. Turbotax 2006 If the OID, as adjusted, is more than the amount shown on Form 1099-OID, show the adjustment as follows. Turbotax 2006 Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Turbotax 2006 Below the subtotal, write “OID Adjustment” and show the additional OID. Turbotax 2006 Add that OID to the subtotal and enter the result on line 2. Turbotax 2006 Figuring OID on Long-Term Debt Instruments How you figure the OID on a long-term debt instrument depends on the date it was issued. Turbotax 2006 It also may depend on the type of the debt instrument. Turbotax 2006 There are different rules for each of the following debt instruments. Turbotax 2006 Corporate debt instruments issued after 1954 and before May 28, 1969, and government debt instruments issued after 1954 and before July 2, 1982. Turbotax 2006 Corporate debt instruments issued after May 27, 1969, and before July 2, 1982. Turbotax 2006 Debt instruments issued after July 1, 1982, and before 1985. Turbotax 2006 Debt instruments issued after 1984 (other than debt instruments described in (5) and (6)). Turbotax 2006 Contingent payment debt instruments issued after August 12, 1996. Turbotax 2006 Inflation-indexed debt instruments (including Treasury inflation-protected securities) issued after January 5, 1997. Turbotax 2006 Zero coupon bonds. Turbotax 2006   The rules for figuring OID on zero coupon bonds backed by U. Turbotax 2006 S. Turbotax 2006 Treasury securities are discussed under Figuring OID on Stripped Bonds and Coupons, later. Turbotax 2006 Corporate Debt Instruments Issued After 1954 and Before May 28, 1969, and Government Debt Instruments Issued After 1954 and Before July 2, 1982 If you hold these debt instruments as capital assets, you include OID in income only in the year the debt instrument is sold, exchanged, or redeemed, and only if you have a gain. Turbotax 2006 The OID, which is taxed as ordinary income, generally equals the following amount. Turbotax 2006   number of full months you held the debt instrument  number of full months from date of original issue to date of maturity X original issue discount The balance of the gain is capital gain. Turbotax 2006 If there is a loss on the sale of the debt instrument, the entire loss is a capital loss and no OID is reported. Turbotax 2006 Corporate Debt Instruments Issued After May 27, 1969, and Before July 2, 1982 If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments. Turbotax 2006 For information about showing the correct OID on your tax return, see the discussion under How To Report OID, earlier. Turbotax 2006 Your basis in the debt instrument is increased by the OID you include in income. Turbotax 2006 Form 1099-OID. Turbotax 2006   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Turbotax 2006 However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Turbotax 2006 See Reduction for acquisition premium, later. Turbotax 2006 If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www. Turbotax 2006 irs. Turbotax 2006 gov/pub1212 by clicking the link under Recent Developments. Turbotax 2006 Form 1099-OID not received. Turbotax 2006    The OID listed is for each $1,000 of redemption price. Turbotax 2006 You must adjust the listed amount if your debt instrument has a different principal amount. Turbotax 2006 For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Turbotax 2006   If you held the debt instrument the entire year, use the OID shown in Section I-A for a calendar year. Turbotax 2006 (If your debt instrument is not listed in Section I-A, consult the issuer for information about the issue price and the OID that accrued for that year. Turbotax 2006 ) If you did not hold the debt instrument the entire year, figure your OID using the following method. Turbotax 2006 Divide the OID shown by 12. Turbotax 2006 Multiply the result in (1) by the number of complete and partial months (for example, 6½ months) you held the debt instrument during a calendar year. Turbotax 2006 This is the OID to include in income unless you paid an acquisition premium. Turbotax 2006 The reduction for acquisition premium is discussed next. Turbotax 2006 Reduction for acquisition premium. Turbotax 2006   If you bought the debt instrument at an acquisition premium, figure the OID to include in income as follows. Turbotax 2006 Divide the total OID on the debt instrument by the number of complete months, and any part of a month, from the date of original issue to the maturity date. Turbotax 2006 This is the monthly OID. Turbotax 2006 Subtract from your cost the issue price and the accumulated OID from the date of issue to the date of purchase. Turbotax 2006 (If the result is zero or less, stop here. Turbotax 2006 You did not pay an acquisition premium. Turbotax 2006 ) Divide the amount figured in (2) by the number of complete months, and any part of a month, from the date of your purchase to the maturity date. Turbotax 2006 Subtract the amount figured in (3) from the amount figured in (1). Turbotax 2006 This is the OID to include in income for each month you hold the debt instrument during the year. Turbotax 2006 Transfers during the month. Turbotax 2006   If you buy or sell a debt instrument on any day other than the same day of the month as the date of original issue, the ratable monthly portion of OID for the month of sale is divided between the seller and the buyer according to the number of days each held the debt instrument. Turbotax 2006 Your holding period for this purpose begins the day you acquire the debt instrument and ends the day before you dispose of it. Turbotax 2006 Debt Instruments Issued After July 1, 1982, and Before 1985 If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments and increase your basis by the amount included. Turbotax 2006 For information about showing the correct OID on your tax return, see How To Report OID, earlier. Turbotax 2006 Form 1099-OID. Turbotax 2006   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Turbotax 2006 However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Turbotax 2006 See Constant yield method and the discussions on acquisition premium that follow, later. Turbotax 2006 If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www. Turbotax 2006 irs. Turbotax 2006 gov/pub1212 by clicking the link under Recent Developments. Turbotax 2006 Form 1099-OID not received. Turbotax 2006    The OID listed is for each $1,000 of redemption price. Turbotax 2006 You must adjust the listed amount if your debt instrument has a different principal amount. Turbotax 2006 For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Turbotax 2006   If you held the debt instrument the entire year, use the OID shown in Section I-A. Turbotax 2006 (If your instrument is not listed in Section I-A, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year. Turbotax 2006 ) If you did not hold the debt instrument the entire year, figure your OID using either of the following methods. Turbotax 2006 Method 1. Turbotax 2006    Divide the total OID for a calendar year by 365 (366 for leap years). Turbotax 2006 Multiply the result in (1) by the number of days you held the debt instrument during that particular year. Turbotax 2006  This computation is an approximation and may result in a slightly higher OID than Method 2. Turbotax 2006 Method 2. Turbotax 2006    Look up the daily OID for the first accrual period you held the debt instrument during a calendar year. Turbotax 2006 (See Accrual period under Constant yield method, next. Turbotax 2006 ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Turbotax 2006 If you held the debt instrument for part of both accrual periods, repeat (1) and (2) for the second accrual period. Turbotax 2006 Add the results of (2) and (3). Turbotax 2006 This is the OID to include in income, unless you paid an acquisition premium. Turbotax 2006 (The reduction for acquisition premium is discussed later. Turbotax 2006 ) Constant yield method. Turbotax 2006   This discussion shows how to figure OID on debt instruments issued after July 1, 1982, and before 1985, using a constant yield method. Turbotax 2006 OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Turbotax 2006   Figure the OID allocable to any accrual period as follows. Turbotax 2006 Multiply the adjusted issue price at the beginning of the accrual period by the debt instrument's yield to maturity. Turbotax 2006 Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Turbotax 2006 Accrual period. Turbotax 2006   An accrual period for any OID debt instrument issued after July 1, 1982, and before 1985 is each 1-year period beginning on the date of the issue of the obligation and each anniversary thereafter, or the shorter period to maturity for the last accrual period. Turbotax 2006 Your tax year will usually include parts of two accrual periods. Turbotax 2006 Daily OID. Turbotax 2006   The OID for any accrual period is allocated equally to each day in the accrual period. Turbotax 2006 You must include in income the sum of the OID amounts for each day you hold the debt instrument during the year. Turbotax 2006 If your tax year includes parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period. Turbotax 2006 Figuring daily OID. Turbotax 2006   The daily OID for the initial accrual period is figured using the following formula. Turbotax 2006   (ip × ytm) − qsi     p   ip = issue price ytm = yield to maturity qsi = qualified stated interest p = number of days in accrual period         The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price. Turbotax 2006 Reduction for acquisition premium on debt instruments purchased before July 19, 1984. Turbotax 2006   If you bought the debt instrument at an acquisition premium before July 19, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Turbotax 2006 Figure the daily acquisition premium by dividing the total acquisition premium by the number of days in the period beginning on your purchase date and ending on the day before the date of maturity. Turbotax 2006 Reduction for acquisition premium on debt instruments purchased after July 18, 1984. Turbotax 2006   If you bought the debt instrument at an acquisition premium after July 18, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Turbotax 2006 However, the method of figuring the daily acquisition premium is different from the method described in the preceding discussion. Turbotax 2006 To figure the daily acquisition premium under this method, multiply the daily OID by the following fraction. Turbotax 2006 The numerator is the acquisition premium. Turbotax 2006 The denominator is the total OID remaining for the debt instrument after your purchase date. Turbotax 2006 Section I-A is available at www. Turbotax 2006 irs. Turbotax 2006 gov/pub1212 and clicking the link under Recent Developments. Turbotax 2006 Using Section I-A to figure accumulated OID. Turbotax 2006   If you bought your corporate debt instrument in a calendar year or the subsequent year, you can figure the accumulated OID to the date of purchase by adding the following amounts. Turbotax 2006 The amount from the “Total OID to January 1, YYYY” column for your debt instrument. Turbotax 2006 The OID from January 1 of a calendar year to the date of purchase, figured as follows. Turbotax 2006 Multiply the daily OID for the first accrual period in the calendar year by the number of days from January 1 to the date of purchase, or the end of the accrual period if the debt instrument was purchased in the second or third accrual period. Turbotax 2006 Multiply the daily OID for each subsequent accrual period by the number of days in the period to the date of purchase or the end of the accrual period, whichever applies. Turbotax 2006 Add the amounts figured in (2a) and (2b). Turbotax 2006 Debt Instruments Issued After 1984 If you hold debt instruments issued after 1984, you must report part of the OID in gross income each year that you own the debt instruments. Turbotax 2006 You must include the OID in gross income whether or not you hold the debt instrument as a capital asset. Turbotax 2006 Your basis in the debt instrument is increased by the OID you include in income. Turbotax 2006 For information about showing the correct OID on your tax return, see How To Report OID, earlier. Turbotax 2006 Form 1099-OID. Turbotax 2006   You should receive a Form 1099-OID showing OID for the part of a calendar year you held the debt instrument. Turbotax 2006 However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Turbotax 2006 See Constant yield method and Reduction for acquisition premium, later. Turbotax 2006   You may also need to refigure the OID for a contingent payment or inflation-indexed debt instrument on which the amount reported on Form 1099-OID is inaccurate. Turbotax 2006 See Contingent Payment Debt Instruments or Inflation-Indexed Debt Instruments, later. Turbotax 2006 If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-B available at www. Turbotax 2006 irs. Turbotax 2006 gov/pub1212 by clicking the link under Recent Developments. Turbotax 2006 Form 1099-OID not received. Turbotax 2006   The OID listed is for each $1,000 of redemption price. Turbotax 2006 You must adjust the listed amount if your debt instrument has a different principal amount. Turbotax 2006 For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Turbotax 2006   Use the OID shown in Section I-B for a calendar year if you held the debt instrument the entire year. Turbotax 2006 (If your debt instrument is not listed in Section I-B, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year. Turbotax 2006 ) If you did not hold the debt instrument the entire year, figure your OID as follows. Turbotax 2006 Look up the daily OID for the first accrual period in which you held the debt instrument during a calendar year. Turbotax 2006 (See Accrual period under Constant yield method, later. Turbotax 2006 ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Turbotax 2006 Repeat (1) and (2) for any remaining accrual periods in which you held the debt instrument. Turbotax 2006 Add the results of (2) and (3). Turbotax 2006 This is the OID to include in income for that year, unless you paid an acquisition premium. Turbotax 2006 (The reduction for acquisition premium is discussed later. Turbotax 2006 ) Tax-exempt bond. Turbotax 2006   If you own a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. Turbotax 2006 You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. Turbotax 2006 In general, use the rules that follow to determine your OID. Turbotax 2006 Constant yield method. Turbotax 2006   This discussion shows how to figure OID on debt instruments issued after 1984 using a constant yield method. Turbotax 2006 (The special rules that apply to contingent payment debt instruments and inflation-indexed debt instruments are explained later. Turbotax 2006 ) OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Turbotax 2006   Figure the OID allocable to any accrual period as follows. Turbotax 2006 Multiply the adjusted issue price at the beginning of the accrual period by a fraction. Turbotax 2006 The numerator of the fraction is the debt instrument's yield to maturity and the denominator is the number of accrual periods per year. Turbotax 2006 The yield must be stated appropriately taking into account the length of the particular accrual period. Turbotax 2006 Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Turbotax 2006 Accrual period. Turbotax 2006   For debt instruments issued after 1984 and before April 4, 1994, an accrual period is each 6-month period that ends on the day that corresponds to the stated maturity date of the debt instrument or the date 6 months before that date. Turbotax 2006 For example, a debt instrument maturing on March 31 has accrual periods that end on September 30 and March 31 of each calendar year. Turbotax 2006 Any short period is included as the first accrual period. Turbotax 2006   For debt instruments issued after April 3, 1994, accrual periods may be of any length and may vary in length over the term of the debt instrument, as long as each accrual period is no longer than 1 year and all payments are made on the first or last day of an accrual period. Turbotax 2006 However, the OID listed for these debt instruments in Section I-B has been figured using 6-month accrual periods. Turbotax 2006 Daily OID. Turbotax 2006   The OID for any accrual period is allocated equally to each day in the accrual period. Turbotax 2006 Figure the amount to include in income by adding the OID for each day you hold the debt instrument during the year. Turbotax 2006 Since your tax year will usually include parts of two or more accrual periods, you must include the proper daily OID for each accrual period. Turbotax 2006 If your debt instrument has 6-month accrual periods, your tax year will usually include one full 6-month accrual period and parts of two other 6-month periods. Turbotax 2006 Figuring daily OID. Turbotax 2006   The daily OID for the initial accrual period is figured using the following formula. Turbotax 2006   (ip × ytm/n) − qsi     p   ip = issue price ytm = yield to maturity n = number of accrual periods in 1 year qsi = qualified stated interest p = number of days in accrual period       The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price. Turbotax 2006 Example 5. Turbotax 2006 On January 1 of Year 1, you bought a 15-year, 10% debt instrument of A Corporation at original issue for $86,235. Turbotax 2006 17. Turbotax 2006 According to the prospectus, the debt instrument matures on December 31 of Year 15 at a stated redemption price of $100,000. Turbotax 2006 The yield to maturity is 12%, compounded semiannually. Turbotax 2006 The debt instrument provides for qualified stated interest payments of $5,000 on June 30 and December 31 of each calendar year. Turbotax 2006 The accrual periods are the 6-month periods ending on each of these dates. Turbotax 2006 The number of days for the first accrual period (January 1 through June 30) is 181 days (182 for leap years). Turbotax 2006 The daily OID for the first accrual period is figured as follows. Turbotax 2006   ($86,235. Turbotax 2006 17 x . Turbotax 2006 12/2) – $5,000     181 days     = $174. Turbotax 2006 11020 = $. Turbotax 2006 96193   181           The adjusted issue price at the beginning of the second accrual period is the issue price plus the OID previously includible in income ($86,235. Turbotax 2006 17 + $174. Turbotax 2006 11), or $86,409. Turbotax 2006 28. Turbotax 2006 The number of days for the second accrual period (July 1 through December 31) is 184 days. Turbotax 2006 The daily OID for the second accrual period is figured as follows. Turbotax 2006   ($86,409. Turbotax 2006 28 x . Turbotax 2006 12/2) – $5,000     184 days     = $184. Turbotax 2006 55681 = $1. Turbotax 2006 00303   184 Since the first and second accrual periods coincide exactly with your tax year, you include in income for Year 1 the OID allocable to the first two accrual periods, $174. Turbotax 2006 11 ($. Turbotax 2006 95665 × 182 days) plus $184. Turbotax 2006 56 ($1. Turbotax 2006 00303 × 184 days), or $358. Turbotax 2006 67. Turbotax 2006 Add the OID to the $10,000 interest you report on your income tax return for Year 1. Turbotax 2006 Example 6. Turbotax 2006 Assume the same facts as in Example 5, except that you bought the debt instrument at original issue on May 1 of Year 1, with a maturity date of April 30, Year 16. Turbotax 2006 Also, the interest payment dates are October 31 and April 30 of each calendar year. Turbotax 2006 The accrual periods are the 6-month periods ending on each of these dates. Turbotax 2006 The number of days for the first accrual period (May 1 through October 31) is 184 days. Turbotax 2006 The daily OID for the first accrual period is figured as follows. Turbotax 2006   ($86,235. Turbotax 2006 17 x . Turbotax 2006 12/2) – $5,000     184 days     = $174. Turbotax 2006 11020 = $. Turbotax 2006 94625   184           The number of days for the second accrual period (November 1 through April 30) is 181 days (182 for leap years). Turbotax 2006 The daily OID for the second accrual period is figured as follows. Turbotax 2006   ($86,409. Turbotax 2006 28 x . Turbotax 2006 12/2) – $5,000     181 days     = $184. Turbotax 2006 55681 = $1. Turbotax 2006 01965   181 If you hold the debt instrument through the end of Year 1, you must include $236. Turbotax 2006 31 of OID in income. Turbotax 2006 This is $174. Turbotax 2006 11 ($. Turbotax 2006 94625 × 184 days) for the period May 1 through October 31 plus $62. Turbotax 2006 20 ($1. Turbotax 2006 01965 × 61 days) for the period November 1 through December 31. Turbotax 2006 The OID is added to the $5,000 interest income paid on October 31 of Year 1. Turbotax 2006 Your basis in the debt instrument is increased by the OID you include in income. Turbotax 2006 On January 1 of Year 2, your basis in the A Corporation debt instrument is $86,471. Turbotax 2006 48 ($86,235. Turbotax 2006 17 + $236. Turbotax 2006 31). Turbotax 2006 Short first accrual period. Turbotax 2006   You may have to make adjustments if a debt instrument has a short first accrual period. Turbotax 2006 For example, a debt instrument with 6-month accrual periods that is issued on February 15 and matures on October 31 has a short first accrual period that ends April 30. Turbotax 2006 (The remaining accrual periods begin on May 1 and November 1. Turbotax 2006 ) For this short period, figure the daily OID as described earlier, but adjust the yield for the length of the short accrual period. Turbotax 2006 You may use any reasonable compounding method in determining OID for a short period. Turbotax 2006 Examples of reasonable compounding methods include continuous compounding and monthly compounding (that is, simple interest within a month). Turbotax 2006 Consult your tax advisor for more information about making this computation. Turbotax 2006   The OID for the final accrual period is the difference between the amount payable at maturity (other than a payment of qualified stated interest) and the adjusted issue price at the beginning of the final accrual period. Turbotax 2006 Reduction for acquisition premium. Turbotax 2006   If you bought the debt instrument at an acquisition premium, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Turbotax 2006 To figure the daily acquisition premium, multiply the daily OID by the following fraction. Turbotax 2006 The numerator is the acquisition premium. Turbotax 2006 The denominator is the total OID remaining for the debt instrument after your purchase date. Turbotax 2006 Example 7. Turbotax 2006 Assume the same facts as in Example 6, except that you bought the debt instrument on November 1 of Year 1 for $87,000, after its original issue on May 1 of Year 1. Turbotax 2006 The adjusted issue price on November 1 of Year 1 is $86,409. Turbotax 2006 28 ($86,235. Turbotax 2006 17 + $174. Turbotax 2006 11). Turbotax 2006 In this case, you paid an acquisition premium of $590. Turbotax 2006 72 ($87,000 − $86,409. Turbotax 2006 28). Turbotax 2006 The daily OID for the accrual period November 1 through April 30, reduced for the acquisition premium, is figured as follows. Turbotax 2006 1) Daily OID on date of purchase (2nd accrual period) $1. Turbotax 2006 01965*  2)  Acquisition premium $590. Turbotax 2006 72    3)  Total OID remaining after purchase date ($13,764. Turbotax 2006 83 − $174. Turbotax 2006 11) 13,590. Turbotax 2006 72   4) Line 2 ÷ line 3 . Turbotax 2006 04346  5)  Line 1 × line 4 . Turbotax 2006 04432  6)  Daily OID reduced for the acquisition premium. Turbotax 2006 Line 1 − line 5 $0. Turbotax 2006 97533  * As shown in Example 6. Turbotax 2006 The total OID to include in income for Year 1 is $59. Turbotax 2006 50 ($. Turbotax 2006 97533 × 61 days). Turbotax 2006 Contingent Payment Debt Instruments This discussion shows how to figure OID on a contingent payment debt instrument issued after August 12, 1996, that was issued for cash or publicly traded property. Turbotax 2006 In general, a contingent payment debt instrument provides for one or more payments that are contingent as to timing or amount. Turbotax 2006 If you hold a contingent payment bond, you must report OID as it accrues each year. Turbotax 2006 Because the actual payments on a contingent payment debt instrument cannot be known in advance, issuers and holders cannot use the constant yield method (discussed earlier under Debt Instruments Issued After 1984) without making certain assumptions about the payments on the debt instrument. Turbotax 2006 To figure OID accruals on contingent payment debt instruments, holders and issuers must use the noncontingent bond method. Turbotax 2006 Noncontingent bond method. Turbotax 2006    Under this method, the issuer must compute a comparable yield for the debt instrument and, based on this yield, construct a projected payment schedule for the instrument, which includes a projected fixed amount for each contingent payment. Turbotax 2006 In general, holders and issuers accrue OID on this projected payment schedule using the constant yield method that applies to fixed payment debt instruments. Turbotax 2006 When a contingent payment differs from the projected fixed amount, the holders and issuers make adjustments to their OID accruals. Turbotax 2006 If the actual contingent payment is larger than expected, both the issuer and the holder increase their OID accruals. Turbotax 2006 If the actual contingent payment is smaller than expected, holders and issuers generally decrease their OID accruals. Turbotax 2006 Form 1099-OID. Turbotax 2006   The amount shown on Form 1099-OID in box 1 you receive for a contingent payment debt instrument may not be the correct amount to include in income. Turbotax 2006 For example, the amount may not be correct if the contingent payment was different from the projected amount. Turbotax 2006 If the amount in box 1 is not correct, you must figure the OID to report on your return under the following rules. Turbotax 2006 For information on showing an OID adjustment on your tax return, see How To Report OID, earlier. Turbotax 2006 Figuring OID. Turbotax 2006   To figure OID on a contingent payment debt instrument, you need to know the “comparable yield” and “projected payment schedule” of the debt instrument. Turbotax 2006 The issuer must make these available to you. Turbotax 2006 Comparable yield. Turbotax 2006   The comparable yield generally is the yield at which the issuer would issue a fixed rate debt instrument with terms and conditions similar to those of the contingent payment debt instrument. Turbotax 2006 The comparable yield is determined as of the debt instrument's issue date. Turbotax 2006 Projected payment schedule. Turbotax 2006   The projected payment schedule for a contingent payment debt instrument includes all fixed payments due under the instrument and a projected fixed amount for each contingent payment. Turbotax 2006 The projected payment schedule is created by the issuer as of the debt instrument's issue date. Turbotax 2006 It is used to determine the issuer's and holder's interest accruals and adjustments. Turbotax 2006 Steps for figuring OID. Turbotax 2006   Figure the OID on a contingent payment debt instrument in two steps. Turbotax 2006 Figure the OID using the constant yield method (discussed earlier under Debt Instruments Issued After 1984 ) that applies to fixed payment debt instruments. Turbotax 2006 Use the comparable yield as the yield to maturity. Turbotax 2006 In general, use the projected payment schedule to determine the instrument's adjusted issue price at the beginning of each accrual period (other than the initial period). Turbotax 2006 Do not treat any amount payable as qualified stated interest. Turbotax 2006 Adjust the OID in (1) to account for actual contingent payments. Turbotax 2006 If the contingent payment is greater than the projected fixed amount, you have a positive adjustment. Turbotax 2006 If the contingent payment is less than the projected fixed amount, you have a negative adjustment. Turbotax 2006 Net positive adjustment. Turbotax 2006   A net positive adjustment exists for a tax year when the total of any positive adjustments described in (2) above for the tax year is more than the total of any negative adjustments for the tax year. Turbotax 2006 Treat a net positive adjustment as additional OID for the tax year. Turbotax 2006 Net negative adjustment. Turbotax 2006   A net negative adjustment exists for a tax year when the total of any negative adjustments described in (2) above for the tax year is more than the total of any positive adjustments for the tax year. Turbotax 2006 Use a net negative adjustment to offset OID on the debt instrument for the tax year. Turbotax 2006 If the net negative adjustment is more than the OID on the debt instrument for the tax year, you can claim the difference as an ordinary loss. Turbotax 2006 However, the amount you can claim as an ordinary loss is limited to the OID on the debt instrument you included in income in prior tax years. Turbotax 2006 You must carry forward any net negative adjustment that is more than the total OID for the tax year and prior tax years and treat it as a negative adjustment in the next tax year. Turbotax 2006 Basis adjustments. Turbotax 2006   In general, increase your basis in a contingent payment debt instrument by the OID included in income. Turbotax 2006 Your basis, however, is not affected by any negative or positive adjustments. Turbotax 2006 Decrease your basis by any noncontingent payment received and the projected contingent payment scheduled to be received. Turbotax 2006 Treatment of gain or loss on sale or exchange. Turbotax 2006   If you sell a contingent payment debt instrument at a gain, your gain is ordinary income (interest income), even if you hold the debt instrument as a capital asset. Turbotax 2006 If you sell a contingent payment debt instrument at a loss, your loss is an ordinary loss to the extent of your prior OID accruals on the debt instrument. Turbotax 2006 If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss. Turbotax 2006 See Regulations section 1. Turbotax 2006 1275-4 for exceptions to these rules. Turbotax 2006 Premium, acquisition premium, and market discount. Turbotax 2006   The rules for accruing premium, acquisition premium, and market discount do not apply to a contingent payment debt instrument. Turbotax 2006 See Regulations section 1. Turbotax 2006 1275-4 to determine how to account for these items. Turbotax 2006 Inflation-Indexed Debt Instruments This discussion shows how you figure OID on certain inflation-indexed debt instruments issued after January 5, 1997. Turbotax 2006 An inflation-indexed debt instrument is generally a debt instrument on which the payments are adjusted for inflation and d
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The Turbotax 2006

Turbotax 2006 4. Turbotax 2006   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. Turbotax 2006 S. Turbotax 2006 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. Turbotax 2006 Useful Items - You may want to see: Publication 519 U. Turbotax 2006 S. Turbotax 2006 Tax Guide for Aliens 570 Tax Guide for Individuals With Income from U. Turbotax 2006 S. Turbotax 2006 Possessions 596 Earned Income Credit (EIC) Form (and Instructions) 1040X Amended U. Turbotax 2006 S. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 If you are a U. Turbotax 2006 S. Turbotax 2006 citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. Turbotax 2006 However, you may qualify to exclude from income up to $97,600 of your foreign earnings. Turbotax 2006 In addition, you can exclude or deduct certain foreign housing amounts. Turbotax 2006 See Foreign Earned Income Exclusion and Foreign Housing Exclusion and Deduction, later. Turbotax 2006 You also may be entitled to exclude from income the value of meals and lodging provided to you by your employer. Turbotax 2006 See Exclusion of Meals and Lodging, later. Turbotax 2006 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. Turbotax 2006 Your tax home must be in a foreign country. Turbotax 2006 You must have foreign earned income. Turbotax 2006 You must be one of the following. Turbotax 2006 A U. Turbotax 2006 S. Turbotax 2006 citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Turbotax 2006 A U. Turbotax 2006 S. Turbotax 2006 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. Turbotax 2006 A U. Turbotax 2006 S. Turbotax 2006 citizen or a U. Turbotax 2006 S. Turbotax 2006 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. Turbotax 2006 See Publication 519 to find out if you are a U. Turbotax 2006 S. Turbotax 2006 resident alien for tax purposes and whether you keep that alien status when you temporarily work abroad. Turbotax 2006 If you are a nonresident alien married to a U. Turbotax 2006 S. Turbotax 2006 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. Turbotax 2006 For information on making the choice, see the discussion in chapter 1 under Nonresident Alien Spouse Treated as a Resident . Turbotax 2006 Waiver of minimum time requirements. Turbotax 2006   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. Turbotax 2006 This is fully explained under Waiver of Time Requirements , later. Turbotax 2006   See Figure 4-A and information in this chapter to determine if you are eligible to claim either exclusion or the deduction. Turbotax 2006 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. Turbotax 2006 Bona fide residence and physical presence are explained later. Turbotax 2006 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. Turbotax 2006 Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. Turbotax 2006 Having a “tax home” in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 However, your abode is not necessarily in the United States while you are temporarily in the United States. Turbotax 2006 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. Turbotax 2006 “Abode” has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. Turbotax 2006 It does not mean your principal place of business. Turbotax 2006 “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home. Turbotax 2006 ” The location of your abode often will depend on where you maintain your economic, family, and personal ties. Turbotax 2006 Example 1. Turbotax 2006 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. Turbotax 2006 You return to your family residence in the United States during your off periods. Turbotax 2006 You are considered to have an abode in the United States and do not satisfy the tax home test in the foreign country. Turbotax 2006 You cannot claim either of the exclusions or the housing deduction. Turbotax 2006 Example 2. Turbotax 2006 For several years, you were a marketing executive with a producer of machine tools in Toledo, Ohio. Turbotax 2006 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. Turbotax 2006 Before you left, you distributed business cards showing your business and home addresses in London. Turbotax 2006 You kept ownership of your home in Toledo but rented it to another family. Turbotax 2006 You placed your car in storage. Turbotax 2006 In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London. Turbotax 2006 Shortly after moving, you leased a car and you and your spouse got British driving licenses. Turbotax 2006 Your entire family got library cards for the local public library. Turbotax 2006 You and your spouse opened bank accounts with a London bank and secured consumer credit. Turbotax 2006 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. Turbotax 2006 Your abode is in London for the time you live there. Turbotax 2006 You satisfy the tax home test in the foreign country. Turbotax 2006 Please click here for the text description of the image. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 If you expect it to last for more than 1 year, it is indefinite. Turbotax 2006 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. Turbotax 2006 Once your expectation changes, it is indefinite. Turbotax 2006 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. Turbotax 2006 A foreign country includes any territory under the sovereignty of a government other than that of the United States. Turbotax 2006 The term “foreign country” includes the country's airspace and territorial waters, but not international waters and the airspace above them. Turbotax 2006 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. Turbotax 2006 The term “foreign country” does not include Antarctica or U. Turbotax 2006 S. Turbotax 2006 possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U. Turbotax 2006 S. Turbotax 2006 Virgin Islands, and Johnston Island. Turbotax 2006 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. Turbotax 2006 American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands Residence or presence in a U. Turbotax 2006 S. Turbotax 2006 possession does not qualify you for the foreign earned income exclusion. Turbotax 2006 You may, however, qualify for an exclusion of your possession income on your U. Turbotax 2006 S. Turbotax 2006 return. Turbotax 2006 American Samoa. Turbotax 2006   There is a possession exclusion available to individuals who are bona fide residents of American Samoa for the entire tax year. Turbotax 2006 Gross income from sources within American Samoa may be eligible for this exclusion. Turbotax 2006 Income that is effectively connected with the conduct of a trade or business within American Samoa also may be eligible for this exclusion. Turbotax 2006 Use Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, to figure the exclusion. Turbotax 2006 Guam and the Commonwealth of the Northern Mariana Islands. Turbotax 2006   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. Turbotax 2006   For more information, see Publication 570. Turbotax 2006 Puerto Rico and U. Turbotax 2006 S. Turbotax 2006 Virgin Islands Residents of Puerto Rico and the U. Turbotax 2006 S. Turbotax 2006 Virgin Islands cannot claim the foreign earned income exclusion or the foreign housing exclusion. Turbotax 2006 Puerto Rico. Turbotax 2006   Generally, if you are a U. Turbotax 2006 S. Turbotax 2006 citizen who is a bona fide resident of Puerto Rico for the entire tax year, you are not subject to U. Turbotax 2006 S. Turbotax 2006 tax on income from Puerto Rican sources. Turbotax 2006 This does not include amounts paid for services performed as an employee of the United States. Turbotax 2006 However, you are subject to U. Turbotax 2006 S. Turbotax 2006 tax on your income from sources outside Puerto Rico. Turbotax 2006 In figuring your U. Turbotax 2006 S. Turbotax 2006 tax, you cannot deduct expenses allocable to income not subject to tax. Turbotax 2006 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. Turbotax 2006 You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either: A U. Turbotax 2006 S. Turbotax 2006 citizen, or A U. Turbotax 2006 S. Turbotax 2006 resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect. Turbotax 2006 You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 Bona fide residence. Turbotax 2006   To meet the bona fide residence test, you must have established a bona fide residence in a foreign country. Turbotax 2006   Your bona fide residence is not necessarily the same as your domicile. Turbotax 2006 Your domicile is your permanent home, the place to which you always return or intend to return. Turbotax 2006 Example. Turbotax 2006 You could have your domicile in Cleveland, Ohio, and a bona fide residence in Edinburgh, Scotland, if you intend to return eventually to Cleveland. Turbotax 2006 The fact that you go to Scotland does not automatically make Scotland your bona fide residence. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 You are clearly not a resident of Scotland in the first instance. Turbotax 2006 However, in the second, you are a resident because your stay in Scotland appears to be permanent. Turbotax 2006 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. Turbotax 2006 Determination. Turbotax 2006   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. Turbotax 2006   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. Turbotax 2006 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. Turbotax 2006 IRS cannot make this determination until you file Form 2555. Turbotax 2006 Statement to foreign authorities. Turbotax 2006   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. Turbotax 2006 Special agreements and treaties. Turbotax 2006   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. Turbotax 2006 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. Turbotax 2006 Example 1. Turbotax 2006 You are a U. Turbotax 2006 S. Turbotax 2006 citizen employed in the United Kingdom by a U. Turbotax 2006 S. Turbotax 2006 employer under contract with the U. Turbotax 2006 S. Turbotax 2006 Armed Forces. Turbotax 2006 You are not subject to the North Atlantic Treaty Status of Forces Agreement. Turbotax 2006 You may be a bona fide resident of the United Kingdom. Turbotax 2006 Example 2. Turbotax 2006 You are a U. Turbotax 2006 S. Turbotax 2006 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. Turbotax 2006 You are not a bona fide resident of the United Kingdom. Turbotax 2006 Example 3. Turbotax 2006 You are a U. Turbotax 2006 S. Turbotax 2006 citizen employed in Japan by a U. Turbotax 2006 S. Turbotax 2006 employer under contract with the U. Turbotax 2006 S. Turbotax 2006 Armed Forces. Turbotax 2006 You are subject to the agreement of the Treaty of Mutual Cooperation and Security between the United States and Japan. Turbotax 2006 Being subject to the agreement does not make you a bona fide resident of Japan. Turbotax 2006 Example 4. Turbotax 2006 You are a U. Turbotax 2006 S. Turbotax 2006 citizen employed as an “official” by the United Nations in Switzerland. Turbotax 2006 You are exempt from Swiss taxation on the salary or wages paid to you by the United Nations. Turbotax 2006 This does not prevent you from being a bona fide resident of Switzerland. Turbotax 2006 Effect of voting by absentee ballot. Turbotax 2006   If you are a U. Turbotax 2006 S. Turbotax 2006 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. Turbotax 2006   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. Turbotax 2006 Uninterrupted period including entire tax year. Turbotax 2006   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. Turbotax 2006 An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis. Turbotax 2006   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. Turbotax 2006 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. Turbotax 2006 Example 1. Turbotax 2006 You arrived with your family in Lisbon, Portugal, on November 1, 2011. Turbotax 2006 Your assignment is indefinite, and you intend to live there with your family until your company sends you to a new post. Turbotax 2006 You immediately established residence there. Turbotax 2006 You spent April of 2012 at a business conference in the United States. Turbotax 2006 Your family stayed in Lisbon. Turbotax 2006 Immediately following the conference, you returned to Lisbon and continued living there. Turbotax 2006 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. Turbotax 2006 Example 2. Turbotax 2006 Assume the same facts as in Example 1, except that you transferred back to the United States on December 13, 2012. Turbotax 2006 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. Turbotax 2006 You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test (discussed later). Turbotax 2006 Bona fide resident for part of a year. Turbotax 2006   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. Turbotax 2006 Your period of bona fide residence can include an entire tax year plus parts of 2 other tax years. Turbotax 2006 Example. Turbotax 2006 You were a bona fide resident of Singapore from March 1, 2011, through September 14, 2013. Turbotax 2006 On September 15, 2013, you returned to the United States. Turbotax 2006 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. Turbotax 2006 Reassignment. Turbotax 2006   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. Turbotax 2006 Example 1. Turbotax 2006 You were a resident of Pakistan from October 1, 2012, through November 30, 2013. Turbotax 2006 On December 1, 2013, you and your family returned to the United States to wait for an assignment to another foreign country. Turbotax 2006 Your household goods also were returned to the United States. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test, discussed later. Turbotax 2006 Example 2. Turbotax 2006 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. Turbotax 2006 On December 1, 2013, you and your family returned to the United States for a month's vacation. Turbotax 2006 On January 2, 2014, you arrived in Turkey for your new assignment. Turbotax 2006 Because you did not interrupt your bona fide residence abroad, you meet the bona fide residence test. Turbotax 2006 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. Turbotax 2006 The 330 days do not have to be consecutive. Turbotax 2006 Any U. Turbotax 2006 S. Turbotax 2006 citizen or resident alien can use the physical presence test to qualify for the exclusions and the deduction. Turbotax 2006 The physical presence test is based only on how long you stay in a foreign country or countries. Turbotax 2006 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. Turbotax 2006 330 full days. Turbotax 2006   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. Turbotax 2006 You can count days you spent abroad for any reason. Turbotax 2006 You do not have to be in a foreign country only for employment purposes. Turbotax 2006 You can be on vacation. Turbotax 2006   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. Turbotax 2006 Exception. Turbotax 2006   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. Turbotax 2006 See Waiver of Time Requirements, later. Turbotax 2006 Full day. Turbotax 2006   A full day is a period of 24 consecutive hours, beginning at midnight. Turbotax 2006 Travel. Turbotax 2006    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. Turbotax 2006 Example. Turbotax 2006 You leave the United States for France by air on June 10. Turbotax 2006 You arrive in France at 9:00 a. Turbotax 2006 m. Turbotax 2006 on June 11. Turbotax 2006 Your first full day of physical presence in France is June 12. Turbotax 2006 Passing over foreign country. Turbotax 2006   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. Turbotax 2006 Example. Turbotax 2006 You leave the United States by air at 9:30 a. Turbotax 2006 m. Turbotax 2006 on June 10 to travel to Kenya. Turbotax 2006 You pass over western Africa at 11:00 p. Turbotax 2006 m. Turbotax 2006 on June 10 and arrive in Kenya at 12:30 a. Turbotax 2006 m. Turbotax 2006 on June 11. Turbotax 2006 Your first full day in a foreign country is June 11. Turbotax 2006 Change of location. Turbotax 2006   You can move about from one place to another in a foreign country or to another foreign country without losing full days. Turbotax 2006 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. Turbotax 2006 Example 1. Turbotax 2006 You leave Ireland by air at 11:00 p. Turbotax 2006 m. Turbotax 2006 on July 6 and arrive in Sweden at 5:00 a. Turbotax 2006 m. Turbotax 2006 on July 7. Turbotax 2006 Your trip takes less than 24 hours and you lose no full days. Turbotax 2006 Example 2. Turbotax 2006 You leave Norway by ship at 10:00 p. Turbotax 2006 m. Turbotax 2006 on July 6 and arrive in Portugal at 6:00 a. Turbotax 2006 m. Turbotax 2006 on July 8. Turbotax 2006 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. Turbotax 2006 If you remain in Portugal, your next full day in a foreign country is July 9. Turbotax 2006 In United States while in transit. Turbotax 2006   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. Turbotax 2006 You are treated as traveling over areas not within any foreign country. Turbotax 2006    Please click here for the text description of the image. Turbotax 2006 Figure 4-B How to figure the 12-month period. Turbotax 2006   There are four rules you should know when figuring the 12-month period. Turbotax 2006 Your 12-month period can begin with any day of the month. Turbotax 2006 It ends the day before the same calendar day, 12 months later. Turbotax 2006 Your 12-month period must be made up of consecutive months. Turbotax 2006 Any 12-month period can be used if the 330 days in a foreign country fall within that period. Turbotax 2006 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. Turbotax 2006 You can choose the 12-month period that gives you the greatest exclusion. Turbotax 2006 In determining whether the 12-month period falls within a longer stay in the foreign country, 12-month periods can overlap one another. Turbotax 2006 Example 1. Turbotax 2006 You are a construction worker who works on and off in a foreign country over a 20-month period. Turbotax 2006 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. Turbotax 2006 Example 2. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 By overlapping the 12-month periods in this way, you meet the physical presence test for the whole 20-month period. Turbotax 2006 See Figure 4-B, on the previous page. Turbotax 2006 Waiver of Time Requirements Both the bona fide residence test and the physical presence test contain minimum time requirements. Turbotax 2006 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. Turbotax 2006 You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 U. Turbotax 2006 S. Turbotax 2006 Travel Restrictions If you are present in a foreign country in violation of U. Turbotax 2006 S. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 For 2013, the only country to which travel restrictions applied was Cuba. Turbotax 2006 The restrictions applied for the entire year. Turbotax 2006 However, individuals working at the U. Turbotax 2006 S. Turbotax 2006 Naval Base at Guantanamo Bay in Cuba are not in violation of U. Turbotax 2006 S. Turbotax 2006 law. Turbotax 2006 Personal service income earned by individuals at the base is eligible for the foreign earned income exclusion provided the other requirements are met. Turbotax 2006 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. Turbotax 2006 Foreign earned income generally is income you receive for services you perform during a period in which you meet both of the following requirements. Turbotax 2006 Your tax home is in a foreign country. Turbotax 2006 You meet either the bona fide residence test or the physical presence test. Turbotax 2006 To determine whether your tax home is in a foreign country, see Tax Home in Foreign Country, earlier. Turbotax 2006 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. Turbotax 2006 Foreign earned income does not include the following amounts. Turbotax 2006 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. Turbotax 2006 Pension or annuity payments you receive, including social security benefits (see Pensions and annuities, later). Turbotax 2006 Pay you receive as an employee of the U. Turbotax 2006 S. Turbotax 2006 Government. Turbotax 2006 (See U. Turbotax 2006 S. Turbotax 2006 Government Employees, later. Turbotax 2006 ) Amounts you include in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract. Turbotax 2006 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. Turbotax 2006 Payments you receive after the end of the tax year following the tax year in which you performed the services that earned the income. Turbotax 2006 Earned income. Turbotax 2006   This is pay for personal services performed, such as wages, salaries, or professional fees. Turbotax 2006 The list that follows classifies many types of income into three categories. Turbotax 2006 The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both. Turbotax 2006 For more information on earned and unearned income, see Earned and Unearned Income, later. Turbotax 2006 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. Turbotax 2006 Noncash income. Turbotax 2006   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. Turbotax 2006 Allowances or reimbursements. Turbotax 2006   Earned income includes allowances or reimbursements you receive, such as the following amounts. Turbotax 2006    Cost-of-living allowances. Turbotax 2006 Overseas differential. Turbotax 2006 Family allowance. Turbotax 2006 Reimbursement for education or education allowance. Turbotax 2006 Home leave allowance. Turbotax 2006 Quarters allowance. Turbotax 2006 Reimbursement for moving or moving allowance (unless excluded from income as discussed later in Reimbursement of employee expenses under Earned and Unearned Income). Turbotax 2006 Source of Earned Income The source of your earned income is the place where you perform the services for which you received the income. Turbotax 2006 Foreign earned income is income you receive for working in a foreign country. Turbotax 2006 Where or how you are paid has no effect on the source of the income. Turbotax 2006 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. Turbotax 2006 Example. Turbotax 2006 You are a U. Turbotax 2006 S. Turbotax 2006 citizen, a bona fide resident of Canada, and working as a mining engineer. Turbotax 2006 Your salary is $76,800 per year. Turbotax 2006 You also receive a $6,000 cost-of-living allowance, and a $6,000 education allowance. Turbotax 2006 Your employment contract did not indicate that you were entitled to these allowances only while outside the United States. Turbotax 2006 Your total income is $88,800. Turbotax 2006 You work a 5-day week, Monday through Friday. Turbotax 2006 After subtracting your vacation, you have a total of 240 workdays in the year. Turbotax 2006 You worked in the United States during the year for 6 weeks (30 workdays). Turbotax 2006 The following shows how to figure the part of your income that is for work done in Canada during the year. Turbotax 2006   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. Turbotax 2006 Earned and Unearned Income Earned income was defined earlier as pay for personal services performed. Turbotax 2006 Some types of income are not easily identified as earned or unearned income. Turbotax 2006 Some of these types of income are further explained here. Turbotax 2006 Income from a sole proprietorship or partnership. Turbotax 2006   Income from a business in which capital investment is an important part of producing the income may be unearned income. Turbotax 2006 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. Turbotax 2006 Capital a factor. Turbotax 2006   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. Turbotax 2006   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. Turbotax 2006 Because you do not have a net profit, the 30% limit does not apply. Turbotax 2006 Example 1. Turbotax 2006 You are a U. Turbotax 2006 S. Turbotax 2006 citizen and meet the bona fide residence test. Turbotax 2006 You invest in a partnership based in Cameroon that is engaged solely in selling merchandise outside the United States. Turbotax 2006 You perform no services for the partnership. Turbotax 2006 At the end of the tax year, your share of the net profits is $80,000. Turbotax 2006 The entire $80,000 is unearned income. Turbotax 2006 Example 2. Turbotax 2006 Assume that in Example 1 you spend time operating the business. Turbotax 2006 Your share of the net profits is $80,000; 30% of your share of the profits is $24,000. Turbotax 2006 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. Turbotax 2006 Capital not a factor. Turbotax 2006   If capital is not an income-producing factor and personal services produce the business income, the 30% rule does not apply. Turbotax 2006 The entire amount of business income is earned income. Turbotax 2006 Example. Turbotax 2006 You and Lou Green are management consultants and operate as equal partners in performing services outside the United States. Turbotax 2006 Because capital is not an income- producing factor, all the income from the partnership is considered earned income. Turbotax 2006 Income from a corporation. Turbotax 2006   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. Turbotax 2006 Any amount over what is considered a reasonable salary is unearned income. Turbotax 2006 Example 1. Turbotax 2006 You are a U. Turbotax 2006 S. Turbotax 2006 citizen and an officer and stockholder of a corporation in Honduras. Turbotax 2006 You perform no work or service of any kind for the corporation. Turbotax 2006 During the tax year you receive a $10,000 “salary” from the corporation. Turbotax 2006 The $10,000 clearly is not for personal services and is unearned income. Turbotax 2006 Example 2. Turbotax 2006 You are a U. Turbotax 2006 S. Turbotax 2006 citizen and work full time as secretary-treasurer of your corporation. Turbotax 2006 During the tax year you receive $100,000 as salary from the corporation. Turbotax 2006 If $80,000 is a reasonable allowance as pay for the work you did, then $80,000 is earned income. Turbotax 2006 Stock options. Turbotax 2006   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. Turbotax 2006   If your gain on the disposition of stock you got by exercising an option is treated as capital gain, your gain is unearned income. Turbotax 2006   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. Turbotax 2006 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. Turbotax 2006 Any part of the earned income that is due to work you did outside the United States is foreign earned income. Turbotax 2006   See Publication 525, Taxable and Nontaxable Income, for a discussion of the treatment of stock options. Turbotax 2006 Pensions and annuities. Turbotax 2006    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. Turbotax 2006 Royalties. Turbotax 2006   Royalties from the leasing of oil and mineral lands and patents generally are a form of rent or dividends and are unearned income. Turbotax 2006   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. Turbotax 2006 Rental income. Turbotax 2006   Generally, rental income is unearned income. Turbotax 2006 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. Turbotax 2006 Example. Turbotax 2006 Larry Smith, a U. Turbotax 2006 S. Turbotax 2006 citizen living in Australia, owns and operates a rooming house in Sydney. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 It is all unearned income. Turbotax 2006 Professional fees. Turbotax 2006   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. Turbotax 2006 Income of an artist. Turbotax 2006   Income you receive from the sale of paintings you created is earned income. Turbotax 2006 Scholarships and fellowships. Turbotax 2006   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. Turbotax 2006 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. Turbotax 2006    Certain scholarship and fellowship income may be exempt under other provisions. Turbotax 2006 See Publication 970, Tax Benefits for Education, chapter 1. Turbotax 2006 Use of employer's property or facilities. Turbotax 2006   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. Turbotax 2006 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. Turbotax 2006 Example. Turbotax 2006 You are privately employed and live in Japan all year. Turbotax 2006 You are paid a salary of $6,000 a month. Turbotax 2006 You live rent-free in a house provided by your employer that has a fair rental value of $3,000 a month. Turbotax 2006 The house is not provided for your employer's convenience. Turbotax 2006 You report on the calendar-year, cash basis. Turbotax 2006 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. Turbotax 2006 Reimbursement of employee expenses. Turbotax 2006   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. Turbotax 2006   The expenses for which you are reimbursed are not considered allocable (related) to your earned income. Turbotax 2006 If expenses and reimbursement are equal, there is nothing to allocate to excluded income. Turbotax 2006 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. Turbotax 2006 (See chapter 5. Turbotax 2006 ) 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. Turbotax 2006   These rules do not apply to the following individuals. Turbotax 2006 Straight-commission salespersons. Turbotax 2006 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. Turbotax 2006 Accountable plan. Turbotax 2006   An accountable plan is a reimbursement or allowance arrangement that includes all three of the following rules. Turbotax 2006 The expenses covered under the plan must have a business connection. Turbotax 2006 The employee must adequately account to the employer for these expenses within a reasonable period of time. Turbotax 2006 The employee must return any excess reimbursement or allowance within a reasonable period of time. Turbotax 2006 Reimbursement of moving expenses. Turbotax 2006   Reimbursement of moving expenses may be earned income. Turbotax 2006 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. Turbotax 2006 This section discusses reimbursements that must be included in earned income. Turbotax 2006 Publication 521, Moving Expenses, discusses additional rules that apply to moving expense deductions and reimbursements. Turbotax 2006   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. Turbotax 2006   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. Turbotax 2006 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. Turbotax 2006 Move from U. Turbotax 2006 S. Turbotax 2006 to foreign country. Turbotax 2006   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. Turbotax 2006 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. Turbotax 2006   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. Turbotax 2006 To figure the amount earned in the year of the move, multiply the reimbursement by a fraction. Turbotax 2006 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. Turbotax 2006   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. Turbotax 2006 The part earned in each year is figured as shown in the following example. Turbotax 2006 Example. Turbotax 2006 You are a U. Turbotax 2006 S. Turbotax 2006 citizen working in the United States. Turbotax 2006 You were told in October 2012 that you were being transferred to a foreign country. Turbotax 2006 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. Turbotax 2006 Your employer reimbursed you $2,000 in January 2013 for the part of the moving expense that you were not allowed to deduct. Turbotax 2006 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. Turbotax 2006 You figure the part of the reimbursement for services performed in the foreign country in 2012 by multiplying the total reimbursement by a fraction. Turbotax 2006 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. Turbotax 2006 The remaining part of the reimbursement is for services performed in the foreign country in 2013. Turbotax 2006 This computation is used only to determine when the reimbursement is considered earned. Turbotax 2006 You would include the amount of the reimbursement in income in 2013, the year you received it. Turbotax 2006 Move between foreign countries. Turbotax 2006   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. Turbotax 2006 Move to U. Turbotax 2006 S. Turbotax 2006   If you move to the United States, the moving expense reimbursement that you must include in income is generally considered to be U. Turbotax 2006 S. Turbotax 2006 source income. Turbotax 2006   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. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006   See the discussion under Move from U. Turbotax 2006 S. Turbotax 2006 to foreign country , earlier, to figure the amount of the includible reimbursement considered earned in the year of the move. Turbotax 2006 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. Turbotax 2006 Example. Turbotax 2006 You are a U. Turbotax 2006 S. Turbotax 2006 citizen employed in a foreign country. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 The fraction is the number of days of foreign residence during the year (90) divided by the number of days in the year (365). Turbotax 2006 The remaining part of the includible reimbursement is for services performed in the foreign country in 2012. Turbotax 2006 You report the amount of the includible reimbursement in 2013, the year you received it. Turbotax 2006    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. Turbotax 2006 Storage expense reimbursements. Turbotax 2006   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. Turbotax 2006 U. Turbotax 2006 S. Turbotax 2006 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. Turbotax 2006 This includes amounts paid from both appropriated and nonappropriated funds. Turbotax 2006 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. Turbotax 2006 United States Armed Forces exchanges. Turbotax 2006 Commissioned and noncommissioned officers' messes. Turbotax 2006 Armed Forces motion picture services. Turbotax 2006 Kindergartens on foreign Armed Forces installations. Turbotax 2006 Amounts paid by the United States or its agencies to persons who are not their employees may qualify for exclusion or deduction. Turbotax 2006 If you are a U. Turbotax 2006 S. Turbotax 2006 Government employee paid by a U. Turbotax 2006 S. Turbotax 2006 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. Turbotax 2006 S. Turbotax 2006 Government and does not qualify for exclusion or deduction. Turbotax 2006 If you have questions about whether you are an employee or an independent contractor, get Publication 15-A, Employer's Supplemental Tax Guide. Turbotax 2006 American Institute in Taiwan. Turbotax 2006   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. Turbotax 2006 If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U. Turbotax 2006 S. Turbotax 2006 tax up to the amount that equals tax-exempt allowances received by civilian employees of the U. Turbotax 2006 S. Turbotax 2006 Government. Turbotax 2006 Allowances. Turbotax 2006   Cost-of-living and foreign-area allowances paid under certain acts of Congress to U. Turbotax 2006 S. Turbotax 2006 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. Turbotax 2006 Post differentials are wages that must be included in gross income, regardless of the act of Congress under which they are paid. Turbotax 2006 More information. Turbotax 2006   Publication 516, U. Turbotax 2006 S. Turbotax 2006 Government Civilian Employees Stationed Abroad, has more information for U. Turbotax 2006 S. Turbotax 2006 Government employees abroad. Turbotax 2006 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. Turbotax 2006 The meals are furnished: On the business premises of your employer, and For the convenience of your employer. Turbotax 2006 The lodging is furnished: On the business premises of your employer, For the convenience of your employer, and As a condition of your employment. Turbotax 2006 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. Turbotax 2006 Amounts you do not include in income because of these rules are not foreign earned income. Turbotax 2006 If you receive a Form W-2, excludable amounts should not be included in the total reported in box 1 as wages. Turbotax 2006 Family. Turbotax 2006   Your family, for this purpose, includes only your spouse and your dependents. Turbotax 2006 Lodging. Turbotax 2006   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. Turbotax 2006 Business premises of employer. Turbotax 2006   Generally, the business premises of your employer is wherever you work. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 Convenience of employer. Turbotax 2006   Whether meals or lodging are provided for your employer's convenience must be determined from all the facts and circumstances. Turbotax 2006 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. Turbotax 2006   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. Turbotax 2006 Condition of employment. Turbotax 2006   Lodging is provided as a condition of employment if you must accept the lodging to properly carry out the duties of your job. Turbotax 2006 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. Turbotax 2006 Foreign camps. Turbotax 2006   If the lodging is in a camp located in a foreign country, the camp is considered part of your employer's business premises. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 Foreign earned income was defined earlier in this chapter. Turbotax 2006 You also can choose to exclude from your income a foreign housing amount. Turbotax 2006 This is explained later under Foreign Housing Exclusion. Turbotax 2006 If you choose to exclude a foreign housing amount, you must figure the foreign housing exclusion before you figure the foreign earned income exclusion. Turbotax 2006 Your foreign earned income exclusion is limited to your foreign earned income minus your foreign housing exclusion. Turbotax 2006 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. Turbotax 2006 This includes any expenses, losses, and other normally deductible items allocable to the excluded income. Turbotax 2006 For more information about deductions and credits, see chapter 5 . Turbotax 2006 Limit on Excludable Amount You may be able to exclude up to $97,600 of your foreign earned income in 2013. Turbotax 2006 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). Turbotax 2006 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. Turbotax 2006 You do not both need to meet the same test. Turbotax 2006 Together, you and your spouse can exclude as much as $195,200. Turbotax 2006 Paid in year following work. Turbotax 2006   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. Turbotax 2006 If you report your income on a cash basis, you report the income on your return for the year you receive it. Turbotax 2006 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. Turbotax 2006 For an exception to this general rule, see Year-end payroll period, later. Turbotax 2006 Example. Turbotax 2006 You were a bona fide resident of Brazil for all of 2012 and 2013. Turbotax 2006 You report your income on the cash basis. Turbotax 2006 In 2012, you were paid $84,200 for work you did in Brazil during that year. Turbotax 2006 You excluded all of the $84,200 from your income in 2012. Turbotax 2006 In 2013, you were paid $117,300 for your work in Brazil. Turbotax 2006 $18,800 was for work you did in 2012 and $98,500 was for work you did in 2013. Turbotax 2006 You can exclude $10,900 of the $18,800 from your income in 2013. Turbotax 2006 This is the $95,100 maximum exclusion in 2012 minus the $84,200 actually excluded that year. Turbotax 2006 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. Turbotax 2006 You can exclude $97,600 of the $98,500 you were paid for work you did in 2013 from your 2013 income. Turbotax 2006 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). Turbotax 2006 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). Turbotax 2006 Year-end payroll period. Turbotax 2006   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. Turbotax 2006 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. Turbotax 2006 The period for which the payment is made is a normal payroll period of your employer that regularly applies to you. Turbotax 2006 The payroll period includes the last day of your tax year (December 31 if you figure your taxes on a calendar-year basis). Turbotax 2006 The payroll period is not longer than 16 days. Turbotax 2006 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. Turbotax 2006 Example. Turbotax 2006 You are paid twice a month. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 Because all of the above conditions are met, the pay you received on January 1, 2013, is considered earned in 2013. Turbotax 2006 Income earned over more than 1 year. Turbotax 2006   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. Turbotax 2006 For example, a bonus may be based on work you did over several years. Turbotax 2006 You determine the amount of the bonus that is considered earned in a particular year in two steps. Turbotax 2006 Divide the bonus by the number of calendar months in the period when you did the work that resulted in the bonus. Turbotax 2006 Multiply the result of (1) by the number of months you did the work during the year. Turbotax 2006 This is the amount that is subject to the exclusion limit for that tax year. Turbotax 2006 Income received more than 1 year after it was earned. Turbotax 2006   You cannot exclude income you receive after the end of the year following the year you do the work to earn it. Turbotax 2006 Example. Turbotax 2006   You were a bona fide resident of Sweden for 2011, 2012, and 2013. Turbotax 2006 You report your income on the cash basis. Turbotax 2006 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. Turbotax 2006 You excluded all the income on your 2011 and 2012 returns. Turbotax 2006   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. Turbotax 2006 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. Turbotax 2006 You must include the $10,000 in income. Turbotax 2006 You can exclude all of the $82,000 received for work you did in 2013. Turbotax 2006 Community income. Turbotax 2006   The maximum exclusion applies separately to the earnings of spouses. Turbotax 2006 Ignore any community property laws when you figure your limit on the foreign earned income exclusion. Turbotax 2006 Part-year exclusion. Turbotax 2006   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. Turbotax 2006 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. Turbotax 2006   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. Turbotax 2006 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. Turbotax 2006 Example. Turbotax 2006 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. Turbotax 2006 You can exclude a maximum of 75/365 of $97,600, or $20,055, of your foreign earned income for 2013. Turbotax 2006 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. Turbotax 2006 Physical presence test. Turbotax 2006   Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. Turbotax 2006 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. Turbotax 2006 Example. Turbotax 2006 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. Turbotax 2006 You figure the maximum exclusion for 2012 as follows. Turbotax 2006 Beginning with June 1, 2012, count forward 330 full days. Turbotax 2006 Do not count the 16 days you spent in the United States. Turbotax 2006 The 330th day, May 12, 2013, is the last day of a 12-month period. Turbotax 2006 Count backward 12 months from May 11, 2013, to find the first day of this 12-month period, May 12, 2012. Turbotax 2006 This 12-month period runs from May 12, 2012, through May 11, 2013. Turbotax 2006 Count the total days during 2012 that fall within this 12-month period. Turbotax 2006 This is 234 days (May 12, 2012 – December 31, 2012). Turbotax 2006 Multiply $95,100 (the maximum exclusion for 2012) by the fraction 234/366 to find your maximum exclusion for 2012 ($60,802). Turbotax 2006 You figure the maximum exclusion for 2013 in the opposite manner. Turbotax 2006 Beginning with your last full day, September 30, 2013, count backward 330 full days. Turbotax 2006 Do not count the 16 days you spent in the United States. Turbotax 2006 That day, October 20, 2012, is the first day of a 12-month period. Turbotax 2006 Count forward 12 months from October 20, 2012, to find the last day of this 12-month period, October 19, 2013. Turbotax 2006 This 12-month period runs from October 20, 2012, through October 19, 2013. Turbotax 2006 Count the total days during 2013 that fall within this 12-month period. Turbotax 2006 This is 292 days (January 1, 2013 – October 19, 2013). Turbotax 2006 Multiply $97,600, the maximum limit, by the fraction 292/365 to find your maximum exclusion for 2013 ($78,080). Turbotax 2006 Choosing the Exclusion The foreign earned income exclusion is voluntary. Turbotax 2006 You can choose the exclusion by completing the appropriate parts of Form 2555. Turbotax 2006 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. Turbotax 2006 A return filed by the due date (including any extensions). Turbotax 2006 A return amending a timely-filed return. Turbotax 2006 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. Turbotax 2006 A return filed within 1 year from the original due date of the return (determined without regard to any extensions). Turbotax 2006 Filing after the above periods. Turbotax 2006   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. Turbotax 2006 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. Turbotax 2006 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. Turbotax 2006 911-7(a)(2)(i)(D). Turbotax 2006 ” 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. Turbotax 2006 You must request a private letter ruling under Income Tax Regulation 301. Turbotax 2006 9100-3 and Revenue Procedure 2013-1, 2013-1 I. Turbotax 2006 R. Turbotax 2006 B. Turbotax 2006 1, available at www. Turbotax 2006 irs. Turbotax 2006 gov/irb/2013-01_IRB/ar06. Turbotax 2006 html. Turbotax 2006 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. Turbotax 2006 Foreign tax credit or deduction. Turbotax 2006