1997 Publication 54

Contents Publication 54 Cat. No. 14999E Important Reminders ...... 1

Department Introduction ...... 2 of the Treasury Tax Guide for 1. Filing Information ...... 2 Filing Requirements ...... 3 Internal Nonresident Spouse Treated as a Revenue Resident ...... 5 Service U.S. Citizens Estimated Tax ...... 6 Information Returns and Reports ... 6

and 2. Withholding Tax ...... 7 Withholding ...... 7 30% Flat Rate Withholding ...... 9 Resident Aliens Social Security and Medicare Taxes 9

3. Self-Employment Tax ...... 10 Abroad Who Must Pay Self-Employment Tax? ...... 10 Exemption ...... 10

For use in preparing 4. Foreign Earned Income and Housing: Exclusion-Deduction .. 11 Who Qualifies for the Exclusions 1997 Returns and the Deduction? ...... 11 Requirements ...... 11 Foreign Earned Income Exclusion . 18 Foreign Housing Exclusion or Deduction ...... 19 Form 2555 and Form 2555–EZ ...... 21

5.Exemptions, Deductions and Credits ...... 27 Exclusion vs. Deduction ...... 27 Exemptions ...... 27 Contributions ...... 27 Moving Expenses ...... 27 Individual Retirement Arrangements 29 Taxes of Foreign Countries and U.S. Possessions ...... 29 How To Report Deductions ...... 30

6. Tax Treaty Benefits ...... 31 The Purpose of Tax Treaties ...... 31 Common Benefits ...... 31 Competent Authority Assistance .... 32 Obtaining Copies of Tax Treaties ... 32

7. How To Get More Information .... 32 Problem Resolution Program ...... 33

Questions and Answers ...... 35

Index ...... 41

Important Reminders

Social security numbers for dependents. You must list the social security number (SSN) of any person for whom you claim an Get forms and other information faster and easier by: exemption in column (2) of line 6c of your COMPUTER Form 1040 or Form 1040A. You do not need • World Wide Web ➤ www.irs.ustreas.gov an SSN for a child who was born in 1997 and • FTP ➤ ftp.irs.ustreas.gov died in 1997. Write Died in column (2) of line • IRIS at FedWorld ➤ (703) 321-8020 6c of your form 1040 or Form 1040A. FAX If your dependent does not have and is ➤ not eligible to get an SSN, you must list the • From your FAX machine, dial (703) 368-9694 dependent's individual taxpayer identification See How To Get More Information in this publication. number (ITIN) instead of an SSN. See Social security number under Exemptions in chapter 5. Form 2555–EZ. You may be able to file Form Withholding tax. Chapter 2 discusses the 2555–EZ, Foreign Earned Income Exclusion, withholding of income taxes and social secu- if: rity and Medicare taxes from the pay of U.S. citizens, resident aliens and nonresident al- 1. iens. It will help you determine if the correct • You had foreign earned income of only amounts of taxes are being withheld and how wages and salaries of $70,000 or less, to adjust your withholding if too much or too Filing and little is being withheld. • The return being filed is not for a short Information year. Self-employment tax. If you are self- employed, you generally are required to pay Form 2555–EZ has fewer lines than Form self-employment tax. Chapter 3 discusses Topics 2555. who must pay self-employment tax and who This chapter discusses: may be exempt from self-employment tax. • Whether you have to file a return Foreign income tax withheld. If a foreign • When to file your return and pay any tax employer withheld taxes from your pay and Foreign earned income exclusion and due paid those taxes to the foreign country's tax housing exclusion and deduction. There authority (not the U.S. treasury), you cannot are income tax benefits that might apply if you • How to treat foreign currency claim those taxes on your U.S. income tax meet certain requirements while living • Where to file your return return as federal income tax withheld. You abroad. You may qualify to treat up to cannot claim those taxes as federal income $70,000 of your income as not taxable by the • Treating your nonresident spouse as a tax withheld even if the amount is reported United States. You may also be able to either resident on your Form W–2, Wage and Tax State- deduct part of your housing expenses from • When you may have to make estimated ment. your taxable income, or treat a limited amount tax payments You may be able to claim a foreign tax of income, used for housing expenses, as not credit or a foreign tax deduction based on the taxable by the United States. These benefits • Information returns and reports you may amount withheld and paid to the foreign tax are called the foreign earned income exclu- have to file authority. See Taxes of Foreign Countries sion and the foreign housing deduction and and U.S. Possessions in chapter 5. exclusion. To qualify for either of the exclusions or Useful Items the deduction, you must have a tax home in You may want to see: Change of address. a foreign country and earn income in a foreign country. These rules are explained in chapter Publication If you change your mailing address, 4. be sure to notify the Internal Revenue If you are going to exclude or deduct your Ⅺ 3 Armed Forces' Tax Guide Service using Form 8822, Change of income as discussed above, you must file Address. Mail it to the Internal Revenue Ser- Form 2555, Foreign Earned Income, or Form Ⅺ 501 Exemptions, Standard Deduction, vice Center for your old address (addresses 2555–EZ, Foreign Earned Income Exclusion. and Filing Information for the Service Centers are on the back of the You will find an example with filled-in Forms Ⅺ 505 Tax Withholding and Estimated form). If you are changing both your home 2555 and 2555–EZ in this publication. Tax and business addresses, you only need to complete one form. Ⅺ 519 U.S. Tax Guide for Aliens Exemptions, deductions and credits. U. S. Ⅺ 520 Scholarships and Fellowships citizens and resident aliens living outside the United States are generally allowed the same exemptions, deductions and credits as those Form (and Instructions) Introduction living in the United States. However, if you choose to exclude foreign earned income or Ⅺ 1040ES Estimated Tax for Individuals This publication discusses the special tax housing amounts, you cannot deduct or ex- Ⅺ 1040X Amended U.S. Individual Income rules for U.S. citizens and resident aliens who clude any item or take credit for any item that Tax Return work abroad or who have income earned in is related to the amounts you exclude. Among foreign countries. As a U.S. citizen or resident the topics discussed in chapter 5 are: Ⅺ 2350 Application for Extension of Time alien, your worldwide income generally is To File U.S. Income Tax Return subject to U.S. income tax, regardless of where you are living. Also, you are subject to • Exemptions you can claim, Ⅺ 2555 Foreign Earned Income the same income tax filing requirements that • Contributions you can deduct, Ⅺ 2555–EZ Foreign Earned Income Exclu- apply to U.S. citizens or residents living in the sion United States. • Moving expenses you can deduct, and Ⅺ 2688 Application for Additional Exten- • Foreign taxes you can either deduct or sion of Time To File U.S. Individ- Filing information. The publication begins take a credit for. ual Income Tax Return with general filing information such as: Ⅺ 4868 Application for Automatic Exten- sion of Time To File U.S. Individ- Tax treaty benefits. Chapter 6 discusses ual Income Tax Return • Who must file a U.S. tax return, some benefits that are common to most tax • When and where to file your return, treaties and explains how to get help if you Ⅺ 5471 Information Return of U.S. Per- think you are not getting a benefit to which sons With Respect To Certain • How to report income if it is paid in foreign you are entitled. It also explains how to get Foreign Corporations currency, copies of tax treaties. Ⅺ 8822 Change of Address • How to determine your filing status if your spouse is a nonresident alien, and Ⅺ SS–5 Application for a Social Security How to get more information. Chapter 7 Card has a brief explanation of how to get infor- • Who must pay estimated tax. mation (including forms and publications) and Ⅺ TD F 90–22.1 Report of Foreign Bank assistance from the IRS. and Financial Accounts If you own stock in a foreign corporation or have an interest in a foreign partnership, you Ⅺ W–7 Application for IRS Individual may have to file information returns. See the Questions and answers. Answers to fre- Taxpayer Identification Number instructions under Information Returns and quently asked questions are presented in the See chapter 7 for information about get- Reports in chapter 1. back of the publication. ting these publications and forms. Page 2 Chapter 1 Filing Information Extensions currently (both extensions start at the same time). You do not have to file Form 4868 until You can be granted an extension of time to the new due date allowed by the first exten- Filing Requirements file your return. In some circumstances, you sion, but the total combined extension will still can also be granted an extension of time to U.S. citizens and resident aliens living or only be 4 months from the regular due date. file and pay any tax due. traveling outside the United States generally Time to pay not extended. An extension are required to file income tax returns, estate of time to file is not an extension of time to tax returns, and gift tax returns and pay esti- Automatic 2–month extension. You are pay. You must make an accurate estimate of mated tax in the same way as those residing allowed an automatic 2–month extension your tax for 1997 and send any necessary in the United States. (until June 15, 1998, if you use a calendar payment with your Form 4868. If you find you Your income, filing status, and age gen- year) to file your 1997 return and pay any cannot pay the full amount due with Form erally determine whether you must file a re- federal income tax that is due if you are a U.S, 4868, you can still get the extension. You will turn. Generally you must file a return for 1997 citizen or resident and on the regular due date owe interest on the unpaid amount. if your gross income is at least the amount of the return (April 15, 1998, if you use a You also may be charged a penalty for shown for your filing status in the following calendar year): paying the tax late unless you have reason- table: able cause for not paying your tax when due. 1) You are living outside of the United Interest and penalties are assessed (charged) States and Puerto Rico, and your main from the original due date of the return, which, Filing Status: Amount: place of business or post of duty is out- for most taxpayers, is April 15, 1998. Single ...... $6,800 side the United States and Puerto Rico, 65 or older ...... $7,800 or Head of household ...... $8,700 Extension beyond the 4 months. If you 65 or older ...... $9,700 2) You are in military or naval service on qualify for the 4–month extension and you Qualifying widow(er) ...... $9,550 duty outside the United States and later find that you are not able to file within the 65 or older ...... $10,350 Puerto Rico. 4–month extension period, you may be able Married filing jointly ...... $12,200 to get 2 more months to file, for a total of 6 Not living with spouse at end of year .. $2,650 However, if you pay the tax due after the months. One spouse 65 or older ...... $13,000 regular due date, interest will be charged from Both spouses 65 or older ...... $13,800 You can apply for an extension beyond Married filing separately ...... $2,650 the regular due date until the date the tax is the 4–month extension either by a letter to the paid. IRS or by filing Form 2688, Application for If you are the dependent of another taxpayer, see Service in a combat zone. If you served Additional Extension of Time To File U.S. In- the instructions for Form 1040 for more information in a combat zone or qualified hazardous duty on whether you must file a return. dividual Income Tax Return. You should re- area, see Extension of deadline in Publication quest the extension early so that, if refused, 3. you still will be able to file on time. Except in Married Taxpayers. If you file a joint re- cases of undue hardship, Form 2688 or a re- Gross income. This includes all income you turn, only one spouse has to qualify for the quest by letter will not be accepted until you receive in the form of money, goods, property, automatic extension to apply. If you and your have first used Form 4868 to get an automatic and services that is not exempt from tax. spouse file separate returns, this automatic 4–month extension. Form 2688 or your letter In determining whether you must file a extension applies only to the spouse who will not be considered if you file it after the return, you must consider as gross income qualifies. extended due date. any income that is excluded as foreign earned How to get the extension. To use this To get an extension beyond the automatic income or as a foreign housing amount. If you automatic 2–month extension, you must at- 4–month extension, you must give all the fol- must file a return and all or part of your in- tach a statement to your return explaining lowing information: come is excluded under these rules, you must what situation (see the two listed earlier) prepare Form 2555, discussed later. You may qualified you for the extension. • The reason for requesting the extension. be able to file Form 2555–EZ if you are Extensions beyond 2 months. If you are • The tax year to which the extension ap- claiming only the foreign earned income ex- unable to file your return within the automatic plies. clusion. 2–month extension period, you may be able to get an additional 2–month extension of Self-employed individuals. If you are • The length of time needed for the exten- time to file your return, for a total of 4 months. self-employed, your gross income includes sion. the amount on line 7 of Schedule C (Form This additional 2–month extension of time 1040), Profit or Loss From Business, or line to file is not an extension of time to pay. See • Whether another extension for time to file 1 of Schedule C-EZ (Form 1040), Net Profit Time to pay not extended, later. has already been requested for this tax From Business. year. 4–month extension. If you are not able to If your net self-employment income is file your 1997 return by the due date, you may You can sign the request for this extension, $400 or more, you must file a return be able to get an automatic 4–month exten- or it can be signed by your attorney, CPA, ! enrolled agent, or a person with a power of CAUTION even if your gross income is below the sion of time to file. To get the automatic ex- amount for filing purposes listed above. tension, you must file Form 4868, Application attorney. If you are unable to sign the request for Automatic Extension of Time to File U.S. because of illness or for another good reason, Individual Income Tax Return. a person in close personal or business re- 65 or older. You are considered 65 on the lationship to you can sign the request. You may not be eligible. You cannot Extension granted. If your application for day before your 65th birthday. If your 65th use the automatic extension of time birthday is on January 1, you would be con- ! this extension is approved, you will be notified CAUTION to file if: sidered 65 on December 31 of the previous by the IRS. Attach the notice to your return year. when you file it. • You want the IRS to figure your tax, or If an extension is granted and the IRS later • You are under a court order to file by the determines that the statements made on your regular due date. request for this extension are false or mis- When To File and Pay leading and an extension would not have been granted at the time based on the true If you file on the calendar year basis, the due facts, the extension is null and void. You will date for filing your return is April 15 of the have to pay the failure-to-file penalty. following year. If you file on a fiscal year basis When to file. Generally, you must file Extension not granted. If your applica- (a year ending on the last day of any month Form 4868 by April 15, 1998. If you are filing tion for this extension is not approved, you except December), the due date is 3 months a fiscal year return, file Form 4868 by the must file your return by the extended due date and 15 days after the close of your fiscal year. regular due date for your return. of the automatic extension. You may be al- In general, the tax shown on your return Concurrent extensions. If you qualify for lowed to file within 10 days of the date of the should be paid by the due date of the return, the 2–month extension discussed above be- notice you get from the IRS if the end of the without regard to any extension of time for cause your tax home and abode are outside 10–day period is later than the due date. The filing the return. the United States and Puerto Rico, that ex- notice will tell you if the 10–day grace period tension and the 4–month extension run con- is granted. Chapter 1 Filing Information Page 3 Further extensions. You generally cannot presence rules, you can file a claim for refund If you choose to postpone the reporting get an extension of more than 6 months. of tax on Form 1040X. The refund will be the of the income, you must file an information However, if you are outside the United States difference between the amount of tax already return with your tax return. For this informa- and meet certain tests, you may be able to paid and the tax liability as figured after the tion return, you should use another Form get a longer extension. See Bona fide resi- exclusion or deduction. 1040 labeled “Report of Deferrable Foreign dence or physical presence test not yet met Income, pursuant to Rev. Rul. 74–351.” You next. must declare on the information return that Foreign Currency the deferrable income will be included in tax- Bona fide residence or physical presence You must express the amounts you report on able income in the year that it becomes un- test not yet met. You can get an extension your U.S. tax return in U.S. dollars. If you re- blocked. You also must state that you waive of time to file your tax return if you need the ceive all or part of your income or pay some any right to claim that the deferrable income time to meet either the bona fide residence or all of your expenses in foreign currency, was includible in income for any earlier year. test or the physical presence test to qualify for you must translate the foreign currency into You must report your income on your in- the foreign earned income exclusion and/or U.S. dollars. How you do this depends on formation return using the foreign currency in the foreign housing exclusion or deduction. your functional currency. Your functional which you received that income. If you have The tests, the exclusions and the deduction currency generally is the U.S. dollar unless blocked income from more than one foreign are explained in Chapter 4, Foreign earned you are required to use the currency of a country, include a separate information return Income and Housing: Exclusion-Deduction. foreign country. for each country. You should request an extension if all You must make all federal income tax Income becomes unblocked and report- three of the following apply: determinations in your functional currency. able for tax purposes when it becomes con- The U.S. dollar is the functional currency for vertible, or when it is converted, into dollars 1) You are a U.S. citizen or resident; all taxpayers except some qualified business or into other money or property that is con- 2) You expect to meet either the bona fide units. A qualified business unit is a separate vertible into U.S. currency. Also, if you use residence test or the physical presence and clearly identified unit of a trade or busi- blocked income for your personal expenses test, but not until after your tax return is ness that maintains separate books and re- or dispose of it by gift, bequest, or devise, you due; and cords. Unless you are self-employed, your must treat it as unblocked and reportable. functional currency is the U.S. dollar. If you have received blocked income on 3) Your tax home is in a foreign country (or Even if you are self-employed and have which you have not paid the tax, you should countries) throughout your period of a qualified business unit, your functional cur- check to see whether that income is still bona fide residence or physical pres- rency is the dollar if any of the following apply: blocked. If it is not, you should take immediate ence, whichever applies. steps to pay the tax on it, file a declaration • You conduct the business in dollars. or amended declaration of estimated tax, and Generally, if you are granted an extension, include the income on your tax return for the • The principal place of business is located it will be to 30 days beyond the date on which year in which the income became unblocked. in the United States. you can reasonably expect to qualify under If you choose to postpone reporting either the bona fide residence test or the • You choose to or are required to use the blocked income and in a later tax year you physical presence test. However, if you have dollar as your functional currency. wish to begin including it in gross income al- moving expenses that are for services per- though it is still blocked, you must obtain the formed in 2 years, you may be granted an • The business books and records are not kept in the currency of the economic en- permission of the IRS to do so. To apply for extension to 90 days beyond the close of the permission, you must file Form 3115, Appli- year following the year of first arrival in the vironment in which a significant part of the business activities is conducted. cation for Change in Accounting Method. You foreign country. also must request permission from the IRS How to get extension. To obtain an ex- on Form 3115 if you have not chosen to defer tension, you should file Form 2350, Applica- If your functional currency is the U.S. dollar, you must immediately translate into dol- the reporting of blocked income in the past, tion for Extension of Time To File U.S. Indi- but now wish to begin reporting blocked in- vidual Income Tax Return, with the Internal lars all items of income, expense, etc. (including taxes), that you receive, pay, or come under the deferred method. See the Revenue Service Center, Philadelphia, PA instructions for Form 3115 for information. 19255–0002, the local IRS representative or accrue in a foreign currency and that will af- other IRS employee. fect computation of your income tax. Use the You must file Form 2350 by the due date exchange rate prevailing when you receive, Fulbright grants. All income must be re- for filing your return. Generally, if both your pay, or accrue the item. If there is more than ported in U.S. dollars. In most cases, the tax tax home and your abode are outside the one exchange rate, use the one that most must also be paid in U.S. dollars. If, however, United States and Puerto Rico on the regular properly reflects your income. You can gen- at least 70% of your entire Fulbright grant has due date of your return and you file on a cal- erally get exchange rates from banks and been paid in nonconvertible foreign currency endar year basis, the due date for filing your U.S. Embassies. (blocked income), you can use the currency return is June 15. An extension can be If your functional currency is not the U.S. of the host country to pay part of the U.S. tax granted to a date after you expect to meet the dollar, make all income tax determinations in that is based on the blocked income. To de- time requirements. your functional currency. At the end of the termine the amount of the tax that you can What if tests not met. If you obtain an year, translate the results, such as income pay in foreign currency get Publication 520. extension of time and unforeseen events or loss, into U.S. dollars to report on your in- Details of these arrangements may also be make it impossible for you to satisfy either the come tax return. obtained from the U.S. Educational Founda- bona fide residence test or the physical tions or Commissions in foreign countries. presence test, you should file your income tax Blocked Income return as soon as possible because you must You generally must report your foreign in- Where To File pay interest on any tax due after the regular come in terms of U.S. dollars and, with one due date of the return (even though an ex- exception (see Fulbright grants, later), you If any of the following situations apply to you, tension was granted). must pay taxes due on it in U.S. dollars. you should file your return with the: If, because of restrictions in a foreign You should make any request for an Internal Revenue Service Center extension early, so that if it is denied country, your income is not readily convertible ! into U.S. dollars or into other money or prop- Philadelphia, PA 19255–0002. CAUTION you still can file your return on time. Otherwise, if you file late and additional tax erty that is readily convertible into U.S. dol- is due, you may be subject to a penalty. lars, your income is “blocked” or “deferrable” 1) You claim the foreign earned income Return filed before test met. If you file income. You can report this income in one of exclusion. a return before you meet the bona fide resi- two ways: dence test or the physical presence test, you 2) You claim the foreign housing exclusion 1) Report the income and pay your federal or deduction. must include all gross income from both U.S. income tax with U.S. dollars that you and foreign sources and pay the tax on that have in the United States or in some 3) You claim the exclusion of income for income. If you later qualify for the foreign other country, or bona fide residents of American Samoa. earned income exclusion, the foreign housing exclusion, or the foreign housing deduction 2) Postpone the reporting of the income 4) You live in a foreign country or U.S. under the bona fide residence or physical until it becomes unblocked. possession and have no legal residence Page 4 Chapter 1 Filing Information or principal place of business in the See Publication 570, Tax Guide for Indi- file joint or separate returns in years after the United States. viduals With Income From U.S. Possessions, year in which you make the choice. for information about the filing requirements The exclusions and the deduction are ex- for residents of Guam. Example 1. Pat Smith has been a U.S. plained in chapter 4. citizen for many years. She is married to If you do not know where your legal resi- Resident of the Commonwealth of the Norman, a nonresident alien. Pat and Norman dence is and you do not have a principal Northern Mariana Islands. make the choice to treat Norman as a resi- place of business in the United States, you dent alien by attaching a statement to their can file with the Philadelphia Service Center. If you are a resident of the Common- joint return. Pat and Norman must report their However, you should not file with the wealth of the Northern Mariana Is- worldwide income for the year they make the Philadelphia Service Center if you are a bona lands on the last day of your tax year, choice and for all later years unless the fide resident of the Virgin Islands or a resident you should file a return with the Northern choice is ended or suspended. Although Pat of Guam or the Commonwealth of the North- Mariana Islands and pay your tax on income and Norman must file a joint return for the ern Mariana Islands on the last day of your you have from all sources to the: year they make the choice, they can file either tax year. joint or separate returns for later years. Division of Revenue and Taxation Resident of Virgin Islands. Commonwealth of the Northern Mariana Example 2. Bob and Sharon Williams are Islands married and both are nonresident aliens. In If you are a bona fide resident of the P.O. Box 5234, CHRB June of last year, Bob became a resident al- Virgin Islands on the last day of your Saipan, MP 96950. ien and remained a resident for the rest of the tax year (even if your legal residence year. Bob and Sharon both choose to be or principal place of business is in the United However, if you are a resident of the treated as resident aliens by attaching a States), you must file your return with and pay United States on the last day of your tax year, statement to their joint return for last year. your tax on income you have from all sources you should file a return with the United States Bob and Sharon must report their worldwide to the: and pay your tax on income you have from income for last year and all later years unless all sources to the Internal Revenue Service the choice is ended or suspended. Bob and Virgin Islands Bureau of Internal Revenue Center, Philadelphia, PA 19255–0002. Sharon must file a joint return for last year, 9601 Estate Thomas See Publication 570 for information about but they can file either joint or separate re- Charlotte Amalie the filing requirements for residents of the turns for later years. St. Thomas, Virgin Islands 00802. Commonwealth of the Northern Mariana Is- lands. Non-Virgin Islands resident with Virgin Is- Social Security Number lands Income. If you are a U.S. citizen or Terrorist or Military Action (SSN) resident and you have income from sources U.S. income taxes are forgiven for U.S. Gov- If your spouse is a nonresident alien and you in the Virgin Islands or income effectively ernment military or civilian employees who file a joint or separate return, your spouse connected with the conduct of a trade or die as a result of wounds or injuries sustained must have either an SSN or an individual business in the Virgin Islands, and you are outside the United States in a terrorist or mil- taxpayer identification number (ITIN). not a bona fide resident of the Virgin Islands itary action directed against the United States To get a social security number for your on the last day of your tax year, you must file or its allies. The taxes are forgiven for the spouse, apply at a social security office or identical tax returns with the United States deceased employee's tax years beginning U.S. consulate. You must complete Form and the Virgin Islands. File the original return with the year immediately before the year in SS–5, Application For A Social Security Card. with the United States and file a copy of the which the injury or wounds were incurred and You must also provide original or certified U.S. return (including all attachments, forms, ending with the year of death. copies of documents to verify your spouse's and schedules) with the Virgin Islands Bureau If the deceased government employee age, identity, and citizenship. of Internal Revenue. and the employee's spouse had a joint in- If your spouse is not eligible to get an The amount of tax you must pay to the come tax liability for those years, the tax must SSN, he or she can file Form W–7 with the Virgin Islands is figured by the following be divided between the spouses to determine IRS to apply for an ITIN. computation: the amount forgiven. For more information on how to have the tax forgiven or how to claim a refund of tax Total tax on U.S. return V.I. AGI How To Make the Choice (after certain adjustments) ϫ already paid, see Publication 559, Survivors, Attach a statement, signed by both spouses, Worldwide A.G.I Executors, and Administrators. to your joint return for the first tax year for Form 8689, Allocation of Individual Income which the choice applies. It should contain the Tax to the Virgin Islands, is used for this following: computation. You must complete this form and attach it to your return. You should pay Nonresident Spouse 1) A declaration that one spouse was a any tax due to the Virgin Islands when you file nonresident alien and the other spouse your return with the Virgin Islands Bureau of Treated as a Resident a U.S. citizen or resident alien on the last Internal Revenue. If, at the end of your tax year, you are married day of your tax year, and that you You should file your U.S. return with the and one spouse is a U.S. citizen or a resident choose to be treated as U.S. residents Internal Revenue Service Center, Philadel- alien and the other spouse is a nonresident for the entire tax year, and phia, PA 19255–0002. alien, you can choose to treat the nonresident 2) The name, address, and social security spouse as a U.S. resident. This includes sit- number (or individual taxpayer identifi- Resident of Guam. uations in which one spouse is a nonresident cation number) of each spouse. (If one alien at the beginning of the tax year, but a spouse died, include the name and ad- If you are a resident of Guam on the resident alien at the end of the year, and the last day of your tax year, you should dress of the person making the choice other spouse is a nonresident alien at the end for the deceased spouse.) file a return with Guam and pay your of the year. tax on income you have from all sources to If you make this choice, the following two You generally make this choice when you the: rules apply. file your joint return. However, you can also make the choice by filing a joint amended Department of Revenue and Taxation 1) You and your spouse are treated, for Government of Guam return on Form 1040 or Form 1040A. Be sure income tax purposes, as residents for to write the word “Amended” across the top P.O. Box 23607 all tax years that the choice is in effect. GMF, GU 96921 of the amended return. If you make the choice 2) You must file a joint income tax return for with an amended return, you and your spouse However, if you are a resident of the the year you make the choice. must also amend any returns that you may United States on the last day of your tax year, have filed after the year for which you made you should file a return with the United States This means that neither you nor your spouse the choice. and pay your tax on income you have from can claim tax treaty benefits as a resident of You generally must file the amended joint all sources to the Internal Revenue Service a foreign country for a tax year for which the return within 3 years from the date you filed Center, Philadelphia, PA 19255–0002. choice is in effect. You and your spouse can your original U.S. income tax return or 2 years Chapter 1 Filing Information Page 5 from the date you paid your income tax for U.S. citizen or resident and is entitled to that year, whichever is later. the joint tax rates as a surviving spouse, the choice will not end until the close of Information Returns the last year for which these joint rates Suspending the Choice may be used. If both spouses die in the and Reports The choice to be treated as a resident alien same tax year, the choice ends on the If you acquire or dispose of stock in a foreign does not apply to any tax year (after the tax first day after the close of the tax year in corporation, own a controlling interest in a year you made the choice) if neither spouse which the spouses died. foreign corporation, or acquire or dispose of is a U.S. citizen or resident alien at any time 3) Legal separation. A legal separation any interest in a foreign partnership, you may during the tax year. under a decree of divorce or separate have to file an information return. You also maintenance ends the choice as of the may have to file an information return if you Example. Dick Brown was a resident al- transfer property to a foreign trust, or if you ien on December 31, 1994, and married to beginning of the tax year in which the legal separation occurs. have transferred property to a foreign trust Judy, a nonresident alien. They chose to treat with at least one U.S. beneficiary. You may Judy as a resident alien and filed joint 1994 4) Inadequate records. The Internal Rev- have to file reports if you ship currency to or and 1995 income tax returns. On January 10, enue Service can end the choice for any from the United States or if you have an in- 1996, Dick became a nonresident alien. Judy tax year that either spouse has failed to terest in a foreign bank or financial account. had remained a nonresident alien throughout keep adequate books, records, and the period. Dick and Judy can file joint or other information necessary to determine Form 5471. Form 5471, Information Return separate returns for 1996. However, since the correct income tax liability, or to neither Dick nor Judy is a resident alien at any of U.S. Persons With Respect To Certain provide adequate access to those re- Foreign Corporations, must generally be filed time during 1997, their choice is suspended cords. for that year. If either has U.S. source income by U.S. shareholders of controlled foreign corporations and by shareholders, officers, or foreign source income effectively con- If the choice is ended for any of these nected with a U.S. trade or business in 1997, and directors of foreign personal holding reasons, neither spouse can make a choice companies. Form 5471 must be filed by offi- they must file separate returns as nonresident in any later tax year. aliens. If Dick becomes a resident alien again cers, directors, and shareholders of U.S. en- in 1998, their choice is no longer suspended. If you do not choose to treat your tities that acquire, dispose of, or are involved For years their choice is not suspended, they TIP nonresident spouse as a U.S. resi- in the reorganization of a foreign corporation. must include income received from sources dent, you may be able to use head You must file Form 5471 at the time you both in and outside the United States in their of household filing status. To use this status file your income tax return. More information income for each tax year. you must pay more than half the cost of about the filing of Form 5471 can be found in maintaining a household for certain depen- the instructions for this information return. dents or relatives other than your nonresident Ending the Choice alien spouse. For more information, see Form 3520. Form 3520, Annual Return To Once made, the choice to be treated as a Publication 501. Report Transactions With Foreign Trusts and resident applies to all later years unless sus- Receipt of Certain Foreign Gifts, is used to pended (as explained above) or ended in one report: of the following ways. • The creation of a foreign trust or a direct 1) Revocation. Either spouse can revoke Estimated Tax or indirect transfer to a foreign trust by a the choice for any tax year, provided he The requirements for determining who must U.S. person, including the executor of an or she makes the revocation by the due pay estimated tax are the same for a U.S. estate, citizen or resident abroad as for a taxpayer in date for filing the tax return for that tax • Distributions received from a foreign trust, year. The spouse who revokes must at- the United States. For current instructions on tach a signed statement declaring that making your estimated tax payments, see the choice is being revoked. The state- Form 1040–ES. • Gifts or bequests received from a non- ment must include the name, address, If you had a tax liability for 1997, you may resident alien or foreign estate that total and social security number (or individual have to pay estimated tax for 1998. Gener- more than $100,000, taxpayer identification number) of each ally, you must make estimated tax payments spouse. Include the name and address for 1998 if you expect to owe at least $1,000 • Gifts or bequests received from a foreign of any person who is revoking the choice in tax for 1998, after subtracting your with- corporation or foreign partnership that for a deceased spouse. The statement holding and credits, and you expect your total more than $10,276, and also must include a list of any states, withholding and credits to be less than the • The annual information return for a U.S. foreign countries, and possessions that smaller of: person treated as the owner of any part have community property laws in which of the assets of a foreign trust. This in- either spouse is domiciled or where real 1) 90% of the tax to be shown on your 1998 formation was previously reported on property is located from which either tax return, or Form 3520–A, Annual Return of Foreign spouse receives income. File the state- 2) 100% of the tax shown on your 1997 tax Trust With U.S. Beneficiaries. Form ment as follows: return. (The return must cover all 12 3520–A is now used by foreign trusts to satisfy their annual information reporting a) If the spouse revoking the choice months.) requirements. must file a return, attach the statement to the return for the first year If less than two thirds of your gross income You must file the form with your income the revocation applies, for 1997 or 1998 is from farming or fishing and your adjusted gross income for 1997 is tax return by the due date (including exten- b) If the spouse revoking the choice more than $150,000 ($75,000 if you are sions) of your return and send a copy of the does not have to file a return, but married and file separately), substitute 110% form to the Internal Revenue Service Center, does file a return (for example, to for 100% in (2) above. Philadelphia, PA 19255–0002. obtain a refund), attach the state- The first installment of estimated tax is ment to the return, or usually due on April 15 of the tax year. See Form 4790. Form 4790, Report of Interna- c) If the spouse revoking the choice Publication 505 for more information. tional Transportation of Currency or Monetary does not have to file a return and When figuring your estimated gross in- Instruments, must be filed by each person does not file a claim for refund, come, subtract amounts you expect to ex- who physically transports, mails, ships, or send the statement to the Internal clude under the foreign earned income ex- causes to be physically transported, mailed, Revenue Service Center where the clusion and the foreign housing exclusion. In or shipped, currency or other monetary in- last joint return was filed. addition, you can reduce your income by your struments totaling more than $10,000 at one estimated foreign housing deduction. How- time from the United States to any place out- 2) Death. The death of either spouse ends ever, if the actual amount of the exclusion or side the United States, or into the United the choice, beginning with the first tax deduction is less than you estimate, you may States from any place outside the United year following the year the spouse died. have to pay a penalty on the underpayment States. The filing requirement also applies to However, if the surviving spouse is a of estimated tax. each person who attempts to transport, mail, Page 6 Chapter 1 Filing Information or ship the currency or monetary instruments the address shown on the form. Form TD F You do not have to use the form. You can or attempts to cause them to be transported, 90–22.1 is not a tax return, so do not attach prepare your own statement. See the next mailed, or shipped. it to your Form 1040. page for a copy of Form 673. The term “monetary instruments” includes coin and currency of the United States or of any other country, money orders, traveler's You must submit the statement to your checks, investment securities in bearer form employer and not to the IRS. or otherwise in such form that title passes Generally, filing a signed statement that upon delivery, and negotiable instruments includes a declaration under penalties of (except warehouse receipts or bills of lading) 2. perjury is considered authority for your em- in bearer form or otherwise in such form that ployer to discontinue withholding. However, title passes upon delivery. The term includes if your employer has reason to believe that bank checks, and money orders that are Withholding Tax you will not qualify for an exclusion of income, signed, but on which the name of the payee your employer must disregard the statement has been omitted. The term does not include and withhold the tax. bank checks, or money orders made payable Your employer is not required to find out to the order of a named person that have not Topics about amounts you received from any other been endorsed or that bear restrictive This chapter discusses: source. But, if your employer has such infor- endorsements. mation, it must be considered in determining A transfer of funds through normal bank- • Withholding income tax from the pay of whether your earned income is more than the ing procedures (wire transfer) which does not U.S. citizens limit on the exclusion. involve the physical transportation of currency Your employer, however, should withhold or bearer monetary instruments is not re- • Withholding income tax from the pay of taxes from any wages you earn in the United quired to be reported on Customs Form 4790. nonresident aliens States. Filing requirements for Customs Form • Social security and Medicare taxes 4790 are the following: Foreign tax credit. If you plan to take a for- Recipients. Each person who receives eign tax credit, you may be eligible for addi- currency or other monetary instruments from tional withholding allowances on Form W–4, a place outside the United States for which a Useful Items You may want to see: Employee's Withholding Allowance Certif- report has not been filed by the shipper must icate. You can take these additional with- file Customs Form 4790. holding allowances only for foreign tax credits Publication attributable to taxable salary or wage It must be filed within 15 days after income. See Publication 505 for further infor- receipt with the Customs officer in Ⅺ 505 Tax Withholding and Estimated mation. charge at any port of entry or depar- Tax ture, or by mail with the: Form (and Instructions) Withholding from pension payments. U.S. Commissioner of Customs payers of benefits from employer deferred Attention: Currency Transportation Ⅺ 673 Statement for Claiming Benefits compensation plans, individual retirement Reports Provided by Section 911 of the plans, and commercial annuities generally 1301 Constitution Ave., N.W. Internal Revenue Code must withhold income tax from the payments Washington, DC 20229. or distributions. Withholding will apply unless Ⅺ W–4 Employee's Withholding Allow- you choose exemption from withholding. You ance Certificate cannot choose exemption unless you provide Shippers or mailers. If the currency or the payer of the benefits with a residence other monetary instrument does not accom- See chapter 7 for information about get- address in the United States or a U.S. pos- pany a person entering or departing the ting these publications and forms. session, or unless you certify to the payer that United States, Customs Form 4790 can be you are not a U.S. citizen or resident alien or filed by mail with the Commissioner of Cus- someone who left the United States to avoid toms at the above address. It must be filed tax. by the date of entry, departure, mailing, or shipping. Withholding Travelers. Travelers must file Customs U.S. employers generally must withhold U.S. Checking your withholding. Before you Form 4790 with the Customs officer in charge income tax from the pay of U.S. citizens per- report how much U.S. income tax was with- at any Customs port of entry or departure forming services in a foreign country unless held on your 1997 return, you should carefully when entering or departing the United States. the employer is required by foreign law to review all information documents, such as Penalties. Civil and criminal penalties are withhold foreign income tax from the pay. Form W–2 and Form 1099. Compare other provided for failure to file a report or if the Your employer, however, is not required records, such as final pay records or bank report contains material omissions or mis- to withhold U.S. income tax from the portion statements, with Form W–2 or Form 1099 to statements, and for structuring the transpor- of your wages earned abroad that are equal verify the withholding on these forms. You tation of currency or monetary instruments to to the foreign earned income exclusion and can use the following chart to help you locate avoid filing a report. Also, the entire amount foreign housing exclusion if your employer the U.S. income tax withholding box on each of the currency or monetary instrument may has good reason to believe that you will form. be subject to seizure and forfeiture. qualify for these exclusions. More information about the filing of Cus- WHERE TO FIND WITHHOLDING toms Form 4790 can be found in the in- Statement. You can submit a statement to FORM NUMBER BOX NUMBER structions on the back of the form. your employer indicating that you will meet W–2 ...... 2 either the bona fide residence test or the W–2G ...... 2 physical presence test and indicating your Form TD F 90–22.1. Form TD F 90–22.1, W–2C ...... 2 estimated housing cost exclusion. 1099–INT ...... 4 Report of Foreign Bank and Financial Ac- 1099–DIV ...... 2 counts, must be filed if you had any financial You can obtain sample copies of an 1099–B ...... 4 interest in, or signature or other authority acceptable statement (Form 673, 1099–OID ...... 4 over, a bank, securities, or other financial Statement For Claiming Benefits Pro- 1099–PATR ...... 4 account in a foreign country. You do not have vided by Section 911 of the Internal Revenue 1099–MISC ...... 4 to file the report if the assets are with a U.S. Code) by writing to the 1099–G ...... 4 military banking facility operated by a U.S. fi- 1099–R ...... 4 nancial institution or if the combined assets Internal Revenue Service Check your U.S. income tax withholding even in the account(s) are $10,000 or less during Assistant Commissioner (International) if you pay someone else to prepare your tax the entire year. Attn: CP:IN:D:CS return. You may be assessed penalties and You must file this form by June 30 each 950 L'Enfant Plaza South, S.W., interest if you claim more than your correct year with the Department of the Treasury at Washington, DC 20024. amount of withholding. Chapter 2 Withholding Tax Page 7 Department of the Treasury – Internal Revenue Service Form 673 OMB No. 1545-1022 Statement For Claiming Benefits Provided (Rev. March 1997) by Section 911 of the Internal Revenue Code (See Instructions on Reverse)

The following statement, when completed and furnished by a citizen of the United States to his or her employer, permits the employer to exclude from income tax withholding all or a part of the wages paid for services performed outside the United States.

Name (please print) Social security number

I expect to qualify for the foreign earned income exclusion under either the bona fide residence or physical presence test for calendar year or fiscal year beginning and ending .

Please check applicable box

Bona Fide Residence Test I am a citizen of the United States. I have been a bona fide resident of and my tax home has been located in (foreign country or countries) for an uninterrupted period which includes an entire tax year that began on ,19 . (date) I expect to remain a bona fide resident and retain my tax home in a foreign country (or countries) until the end of the tax year for which this statement is made. Or if not that period, from the date of this statement until , 19 . (date within tax year) I have not stated to the authorities of any foreign country named above that I an not a resident of that country. Or, if I made such a statement, the authorities of that country thereafter made a determination to the effect that I am a resident of that country. Based on the facts in my case, I have good reason to believe that for this period of foreign residence I will satisfy the tax home and the bona fide foreign residence requirements prescribed by the section 911(d)(1)(A) of the Internal Revenue Code and qualify for the exclusion Code section 911(a) allows. Physical Presence Test I am a citizen of the United States. Except for occasional absences that won’t disqualify me for the benefit of section 911(a) of the Internal Revenue Code, I expect to be present in and maintain my tax home in (foreign country or countries) for a 12-month period that includes the entire tax year . Or, if not the entire year, for the part of the tax year beginning on ,19 , and ending on , 19 .

Based on the facts in my case, I have good reason to believe that for this period of presence in a foreign country or countries, I will satisfy the tax home and the 330 full-day requirements within a 12-month period under section 911(d)(1)(B).

Estimated Housing Cost

(1) Rent (2) Utilities (other than telephone Charges) (3) Real & Personal Property Insurance (4) Occupancy tax not deductible under section 164 (5) Nonrefundable fees paid for securing a leasehold (6) Household Repairs (7) Add lines 1 through 6 (8) Estimated Base Housing Amount for my qualifying period is (9) Subtract line 8 from line 7. This is your estimated housing cost amount

I understand that this total, plus the total reported on any other statements outstanding with other employers, should not be more than my expected housing cost amount exclusion. If I become disqualified for the exclusions, I will immediately notify my employer and advise what part, if any, of the period I am qualified for. I understand that any exemption form income tax withholding permitted by reason of furnishing this statement is not a determination by the Internal Revenue that any amount paid to me for any services performed during the tax year is excludable form gross income under the provisions of Code section 911(a).

Your Signature Date

Cat. No. 10183Y Form 673 Page 1 (Rev. 03-97)

Page 8 Chapter 2 Withholding Tax craft is an aircraft registered under the laws • Spain, of the United States. 30% Flat Rate • Sweden, Withholding American employer. An American employer • Switzerland, and includes any of the following: Generally, U.S. payers of certain fixed or de- • The United Kingdom terminable annual or periodic income are re- 1) The U.S. Government or any of its in- quired to withhold tax at a flat 30% (or lower Under these agreements, dual coverage and strumentalities, treaty) rate on payments of this income to dual contributions (taxes) for the same work nonresident aliens. If you are a U.S. citizen 2) An individual who is a resident of the are eliminated. The agreements generally or resident and this tax is withheld in error United States, make sure that social security taxes are paid from payments to you because you have a only to one country. foreign address, you should notify the payer 3) A partnership of which at least two-thirds Generally, under these agreements, you of the income to stop the withholding. of the partners are U.S. residents, will only be subject to social security taxes in To do this, you must give the payer a the country where you are working. However, written statement in duplicate stating that you 4) A trust of which all the trustees are U.S. if you are temporarily sent to work in a foreign are a citizen or resident of the United States. residents, or country, and your pay would otherwise be If you are a resident alien, you can claim U.S. subject to social security taxes in both the residence by filing Form 1078, Certificate of 5) A corporation organized under the laws United States and that country, you generally Alien Claiming Residence in the United of the United States, any U.S. state, or can remain covered only by U.S. social se- States, in duplicate with the payer. the District of Columbia, Puerto Rico, the curity. More information on any specific You can claim the tax withheld in error as Virgin Islands, Guam, or American Sa- agreement can be obtained by contacting the a credit on your tax return if the amount is not moa. United States Social Security Administration. adjusted by the payer of the income. Foreign affiliate. A foreign affiliate of an To establish that your pay in a foreign American employer is any foreign entity in country is subject only to U.S. social which the American employer has at least a security tax and is exempt from for- 10% interest, directly or through one or more eign social security tax, your employer in the Social Security entities. For a corporation, the 10% interest United States should write to the: must be in its voting stock, and for any other and Medicare Taxes entity the 10% interest must be in its profits. U.S. Social Security Administration Office of International Policy Social security and Medicare taxes may apply Form 2032, Contract Coverage Under Ti- tle II of the Social Security Act, is used by Post Office Box 17741 to wages paid to an employee regardless of Baltimore, MD 21235. where the services are performed. American employers to extend social security coverage to U.S. citizens and residents working abroad for foreign affiliates of the Your employer should include the follow- American employers. Coverage under an ing information in the letter: General agreement in effect on or after June 15, 1989, In general, U.S. social security and Medicare cannot be terminated. 1) Your name, taxes apply to payments of wages for ser- 2) Your U.S. social security number, vices performed as an employee: Excludable meals and lodging. Social security tax does not apply to the value of meals 3) Your date and place of birth, 1) Within the United States, regardless of and lodging provided to you for the conven- the citizenship or residence of either the ience of your employer and excluded from 4) The country of which you are a citizen, employee or the employer, your income. 5) The country of your permanent resi- 2) Outside the United States on or in con- dence, nection with an American vessel or aircraft, regardless of the citizenship or Binational Social Security 6) The name and address of your employer residence of either the employee or the (Totalization) Agreements in the United States and in the foreign employer, provided that either: The United States has entered into agree- country, ments with several foreign countries to coor- a) The employment contract is entered 7) The date and place you were hired, and dinate social security coverage and taxation into within the United States, or of workers who are employed in one of the 8) The beginning date and the expected b) The vessel or aircraft touches at a countries. These agreements are commonly ending date of your employment in the U.S. port while the employee is referred to as totalization agreements. foreign country. employed on it, Agreements are in effect with the following countries: If you are permanently working in a foreign 3) Outside the United States, as provided country with which the United States has a by an applicable binational social se- • Austria, social security agreement and your pay is curity agreement (discussed later), • Belgium, exempt under the agreement from U.S. social 4) Outside the United States by a U.S. citi- security tax, you or your employer should get • Canada, zen or a U.S. resident alien for an a statement from the authorized official or agency of the foreign country verifying that American employer (defined later), or • Finland, your pay is subject to social security coverage 5) Outside the United States by a U.S. citi- • France, in that country. zen or U.S. resident alien for a foreign If the authorities of the foreign country will • Germany, affiliate of an American employer under not issue such a statement, either you or your a voluntary agreement entered into be- • Greece employer should get a statement from the tween the American employer and the U.S. Social Security Administration, Office of U.S. Treasury Department. • Ireland, International Policy, at the above address, that your wages are not covered by the U.S. • Italy, social security system. American vessel or aircraft. An American • Luxembourg, This statement should be kept by your vessel is any vessel documented or num- employer because it establishes that your pay bered under the laws of the United States, • The Netherlands, is exempt from U.S. social security tax. Only and any other vessel whose crew is employed • Norway, wages paid on or after the effective date of solely by one or more U.S. citizens or resi- the agreement can be exempt from U.S. so- dents or U.S. corporations. An American air- • Portugal, cial security tax. Chapter 2 Withholding Tax Page 9 emption from social security and Medicare must otherwise file a U.S. income tax return). taxes, and you received wages of $108.28 Unless your situation is described below, at- or more from the organization, the amounts tach Schedule SE (Form 1040) to your U.S. 3. paid to you are subject to the self- income tax return. employment tax. However, you can choose If you do not have to file Form 1040 with to be exempt from social security and Medi- the United States and you are a resident of: Self-Employment care taxes if you are a member of a recognized religious sect. See Publication 533. Tax • Guam, • American Samoa, Effect of exclusion. You must take all of your self-employment income into account in • The Virgin Islands, Topics figuring your net earnings from self- This chapter discusses: employment, even though the income is ex- • The Commonwealth of the Northern empt from income tax because of the foreign Mariana Islands, or earned income exclusion. • Who must pay self-employment tax • Puerto Rico, • Who is exempt from self-employment tax Example. You are in business abroad as a consultant and qualify for the foreign earned figure your self-employment tax on either income exclusion. Your foreign earned in- Form 1040–PR or Form 1040–SS, whichever Useful Items come is $95,000, your business deductions applies. You must file these forms with the Internal You may want to see: total $27,000, and your net profit is $68,000. You must pay social security tax and Medi- Revenue Service Center, Philadelphia, PA 19255–0002. Publication care tax on your net earnings even though you can exclude all of your earned income. Ⅺ 533 Self-Employment Tax

Ⅺ 517 Social Security and Other Infor- Optional method. You can use the nonfarm mation for Members of the Clergy optional method if you are self-employed and and Religious Workers your net nonfarm profits are less than $1,733 Exemption and less than 72.189% of your gross nonfarm The United States may reach agreements income. You must have had $400 of net Form (and Instructions) with foreign countries to eliminate dual cov- self-employment earnings in at least 2 of the erage and dual contributions (taxes) to social 3 immediately preceding tax years. You can- Ⅺ Schedule SE Self-Employment Tax security systems for the same work. See not choose to report less than your actual net Binational Social Security (Totalization) Ⅺ Form 4361 Application for Exemption earnings from nonfarm self-employment. You Agreements in chapter 2 under Social Secu- From Self-Employment Tax for cannot use the nonfarm optional method for rity and Medicare Taxes. As a general rule, Use by Ministers, Members of more than 5 tax years. Use Long Schedule self-employed persons who are subject to Religious Orders and Christian SE (Section B). For more details get Publi- dual taxation will only be covered by the so- Science Practitioners cation 533. cial security system of the country where they reside. For more information on how any Ⅺ Form 1040–PR specific agreement affects self-employed Members of the clergy. Although members Ⅺ Form 1040–SS persons, contact the United States Social of the clergy may be employees in performing Security Administration. See chapter 7 for information about get- their ministerial services, they are treated as If you are a U.S. citizen permanently ting these publications. self-employed for self-employment tax pur- working in a foreign country with which the poses. Their U.S. self-employment tax is United States has a social security agreement based upon net earnings from self- and you are exempt under the agreement employment figured without regard to the from U.S. self-employment tax, you should foreign earned income exclusion or the for- get a statement from the authorized official Who Must Pay eign housing exclusion. or agency of the foreign country verifying that Members of the clergy are covered auto- you are subject to social security coverage in Self-Employment Tax? matically by social security and Medicare. that country. If you are a self-employed U.S. citizen or You can receive exemption from coverage for resident abroad, other than a U.S. citizen your ministerial duties if you conscientiously If the authorities of the foreign country employee of an international organization, oppose public insurance due to religious rea- will not issue a statement, you should foreign government, or wholly owned instru- sons or if you oppose it due to the religious get a statement that your earnings are mentality of a foreign government, you gen- principles of your denomination. You must file not covered by the U.S. social security sys- erally are subject to the self-employment tax. Form 4361, Application for Exemption From tem from the This is a social security and Medicare tax on Self-Employment Tax for Use by Ministers, net earnings from self-employment of $400 Members of Religious Orders and Christian Science Practitioners, to apply for this ex- U.S. Social Security Administration or more a year. For 1997 the tax is on net Office of International Policy earnings of $400 or more up to $65,400 for emption. This subject is discussed in further detail Post Office Box 17741 the social security portion. All net earnings Baltimore, MD 21235. are subject to the Medicare portion. Your net in Publication 517. self-employment income is used to figure your net earnings from self-employment. Net self- Attach a photocopy of either statement to employment income usually includes all Puerto Rico, Guam, Commonwealth of the your federal income tax return each year you business income less all business deductions Northern Mariana Islands, American Sa- are exempt. Also enter “Exempt, see attached allowed for income tax purposes. Net moa, or Virgin Islands. If you are a U.S. statement,” on the line for self-employment earnings from self-employment is a portion citizen or resident and own and operate a tax on your return. of net self-employment income. This amount business in Puerto Rico, Guam, the Com- If you believe that your self-employment is figured on Short Schedule SE (Section A), monwealth of the Northern Mariana Islands, earnings should be exempt from foreign so- line 4, or Long Schedule SE (Section B), line American Samoa, or the Virgin Islands, you cial security tax and subject only to U.S. 6. The actual self-employment tax is figured must pay tax on net earnings from self- self-employment tax, you should request a on net earnings from self-employment. employment (if it is $400 or more) from those certificate of coverage from the United States sources. You must pay the self-employment Social Security Administration, Office of tax whether or not the income is exempt from International Policy. The certificate will es- Employed by a U.S. church. If you were U.S. income taxes (or whether or not you tablish your exemption from the foreign social employed by a U.S. church or a qualified security tax. church-controlled organization that chose ex- Page 10 Chapter 3 Self-Employment Tax an itinerant and your tax home is wherever you work. 4. Requirements You are not considered to have a tax To claim the foreign earned income exclusion, home in a foreign country for any period in the foreign housing exclusion, or the foreign which your abode is in the United States. housing deduction, you must have foreign However, your abode is not necessarily in the Foreign Earned earned income, your tax home must be in a United States while you are temporarily in the foreign country, and you must be one of the United States. Your abode is also not neces- Income and following: sarily in the United States merely because you maintain a dwelling in the United States, Housing: whether or not your spouse or dependents • A U.S. citizen who is a bona fide resident use the dwelling. of a foreign country or countries for an “Abode” has been variously defined as Exclusion - uninterrupted period that includes an en- one's home, habitation, residence, domicile, tire tax year, or place of dwelling. It does not mean your Deduction • A U.S. resident alien who is a citizen or principal place of business. “Abode” has a national of a country with which the domestic rather than a vocational meaning United States has an income tax treaty and does not mean the same as “tax home”. in effect and who is a bona fide resident The location of your abode often will depend Topics of a foreign country or countries for an on where you maintain your economic, family, This chapter discusses: uninterrupted period that includes an en- and personal ties. tire tax year, or • Who qualifies for the foreign earned in- Example 1. You are employed on an • A U.S. citizen or a U.S. resident alien who offshore oil rig in the territorial waters of a come exclusion, the foreign housing ex- is physically present in a foreign country clusion, or the foreign housing deduction foreign country and work a 28–day on/28-day or countries for at least 330 full days off schedule. You return to your family resi- • How to figure the foreign earned income during any period of 12 consecutive dence in the U.S. during your off periods. You exclusion months. are considered to have an abode in the U.S. and do not satisfy the tax home test in the • How to figure the foreign housing exclu- See Publication 519, U.S. Tax Guide for foreign country. You cannot claim either of the sion and the foreign housing deduction Aliens, to find out if you qualify as a U.S. exclusions or the housing deduction. resident alien for tax purposes and whether you keep that alien status when you tempo- Example 2. For several years, you were rarily work abroad. a marketing executive with a producer of Useful Items If you are a nonresident alien, your spouse machine tools in Toledo, Ohio. In November You may want to see: is a U.S. citizen or resident, and you both of last year your employer transferred you to choose to be treated as U.S. residents for tax London, England, for a minimum of 18 Publication purposes, you are considered a resident al- months to set up a sales operation for ien. For information on making the choice, Europe. Before you left for London, you dis- see the discussion in Chapter 1 under Non- Ⅺ 519 U.S. Tax Guide for Aliens tributed new business cards showing your resident Spouse Treated as a Resident. new business and home addresses in Ⅺ 596 Earned Income Credit London. You kept ownership of your home in Waiver of minimum time requirements. Toledo and rented it to another family. You Form (and Instructions) The minimum time requirements for the bona placed your car in storage. In November of fide residence test and the physical presence last year, you moved your spouse, children, test can be waived if you must leave a foreign furniture, and family pets to a home your Ⅺ 1040X Amended U.S. Individual Income employer rented for you in London. Tax Return country because of war, civil unrest, or similar adverse conditions in that country. See the Shortly after moving to London, you bought a car, and you and your spouse got Ⅺ 2555 Foreign Earned Income discussion later under Waiver of Time Re- quirements. British driving licenses. Your entire family got Ⅺ 2555–EZ Foreign Earned Income Exclu- library cards for the local public library. You sion and your spouse opened bank accounts with Tax Home a London bank and secured consumer credit. See chapter 7 for information about get- You joined a local business league, and both ting these publications and forms. in Foreign Country you and your spouse also became active in To qualify for the foreign earned income ex- the neighborhood civic association and clusion, the foreign housing exclusion, or the worked with a local charity. Your abode is in foreign housing deduction, your tax home London for the time you live there, and you must be in a foreign country throughout your satisfy the tax home test in the foreign coun- Who Qualifies for the period of bona fide residence or physical try. Exclusions and the presence abroad. Bona fide residence and physical presence are explained later. Temporary or Indefinite Deduction? Assignment If you meet certain requirements, you may Tax Home The location of your tax home often depends qualify for the foreign earned income and Your tax home is the general area of your on whether your assignment is temporary or foreign housing exclusions and the foreign main place of business, employment, or post indefinite. If you are temporarily absent from housing deduction. of duty, regardless of where you maintain your tax home in the United States on busi- If you are a U.S. citizen or a resident alien your family home. Your tax home is the place ness, you may be able to deduct your away- of the United States and live abroad, you are where you are permanently or indefinitely from-home expenses (for travel, meals, and taxed on your worldwide income. However, engaged to work as an employee or self- lodging) but you would not qualify for the for- you may qualify to exclude up to $70,000 of employed individual. Having a “tax home” in eign earned income exclusion. If your new your foreign earned income. In addition, you a given location does not necessarily mean work assignment is for an indefinite period, can exclude or deduct certain foreign housing that the given location is your residence or your new place of employment becomes your amounts. See Foreign Earned Income Exclu- domicile for tax purposes. tax home, and you would not be able to de- sion and Foreign Housing Exclusion or De- If you do not have a regular or main place duct any of the related expenses that you duction, later. of business because of the nature of your have in the general area of this new work You may also be entitled to exclude from work, your tax home may be the place where assignment. However, if your new tax home income the value of meals and lodging pro- you regularly live. If you have neither a regu- is in a foreign country and you meet the other vided to you by your employer. See Exclusion lar or main place of business nor a place requirements, your earnings may qualify for of Meals and Lodging, later. where you regularly live, you are considered the foreign earned income exclusion. Chapter 4 Foreign Earned Income and Housing: Exclusion - Deduction Page 11 Figure 4-A. Can I Claim the Exclusion or Deduction?

Start Here Yes Yes No No Do you have foreign Is your tax home in a Are you a U.S. resident ᮣ ᮣ Are you a U.S. citizen? ᮣ earned income? foreign country? alien?

No No Yes Yes ᮣ ᮣ

Were you a bona fide Are you a citizen or resident of a foreign national of a country with

Yes country or countries for ᮣ which the Unted States an uninterrupted period has an income tax treaty that includes an entire in effect? tax year?

No Yes No ᮣ

You CAN claim the foreign earned income exclusion and the foreign housing exclusion or the foreign housing deduction. ᮣ ᮣ

Were you physically present in a foreign country or countries for Yes

at least 330 full days during any period of 12 ᮣ consecutive months?

ᮣ You CANNOT claim the foreign earned income exclusion, the ᮣ ᮣ foreign housing exclusion, or the foreign housing deduction.

If you expect your employment away from Islands, or U.S. possessions such as Ameri- for Bona Fide Residents of American Samoa, home in a single location to last, and it does can Samoa. For purposes of the foreign to figure the exclusion. last, for 1 year or less, it is temporary unless earned income exclusion, the foreign housing facts and circumstances indicate otherwise. exclusion, and the foreign housing deduction, Guam and the Commonwealth of the If you expect it to last for more than 1 year the terms “foreign,” “abroad,” and “overseas” Northern Mariana Islands. New exclusion or you do not expect it to last for 1 year or refer to areas outside the United States, rules will apply to residents of Guam and the less, it is indefinite. If you expect it to last for American Samoa, Guam, the Commonwealth Commonwealth of the Northern Mariana Is- 1 year or less, but at some later date you of the Northern Mariana Islands, Puerto Rico, lands if, and when, new implementation expect it to last longer than 1 year, it is tem- the Virgin Islands, and the Antarctic region. agreements take effect between the United porary (in the absence of facts and circum- States and those possessions. stances indicating otherwise) until your ex- For more information, see Publication 570, pectation changes. American Samoa, Tax Guide for Individuals With Income From Guam, and the U.S. Possessions. Commonwealth of the Foreign Country Northern Mariana Islands Puerto Rico To meet the bona fide residence test or the Residence or presence in a U.S. possession and Virgin Islands physical presence test, you must live in or be does not qualify you for the foreign earned Residents of Puerto Rico and the Virgin Is- present in a foreign country. A foreign country income exclusion. You may, however, qualify lands are not entitled to the possession ex- usually is any territory (including the air space for the possession exclusion. clusion (discussed above) or to the exclusion and territorial waters) under the sovereignty of foreign earned income or the exclusion or of a government other than that of the United American Samoa. There is a possession deduction of foreign housing amounts under States. exclusion available to individuals who are the bona fide residence or physical presence The term “foreign country” includes the bona fide residents of American Samoa for rules discussed later. seabed and subsoil of those submarine areas the entire tax year. Gross income from adjacent to the territorial waters of a foreign sources within American Samoa, Guam, or Puerto Rico. Generally, if you are a U.S. country and over which the foreign country the Commonwealth of the Northern Mariana citizen who is a bona fide resident of Puerto has exclusive rights under international law Islands may be eligible for this exclusion. In- Rico for the entire tax year, you are not sub- to explore and exploit the natural resources. come that is effectively connected with the ject to U.S. tax on income from Puerto Rican The term “foreign country” does not in- conduct of a trade or business within those sources. This does not include amounts paid clude Puerto Rico, Guam, the Commonwealth possessions also may be eligible for this ex- for services performed as an employee of the of the Northern Mariana Islands, the Virgin clusion. Use Form 4563, Exclusion of Income United States. However, you are subject to Page 12 Chapter 4 Foreign Earned Income and Housing: Exclusion - Deduction U.S. tax on your income from sources outside prevent a person from being a bona fide with your employer, leaving your family in Puerto Rico. You cannot deduct expenses resident of the foreign country. Whether a Lisbon. You return to Lisbon on May 1, and allocable to the exempt income. treaty prevents a person from becoming a continue living there. On January 1, 1997, you bona fide resident of a foreign country is de- have completed an uninterrupted period of termined under all provisions of the treaty, residence for a full tax year (1996), and you Bona Fide Residence Test including specific provisions relating to resi- may qualify as a bona fide resident of a for- The bona fide residence test applies to U.S. dence or privileges and immunities. eign country. citizens and to any U.S. resident alien who is Example 1. You are a U.S. citizen em- Example 2. Assume that in Example 1, a citizen or national of a country with which ployed in England by a U.S. employer under you are transferred back to the United States the United States has an income tax treaty in contract with the U.S. Armed Forces. You do on December 13, 1996. You do not qualify effect. not qualify for special status under the North under the bona fide residence test because Atlantic Treaty Status of Forces Agreement. your bona fide residence in the foreign coun- Bona fide residence. To see if you meet the You are subject to United Kingdom income try, although it lasted more than a year, did test of bona fide residence in a foreign coun- taxes and may qualify as a bona fide resident. not include a full tax year. You may, however, try, you must find out if you have established qualify for the foreign earned income exclu- such a residence. Example 2. You are a U.S. citizen in sion or the housing exclusion or deduction Your bona fide residence is not neces- England who qualifies as an “employee” of under the physical presence test discussed sarily the same as your domicile. Your an armed service or as a member of a “civil- later. domicile is your permanent home, the place ian component” under the North Atlantic to which you always return or intend to return. Treaty Status of Forces Agreement. You do Bona fide residence status not auto- not qualify as a bona fide resident. matic. You do not automatically acquire Example. You could have your domicile bona fide resident status merely by living in in Cleveland, Ohio, and a bona fide residence Example 3. You are a U.S. citizen em- a foreign country or countries for 1 year. in London if you intend to return eventually to ployed in Japan by a U.S. employer under Cleveland. contract with the U.S. Armed Forces. You are Example. If you go to a foreign country The fact that you go to London does not subject to the agreement of the Treaty of to work on a particular construction job for a automatically make London your bona fide Mutual Cooperation and Security between the specified period of time, you ordinarily will not residence. If you go there as a tourist, or on United States and Japan. You do not qualify be regarded as a bona fide resident of that a short business trip, and return to the United as a bona fide resident. country even though you work there for one States, you have not established bona fide tax year or longer. The length of your stay and residence in London. But if you go to London Example 4. You are a U.S. citizen em- the nature of your job are only some of the to work for an indefinite or extended period ployed as an “official” by the United Nations factors to be considered in determining and you set up permanent quarters there for in Switzerland. You are exempt from Swiss whether you meet the bona fide residence yourself and your family, you probably have taxation on the salary or wages paid to you test established a bona fide residence in a foreign by the United Nations. This does not prevent country, even though you intend to return you from qualifying as a bona fide resident if Bona fide resident for part of a year. Once eventually to the United States. you meet all the requirements for that status. you have established bona fide residence in You are clearly a transient in the first in- a foreign country for an uninterrupted period stance. However, in the second, you are a Effect of voting by absentee ballot. If you that includes an entire tax year, you will resident because your stay in London ap- are a U.S. citizen living abroad, you can vote qualify as a bona fide resident for the period pears to be permanent. If your residency is by absentee ballot in any elections held in the starting with the date you actually began the not as clearly defined as either of these illus- United States without risking your status as residence and ending with the date you trations, it may be more difficult to decide a bona fide resident of a foreign country. abandon the foreign residence. You could whether you have established a bona fide However, if you give information to the qualify as a bona fide resident for part of a tax residence. local election officials about the nature and year. length of your stay abroad that does not Determination. Questions of bona fide match the information you give for the bona Example. You were a bona fide resident residence are determined according to each fide residence test, the information given in of England from March 1, 1995, through individual case, taking into account such fac- connection with absentee voting will be con- September 14, 1997. On September 15, tors as your intention or the purpose of your sidered in determining your status, but will not 1997, you returned to the United States. trip and the nature and length of your stay necessarily be conclusive. Since you were a bona fide resident of a for- abroad. eign country for all of 1996, you qualify as a You must show the Internal Revenue bona fide resident from March 1, 1995, Service (IRS) that you have been a bona fide Uninterrupted period including entire tax through September 14, 1997. resident of a foreign country or countries for year. To qualify for bona fide residence, you an uninterrupted period that includes an entire must reside in a foreign country for an unin- Reassignment. If you are assigned from tax year. The IRS decides whether you qualify terrupted period that includes an entire tax one foreign post to another, you may or may as a bona fide resident of a foreign country year. An entire tax year is from January 1 not have a break in foreign residence be- largely on the basis of facts you report on through December 31 for taxpayers who file tween your assignments, depending on the Form 2555, Foreign Earned Income. File this their income tax returns on a calendar year circumstances. form with your income tax return on which you basis. claim the exclusion of foreign earned income. During the period of bona fide residence Example 1. You were a resident of IRS cannot make this determination until you in a foreign country—even during the first full France from October 1, 1996, through No- file Form 2555. year—you can leave the country for brief or vember 30, 1997. On December 1, 1997, you temporary trips back to the United States or and your family were returned to the United elsewhere for vacation or business. To keep States by your employer to wait for an as- Statement to foreign authorities. You are your status as a bona fide resident of a for- signment to another foreign country. Your not considered a bona fide resident of a foreign country, you must have a clear intention household goods also were returned to the eign country if you make a statement to the of returning from such trips, without unrea- United States. authorities of that country that you are not a sonable delay, to your foreign residence or to Your foreign residence ended on Novem- resident of that country, and the authorities a new bona fide residence in another foreign ber 30, 1997, and did not begin again until hold that you are not subject to their income country. after you were assigned to another foreign tax laws as a resident. country and physically entered that country. If you have made such a statement and Example 1. You are the Lisbon repre- Since you were not a bona fide resident of a the authorities have not made a final decision sentative of a U.S. employer. You arrive with foreign country for the entire tax year of 1996 on your status, you are not considered to be your family in Lisbon on November 1, 1995. or 1997, you do not qualify under the bona a bona fide resident of that foreign country. Your assignment is indefinite, and you intend fide residence test in either year. You may, to live there with your family until your com- however, qualify for the foreign earned in- Special agreements and treaties. The in- pany sends you to a new post. You imme- come exclusion or the housing exclusion or come tax exemption provided in a treaty or diately establish residence there. On April 1, deduction under the physical presence test, other international agreement will not in itself 1996, you arrive in the United States to meet discussed later. Chapter 4 Foreign Earned Income and Housing: Exclusion - Deduction Page 13 Example 2. Assume the same facts as day you can count toward the 330–day total in Example 1, except that upon completion is the day following the day you leave the Exceptions to Tests of your assignment in France you were given United States. The following discussions under this heading a new assignment to England. On December are exceptions to meeting the requirements 1, 1997, you and your family returned to the Example. You leave the United States under the bona fide residence and the phys- United States for a month's vacation. On by air at 9:30 a.m. on June 10 to travel to ical presence tests. January 2, 1998, you arrived in England for Spain. You pass over a part of France at your new assignment. Because you did not 11:00 p.m. on June 10 and arrive in Spain at Waiver of Time Requirements interrupt your bona fide residence abroad, 12:30 a.m. on June 11. Your first full day in you qualify at the end of 1997 as a bona fide a foreign country is June 11. Both the bona fide residence test and the resident of a foreign country. physical presence test contain minimum time Foreign move. You can move about from requirements. The bona fide residence test one place to another in a foreign country or requires residence in a foreign country or Physical Presence Test to another foreign country without losing full countries for an uninterrupted period that in- You meet the physical presence test if you days. But if any part of your travel is not within cludes an entire tax year (January – Decem- are physically present in a foreign country or a foreign country or countries and takes 24 ber 31 for calendar year taxpayers). The countries 330 full days during a period of 12 hours or more, you will lose full days. physical presence test requires presence in consecutive months. The 330 qualifying days a foreign country or countries for 330 days Example 1. You leave London by air at during a period of 12 consecutive months. do not have to be consecutive. The physical 11:00 p.m. on July 6 and arrive in Stockholm presence test applies to both U.S. citizens The minimum time requirements can be at 5:00 a.m. on July 7. Your trip takes less waived, however, if you must leave a foreign and resident aliens. than 24 hours and you lose no full days. The physical presence test is concerned country because of war, civil unrest, or only with how long you stay in a foreign Example 2. You leave Norway by ship similar adverse conditions in that country. country or countries. This test does not de- at 10:00 p.m. on July 6 and arrive in Portugal You also must be able to show that you rea- pend on the kind of residence you establish, at 6:00 a.m. on July 8. Since the trip takes sonably could have expected to meet the your intentions about returning, or the nature more than 24 hours, you lose as full days July minimum time requirements if it had not been and purpose of your stay abroad. However, 6, 7, and 8. If you remain in Portugal, your for the adverse conditions. Before you can your intentions with regard to the nature and next full day in a foreign country is July 9. qualify for the waiver, you must actually have purpose of your stay abroad are relevant in your tax home in the foreign country and be determining whether you meet the tax home In U.S. while in transit. If you are in a bona fide resident of, or be physically test. transit between two points outside the United present in, the foreign country. States and are physically present in the 12–month period. Your 12–month period United States for less than 24 hours, you are Countries affected. The IRS has deter- can begin with any day of any calendar not treated as present in the United States mined that adverse conditions existed in the month. It ends the day before the same cal- during the transit. You are treated as traveling following countries during the periods shown. endar day, 12 months later. over areas not within any foreign country. If you left one of these countries during the period shown, you can qualify for the bona Example. Your flight touches down in How to figure the 12–month period. Four fide residence test or physical presence test London on June 13, 1997. Your 12–month rules you should know when figuring the without meeting the minimum time require- period ends on June 12, 1998. 12–month period are: ment. However, in figuring your exclusion, the First, your 12–month period can begin number of your qualifying days of bona fide Purpose of stay. Your presence in a foreign with any day of the month. It ends the day residence or physical presence includes only country does not have to be only for employ- before the same calendar day, 12 months days of actual residence or presence within ment purposes. Some of the qualifying later. the country. foreign-presence time can be vacation time Second, your 12–month period must be in foreign countries. made up of consecutive months. Any Country Time Periods 12–month period can be used if the 330 days Beginning Ending Less than 330 full days. Generally, to meet in a foreign country fall within that period. Afghanistan April 23, 1979 (Still in effect) the physical presence test, you must be Third, you do not have to begin your Algeria Dec. 10, 1993 March 10, 1994 physically present in a foreign country or 12–month period with your first full day in a Angola Oct. 31, 1992 March 1, 1993 countries for at least 330 full days during the foreign country or to end it with the day you Bosnia & April 7, 1992 (Still in effect) 12–month period. This means that if illness, leave. You can choose the 12–month period Herzegovina family problems, a vacation, or your employ- that gives you the greatest exclusion. Burundi April 8, 1994 Oct. 4, 1994 er's orders cause you to be present for less Congo June 15, 1993 Aug. 14, 1993 than the required amount of time, you cannot Example. You are a construction worker Croatia April 7, 1992 (Still in effect) meet the physical presence test. who works on and off in a foreign country over Former June 13, 1992 (Still in effect) Exception. You can be physically present a 20–month period. You might pick up the 330 Yugoslav Re- in a foreign country or countries for less than full days in a 12–month period only during the public of 330 full days and still meet the physical middle months of the time you work in the Macedonia foreign country because the first few and last presence test if you are required to leave a Haiti Oct. 29, 1991 Jan. 18, 1994 country because of war or civil unrest. See few months of the 20–month period are bro- June 10, 1994 Oct. 7, 1994 Waiver of Time Requirements, later. ken up by long visits to the United States. Iran Sept. 1, 1978 (Still in effect) Lebanon Aug. 31, 1979 (Still in effect) Full day. A full day is a period of 24 hours Fourth, in determining if the 12–month in a row, beginning at midnight. You must period falls within a longer stay in the foreign Liberia Oct. 20, 1992 Feb. 16, 1993 Montenegro * June 13, 1992 (Still in effect) spend each of the 330 full days in a foreign country, any 12–month period can overlap another. Rwanda April 8, 1994 July 6, 1994 country. When you leave the United States to Serbia * June 13, 1992 (Still in effect) go directly to a foreign country or when you Example. You work in Canada for a Somalia Dec. 21, 1990 (Still in effect) return directly to the United States from a 20–month period from January 5, 1996, foreign country, the time you spend on or over Sudan Aug. 21, 1993 Feb. 16, 1994 through September 4, 1997, except that you Tajikistan Oct. 24, 1992 Feb. 19, 1993 international waters does not count toward spend February 1996 and February 1997 on the 330–day total. Yemen May 5, 1994 Aug. 2, 1994 vacation in the United States. You are present Zaire Sept. 24, 1991 Jan. 18, 1994 Example. You leave the United States for in Canada 330 full days during each of the *Montenegro and Serbia, formerly part of the So- France by air on June 10. You arrive in following two 12–month periods. One cialist Federal Republic of Yugoslavia, have as- France at 9:00 a.m. on June 11. Your first full 12–month period can begin January 5, 1996, serted the formation of a joint independent state, but day in France is June 12. and end January 4, 1997; the second period this entity has not been formally recognized as a can begin September 5, 1996, and end Sep- state by the United States. Passing over foreign country. If, in tember 4, 1997. By overlapping the 12–month traveling from the United States to a foreign periods in this way, you meet the physical The above list is effective up to and in- country, you pass over a foreign country be- presence test for the whole 20–month period. cluding May 28, 1996. See Publication 553, fore midnight of the day you leave, the first See Table 4–1. Highlights of 1997 Tax Changes, for any ad- Page 14 Chapter 4 Foreign Earned Income and Housing: Exclusion - Deduction TABLE 4-1. Time Line (For the Entire 20-Month Period You Worked in Canada) First Full 12-Month Period

J. F. M. A. M. J. J. A. S. O. N. D. J. F. M. A. M. J. J. A. S. 5/96 96 96 96 96 96 96 96 5/96 96 96 96 4/97 97 97 97 97 97 97 97 4/97 * **

Second Full 12-Month Period

* 29-day vacation in the United States. ** 28-day vacation in the United States. ditions or changes to this list made after that 5) Included in your income as a recaptured Source of Earned Income date. If, based on the above list, you are en- unallowable moving expense (see Mov- The source of earned income is the place titled to a foreign earned income exclusion ing Expenses in chapter 5), or where you perform the services. Foreign or deduction for a prior year, you should file earned income is income you receive for an amended return. If, based on a later list, 6) Received after the end of the tax year performing personal services in a foreign you find you are entitled to an exclusion or following the tax year in which you per- country. Where or how you are paid has no deduction for this year, you should file an formed the services that earned the in- effect on the source of the income. For ex- amended return. come. ample, income you receive for work done in France is income from a foreign source even Earned income is pay for personal ser- U.S. Travel Restrictions if the income is paid directly to your bank ac- vices performed, such as wages, salaries, count in the United States and your employer If you are present in a foreign country in vio- or professional fees. The list that follows is located in New York City. lation of U.S. law, you will not be treated as classifies many types of income into three If you receive a specific amount for work a bona fide resident of or physically present categories. The column headed Variable lists done in the United States, you must report in a foreign country while you are in violation income that may fall into the category of that amount as U.S. source income. If you of the law. Furthermore, income that you earn earned, unearned, or partly into both. For cannot determine how much is for work done from sources within such a country for ser- more information on earned and unearned in the United States, or for work done partly vices performed during a period of violation income, see Earned and Unearned Income, in the United States and partly in a foreign does not qualify as foreign earned income. later. country, determine the amount of U.S. source Housing expenses that you incur within that income using the method that most correctly country (or outside that country for housing Unearned shows the proper source of your income. your spouse or dependents) while you are in Earned Income Income Variable In most cases you can make this deter- violation of the law cannot be included in fig- Salaries and Dividends Business mination on a time basis. U.S. source income uring your foreign housing amount. wages Interest profits is the amount that results from multiplying Currently, the countries to which travel Commissions Capital gains Royalties Bonuses Gambling Rents your total pay (including allowances, re- restrictions apply and the beginning dates of imbursements other than for foreign moves, the restrictions are as follows: Professional fees winnings Tips Alimony and noncash fringe benefits) by a fraction. Social security The numerator (top number) is the number • Cuba — January 1, 1987, benefits of days you worked within the United States. Pensions • Iraq — August 2, 1990, The denominator (bottom number) is the total Annuities number of days of work for which you are • Libya — January 1, 1987. In addition to the types of earned income paid. listed, the following noncash income and al- The restrictions are still in effect in all three lowances or reimbursements are considered Example. You are a U.S. citizen, a bona countries. earned income. They must be included in the fide resident of Country A, and working as a listing of earned income on Form 2555. mining engineer. Your salary is $36,800 per year. You also receive a $5,000 cost of living Foreign Earned Income allowance, and a $5,000 education allow- Noncash income. The fair market value of ance. Your employment contract did not indi- The computation of the foreign earned in- property or facilities provided by your em- cate that you were entitled to these allow- come exclusion, the foreign housing exclu- ployer for: ances only while outside the United States. sion, and the foreign housing deduction is Your total pay is $46,800. You work a 5–day based on foreign earned income. For this • Home (lodging) week, Monday through Friday. After sub- purpose, foreign earned income is income tracting your vacation, you have a total of 240 you receive for services you perform in a for- • Meals workdays in the year. You worked in the eign country during a period your tax home United States during the year for 6 weeks, is in a foreign country and you meet either the • Car which included 30 workdays. The following bona fide residence test or the physical • Other shows how to figure your wages paid for work presence test, which are discussed earlier. done in the United States during the year. Foreign earned income does not include Number of days worked in the U.S. during amounts: Allowances or reimbursements you re- the year (30) ÷ Number of days of work during ceive for: the year for which payment was made (240) 1) Already excluded from your income as × Total pay ($46,800)=$5,850. meals and lodging furnished for the Your U.S. source income is $5,850. convenience of your employer, • Cost of living 2) Received as a pension or annuity, in- • Overseas differential Earned and cluding social security benefits (see • Family Unearned Income Pensions and annuities, later), Earned income was defined earlier as pay for • Education 3) Paid by the U.S. Government to its em- personal services performed. Some types of ployees (see U.S. Government Employ- • Home leave income are not easily identified as earned or ees, later), unearned income. These types of income • Quarters —specifically, income from sole 4) Included in your income because of your • Moving (unless excluded from income as proprietorships, partnerships, and corpo- employer's contributions to a nonexempt discussed later) rations, stock options, pensions and annui- employee trust or to a nonqualified an- ties, royalties, rents, and fringe benefits—are nuity contract, • Other further explained here. Income from sole Chapter 4 Foreign Earned Income and Housing: Exclusion - Deduction Page 15 proprietorships and partnerships generally is the work you did, then $40,000 is earned in- in a house provided by your employer that treated one way, and income from corpo- come. has a fair rental value of $2,000 a month. The rations is treated another way. house is not provided for your employer's Stock options. You may have earned in- convenience. You report on the calendar Trade or business—sole proprietorship or come if you disposed of stock that you got year, cash basis. You received $48,000 sal- partnership. Generally, income from a by exercising a stock option granted to you ary from foreign sources plus $24,000 fair business in which capital investment is an under an employee stock purchase plan. rental value of the house, or a total of important part of producing income is un- If your gain on the disposition of option $72,000. earned income. However, if you are a sole stock is treated as capital gain, your gain is proprietor or partner and your personal ser- not earned income. Reimbursement of employee expenses. If vices are also an important part of producing However, if you disposed of the stock less you are reimbursed under an accountable the income, part of it will be treated as your than 2 years after you were granted the option plan (defined below) for expenses you incur pay (earned income). or less than 1 year after you got the stock, on your employer's behalf and you have ad- The amount treated as your pay cannot part of the gain on the disposition may be equately accounted to your employer for the be more than the smaller of: earned income. It is considered received in expenses, do not include the reimbursement the year you disposed of the stock and for those expenses in your earned income. 1) The value of your personal services to earned in the year you performed the services The expenses for which you are reim- the business, or for which you were granted the option. Any bursed are not considered allocable (related) 2) If there are net profits, 30% of your share part of the earned income that is due to work to your earned income. If expenses and re- of the net profits of the business. you did outside the U.S. is foreign earned in- imbursement are equal, there is nothing to come. allocate to excluded income. If expenses are Example 1. You are a U.S. citizen and See Publication 525, Taxable and Non- more than the reimbursement, the unreim- meet the bona fide residence test. You invest taxable Income, for a discussion of treatment bursed expenses are considered to have in a partnership based in Italy that is engaged of stock options. been incurred in producing earned income solely in selling merchandise outside the and must be divided between your excluded United States. You perform no services for Pensions and annuities. For purposes of and included income in determining the the partnership. At the end of the tax year, the foreign earned income exclusion, the for- amount of unreimbursed expenses you can your share of the net profits is $80,000. The eign housing exclusion, and the foreign deduct. (See Chapter 5.) If the reimbursement entire $80,000 is unearned income. housing deduction, amounts received as is more than the expenses, no expenses re- pensions or annuities are not earned income. main to be divided between excluded and in- Example 2. Assume that in Example 1 cluded income and the excess must be in- you spend time operating the business. Your Royalties. Royalties from the leasing of oil cluded in earned income. share of the net profits is $80,000, 30% of and mineral lands and patents generally are These rules do not apply to straight- your share of the profits is $24,000. If the not earned income. These royalties are a commission salespersons or other individuals value of your services for the year is $15,000, form of rent or dividends and are unearned who are employees and have arrangements your earned income is limited to the value of income. with their employers under which, for with- your services, $15,000. Royalties received by a writer are earned holding tax purposes, their employers con- income if they are received: sider a percentage of the commissions to be No net profits. If you have no net profits, attributable to the expenses of the employees the part of your gross profit that represents a 1) For the transfer of property rights of the and do not withhold taxes on that percentage. reasonable allowance for personal services writer in the writer's product, or Accountable plan. An accountable plan actually performed is considered earned in- is a reimbursement or allowance arrangement 2) Under a contract to write a book or series come. Because you do not have a net profit, that includes all three of the following rules. the 30% limit does not apply. of articles. If capital is not an income-producing 1) The expenses covered under the plan factor and personal services produce the Rental income. Generally, rental income is must have a business connection. business income, the 30% rule does not ap- unearned income. If you perform personal ply. The entire amount of business income is services in connection with the production of 2) The employee must adequately account earned income. rent, up to 30% of your net rental income can to the employer for these expenses be considered earned income. within a reasonable period of time. Example. You and Lou Green are man- 3) The employee must return any excess agement consultants and operate as an equal Example. Larry Smith, a U.S. citizen living in France, owns and operates a rooming reimbursement or allowance within a partnership in performing services outside the reasonable period of time. United States. Because capital is not an house in Paris. If he is operating the rooming income-producing factor, all the gross income house as a business that requires capital and personal services, he can consider up to 30% Reimbursement of moving expenses. from the partnership is considered earned in- Earned income may include reimbursement come. of net rental income as earned income. On the other hand, if he just owns the rooming of moving expenses. You must include as earned income: Trade or business—corporation. Income house and performs no personal services connected with its operation, except perhaps from a corporation is not treated the same as 1) Any reimbursements of, or payments for, making minor repairs and collecting rents, income from a sole proprietorship or partner- nondeductible moving expenses; ship. The salary you receive from a corpo- none of his net income from the house is ration is earned income only if it represents considered earned income. 2) Reimbursement amounts that are more a reasonable allowance as compensation for than your deductible expenses and that work you do for the corporation. Any amount Income of an artist. Income you receive you do not return to your employer; from the sale of paintings is earned income over what is considered a reasonable salary 3) Any reimbursements made (or treated if you painted the pictures yourself. is not earned income. as made) under a nonaccountable plan (any plan that does not meet the rules Example 1. You are a U.S. citizen and Use of employer's property or facilities. If listed above for an accountable plan), an officer and stockholder of a corporation in you receive fringe benefits in the form of the even if they are for deductible expenses; Canada. You perform no work or service of right to use your employer's property or facil- and any kind for the corporation. During the tax ities, you must add the fair market value of year you receive a $10,000 “salary” from the that right to your pay. Fair market value is 4) Any reimbursement of moving expenses corporation. The entire $10,000 clearly is not the price at which the property would change you deducted in an earlier year. for personal services and is not earned in- hands between a willing buyer and a willing come. seller, neither being required to buy or sell, This section discusses reimbursements that and both having reasonable knowledge of all must be included in earned income. Publica- Example 2. You are a U.S. citizen and the necessary facts. tion 521, Moving Expenses, discusses addi- devote full time as secretary-treasurer of your tional rules that apply to moving expense de- corporation. During the tax year you receive Example. You are privately employed ductions and reimbursements. $50,000 as salary from the corporation. If and live in Japan all year. You are paid a The rules for determining when the re- $40,000 is a reasonable allowance as pay for salary of $4,000 a month. You live rent-free imbursement is considered earned or where Page 16 Chapter 4 Foreign Earned Income and Housing: Exclusion - Deduction the reimbursement is considered earned may Move to U.S. If the move is to the United during the period you are in the foreign differ somewhat from the general rules previ- States, the moving expense reimbursement country. ously discussed. that must be included in income is generally Although you receive the reimbursement considered to be U.S. source income. in one tax year, it may be considered earned However, if under either an agreement U.S. Government Employees for services performed, or to be performed, in between you and your employer or a state- For purposes of the foreign earned income another tax year. You must report the re- ment of company policy that is reduced to exclusion and the foreign housing exclusion imbursement as income on your return in the writing before your move to the foreign coun- or deduction, foreign earned income does not year you receive it, even if it is considered try, your employer will reimburse you for your include any amounts paid by the United earned during a different year. move back to the United States regardless States or any of its agencies to its employees. Move from U.S. to foreign country. If of whether you continue to work for the em- Payments to employees of nonappropriated a move is from the United States to a foreign ployer, the includible reimbursement is con- fund activities are not foreign earned income. country, the moving expense reimbursement sidered compensation for past services per- Nonappropriated fund activities include: is considered pay for future services to be formed in the foreign country. The includible performed at the new location. The re- reimbursement is considered earned in the imbursement is considered earned solely in tax year of the move if you qualify under the 1) Armed forces post exchanges the year of the move if your tax home is in a bona fide residence test or the physical 2) Officers' and enlisted personnel clubs foreign country and you qualify under the presence test for at least 120 days during that bona fide residence test or physical presence tax year. Otherwise, you treat the includible 3) Post and station theaters test for at least 120 days during that tax year. reimbursement as received for services per- If you do not qualify under either test for formed in the foreign country in the year of the 4) Embassy commissaries. 120 days during the year of the move, the move and the year immediately before the reimbursement is considered earned in the year of the move. Amounts paid by the United States or its year of the move and the year following the See the discussion under If a move is from agencies to persons who are not their em- year of the move. To figure the amount the United States to a foreign country to figure ployees may qualify for exclusion or de- earned in the year of the move, multiply the the amount of the includible reimbursement duction. reimbursement by a fraction. The numerator considered earned in the year of the move. If you are a U.S. Government employee (top number) is the number of days in your The amount earned in the year before the paid by a U.S. agency that assigned you to qualifying period that fall within the year of the year of the move is the difference between a foreign government to perform specific ser- move, and the denominator (bottom number) the total includible reimbursement and the vices for which the agency is reimbursed by is the total number of days in the year of the amount earned in the year of the move. the foreign government, your pay is from the move. U.S. Government and does not qualify for the The difference between the total re- Example. You are a U.S. citizen em- exclusion or deduction. imbursement and the amount considered ployed in a foreign country. You retired from If you have questions about whether you earned in the year of the move is the amount employment with your employer on March 31 are an employee or an independent contrac- considered earned in the year following the of last year, and returned to the United States tor, get Publication 15–A, Employer's Sup- year of the move. The part earned in each after having been a bona fide resident of the plemental Tax Guide. year is figured as shown in the following ex- foreign country for several years. A written ample. agreement with your employer entered into before you went abroad provided that you Panama Canal Commission. U.S. employ- Example. You are a U.S. citizen working would be reimbursed for your move back to ees of the Panama Canal Commission are in the United States. You were told in October the United States. employees of a U.S. Government agency and of last year that you were being transferred In April of last year, your former employer are not eligible for the foreign earned income to a foreign country. You arrived in the for- reimbursed you $2,000 for the part of the cost exclusion on their salaries from that source. eign country on December 15 of last year, of your move back to the United States that Furthermore, no provision of the Panama and you qualify as a bona fide resident for the you were not allowed to deduct. Because you Canal Treaty or Agreement exempts their in- remainder of last year and all of this year. were not a bona fide resident for at least 120 come from U.S. taxation. Employees of the Your employer reimburses you $2,000 in days last year (the year of the move), the Panama Canal Commission and civilian em- January of this year for part of the expense includible reimbursement is considered pay ployees of the Defense Department of the of moving to the foreign country that you were for services performed in the foreign country United States stationed in Panama can ex- not allowed to deduct. Because you did not for both last year and the year before last. clude certain foreign-area and cost-of-living qualify as a bona fide resident for at least 120 You figure the part of the moving expense allowances. See Publication 516, U.S. Gov- days last year (the year of the move), the re- reimbursement for services performed in the ernment Civilian Employees Stationed imbursement is considered pay for services foreign country last year by multiplying the Abroad, for more information. performed in the foreign country for both last total includible reimbursement by a fraction. These employees cannot exclude any year and this year. The fraction is the number of days of foreign overseas tropical differential they receive. You figure the part of the moving expense residence during the year (90) divided by the reimbursement for services performed in the number of days in the year (365 or 366). The American Institute in Taiwan. Amounts foreign country last year by multiplying the remaining part of the includible reimburse- paid by the American Institute in Taiwan are total reimbursement by a fraction. The fraction ment is for services performed in the foreign not considered foreign earned income for is the number of days during which you were country the year before last. You report the purposes of the exclusion of foreign earned a bona fide resident during the year of the amount of the includible reimbursement on income or the exclusion or deduction of for- move divided by 365 (366 if it was a leap your Form 1040 for last year, the tax year you eign housing amounts. If you are an em- year). The remaining part of the reimburse- received it. ployee of the American Institute in Taiwan, ment is for services performed in the foreign allowances you receive are exempt from U.S. country this year. In this example, if you qualify to ex- tax up to the amount that equals tax-exempt This computation is used only to deter- TIP clude income under the physical allowances received by civilian employees of mine when the reimbursement is considered presence test instead of the bona fide the U.S. Government. earned. You would report the amount you in- residence test for last year, you may have had clude in income in this tax year, the year you more than 120 qualifying days in the year of received it. Allowances. Cost-of-living and foreign-area the move because you can choose the allowances paid under certain Acts of Con- 12–month qualifying period that is most ad- gress to U.S. civilian officers and employees Move between foreign countries. If the vantageous to you. (See Physical presence stationed in Alaska and Hawaii or elsewhere move is between foreign countries, and you test, later under Part-year exclusion.) If so, outside the 48 contiguous states and the qualify for at least 120 days during the tax the moving expense reimbursement would be District of Columbia can be excluded from year under the bona fide residence test or the considered earned entirely in the year of the gross income. See Publication 516 for more physical presence test, the moving expense move (last year). information. Post differentials are wages that reimbursement that must be included in in- Storage expense reimbursements. If must be included in gross income, regardless come is considered earned in the tax year of you are reimbursed for storage expenses, the of the Act of Congress under which they are the move. reimbursement is for services you perform paid. Chapter 4 Foreign Earned Income and Housing: Exclusion - Deduction Page 17 Exclusion of Foreign camps. If you are provided lodging foreign country. You can exclude all of the by or for your employer in a camp located in $65,000. Meals and Lodging a foreign country, the camp is considered to This year you will receive $85,000: You do not include in your income the value be part of your employer's business premises. $10,000 for services performed in the foreign of meals and lodging provided to you and For this purpose, a camp is lodging that is: country last year and $75,000 for services your family by your employer at no charge if performed in the foreign country this year. the following conditions are met: 1) Provided for your employer's conven- You can exclude $5,000 of the $10,000 re- ience because the place where you work ceived for services performed last year. This 1) The meals are: is in a remote area where satisfactory is the $70,000 maximum exclusion minus housing is not available to you on the $65,000 excluded. You must include the re- a) Furnished on the business prem- open market within a reasonable com- ises of your employer, and maining $5,000 in income (this year) because muting distance, you could not have excluded that income last year had you received it then. You can also b) Furnished for the convenience of 2) Located as close as reasonably possible exclude $70,000 of the $75,000 received for your employer. in the area where you render services, services performed during this year. and 2) The lodging is: Your total foreign earned income excluded a) Furnished on the business prem- 3) Provided in a common area or enclave on your return for this year would be $75,000 ises of your employer, that is not available to the general public ($5,000 attributable to last year and $70,000 for lodging or accommodations and that attributable to this year). You would have b) Furnished for the convenience of normally houses at least ten employees. $10,000 of includible income. your employer, and Year-end payroll period. There is an ex- c) A condition of your employment. ception to the rule that you exclude income (You are required to accept it). in the year you earn it. If you are a cash basis Foreign Earned taxpayer, a salary or wage payment that you Amounts not included in income because of receive after the end of the tax year in which these rules are not included in foreign earned Income Exclusion you perform the services is considered income. earned entirely in the year you receive it if If your tax home is in a foreign country and all the following apply: Family. Your family, for this purpose, in- you meet the bona fide residence test or the cludes only your spouse and your depen- physical presence test, you can choose to 1) The period for which the payment is dents. exclude from your income a limited amount made is a normal payroll period of your of your foreign earned income. Foreign employer that regularly applies to you, earned income is defined earlier. You cannot Lodging. This includes the cost of heat, deduct expenses directly connected with the 2) The payroll period includes the last day electricity, gas, water, sewer service, and earning of excluded income. See Chapter 5. of your tax year, similar items needed to make the lodging You can also choose to exclude from your habitable. 3) The payroll period is not longer than 16 income a foreign housing amount. This is days, and explained later. If you choose to exclude a Employer's place of business. Your em- foreign housing amount, you must figure the 4) The payday comes at the same time in ployer's place of business generally means foreign housing exclusion first. Your foreign relation to the payroll period that it would your workplace. For example, if you work as earned income exclusion is limited to your normally come and it comes before the a housekeeper, meals and lodging provided foreign earned income minus your foreign end of the next payroll period. in your employer's home are provided at your housing exclusion. employer's place of business. Similarly, Income earned over more than 1 year. meals provided to cowhands while herding Regardless of when you actually receive in- cattle on land leased or owned by their em- Limit on Excludable Amount come, you must credit it to the tax year in ployer are considered provided at their em- You may be able to exclude up to $70,000 which you earned it in figuring your ployer's place of business. of income earned in each year. excludable amount for that year. For example, a bonus that you receive in 1 year may be Your employer's convenience. Whether Limits. You cannot exclude more than the based on services you performed over sev- meals or lodging are provided for your em- smaller of eral tax years. You determine the amount of ployer's convenience must be determined the bonus that is considered earned in a from all the facts. Meals or lodging provided 1) $70,000, or particular tax year by dividing the bonus by to you and your family by your employer will the number of calendar months in the period be considered provided for your employer's 2) Your foreign earned income (discussed when you performed the services that re- convenience if there is a good business rea- earlier) for the tax year minus your for- sulted in the bonus and then multiplying the son for providing the meals or lodging, other eign housing exclusion (discussed later). result by the number of months you per- than merely giving you more pay. formed these services during the tax year. If both you and your spouse work abroad If your employer has a good business This is the amount that is subject to the ex- and you each meet either the bona fide resi- reason for providing the meals or lodging, do clusion limit for that tax year. dence test or the physical presence test, you not include their value in your income, even can each choose the foreign earned income though your employer may also intend them Income received more than 1 year after it exclusion. It is possible for a married couple as part of your pay. You can exclude the was earned. You cannot exclude income together to exclude as much as $140,000. value of meals or lodging from your income you receive after the end of the tax year fol- If you perform services one year but do even if a law or your employment contract lowing the tax year in which you perform the not get paid for those services until the fol- says that they are provided as compensation. services that earned it. lowing year, the income is generally consid- On the other hand, if meals or lodging are ered earned in the year you performed the provided to you or your family by your em- services. If you report your income on the Community income. The maximum exclu- ployer as a means of giving you more pay, cash basis, you report the income on your sion applies individually to the earnings of a and there is no other business reason for return for the year you receive it. You can husband and wife. Ignore any community providing them, their value is extra income to exclude as much of the income in the year property laws when you figure your limit on you. you receive it as you could have excluded in the foreign earned income exclusion. the year you performed the services had you Condition of employment. Lodging is pro- received the income that year. Part-year exclusion. If you qualify under vided as a condition of employment if you either the bona fide residence test or the must accept the lodging to properly carry out Example. You qualify as a bona fide physical presence test for only part of the tax the duties of your job. You must accept lodg- resident of a foreign country for all of last year year, you must adjust the maximum limit ing to properly carry out your duties if, for and this year. You report your income on the based on the number of qualifying days in example, you must be available for duty at cash basis. You received $65,000 last year your tax year. The number of qualifying days all times. for services you performed last year in the in your tax year is the number of days within Page 18 Chapter 4 Foreign Earned Income and Housing: Exclusion - Deduction the period you have your tax home in a for- These are limits on the amount you Because requesting a ruling can be com- eign country and meet either test. ! can exclude. You can never exclude plex, you may need professional help. Also, For this purpose, you can count as quali- CAUTION more pay than you actually earned the IRS charges a fee for issuing these fying days all days within a period of 12 con- during your qualifying period. rulings. For more information, see Revenue secutive months once you are physically Procedure 97–1, which is published in I.R.B. present and have your tax home in a foreign 97–1. country for 330 full days. To figure your Choosing the Exclusion In deciding whether to give approval, the maximum exclusion, multiply $70,000 by the The foreign earned income exclusion is vol- IRS will consider any facts and circumstances number of your qualifying days in the year, untary. You can separately choose the foreign that may be relevant. These may include a and then divide the result by the number of earned income exclusion and the foreign period of United States residence, a move days in your tax year. housing exclusion by completing the appro- from one foreign country to another foreign priate parts of Form 2555, Foreign Earned country with different tax rates, a substantial Example. You report your income on the Income. Your initial choice of the exclusions change in the tax laws of the foreign country calendar-year basis and qualified under the on Form 2555 or Form 2555–EZ generally of residence or physical presence, and a bona fide residence test for only 75 days last must be filed with a timely filed return (in- change of employer. year. You can exclude a maximum of 75/366 cluding any extensions), a return amending Foreign tax credit. Once you choose to of $70,000, or $14,344, of your foreign earned a timely filed return, or a late-filed return filed exclude either foreign earned income or for- income for last year. If you qualify under the within 1 year from the original due date of the eign housing costs, you cannot take a foreign bona fide residence test for all of this year, return (determined without regard to any ex- tax credit for taxes on excludable income. If you can exclude your foreign earned income tensions). you do take the credit, one or both of the up to the full $70,000 limit. You can choose the exclusion on a return choices may be considered revoked. See filed after the periods described above pro- Credit for Foreign Income Taxes in Chapter Physical presence test. Under the 5 for more information. physical presence test, a 12–month period vided you owe no federal income tax after can be any period of 12 consecutive months taking into account the exclusion. If you owe that includes 330 full days. If you qualify un- federal income tax after taking into account Earned income credit. You will not qualify der the physical presence test for part of a tax the exclusion, you can choose the exclusion for the earned income credit if you claim the year, it is important to carefully choose the on a return filed after the periods described foreign earned income exclusion, the foreign 12–month period that will allow the maximum above provided you file before IRS discovers housing exclusion, or the foreign housing de- exclusion for that year. that you failed to choose the exclusion. You duction for the year. For more information on must type or legibly print at the top of the first this credit, see Publication 596, Earned In- Example. You are physically present and page of the Form 1040 “FILED PURSUANT come Credit. have your tax home in a foreign country for TO SECTION 1.911–7(a)(2)(i)(D).” If you owe a 16–month period from June 1, 1996 through federal income tax after taking into account September 30, 1997, except for 15 days in the foreign earned income exclusion and the December 1996 that you spend on vacation IRS discovered that you failed to choose the in the United States. You figure the maximum exclusion, you must request a private letter amount excludable from your income in 1996 ruling under Revenue Procedure 92–85 (as Foreign Housing as follows: modified by Revenue Procedure 93–28). Revenue procedures are published in the Exclusion or 1) Beginning with June 1, 1996, count for- Internal Revenue Bulletin (I.R.B.) and in the Deduction ward 330 full days (disregarding the 15 Cumulative Bulletin (C.B.), which are volumes days in the U.S.). The 330th day, May containing official matters of the Internal In addition to the foreign earned income ex- 11, 1997, is the last day of a 12–month Revenue Service. You can buy the C.B. clusion, you can also separately claim an ex- period. containing a particular revenue procedure clusion or a deduction from gross income for from the Superintendent of Documents, U.S. your housing amount if your tax home is in a 2) Count backward 12 months from May Government Printing Office, Washington, DC foreign country and you qualify under either 11, 1997, to find the first day of this 20402. the bona fide residence test or the physical 12–month period, May 12, 1996. This You may also be able to choose the for- presence test. 12–month period runs from May 12, eign earned income exclusion by completing The housing exclusion applies only to 1996, through May 11, 1997. Form 2555–EZ, Foreign Earned Income Ex- amounts considered paid for with employer- 3) Count the total days during 1996 that fall clusion. provided amounts. The housing deduction within this 12–month period. This is 234 Once you choose to exclude your foreign applies only to amounts paid for with the days (May 12, 1996—December 31, earned income or housing amount, that proceeds of self-employment. 1996). choice remains in effect for that year and all If you are married and each spouse qual- later years unless you revoke it. ifies under one of the tests, see Married 4) Multiply $70,000 by the fraction 234/366 Couples Living Apart, later. to find your maximum exclusion for 1996 Revocation. You can revoke your choice for ($44,754). any tax year. You do this by attaching a statement that you are revoking one or more Housing Amount You figure the maximum exclusion for previously made choices to the return or 1997 in the opposite manner: amended return for the first year that you do Your housing amount is your housing ex- not wish to claim the exclusion(s). You must penses after subtracting a base amount. 1) Beginning with your last full day, Sep- revoke separately a choice to exclude foreign tember 30, 1997, count backward 330 earned income and a choice to exclude for- full days (disregarding the 15 days in the eign housing amounts. Base amount. The base amount is 16% of U.S.). That day, October 21, 1996, is the If you revoked a choice and within 5 tax the annual salary of a GS–14, step 1, U.S. first day of a 12–month period. years again wish to choose the same exclu- Government employee, figured on a daily sion, you must apply for IRS approval. You basis, times the number of days during the 2) Count forward 12 months from October year that you meet the bona fide residence 21, 1996, to find the last day of this do this by requesting a ruling from the Internal Revenue Service. test or the physical presence test. The annual 12–month period, October 20, 1997. salary is determined on January 1 of the year This 12–month period runs from October Mail your request for a ruling in du- in which your tax year begins. 21, 1996, through October 20, 1997. plicate to: On January 1, 1997, the GS–14 salary 3) Count the total days during 1997 that fall was $58,915 per year; 16% of this amount within this 12–month period. This is 293 comes to $9,426 or $25.82 per day. To figure days (January 1, 1997—October 20, Associate Chief Counsel (International) your base amount if you are a calendar-year 1997). Internal Revenue Service taxpayer, multiply $25.82 by the number of CC:DOM:CORP:T your qualifying days during 1997 (see Limit 4) Multiply $70,000, the maximum limit, by P.O. Box 7604 on Excludable Amount, earlier). Subtract the the fraction 293/365 to find your maxi- Ben Franklin Station result from your total housing expenses for mum exclusion for 1997 ($56,192). Washington, DC 20044 1997 to find your housing amount. Chapter 4 Foreign Earned Income and Housing: Exclusion - Deduction Page 19 Example. You qualify under the physical Adverse living conditions include a state either case, the amount you can deduct is presence test for all of 1997. During the year, of warfare or civil insurrection in the general subject to the limit explained below. you spend $12,500 for your housing. Your area of your tax home and conditions under housing amount is $12,500 minus $9,426, or which it is not feasible to provide family Self-employed — no employer-provided $3,074. housing (for example, if you must live on a amounts. If none of your housing amount is construction site or drilling rig). considered paid for with employer-provided U.S. Government allowance. You must re- amounts, such as when all of your income is duce your housing amount by any U.S. Gov- from self-employment, you can deduct your ernment allowances or similar nontaxable al- Foreign Housing Exclusion housing amount, subject to the limit below, in lowances intended to compensate you or your If you have no self-employment income, your figuring your adjusted gross income. spouse for the expenses of housing during entire housing amount is considered paid for Take the deduction by including it in the the period for which you claim a foreign with employer-provided amounts. This means total on line 31 of Form 1040. Write the housing exclusion or deduction. that you can exclude (up to the limits) the amount and “Form 2555” on the dotted line entire amount. next to line 31. Housing expenses. Housing expenses in- Employer-provided amounts include any clude your reasonable expenses paid or in- amounts paid to you or paid or incurred on Self-employed and employer-provided curred for housing in a foreign country for you your behalf by your employer that is taxable amounts. If you are both an employee and and (if they live with you) for your spouse and foreign earned income (without regard to the a self-employed individual during the year, dependents. foreign earned income exclusion) to you for you can deduct part of your housing amount Consider only housing expenses for the the tax year. This includes: and exclude part of it. To find the part that you part of the tax year that your tax home is in can take as a housing exclusion, multiply your a foreign country and that you meet either the 1) Your salary, housing amount by the employer-provided bona fide residence test or the physical 2) Any reimbursement for housing ex- amounts (discussed earlier) and then divide presence test. penses, the result by your foreign earned income. The Housing expenses include rent, the fair balance of the housing amount can be de- rental value of housing provided in kind by 3) Amounts your employer pays to a third ducted, subject to the limit below. your employer, and other expenses for hous- party for your housing, ing, such as repairs, utilities (other than tele- Example. Your housing amount for the 4) The fair rental value of company-owned phone charges), real and personal property year is $6,000. During the year, your total housing furnished to you unless that insurance, nondeductible occupancy taxes, foreign earned income is $40,000, of which value is excluded from your income be- nonrefundable fees for securing a leasehold, half ($20,000) is from self-employment and cause it is provided for your employer's rental of furniture and accessories, and resi- half is from your services as an employee. convenience, dential parking. Half ($20,000/$40,000) of your housing Housing expenses do not include ex- 5) Amounts paid to you by your employer amount ($6,000/2) is considered provided by penses that are lavish or extravagant under as part of a tax equalization plan, and your employer. You can exclude $3,000 as a the circumstances. They also do not include housing exclusion. You can deduct the re- deductible interest and taxes (including 6) Amounts paid to you or a third party by maining $3,000 as a housing deduction sub- deductible interest and taxes of a tenant- your employer for the education of your ject to the following limit. stockholder in a cooperative housing corpo- dependents. ration) or the cost of buying property, includ- Limit ing principal payments on a mortgage. They Your only earnings that are not employer- do not include the cost of domestic labor provided amounts are earnings from self- Your housing deduction cannot be more than (maids, gardeners, etc.), pay television sub- employment. your foreign earned income minus the total scriptions, improvements and other expenses of: that increase the value or appreciably prolong Choosing the exclusion. You can choose the life of property, purchased furniture or the housing exclusion by completing the ap- 1) Your foreign earned income exclusion, accessories, or depreciation or amortization propriate parts of Form 2555. Follow the rules plus explained earlier in Choosing the Exclusion, of property or improvements. 2) Your housing exclusion. under Foreign Earned Income Exclusion. No double benefit. You cannot in- You cannot use Form 2555–EZ to claim the You can carry over to the next year any part clude in housing expenses any ! housing exclusion. of your housing deduction that is not allowed CAUTION amounts that you exclude from gross Your housing exclusion is the lesser of: because of this limit. income as meals or lodging provided for your employer's convenience on the business • That part of your housing amount paid for premises (see Exclusion of Meals and Lodg- with employer-provided amounts, or Carryover. You are allowed to carry over ing, earlier) or that you deduct as moving ex- your excess housing deduction to the follow- penses. • Your foreign earned income. ing year only. If you cannot deduct it in the following year, you cannot carry it over to any If you choose the housing exclusion, you other year. You deduct the carryover in figur- must figure it before figuring your foreign ing adjusted gross income. The amount of earned income exclusion. You cannot claim carryover you can deduct is limited to your Second foreign household. Ordinarily, less than the full amount of the housing ex- foreign earned income for the year of the if you maintain two foreign households, your clusion to which you are entitled. carryover minus the total of your foreign reasonable foreign housing expenses include Foreign tax credit. Once you choose earned income exclusion, housing exclusion, only costs for the household that bears the and housing deduction for that year. closer relationship (not necessarily ge- ! to exclude either foreign earned in- ographic) to your tax home. However, if you CAUTION come or foreign housing costs, you maintain a second, separate household out- cannot take a foreign tax credit for taxes on Married Couples side the United States for your spouse or excludable income. If you do take the credit, dependents because living conditions near one or both of the choices may be considered Living Apart your tax home are dangerous, unhealthful, revoked. If you and your spouse live apart and maintain or otherwise adverse, include the expenses separate households, you both may be able for the second household in your reasonable to claim the foreign housing exclusion or the foreign housing expenses. You cannot in- foreign housing deduction for your own rea- clude expenses for more than one second sonable housing expenses. You can do this foreign household at the same time. Foreign Housing Deduction if you have different tax homes that are not If you maintain two households, one of If you have no self-employment income, you within reasonable commuting distance of which you exclude the value of because it is cannot take a foreign housing deduction. each other and neither spouse's residence is provided by your employer, you can still in- How you figure your housing deduction within reasonable commuting distance of the clude the expenses for the second household depends on whether you have only self- other spouse's tax home. Otherwise, only one in figuring a foreign housing exclusion or de- employment income or both self-employment spouse can exclude or deduct a housing duction. income and employer-provided income. In amount. Page 20 Chapter 4 Foreign Earned Income and Housing: Exclusion - Deduction If you both claim the housing exclu- utable to employer-provided amounts, based presence test to claim the foreign earned in- TIP sion or the housing deduction, neither on his or her separate foreign earned income. come exclusion, the foreign housing exclu- of you can claim the expenses for a sion, or the foreign housing deduction, you qualified second foreign household main- must each file a separate Form 2555 to tained for the other spouse. If one of you claim these benefits. See the discussion ear- qualifies for but does not claim the exclusion Form 2555 and lier under Married Couples Living Apart. or the deduction, the other spouse can claim the expenses for a qualified second house- Form 2555–EZ hold maintained for the first spouse. This Form 2555 can be used to claim the foreign would usually result in a larger total housing Illustrated Example earned income exclusion. It must be used to exclusion or deduction since you would apply claim the foreign housing exclusion or de- Jim and Judy Adams are married, with two only one base amount against the combined duction. In some circumstances you can use dependent children. They are both U.S. citi- housing expenses. Form 2555–EZ to claim the foreign earned zens and file a joint U.S. income tax return. If you and your spouse live together, both income exclusion. Each one has a tax home in a foreign country of you claim a foreign housing exclusion or a You must attach Form 2555, Foreign and each one meets the physical presence foreign housing deduction, and you file a joint Earned Income, to your Form 1040 or 1040X test for all of 1997. They both can exclude return, you can figure your housing amounts if you claim the foreign housing exclusion or their foreign earned income up to the limit. either separately or jointly. If you file separate the foreign housing deduction. If you cannot Jim is a petroleum engineer. He works returns, you must figure your housing use Form 2555–EZ, you must attach Form primarily in the Persian Gulf region. For 1997, amounts separately. In figuring your housing 2555 if you claim the foreign earned income his salary, which was entirely from foreign amounts separately, you can allocate your exclusion. Form 2555 shows how you qualify sources, amounted to $71,000. In addition, housing expenses between yourselves in any for the bona fide residence test or physical his employer provided him an annual housing proportion you wish, but each spouse must presence test, how much of your earned in- allowance of $18,000, which he used to use his or her full base amount. come is excluded, and how to figure the maintain a rented apartment at his tax home In figuring your housing amount jointly, amount of your allowable housing exclusion in Country X for the period he was not work- you can combine your housing expenses and or deduction. Unless you completely and ing at remote drilling sites. figure one base amount. If you figure your correctly provide all the information, there will At various times during the year, Jim housing amount jointly, only one spouse can be delays in processing your original tax re- worked at remote oil drilling sites in nearby claim the housing exclusion or housing de- turn or your claim for refund (Form 1040X). countries. While he worked at these remote duction. Either spouse can claim the exclu- Do not submit Form 2555 by itself. See the sites, his employer provided him lodging and sion or deduction. However, if you and your instructions for Form 2555 if you are not sure meals at nearby camps. Satisfactory housing spouse have different periods of residence about the information requested. was not available on the open market near or presence and the one with the shorter pe- these drilling sites, and the lodging was pro- riod of residence or presence claims the ex- vided in common areas that normally accom- clusion or deduction, you can claim as hous- Form 2555–EZ modated 10 or more employees and were not ing expenses only the expenses for that Form 2555–EZ is a form that has fewer lines available to the general public. The fair mar- shorter period. than Form 2555. You can use this form if: ket value of the lodging he was provided in these camps was $2,000, and the value of the Example. Tom and Jane live together meals was $1,000. and file a joint return. Tom was a bona fide • You had foreign earned income of only wages and salaries of $70,000 or less, Jim was reimbursed by his employer, after resident of and had his tax home in a foreign he made an adequate accounting, for part of country from August 17, 1997, through De- • The return being filed is not for a short his travel expenses and other employee cember 31, 1998. Jane was a bona fide resi- or fiscal year, and business expenses. In addition, Jim had dent of and had her tax home in the same • You do not have a housing deduction $2,500 of unreimbursed employee business foreign country from September 15, 1997, carryover. expenses for travel, meals, and lodging that through December 31, 1998. were allocable to his foreign earned income. During 1997 Tom received $50,000 of However, you cannot use Form 2555–EZ if Because of adverse conditions in Country foreign earned income, and Jane earned and you have self-employment income, business X, Judy and the children lived in Paris, received $25,000 of foreign earned income. or moving expenses, or claim the foreign France, while Jim worked in the Middle East. Tom paid $10,000 for housing expenses in housing deduction or housing exclusion. Judy had a job as an executive secretary with 1997, of which $7,500 was for expenses in- a U.S. company in Paris. Her earnings from curred from September 15 through the end this job were $25,000 in 1997. These of the year. Jane paid $3,000 for housing Form 2555 earnings were subject to French income tax. expenses in 1997, all of which were incurred If you claim exclusion under the bona fide The Adams family rented an apartment in during her period of foreign residence. residence test, you should fill out completely Paris during 1997 for Judy and the children. Tom and Jane can choose to figure their Parts II, IV, and V of Form 2555 as well as They paid $750 a month rent, including utili- housing amount jointly. If they do so, and Tom Part I. In filling out Part II, be sure to give your ties, or $9,000 for the year. The Adamses claims the housing exclusion, their housing visa type and the period of your bona fide choose to treat the expenses for the Paris expenses would be $13,000 and their base residence. Frequently, these items are over- apartment as those for a qualified second amount, using Tom's period of residence looked. foreign household, because conditions at (Aug. 11–Dec. 31,1997), would be $3,537.34 If you claim exclusion under the physical Jim's tax home in Country X are considered × ($25.82 137 days). Tom's housing amount presence test, you should fill out completely to be adverse. They include the $9,000 Paris would be $9,462.66 ($13,000–$3,537.34). If, Parts III, IV, and V of Form 2555 as well as housing expenses with Jim's $18,000 Country instead, Jane claims the housing exclusion, Part I. When filling out Part III, be sure to in- X housing expenses and this results in a their housing expenses would be limited to sert the beginning and ending dates of your larger total housing exclusion. $10,500 ($7,500 + $3,000) and their base 12–month period and the dates of your ar- Jim and Judy had taxable U.S. interest amount, using Jane's period of residence rivals and departures as requested in the income of $7,500 in 1997. The Adamses had (Sept. 15–Dec. 31,1997), would be $2,788.56 travel schedule. Your attention is directed to no other income for the year and do not × ($25.82 108 days). Jane's housing amount these items in particular because frequently itemize deductions. would be $7,711.44 ($10,500–$2,788.56). they are omitted. The Adamses report their income, figure If Tom and Jane choose to figure their In addition, you must complete Part VI if their foreign earned income exclusions and housing amounts separately, then Tom's you are claiming an exclusion or deduction foreign housing exclusion, and figure their tax separate base amount would be $3,537.34 of foreign housing amounts. Also complete as shown on the accompanying filled-in and Jane's separate base amount would be Part IX if you are claiming the foreign housing forms. $2,788.56. They could divide their total deduction. If you are claiming the foreign First, they list their income on the front of $13,000 housing expenses between them in earned income exclusion, complete Part VII. Form 1040. Their combined salaries, includ- any proportion they wished. Finally, if you are claiming the foreign earned ing Jim's $18,000 housing allowance, amount income exclusion, the foreign housing exclu- to $114,000. They enter this on line 7 and Housing exclusion. Each spouse claiming sion, or both, complete Part VIII. their interest income of $7,500 (including a list a housing exclusion must figure separately If you and your spouse each qualify under of payers and amounts on Schedule B (Form the part of the housing amount that is attrib- the bona fide residence test or the physical 1040)—not illustrated) on line 8a. Chapter 4 Foreign Earned Income and Housing: Exclusion - Deduction Page 21 At this point, Jim will complete Form 2555 Although Judy could claim a separate they are all allocable to excluded income. and Judy will complete Form 2555–EZ to fig- TIP housing exclusion for the expenses However, the Adamses are still entitled to the ure their foreign earned income and housing of the Paris apartment rather than full standard deduction for a married couple exclusions. On Jim's Form 2555, Part IV, he combining those expenses with Jim's housing filing jointly. lists his salary on line 19, his housing allow- expenses, she does not do so because she Judy completes a Form 2555–EZ to figure ance on line 22e, and the fair market value would have to reduce her expenses by a her foreign earned income exclusion. Her of meals and lodging provided in camps by separate base housing amount. Also, her foreign earned income is well below the his employer on lines 21a and 21b. This last foreign earned income is less than the maximum excludable amount ($70,000). On item, totaling $3,000, is not shown as income $70,000 maximum foreign earned income Judy's Form 2555–EZ, Part IV, she lists her on Form 1040. Jim subtracts it on line 25 of exclusion, so claiming a separate housing salary on line 17. She figures an exclusion Form 2555. exclusion would not result in any tax benefit. of $25,000 on line 18. Jim combines his housing expenses, Jim figures his foreign earned income ex- The Adamses enter their combined ex- $18,000, with the qualified expenses for the clusion in Part VII of Form 2555. Because his clusions of $112,574 on line 21, Form 1040. second household that he maintains for his foreign earned income minus his housing ex- They identify this item to the left of the entry wife and children, $9,000, and enters total clusion is greater than the maximum exclu- space. Their adjusted gross income on line housing expenses of $27,000 on line 28, Part sion of $70,000, Jim is entitled to exclude 32 is $8,926, mostly from their interest in- VI. He puts a base amount of $9,426 on line $70,000 for 1997. come, which does not qualify for exclusion. 30 and subtracts that amount to arrive at a When Jim combines the exclusion of After subtracting their standard deduction total foreign housing amount of $17,574 on $70,000 with his housing exclusion of of $6,900 and $2,650 for each of their four line 31. He figures an exclusion of $17,574 $17,574 he comes up with a total exclusion exemptions, Jim and Judy arrive at a taxable (attributable to the amounts provided by his of $87,574 in Part VIII. income of zero on page 2 of Form 1040. They employer) on line 34. None of his unreimbursed employee owe no tax for the year. business expenses are allowable because

Page 22 Chapter 4 Foreign Earned Income and Housing: Exclusion - Deduction Department of the Treasury—Internal Revenue Service Form 1040 (1997) Page 2

Form 1040 U.S. Individual Income Tax Return 97 (99) IRS Use Only—Do not write or staple in this space. 33 Amount from line 32 (adjusted gross income) 338,926 For the year Jan. 1–Dec. 31, 1997, or other tax year beginning , 1997, ending , 19 OMB No. 1545-0074 Tax 34a Check if: You were 65 or older, Blind; Spouse was 65 or older, Blind. Page 23 Label Your first name and initial Last name Your social security number Compu- Add the number of boxes checked above and enter the total here ᮣ 34a (See L tation A James M. Adams 1 1 1 00 1 1 1 1 instructions b on page 10.) BIf a joint return, spouse’s first name and initial Last name Spouse’s social security number E If you are married filing separately and your spouse itemizes deductionsᮣ or 34b L Judith E. Adams 222 00 2222 Use the IRS you were a dual-status alien, see page 18 and check here Home address (number and street). If you have a P.O. box, see page 10. Apt. no. Itemized deductions from Schedule A, line 28, OR label. H For help in finding line 35 Enter Otherwise, E 21 Rue Reynaud the Standard deduction shown below for your filing status. But see 6,900 R instructions, see pages page 18 if you checked any box on line 34a or 34b or someone 35 please print E 2 and 3 in the booklet. larger or type. City, town or post office, state, and ZIP code. If you have a foreign address, see page 10. of can claim you as a dependent. Paris, France your: ● Single—$4,150 ● Married filing jointly or Qualifying widow(er)—$6,900 Yes No Note: Checking ͕͖ Presidential “Yes”ߛ will not ● Head of household—$6,050 ● Married filing separately—$3,450 2,026 Election CampaignDo you want $3 to go to this fund? changeߛ your tax or reduce your refund. Subtract36 line 35 from line 33 36 (See page 10.) ᮣIf a joint return, does your spouse want $3 to go to this fund? If you want 10,600 the IRS to ߛ 37 If line 33 is $90,900 or less, multiply $2,650 by the total number of exemptions claimed on -0- 1 Single figure your 37 Filing Status tax, see line 6d. If line 33 is over $90,900, see the worksheet on page 19 for the amount to enter 2 Married filing joint return (even if only one had income) page 18. Taxable38 income. Subtract line 37 from line 36. If line 37 is more than line 36, enter -0- 38 3 Married filing separate return. Enter spouse’s social security no. above andᮣ full name here. 39 Tax. See page 19. Check if any tax from b Form 4972 ᮣ 39 Head of household (with qualifying person). (See page 10.) If the qualifying person is a child but not your dependent, Check only 4 40 Credit for child and dependent care expenses. Attach Form40 2441 one box. enter this child’s name here.ᮣ Credits ߛ Credit for the elderly or the disabled. Attach Schedule R 5 Qualifying widow(er) with dependent child (year spouseᮣ died19 ). (See page 10.) a Form(s) 8814 2 42 Adoption credit. Attach Form 8839 42 6a Yourself. If your parent (or someone else) can claim you as a dependent on his or her tax ߛ No. of boxes 43 43 Exemptions return, do not check box 6a checked on Foreign41 tax credit. Attach Form 1116 41 ͖6a and 6b 44 Other. Check if froma Form 3800 b Form 8396 b Spouse 44 -0- No. of your 2 c Form 8801 d Form (specify) Dependent’s(4) No. of months c Dependents:Chris T. Adams (2)333 Dependent’s00 3333(3) Daughter 12children on 6c 45 relationship to lived in your who: Add 45lines 40 through 44 (1) First nameStephen F. Adams Last name social444 security00 number4444 Son home in 1997 12 you ᮣ ● lived with you Subtract46 line 45 from line 39. If line 45 is more than line 39, enter -0- 46 ● did not live with 47 47 If more than six you due to divorce Self-employment tax. Attach Schedule SE Other 48 dependents, or separation Taxes 48 Alternative minimum tax. Attach Form 6251 see page 10. (see page 11) 49 4 49 Social security and Medicare tax on tip income not reported to employer. Attach Form 4137 Dependents on 6c 50 -0- not entered above 50 Tax on qualified retirement plans (including IRAs) and MSAs. Attach Form 5329 if required 114,000 Advance earned income credit payments from Form(s) W-2 51 Add numbers 51 entered on 7,500 52 Household employment taxes. Attach Schedule H 52 lines aboveᮣ d Total number of exemptions claimed 53 Add lines 46 through 52. This is your total tax ᮣ 53 7 Wages, salaries, tips, etc. Attach Form(s) W-2 7 54

54 Federal income tax withheld from Forms W-2 and 1099 Foreign Earned Income and Housing: Exclusion - Deduction Income 8a Payments 8a Taxable interest. Attach Schedule B if required 55 1997 estimated tax payments and amount applied from 199655 return b Tax-exempt interest. DO NOT include on line 8a 8b Attach 56a Earned income credit. Attach Schedule EIC if you have a qualifying Copy B of your 9 9 Dividends. Attach Schedule B if required child b Nontaxable earned income:ᮣ amount Forms W-2, 10 W-2G, and 10 Taxable refunds, credits, or offsets of state and local income taxes (see page 12) ᮣ 56a -0- Attach and type 1099-R here. 11 57 11 Alimony received Forms W-2, Amount57 paid with Form 4868 (request for extension) Chapter 4 12 W-2G, and 58 12 Business income or (loss). Attach Schedule C or C-EZ 1099-R on 58 Excess social security and RRTA tax withheld (see page 27) 13 Capital gain or (loss). Attach Schedule D the front. 59 13 59 Other payments. Check if froma Form 2439 b Form 4136 61 14 Other gains or (losses). Attach Form 4797 14 60 Add lines 54, 55, 56a, 57, 58, and 59. These are your total payments ᮣ 60 If you did not 15a 15b get a W-2, 15aTotal IRA distributions b Taxable amount (see page 13) 61 Refund If line 60 is more than line 53, subtract line 53 from line 60. This is the amount you OVERPAID 62a see page 12. 16a Total pensions and16a annuities b Taxable amount (see page 13)16b 62a ᮣ Enclose but do Forms 2555 & 2555-EZ Have it 17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule17 E directly Amount of line 61 you want REFUNDED TO YOU not attach any (112,574) ᮣ b Routing number ᮣ cType: Checking Savings 18 deposited! payment.18 Also,Farm income or (loss). Attach Schedule F 8,926 See page 27 please use19 Unemployment compensation 19 and fill in 62b,ᮣ d Account number Form 1040-V. 62c, and 62d. 20a Social security benefits20a b Taxable amount (see page 14)20b 63 Amount of line 61 you want APPLIED TO YOUR 1998 ESTIMATEDᮣ TAX63 21 Other income. List type and amount—see page 15 64 If line 53 is more than line 60, subtract line 60 from line 53. This is the AMOUNT YOU OWE. Amount James M. Adams 2-15-98 Engineer 21 You Owe For details on how to pay, see page 27 ᮣ 64 22 Add the amounts in the far right column for lines 7 through 21. This is your totalᮣ income22 65 Estimated tax penalty. Also include on line 64 65 Judith E. Adams 2-15-98 Secretary IRA23 deduction (see page 16) 23 Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and Sign belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. Adjusted 24 Medical savings account deduction. Attach Form 8853 24 Gross Here Your signature Date Your occupation 25 Moving expenses. Attach Form 3903 or 3903-F 25 -0- Income 26 One-half of self-employment tax. Attach Schedule SE 26 Keep a copy 8,926 of this return Spouse’s occupation 27 Self-employed health insurance deduction (see page 17) 27 for your Spouse’sᮣ signature. If a joint return, BOTH must sign. Date If line 32 is under records. $29,290 (under28 Keogh and self-employed SEP and SIMPLE plans 28 $9,770 if a child 29 Penalty on early withdrawal of savings 29 Date Preparer’s social security no. did not live with Preparer’s Check if Paidsignature ᮣ ᮣ self-employed you), see EIC inst.30a Alimony paid b Recipient’s SSN 30a ᮣ on page 21. Preparer’s Add 31lines 23 through 30a 31 Firm’s name (or yours EIN Use Only if self-employed) and 32 Subtract line 31 from line 22. This is your adjusted gross income ᮣ 32 address ZIP code

For Privacy Act and Paperwork Reduction Act Notice, see page 38. Cat. No. 11320B Form 1040 (1997) Printed on recycled paper OMB No. 1545-0067 Form 2555 (1997) Page 2 Form 2555 Foreign Earned Income 97 Part III Taxpayers Qualifying Under Physical Presence Test (See page 2 of the instructions.) ᮣ ᮣ Department of the Treasury See separate instructions. Attach to Form 1040. Attachment Internal Revenue Service Sequence No. 34 16 The physical presence test is based on the 12-month period from ᮣ 1-1-97 through ᮣ 12-31-97 For Use by U.S. Citizens and Resident Aliens Only 17 Enter your principal country of employment during your tax year. ᮣ Country X Name shown on Form 1040 Your social security number 18 If you traveled abroad during the 12-month period entered on line 16, complete columns (a)–(f) below. Exclude travel between James M. Adams 1 1 1 00 1111 foreign countries that did not involve travel on or over international waters, or in or over the United States, for 24 hours or more. If you have no travel to report during the period, enter “Physically present in a foreign country or countries for the entire Part I General Information 12-month period.” Do not include the income from column (f) below in Part IV, but report it on Form 1040.

1 Your foreign address (including country) 2 Your occupation (a) (d) Full days (e) Number of (f) Income earned in U.S. Name of country (b) (c) (including U.S.) Date arrived Date left present in days in U.S. on business (attach 10 Wadi Abu Hassan, City A, Country X Engineer country on business computation) 3 Employer’s name ᮣ Pan American Oil Company Physically present in foreign countries during entire 12 month period 4a Employer’s U.S. address ᮣ N/A b Employer’s foreign address ᮣ 65 Sheik Hussein Street, City A, Country X 5 Employer is (check a X A foreign entity b A U.S. company c Self ᮣ any that apply): d A foreign affiliate of a U.S. company e Other (specify) ᮣ Part IV All Taxpayers 6a If, after 1981, you filed Form 2555 to claim either of the exclusions or Form 2555-EZ to claim the foreign earned income exclusion, enter the last year you filed the form. ᮣ 1996 Note: Enter on lines 19 through 23 all income, including noncash income, you earned and actually or constructively received during b If you did not file Form 2555 or 2555-EZ after 1981 to claim either of the exclusions, check hereᮣ and go to line 7 now. your 1997 tax year for services you performed in a foreign country. If any of the foreign earned income received this tax year c Have you ever revoked either of the exclusions? Yes ߛ No was earned in a prior tax year, or will be earned in a later tax year (such as a bonus), see the instructions. Do not include dIf you answered “Yes,” enter the type of exclusion and the tax year for which the revocation was effective. ᮣ income from line 14, column (d), or line 18, column (f). Report amounts in U.S. dollars, using the exchange rates in effect when you actually or constructively received the income. 7 Of what country are you a citizen/national? ᮣ United States If you are a cash basis taxpayer, report on Form 1040 all income you received in 1997, no matter when you performed 8a Did you maintain a separate foreign residence for your family because of adverse living conditions at your the service. tax home? See Second foreign household on page 3 of the instructions ߛ Yes No bIf “Yes,” enter city and country of the separate foreign residence. Also, enter the number of days during your tax year that Amount 1997 Foreign Earned Income (in U.S. dollars) you maintained a second household at that address. ᮣ Paris, France 365 days 9 List your tax home(s) during your tax year and date(s) established. ᮣ City A, Country X 6-9-93 19 Total wages, salaries, bonuses, commissions, etc. 19 71,000 Next, complete either Part II or Part III. If an item does not apply, write “NA.” If you do not give 20 Allowable share of income for personal services performed (see instructions): the information asked for, any exclusion or deduction you claim may be disallowed. a In a business (including farming) or profession 20a b In a partnership. List partnership’s name and address and type of income. ᮣ 20b Part II Taxpayers Qualifying Under Bona Fide Residence Test (See page 2 of the instructions.) 21 Noncash income (market value of property or facilities furnished by employer—attach statement 10 Date bona fide residence began ᮣ , and ended ᮣ showing how it was determined): 11 Kind of living quarters in foreign countryᮣ a Purchased house bcRented house or apartment Rented room a Home (lodging) 21a 2,000 d Quarters furnished by employer 12a Did any of your family live with you abroad during any part of the tax year? ‘ Yes No b Meals 21b 1,000 b If “Yes,” who and for what period? ᮣ 13a Have you submitted a statement to the authorities of the foreign country where you claim bona fide residence c Car 21c that you are not a resident of that country? (See instructions.) Yes No d Other property or facilities. List type and amount. ᮣ b Are you required to pay income tax to the country where you claim bona fide residence? (See instructions.) Yes No 21d If you answered “Yes” to 13a and “No” to 13b, you do not qualify as a bona fide resident. Do not complete the rest of 22 Allowances, reimbursements, or expenses paid on your behalf for services you performed: this part. a Cost of living and overseas differential 22a 14 If you were present in the United States or its possessions during the tax year, complete columns (a)–(d) below. Do not b Family 22b include the income from column (d) in Part IV, but report it on Form 1040. c Education 22c (a) (b) (c) Number of (d) Income earned in (a) (b) (c) Number of (d) Income earned in 22d Date Date left Date Date left days in U.S. U.S. on business d Home leave arrived in U.S. U.S. days in U.S. U.S. on business arrived in U.S. U.S. on business (attach computation) on business (attach computation) e Quarters 22e 18,000 f For any other purpose. List type and amount. ᮣ 22f

g Add lines 22a through 22f 22g 18,000 15a List any contractual terms or other conditions relating to the length of your employment abroad. ᮣ 23 Other foreign earned income. List type and amount. ᮣ 23 b Enter the type of visa under which you entered the foreign country. ᮣ c Did your visa limit the length of your stay or employment in a foreign country? If “Yes,” attach explanation Yes No 24 Add lines 19 through 21d, line 22g, and line 23 24 92,000 dDid you maintain a home in the United States while living abroad? Yes No e If “Yes,” enter address of your home, whether it was rented, the names of the occupants, and their relationship 25 Total amount of meals and lodging included on line 24 that is excludable (see instructions) 25 3,000 Foreign Earned Income and Housing: Exclusion - Deduction to you. ᮣ 26 Subtract line 25 from line 24. Enter the result here and on line 27 on page 3. This is your 1997 foreign earned income ᮣ 26 89,000 For Paperwork Reduction Act Notice, see page 4 of separate instructions. Cat. No. 11900P Form 2555 (1997) Page 24 Chapter 4 Form 2555 (1997) Page 3 Part V All Taxpayers

27 Enter the amount from line 26 27 89,000 Are you claiming the housing exclusion or housing deduction? Yes. Complete Part VI. No. Go to Part VII. Part VI For Taxpayers Claiming the Housing Exclusion AND/OR Deduction

28 Qualified housing expenses for the tax year (see instructions) 28 27,000 29 Number of days in your qualifying period that fall within your 1997 tax year (see instructions) 29 365 30 Multiply $25.82 by the number of days on line 29. If 365 entered on line 29, enter $9,426.00 here 30 9,246 31 Subtract line 30 from line 28. If zero or less, do not complete the rest of this part or any of Part IX 31 17,574 32 Enter employer-provided amounts (see instructions) 32 89,000 33 Divide line 32 by line 27. Enter the result as a decimal (to two places), but do not enter more than “1.00” 33 ϫ 10. 0 34 Housing exclusion. Multiply line 31 by line 33. Enter the result but do not enter more than the amount on line 32. Also, complete Part VIII ᮣ 34 17,574 Note: The housing deduction is figured in Part IX. If you choose to claim the foreign earned income exclusion, complete Parts VII and VIII before Part IX. Part VII For Taxpayers Claiming the Foreign Earned Income Exclusion

35 Maximum foreign earned income exclusion 35 $70,000 00 36 ● If you completed Part VI, enter the number from line 29. 36 365 ● All others, enter the number of days in your qualifying period that fall within your 1997 tax year (see the instructions for line 29). ͖ 37 ● If line 36 and the number of days in your 1997 tax year (usually 365) are the same, enter “1.00.” 37 ϫ 10. 0 ● Otherwise, divide line 36 by the number of days in your 1997 tax year and enter the result as a decimal (to two places). ͖ 38 Multiply line 35 by line 37 38 70,000 39 Subtract line 34 from line 27 39 71,426 40 Foreign earned income exclusion. Enter the smaller of line 38 or line 39. Also, complete Part VIII ᮣ 40 70,000 Part VIII For Taxpayers Claiming the Housing Exclusion, Foreign Earned Income Exclusion, or Both

41 Add lines 34 and 40 41 87,574 42 Deductions allowed in figuring your adjusted gross income (Form 1040, line 32) that are allocable to the excluded income. See instructions and attach computation 42 43 Subtract line 42 from line 41. Enter the result here and in parentheses on Form 1040, line 21. Next to the amount write “Form 2555.” On Form 1040, subtract this amount from your income to arrive at total income on Form 1040, line 22 ᮣ 43 87,574 For Taxpayers Claiming the Housing Deduction—Complete this part only if (a) line 31 is more than Part IX line 34 and (b) line 27 is more than line 41.

44 Subtract line 34 from line 31 44

45 Subtract line 41 from line 27 45

46 Enter the smaller of line 44 or line 45 46 Note: If line 45 is more than line 46 and you could not deduct all of your 1996 housing deduction because of the 1996 limit, use the worksheet on page 4 of the instructions to figure the amount to enter on line 47. Otherwise, go to line 48. 47 Housing deduction carryover from 1996 (from worksheet on page 4 of the instructions) 47 48 Housing deduction. Add lines 46 and 47. Enter the total here and on Form 1040 to the left of line 31. Next to the amount on Form 1040, write “Form 2555.” Add it to the total adjustments reported on that line ᮣ 48

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Chapter 4 Foreign Earned Income and Housing: Exclusion - Deduction Page 25 OMB No. 1545-1326 Form 2555-EZ (1997) Page 2 Form 2555-EZ Foreign Earned Income Exclusion 97 Part III Days Present in the United States—Complete this part if you were present in Department of the Treasury Attachment Internal Revenue Service ᮣ See separate instructions.ᮣ Attach to Form 1040. Sequence No.34A the United States or its possessions in 1997. Name shown on Form 1040 Your social security number (c) Number of days (d) Income earned in U.S. (a) Date12 arrived in U.S. (b) Date left U.S. Judith E. Adams 222 00 2222 in U.S. on business on business (attach computation)

● Are a U.S. citizen or a resident alien. ● Do not have self-employment income. ● Earned wages/salaries in a foreign country. You May Use ● Had total foreign earned income of ● Do not have business/moving expenses. This Form $70,000 or less. And You: If You: ● Do not claim the foreign housing ● Are filing a calendar year return that exclusion or deduction. covers a 12-month period.

Part I Tests To See If You Can Take the Foreign Earned Income Exclusion

1 Bona Fide Residence Test ߛ Were you a bona fide resident of a foreign country or countries for a period that includes an entire tax year (see page 2 of the instructions)? Yes No a ● If you answered “Yes,” you meet this test. Fill in line 1b and then go to line 3. ●EnterIf you the answered date your “No,” bona you fide do residence not meet began this test. Go to line 2 to see if you meet the Physical Presence Test. ᮣ , and ended (see instructions)ᮣ . b 2 Physical Presence Test ߛ Were you physically present in a foreign country or countries for at least 330 full days during— Part IV Figure Your Foreign Earned Income Exclusion a 1997, or Yes No ͕͖any other period of 12 months in a row starting or ending in 1997? ● If you answered “Yes,” you meet this test. Fill in line 2b and then go to line1-1-97 3. 12-31-97 13 $70,000 00 ● If you answered “No,” you do not meet this test. You cannot take the exclusion unless you meet the Bona Fide Residence Test above. 13 Maximum foreign earned income exclusion The physical presence test is based on the 12-month period from ߛ 14 b ᮣ throughᮣ . Enter the number of days in your qualifying period that fall within 1997 365 14 3 Tax Home Test. Was your tax home in a foreign country or countries throughout your period of bona fide ● If you entered 365 days on line 14, enter “1.00” here. 15 10 Yes No ϫ . 0 residence or physical presence, whichever applies? 15 ● Otherwise, divide line 14 by 365 and enter the result here as a decimal (to two͖ places). ● If you answered “Yes,” you can take the exclusion. Complete Part II below and then go to page 2. If you answered “No,” you cannot take the exclusion. Do not file this form. ● 16 70,000 Multiply line 13 by line 15 21 Rue Reynaud 16 PartParis, II FranceGeneral Information Secretary 17 25,000 17 Enter, in U.S. dollars, the total foreign earned income you earned and received in 1997 (see Your foreign4 address (including country) Your occupation5 instructions). Be sure to include this amount on Form 1040, line 7 2645 Pewter Place 40 Rue Royale A B Insurance Co., Inc. Anytown, Anystate, U.S.A. Paris, France 18 Foreign earned income exclusion. Enter the smaller of line 16 or line 17 here and18 in 25,000 parentheses on Form 1040, line 21. Next to the amount write “2555-EZ.” On Form 1040, subtract 6 this amount from your income to arrive at total income on Form 1040, line 22 Employer’s name 7 Employer’s U.S. address (including ZIP code) 8 Employer’s foreign address ߛ ᮣ

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1996 9 Employer is (check any that apply): A U.S. business a Foreign Earned Income and Housing: Exclusion - Deduction b A foreign business Paris, France 6-1-93 11a cListOther your (specify) tax home(s)ᮣ during 1997 and date(s) established. 10a If you filed Form 2555 or 2555-EZ after 1981, enter the lastUnited year you States filed theᮣ form. b If you did not file Form 2555 or 2555-EZ after 1981, checkᮣ here and go to line 11a now. c Have you ever revoked the foreign earned income exclusion? Yes No d If you answered “Yes,” enter the tax year for which the revocation was effective.ᮣ ᮣ

b Of what country are you a citizen/national?ᮣ

For Paperwork Reduction Act Notice, see page 3 of separate instructions. Cat. No. 13272W Form 2555-EZ(1997) Page 26 Chapter 4 same deductions as citizens and residents Children. Children usually are citizens living in the United States. or residents of the same country as their If you choose to exclude foreign earned parents. If you were a U.S. citizen when your 5. income or housing amounts, you cannot de- child was born, your child may be a U.S. citi- duct, exclude, or claim a credit for any item zen. He or she may be a U.S. citizen even if that can be allocated to or charged against the child's other parent is a nonresident alien, Exemptions, the excluded amounts. This includes any ex- the child was born in a foreign country, and penses, losses, and other normally deductible the child lives abroad with the other parent. Deductions and items that are allocable to the excluded in- If you are a U.S. citizen living abroad and come. You can deduct only those expenses have a legally adopted child who is not a U.S. Credits connected with earning includible income. citizen or resident, you can claim an ex- This applies only to items definitely related emption for the child as a dependent if your to the excluded earned income, and does not home is the child's main home and the child apply to other items that are not definitely re- is a member of your household for your entire Topics lated to any particular type of gross income, tax year. For more information, see Publica- This chapter discusses: such as those for personal exemptions, qual- tion 501, Exemptions, Standard Deduction, ified retirement contributions, alimony pay- and Filing Information. • Items related to excluded income ments, charitable contributions, medical ex- • The exemption for a nonresident alien penses, mortgage interest, and real estate spouse or dependent taxes on your personal residence. For this • Contributions to a foreign charitable or- purpose, your housing deduction is not Contributions ganization treated as allocable to your excluded income, but the deduction for self-employment tax is. If you make contributions directly to a foreign • Moving expenses If you receive foreign earned income in a church or other foreign charitable organiza- tax year after the year in which you earned it, tion, you cannot deduct the contributions • Contributions to individual retirement ar- (unless you make them to certain Canadian rangements (IRAs) you may have to file an amended return for the earlier year to properly adjust the amounts or Mexican organizations). However, you can • Taxes of foreign countries and U.S. pos- of deductions, credits, or exclusions allocable deduct contributions to a U.S. organization sessions to your foreign earned income and housing that transfers funds to a charitable foreign organization if the U.S. organization controls • How to report deductions exclusions. the use of the funds by the foreign organiza- Example. If you excluded all of your tion, or if the foreign organization is just an $70,000 foreign earned income in 1996, you administrative arm of the U.S. organization. Useful Items Under the treaties with Canada and You may want to see: would not have been able to claim any deductions allocable to that excluded income. If Mexico, you can deduct contributions to cer- you then receive a bonus of $10,000 in 1997 tain Canadian and Mexican charitable organ- Publication for work you did abroad in 1996, you cannot izations. These organizations must meet the exclude it because it exceeds the $70,000 qualifications that a U.S. charitable organiza- Ⅺ 501 Exemptions, Standard Deduction tion must meet under U.S. tax law. The or- and Filing Information foreign earned income exclusion limit. (You have no housing exclusion.) But, you can file ganization can tell you whether it qualifies. If Ⅺ 514 Foreign Tax Credit for Individuals an amended return for 1996 to claim the you are unable to get this information from the organization itself, contact IRS at the address Ⅺ 521 Moving Expenses 10/80 of your allocable deductions that are now allowable ($10,000 included foreign below. Ⅺ 523 Selling Your Home earned income over $80,000 total foreign You cannot deduct more than the per- earned income). centage limit on charitable contributions ap- Ⅺ 590 Individual Retirement Arrange- plied to your Canadian or Mexican source in- ments (IRAs) (Including come. If you or a member of your family is SEP-IRAs and SIMPLE IRAs) enrolled at a Canadian college or university, Ⅺ 597 Information on the United the limit does not apply to gifts to that school. States–Canada Income Tax For additional information on the deduction Treaty Exemptions of contributions to Canadian charities, see Publication 597, Information on the United You can claim an exemption for your non- States–Canada Income Tax Treaty. Form (and Instructions) resident alien spouse on your separate return, provided your spouse has no gross income For more information about the United Ⅺ 1116 Foreign Tax Credit (Individual, for U.S. tax purposes and is not the depend- States–Mexico Income Tax Treaty, Estate, Trust, or Nonresident Al- ent of another U.S. taxpayer. write to: ien Individual) You can also claim exemptions for de- Ⅺ 2106 Employee Business Expenses pendents who qualify under all the depend- Internal Revenue Service ency tests. The dependent must be a U.S. Assistant Commissioner (International) Ⅺ 2555 Foreign Earned Income citizen or national, or must be a resident of Attn: CP:IN:D:CS Ⅺ 2555–EZ Foreign Earned Income Exclu- the United States, Canada, or Mexico for 950 L'Enfant Plaza South, S.W. sion some part of the calendar year in which your Washington, DC 20024 tax year begins. Ⅺ 3903 Moving Expenses Social security number. You must in- Ⅺ 3903–F Foreign Moving Expenses clude on your return the social security number of each dependent for whom you claim Ⅺ Schedule A (Form 1040) Itemized De- an exemption. To get a social security num- Moving Expenses ductions ber for a dependent, apply at a Social Secu- If you moved to a new home in 1997 because Ⅺ Schedule C (Form 1040) Profit or Loss rity office or U.S. consulate outside the United of your job or business, you may be able to From Business States. You must provide original or certified deduct the expenses of your move. To be copies of documents to verify the dependent's deductible, the moving expenses must have See chapter 7 for information about get- age, identity, and citizenship and complete been paid or incurred in connection with ting these publications and forms. Form SS–5. starting work at a new job location. If your dependent is a nonresident alien In addition, if you sold your home and who is not eligible to get a social security moved outside the United States, you may number, you must apply for an IRS Individual be eligible for an extended replacement pe- Exclusion vs. Taxpayer Identification Number (ITIN). To riod to reinvest the proceeds in a new home apply for an ITIN, file Form W–7 with the IRS. and thereby postpone tax on the capital gain. Deduction It usually takes 30 days to get an ITIN. Enter If you sold your home at a gain after May 6, U.S. citizens and resident aliens living outside your dependent's ITIN wherever an SSN is 1997, you may be able to exclude part or all the United States generally are allowed the requested on your tax return. of the gain from gross income. For more in- Chapter 5 Exemptions, Deductions and Credits Page 27 formation, see Publication 523, Selling Your 2) You will spend less time or money com- you cannot deduct the part of the moving ex- Home. muting from your new home to your new pense that is related to the excluded income. job. The moving expense is connected with earning the income (including reimburse- Requirements ments, as discussed in chapter 4 under Re- You may be able to deduct moving expenses Deductible Expenses imbursement of moving expenses) either en- if you meet the following requirements. You can only deduct certain expenses. tirely in the year of the move or in 2 years. It is connected with earning the income entirely Reasonable expenses. You can only deduct in the year of the move if you qualify under Distance expenses that are reasonable for the circum- the bona fide residence test or physical Your new job location must be at least 50 stances of your move. The cost of traveling presence test for at least 120 days during that miles farther from your former home than from your former home to your new one tax year. your old job location was. If you did not have should be by the shortest, most direct route If you do not qualify under either the bona an old job location, your new job location must available by conventional transportation. fide residence test or the physical presence be at least 50 miles from your former home. test for at least 120 days during the year of Reimbursements. If you are reimbursed by the move, the expense is connected with your employer for allowable moving ex- earning the income in 2 years. The moving Time penses, these reimbursements may have expense is connected with the year of the You must work full time for at least 39 weeks been excluded from your income. You cannot move and the following year if the move is during the 12 months right after you move. deduct moving expenses for which you were from the United States to a foreign country, In addition, if you are self-employed, you must reimbursed by your employer unless the re- or the year of the move and the preceding work full time for at least 78 weeks during imbursement was included in your income. year if the move is from a foreign country to the 24 months right after you move. the United States. Deductible moving expenses. Some of the To figure the amount of your moving ex- Retirees. You can deduct the cost of moving moving expenses that you may be able to pense that is allocable to your excluded for- to the United States when you permanently deduct include the reasonable costs of: eign earned income (and not deductible), you retire if your principal place of work and for- must multiply your total moving expense de- mer home were outside the United States and 1) Moving household goods and personal duction by a fraction. The numerator (top its possessions. You do not have to meet the effects (including packing, crating, in- number) of the fraction is your total excluded time test. The other requirements must be transit storage, and insurance) of both foreign earned income and housing amounts met. you and members of your household. for both years and the denominator (bottom For foreign moves, costs of moving number) of the fraction is the total foreign earned income for both years. Survivors. You can deduct moving ex- household goods and personal effects include reasonable expenses of moving penses for a move to the United States if you Example. You are transferred by your are the spouse or dependent of a person the items to and from storage and storing them for part or all of the period your new employer as of November 1, 1997, to a for- whose principal place of work at the time of eign country. Your tax home is in the foreign death was outside the United States or its place of work abroad continues to be your principal place of work. country, and you qualify as a bona fide resi- possessions. The move must begin within 6 dent for the entire tax year 1998. In 1997 you months after the death of the decedent and 2) Transportation and lodging for yourself paid $6,000 for allowable moving expenses must be from a home outside the United and members of your household for one for your move from the United States to the States in which you lived with the decedent trip from your former home to your new foreign country. You were fully reimbursed at the time of death. You are not required to home (including costs of getting pass- (under a nonaccountable plan) for these ex- meet the time test. The other requirements ports). penses in the same year. The reimbursement must be met. is included in your income. Your only other Foreign move. A foreign move is a move income consists of $14,000 wages earned in in connection with the start of work at a new 1997 after the date of your move, and Closely Related to the Start of job location outside the United States and its Work $80,000 wages earned in the foreign country possessions. A foreign move does not include for the entire year 1998. You exclude the Your move must be closely related, both in a move back to the United States or its pos- maximum amount under the foreign earned time and in place, to the start of work at your sessions. income exclusion and have no housing ex- new job location. Member of household. A member of clusion. your household includes anyone who has Because you did not meet the bona fide both your former and new home as his or her Closely related in time. In general, moving residence test for at least 120 days during home. It does not include a tenant or em- expenses incurred within one year from the 1997, the year of the move, the moving ex- ployee unless that person is your dependent. date you first reported to work are considered penses are for services you performed in both closely related in time to the start of work at 1997 and the following year, 1998. Your total the new location. Allocation of Moving Expenses foreign earned income for both years is If you do not move within one year, you Your deductible moving expenses must be $100,000, consisting of $14,000 wages for ordinarily cannot deduct the expenses unless incurred in connection with the start of your 1997, $80,000 wages for 1998, and $6,000 you can show that circumstances existed that work at a new job location. When your new moving expense reimbursement for both prevented the move within that time. place of work is in a foreign country, your years. moving expenses are directly connected with Of this total, $81,699 is excluded, con- Example. Your family moved more than the income earned in that foreign country. If sisting of the $70,000 full-year exclusion for a year after you started work at a new lo- all or part of the income that you earn at the 1998 and an $11,699 part-year exclusion for cation. Their move was delayed because you new location is excluded under the foreign 1997 ($70,000 times the fraction of 61 quali- allowed your child to complete high school. earned income exclusion or the housing ex- fying bona fide residence days over 365 total You can deduct your allowable moving exclusion, the part of your moving expense that days in the year). To find the part of your penses. is allocable to the excluded income is not moving expenses that is not deductible, mul- deductible. tiply your $6,000 total expenses by the frac- Closely related in place. A move is gener- Also, if you move from a foreign country tion $81,699 over $100,000. The result, ally considered closely related in place to the to the U.S. and: $4,902, is your nondeductible amount. start of work if the distance from your new home to the new job location is not more than • You are reimbursed for your move by You must report the full amount of the the distance from your former home to the your employer, ! moving expense reimbursement on new job location. A move that does not meet CAUTION your 1997 return, the year in which • You are able to treat the reimbursement this requirement may qualify if you can show you received the reimbursement. You attri- as compensation for services performed that: bute the reimbursement to both 1997 and in the foreign country, and 1998 only to figure the amount of foreign 1) A condition of employment requires you • You choose to exclude your foreign earned income eligible for exclusion for each to live at your new home, or earned income, year. Page 28 Chapter 5 Exemptions, Deductions and Credits Move between foreign countries. If you a foreign country that would be refunded by move between foreign countries and you the foreign country if you made a claim for qualified under the bona fide residence test Individual Retirement refund. or the physical presence test for at least 120 days during the year of the move, your mov- Arrangements If a foreign country returns your ing expense is allocable to the income earned ! foreign tax payments to you in the Contributions to your individual retirement ar- CAUTION in the year of the move. form of a subsidy, you cannot claim rangements (IRAs) are generally limited to the these payments as taxes qualified for the lesser of $2,000 or your compensation that is foreign tax credit. This rule applies to a sub- New place of work in U.S. If your new place includible in your gross income for the tax sidy provided by any means that is deter- of work is in the United States, the deductible year. For example, do not take into account mined, directly or indirectly, by reference to moving expenses are directly connected with compensation up to the amount of your for- the amount of tax, or to the base used to fig- the income earned in the United States. If you eign earned income exclusion and foreign ure the tax. treat a reimbursement from your employer as housing exclusion, if any. Do not reduce your foreign earned income (see the discussion in compensation by the foreign housing de- chapter 4), you must allocate deductible duction. moving expenses to foreign earned income. If you are covered by an employer retire- Subsidies. Some ways of providing a ment plan at work (or if your spouse is cov- subsidy are refunds, credits, deductions, ered), your deduction for your contributions payments, or discharges of obligations. The Storage expenses are attributable to ser- to your IRAs are limited based on your modi- credit is also not allowed if the subsidy is vices you perform during the year in which the fied adjusted gross income. The adjusted given to a person related to you, or persons storage expenses are incurred. The amount gross income shown on your return is modi- who participated in a transaction or a related allocable to excluded income is not deduct- fied by figuring it without regard to the foreign transaction with you. ible. earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. Foreign income taxes on U.S. return. For- Other modifications are also required. For eign income taxes can only be taken as a Recapture of Moving more information on IRAs, see Publication credit on Form 1116 or a deduction on 590, Individual Retirement Arrangements Schedule A. These amounts cannot be in- Expense Deduction (IRAs) (Including SEP-IRAs and SIMPLE cluded as withheld income taxes on Form IRAs). 1040, line 54. If your moving expense deduction is TIP attributable to your foreign earnings Foreign taxes paid on excluded income. in 2 years (the year of the move and You cannot take a credit or deduction for for- the following year), you should preferably re- eign income taxes paid on income that is ex- quest an extension of time to file your return empt from tax under the foreign earned infor the year of the move until after the end of Taxes of Foreign come exclusion, the foreign housing the following year. You should then have all exclusion, or the possession exclusion. If your the information needed to properly figure the Countries and wages are completely excluded, you cannot moving expense deduction. See Extensions U.S. Possessions deduct or take a credit for any of the foreign under When To File and Pay, in chapter 1. taxes paid on these wages. If you do not request an extension, you You can take either a credit or a deduction for If only part of your wages are excluded, should figure the part of the entire moving income taxes imposed on you by a foreign you cannot deduct or take a credit for the expense deduction that is disallowed. You do country or a U.S. possession. Taken as a foreign income taxes allocable to the ex- this by multiplying the moving expense by a deduction, foreign income tax reduces your cluded part. You find the taxes allocable to fraction, the numerator (top number) of which taxable income. Taken as a credit, foreign your excluded wages by applying a fraction is your excluded foreign earned income for income tax reduces your tax liability. You to the foreign taxes paid on foreign earned the year of the move, and the denominator must treat all foreign income taxes in the income received during the tax year. The nu- (bottom number) of which is your total foreign same way. You generally cannot deduct merator (top number) of the fraction is your earned income for the year of the move. Once some foreign income taxes and take a credit excluded foreign earned income received you know your foreign earnings and exclusion for others. See Deduction for Other Foreign during the tax year minus deductible ex- for the following year, you must either: Taxes, later. penses allocable to that income (not including There is no specific rule that will let you the foreign housing deduction). The denomi- choose the more advantageous method. If 1) Adjust the moving expense deduction nator (bottom number) of the fraction is your foreign income taxes were imposed at a high by filing an amended return for the year total foreign earned income received during rate, and the proportion of foreign income to of the move, or the tax year minus all deductible expenses U.S. income is small, a lower final tax may allocable to that income (including the foreign result from taking the foreign income tax de- 2) Recapture any additional unallowable housing deduction). duction. In any event, you should figure your amount as income on your return for the If foreign law taxes earned income and tax liability both ways and then use the one following year. some other amount (for example, unearned that is better for you. In most cases, it is to income, earned income from U.S. sources, your advantage to take foreign income taxes If, after you make the final computation, you or a type of income not subject to U.S. tax), as a tax credit, which you subtract directly have an additional amount of allowable mov- and the taxes on the other amount cannot be from your U.S. tax liability, rather than as a ing expense deduction, you can claim this segregated, the denominator of the fraction deduction in figuring taxable income. only on an amended return for the year of the is the total amount of income subject to for- You can make or change your choice move. You cannot claim it on the return for eign tax minus deductible expenses allocable within 10 years from the due date for filing the second year. to that income. your U.S. tax return for the tax year for which If you take a foreign tax credit for tax on you make the claim. income you could have excluded under your Forms to file. If your move is to a foreign The terms “foreign country” and “foreign choice to exclude foreign earned income or country, file Form 3903–F, Foreign Moving taxes” also refer to possessions of the United your choice to exclude foreign housing costs, Expenses. For all other moves, file Form States and the income taxes imposed by one or both of the choices may be considered 3903, Moving Expenses. In either case, re- these possessions. See Foreign Country, in revoked. port your moving expense deduction on line chapter 4. Foreign income taxes are gen- 25 of Form 1040. If you must reduce your erally income taxes you pay to any foreign moving expenses by the amount allocable to country. Credit for excluded income as explained later under The foreign income tax you can claim is How To Report Deductions, attach a state- the amount of foreign income tax that is the Foreign Income Taxes ment to your return showing how you figured legal and actual tax liability you pay or accrue If you take the foreign tax credit, you must this amount. during the year. The amount you claim is not file Form 1116, Foreign Tax Credit, (Individ- For more information about figuring mov- necessarily the amount of tax withheld by the ual, Estate, Trust, or Nonresident Alien Indi- ing expenses, see Publication 521, Moving foreign country. You cannot take a foreign tax vidual) with Form 1040. Use Form 1116 to Expenses. credit or deduction for income tax you paid to figure the amount of foreign tax paid or ac- Chapter 5 Exemptions, Deductions and Credits Page 29 crued that you can claim as a foreign tax merator of the limiting fraction and the result- amount related to the excluded income) on credit. Do not include the amount of foreign ing foreign tax credit limit. Form 2555. Enter the amount from line 43 of tax paid or accrued as withheld federal in- Form 2555 (or line 18 of Form 2555–EZ) in come taxes on Form 1040, line 54. Foreign tax credit carryback and parentheses on Form 1040, line 21. Next to carryover. The amount of foreign income tax the amount, write “Exclusion(s) from Form Limit not allowed as a credit because of the limit 2555” or “Exclusion from Form 2555–EZ,” can be allowed as a carryback to 2 prior years whichever is applicable. Subtract the amount The foreign tax credit is limited to the part of and a carryover to 5 later years. on line 21 from your income. your total U.S. tax that is in proportion to your More information on figuring the foreign If you have expenses that would be al- taxable income from sources outside the tax credit can be found in Publication 514. lowed as itemized deductions if they were United States compared to your total taxable not related to excluded income, do not enter income. The allowable foreign tax credit can- the part related to excluded income on not be more than your actual foreign tax li- Deduction for Schedule A (Form 1040). Enter only the part ability. Foreign Income Taxes not related to excluded income. To avoid un- necessary correspondence or contact with Instead of taking the foreign tax credit, you Separate limit. You must figure the limit on IRS, you should attach a statement showing can deduct foreign income taxes as an item- a separate basis with regard to each of the how you figured the deductible amount. following categories of income (see the in- ized deduction on Schedule A (Form 1040). structions for Form 1116): You can claim a deduction only for those Example 1. You are a U.S. citizen em- foreign income taxes paid on income that is ployed as an accountant. Your tax home is in 1) Passive income, subject to U.S. tax. You cannot claim a de- a foreign country for the entire tax year. You duction for foreign taxes paid on income ex- 2) High withholding tax interest, meet the physical presence test. Your foreign cluded under the foreign earned income or earned income for the year was $100,000, of 3) Financial services income, housing exclusions. which you choose to exclude $70,000. You have no housing exclusion. You had unreim- 4) Shipping income, Example. You are a U.S. citizen and bursed business expenses of $1,500 for qualify to exclude your foreign earned in- 5) Certain dividends from a domestic inter- travel and entertainment in earning your for- come. Your excluded wages in Country X are national sales corporation (DISC) or foreign income, of which $500 were for meals $10,000 on which you paid income tax of mer DISC, and entertainment. These expenses are $1,000. You received dividends from Country deductible only as miscellaneous deductions 6) Certain distributions from a foreign sales X of $2,000 on which you paid income tax of on Schedule A (Form 1040). You also have corporation (FSC) or former FSC attrib- $600. $500 of miscellaneous expenses for manag- utable to foreign trade income, You can claim a deduction for the $600 tax ing investments that you enter on line 22 of payment because the dividends relating to it 7) Any lump-sum distributions from em- Schedule A. are subject to U.S. tax. Because the wages ployer benefit plans for which the 5– or You must fill out Form 2106, Employee are exempt from U.S. tax, you cannot claim 10–year tax option is used to determine Business Expenses. On that form, reduce a deduction for the income tax of $1,000. your tax, and your deductible meal and entertainment ex- If only a part of your earnings are expenses by 50% ($250). You must reduce the 8) All other income not included above cluded, see the earlier discussion under For- remaining $1,250 of travel and entertainment (general limitation income). eign taxes paid on excluded income. expenses by 70% ($875) because you excluded 70% ($70,000/$100,000) of your for- Figuring the limit. In figuring taxable income eign earned income. You carry the remaining in each income category, you take into ac- Deduction for total of $375 to line 20 of Schedule A. Add the count only the income that you must include Other Foreign Taxes $375 to the $500 that you have on line 22 and in income on your federal income tax return. You can deduct real property taxes you pay enter the total ($875) on line 23. Do not take any excluded income into ac- that are imposed on you by a foreign country. On line 25 of Schedule A, you enter $600, count. You take this deduction on Schedule A (Form which is 2% of your adjusted gross income To determine your taxable income in each 1040). You cannot deduct other foreign taxes, of $30,000 (line 32, Form 1040) and subtract category from sources outside the United such as personal property taxes, unless you it from the amount on line 23. States, deduct expenses and losses that are incurred the expenses in a trade or business Enter $275 on line 26 of Schedule A. definitely related to that income. or in the production of income. In addition, other expenses (such as On the other hand, you generally can de- Example 2. You are a U.S. citizen, have itemized deductions or the standard deduct personal property taxes when you pay a tax home in a foreign country, and meet the duction if you do not itemize) not definitely them to U.S. possessions. But if you claim the physical presence test. You are self- related to specific items of income must be possession exclusion, see Publication 570, employed and personal services produce the apportioned to the foreign income in each Tax Guide for Individuals With Income From business income. Your gross income was category by a fraction. The numerator (top U.S. Possessions . $100,000, business expenses $60,000, and number) of the fraction is your gross foreign The deduction for foreign taxes other than net income (profit) $40,000. You choose the income in the separate limit category. The foreign income taxes is not related to the for- foreign earned income exclusion and exclude denominator (bottom number) of the fraction eign tax credit. You can take deductions for $70,000 of your gross income. Since your is your gross income from all sources. For this these miscellaneous foreign taxes and also excluded income is 70% of your total income, purpose, gross income includes amounts that claim the foreign tax credit for income taxes 70% of your business expenses are not are otherwise exempt or excluded. You must imposed by a foreign country. deductible. Report your total income and ex- use special rules for deducting interest expenses on Schedule C (Form 1040). On Form penses. For more information on allocating 2555 you will show the following: and apportioning your deductions, see Publi- cation 514, Foreign Tax Credit for Individuals. How To Report 1) Line 20a, $100,000, gross income Exemptions. Do not take the deduction 2) Lines 40 & 41, $70,000, foreign earned for exemptions for yourself, your spouse, or Deductions income exclusion your dependents in figuring taxable income How you show your deductions on your tax 3) Line 42, $42,000 (70% × 60,000) busi- for purposes of the limit. return and figure the disallowed amount that ness expenses attributable to the exclu- is allocable to your excluded income depends sion. Recapture of foreign losses. If you have on whether the deductible expenses are al- an overall foreign loss and the loss reduces lowed in figuring adjusted gross income In this situation (Example 2), you your U.S. source income (resulting in a re- (Form 1040, line 32) or are itemized de- TIP would not use Form 2555–EZ since duction of your U.S. tax liability), you must ductions. you had self-employment income and recapture the loss in later years when you If you have expenses or other items al- business expenses. have taxable income from foreign sources. lowed in figuring adjusted gross income, This is done by treating a part of your taxable enter the total amount for each of these items Example 3. Assume in Example 2, income from foreign sources in later years as on the appropriate lines and schedules of above, that both capital and personal services U.S. source income. This reduces the nu- Form 1040. Figure the nondeductible part (the combine to produce the business income. No Page 30 Chapter 5 Exemptions, Deductions and Credits more than 30% of your net income, or salaries and wages and you had business emptions, reductions in rate, and other bene- $12,000, assuming that this amount is a rea- expenses. fits provided by tax treaties are subject to sonable allowance for your services, is con- conditions and restrictions that vary from one sidered earned and can be excluded. Your treaty to another. Also, benefits provided by exclusion of $12,000 is 12% of your gross certain treaties are not provided by others. income ($12,000/$100,000). Because you 1) Personal service income. If you are excluded 12% of your total income, $7,200, a U.S. resident who is in a treaty country for or 12% of your business expenses, are at- a limited number of days in the tax year and tributable to the excluded income and are not you meet certain other requirements, any pay deductible. you receive for personal services performed 6. in that country may be exempt from that Example 4. You are a U.S. citizen, have country's income tax. a tax home in a foreign country, and meet the 2) Professors and teachers. If you are physical presence test. You are self- a U.S. resident, pay you receive for the first employed and both capital and personal ser- Tax Treaty 2 or 3 years that you are teaching or doing vices combine to produce business income. research in a treaty country may be exempt Your gross income was $140,000, business Benefits from that country's income tax. expenses were $170,000, and your net loss 3) Students, trainees, and apprentices. was $30,000. A reasonable allowance for the If you are a U.S. resident, amounts you re- services you performed for the business is Topics ceive from the United States for study, re- $75,000. Because you incurred a net loss, the This chapter discusses: search, or business, professional and techni- earned income limit of 30% of your net profit cal training may be exempt from a treaty does not apply. The $75,000 is foreign earned • Some common tax treaty benefits country's income tax income. If you choose to exclude the maxi- Some treaties exempt grants, allowances, mum $70,000, you exclude 50% of your gross • How to get help in certain situations and awards received from governmental and income ($70,000/$140,000), and 50% of your • How to get copies of tax treaties certain nonprofit organizations. Also, under business expenses ($85,000) are attributable certain circumstances, a limited amount of to that income and not deductible. Show your pay received by students, trainees, and ap- total income and expenses on Schedule C prentices may be exempt from the income tax (Form 1040). On Form 2555, exclude $70,000 Useful Items of many treaty countries. and show $85,000 on line 42. Subtract line You may want to see: 4) Pensions and annuities. If you are a 42 from line 41, and enter the difference on U.S. resident, any nongovernment pensions line 43. Enter this amount in parentheses on Publication and annuities you receive may be exempt line 21, Form 1040, and combine it with your from the income tax of treaty countries. other income to arrive at total income on on Ⅺ 597 Information on the United Most treaties contain separate provisions line 22 of Form 1040. States–Canada Income Tax for exempting government pensions and an- Treaty nuities from treaty country income tax, and In this situation (Example 4), you Ⅺ 901 U.S. Tax Treaties some treaties provide exemption from the TIP would probably not want to choose treaty country's income tax for social security the foreign earned income exclusion See chapter 7 for information about get- payments. if this was the first year you were eligible. If ting these publications. 5) Investment income. If you are a U.S. you had chosen the exclusion in an earlier resident, investment income, such as interest year, you might want to revoke the choice for and dividends, that you receive from sources this year. To do so would mean that you could in a treaty country may be exempt from that not claim the exclusion again for the next 5 The Purpose of Tax country's income tax or taxed at a reduced tax years without IRS approval. See Choosing rate. the Exclusion, in Chapter 4. Also, you would Treaties Several treaties provide exemption for not use Form 2555–EZ since self- capital gains (other than from sales of real The United States has tax treaties or con- employment income and business expenses property in most cases) if specified require- ventions with many countries under which were involved. ments are met. citizens and residents of the United States 6) Tax credit provisions. If you are a who are subject to taxes imposed by foreign U.S. resident who receives income from or countries are entitled to certain credits, de- owns capital in a foreign country, you may be ductions, exemptions, and reductions in the Example 5. You are a U.S. citizen, have taxed on that income or capital by both the rate of taxes of those foreign countries. If a a tax home in a foreign country, and meet the United States and the treaty country. foreign country with which the United States bona fide residence test. You have been Most treaties allow you to take a credit has a treaty imposes a tax on you, you may performing services for clients as a partner in against or deduction from the treaty country's be entitled to benefits under the treaty. See a firm that provides services exclusively in a taxes based on the U.S. tax on the income. Table 6–1, Table of Tax Treaties, later. foreign country. Capital investment is not 7) Nondiscrimination provisions. Most Treaty benefits generally are available to material in producing the partnership's in- U.S. tax treaties provide that the treaty coun- residents of the United States. They generally come. Under the terms of the partnership try cannot discriminate by imposing more are not available to U.S. citizens who do not agreement, you are to receive 50% of the net burdensome taxes on U.S. citizens who are reside in the United States. However, certain profits. The partnership received gross in- residents of the treaty country than it imposes treaty benefits and safeguards, such as the come of $200,000 and incurred operating on its own citizens in the same circum- nondiscrimination provisions, are available to expenses of $80,000. Of the net profits of stances. U.S. citizens residing in the treaty countries. $120,000, you received $60,000 as your dis- 8) Saving clauses. U.S. treaties contain U.S. citizens residing in a foreign country may tributive share. saving clauses that provide that the treaties also be entitled to benefits under that coun- You choose to exclude $70,000 of your do not affect the U.S. taxation of its own citi- try's tax treaties with third countries. share of the gross income. Because you ex- zens and residents. As a result, most of the clude 70% ($70,000/$100,000) of your share You should carefully examine the treaty benefits and safeguards with reference of the gross income, you cannot deduct TIP specific treaty articles that may apply to a treaty country's taxes are available only $28,000, 70% of your share of the operating to find if you are entitled to a tax to U.S. citizens who are not residents of the expenses (70% × $40,000). Report $60,000, credit, tax exemption, reduced rate of tax, or treaty country and to U.S. residents who are your distributive share of the partnership net other treaty benefit or safeguard. not citizens of the treaty country. profit, on Schedule E (Form 1040). On Form However, some treaties provide certain 2555, exclude $70,000 and show $28,000 on limited exceptions to saving clauses. It is im- line 42. portant that you examine the applicable saving clause to determine if such an exception In this situation (Example 5), you Common Benefits applies. TIP would not use Form 2555–EZ since Some common tax treaty benefits are ex- you had earned income other than plained below. The credits, deductions, ex- Chapter 6 Tax Treaty Benefits Page 31 Additional details on the procedures for requesting competent authority Competent Authority assistance are included in Revenue Procedure 96–13, 1996–1 C.B. You can ob- 7. Assistance tain copies of this procedure by writing to: If you are a U.S. citizen or resident, you can How To Get request assistance from the U.S. competent Internal Revenue Service authority if you think that the actions of the Assistant Commissioner (International) More United States, a treaty country, or both, cause Attn: CP:IN:D:CS or will cause a tax situation contrary to the 950 L'Enfant Plaza South, S.W. applicable treaty between the two countries. Washington, D.C. 20024. Information You should read any specific treaty articles, including the mutual agreement procedure article, that apply in your situation. If your request provides a basis for com- More information on treaties and prob- petent authority assistance, the U.S. compe- lems. You can get more information about tent authority will consult with the treaty the benefits and safeguards provided by U.S. You can get help from the IRS in several country competent authority on how to re- tax treaties or information concerning double ways. During the filing period, you can get the solve the situation. taxation problems by writing to the IRS As- necessary federal income tax forms and The U.S. competent authority cannot sistant Commissioner (International). publications from U.S. Embassies and con- consider requests involving countries with Publication 901, U.S. Tax Treaties, con- sulates. which the United States does not have an tains an explanation of treaty provisions that You can also call your nearest U.S. applicable tax treaty. apply to amounts received by teachers, stu- Embassy, consulate, or IRS office It is important that you make your request dents, workers, and government employees listed below to find out when and for competent authority consideration as soon and pensioners who are alien nonresidents where assistance will be available. These IRS as you have been denied treaty benefits or or residents of the United States. Since treaty telephone numbers include the country and the actions of both the United States and the provisions generally are reciprocal, you can city codes required if you are outside the local foreign country have resulted in double taxa- usually substitute “United States” for the dialing area. tion or will result in taxation contrary to the name of the treaty country whenever it ap- treaty. This is to provide the competent au- pears, and vice versa when “U.S.” appears in Bonn, Germany (49) (228) 339-2119 thorities adequate time to consult and arrive the treaty exemption discussions in Publica- London, England (44) (171) 408-8077 Mexico City, Mexico (52) (5) 209-9100 at an agreement so that the final determi- tion 901. Ext. 3557 nation of liability can be made before any Publication 597, Information on the United Nassau, Bahamas (800) 829–1040 procedural barriers are imposed under foreign States–Canada Income Tax Treaty, contains or (809) 759–5100 law or the particular treaty. an explanation of a number of frequently used Paris, France (33) (1) 4312-2555 In addition to a timely request for assist- provisions of the United States–Canada in- Ext. 1210 ance, you should take the following measures come tax treaty along with the entire text of Rome, Italy (39) (6) 4674-2560 to protect your right to the review of your case the treaty. Santiago, Chile (56) (2) 330-3424 Singapore (65) 476–9413 by the competent authorities: Sydney, Australia (61) (2) 9373-9194 Tokyo, Japan (81) (3) 3224-5466 1) File a timely protective claim for credit The Ottawa office has closed perma- or refund of U.S. taxes on Form 1040X nently. Taxpayers residing in Canada may in the event you do not qualify for the call our Puerto Rico office for assistance: treaty benefit in question and are entitled Obtaining Copies to a foreign tax credit. of Tax Treaties • For questions of a technical nature or a specific account–related issue, call (787) 2) Take appropriate action under the pro- Table 6–1, shown after Chapter 7, lists those 759–5100 (not toll-free). cedures of the foreign country to avoid countries with which the United States has • If you received an IRS notice about your the lapse or termination of your right of income tax treaties. account which asked you to call the IRS, appeal under the foreign country's in- The tax treaties are published in the use this new number: (787) 759–6262 come tax law. Internal Revenue Bulletin (I.R.B.) and in the (not toll-free). Cumulative Bulletin (C.B.), which are volumes containing official matters of the Internal • For forms, publications, and other mate- Your request for competent authority Revenue Service. The column headed Cita- rial, use the resources described below. consideration should be addressed to: tion shows the number of the I.R.B. or C.B. and the page on which a particular treaty may The IRS conducts an overseas taxpayer be found. assistance program during the filing season Internal Revenue Service Regulations implementing some treaties (January to mid-June). To find out if IRS per- Assistant Commissioner (International) were issued as Treasury Decisions (T.D.). sonnel will be in your area, you should contact Attn: CP:IN:D:CS Other treaties are explained by Treasury ex- the consular office at the nearest U.S. Em- 950 L'Enfant Plaza South, S.W. planations. The fifth column lists the T.D. bassy. Washington, DC 20024. numbers and the I.R.B. or C.B. in which each Special forms and instructions as well as T.D. or Treasury explanation is printed. publications are combined in Publication 776, Overseas Filers of Form 1040 (Supplemental The request should contain all essential Package), for U.S. citizens and residents liv- items of information including the following: You can buy the C.B. containing a ing abroad. the facts from which the issue arises; the particular tax treaty, regulation, or amounts of income and tax involved; a de- explanation from the: You can get the package and addi- scription of the issue and identification of the tional assistance by writing to: relevant treaty provisions; the respective po- Superintendent of Documents sitions taken by you and the foreign country; U.S. Government Printing Office and copies of any protests, briefs, or other P.O. Box 371954 Internal Revenue Service pertinent documents. Pittsburgh, PA., 15250–7954. Assistant Commissioner (International) Attn: CP:IN:D:CS 950 L'Enfant Plaza South, S.W. You can also order it by calling the Gov- Washington, DC 20024. ernment Printing Office at (202) 512-1800 (not a toll-free number). If you have a question about a return you have filed, write to the Internal Revenue Ser- vice Center where you filed your return. Page 32 Chapter 7 How To Get More Information If you have access to a personal related publications and describes other free normal channels, write to the Office of Tax- computer and a modem, you can also tax information services available from IRS, payer Advocate in the district or Service get many forms and publications including tax education and assistance pro- Center with which you have the problem. If electronically. They are available through grams. you are abroad, you can also write to the Of- IRIS, the Internal Revenue Information Ser- You can call the IRS with your tax fice of Taxpayer Advocate in the: vices, on FedWorld, a government bulletin questions. Check your income tax package board. IRIS is accessible directly by calling or telephone book for the local number, or you Office of the Assistant Commissioner 703–321–8020. On the Internet, you can can call 1–800–829–1040. (International) telnet to iris.irs.ustreas.gov or, for file transfer If you have access to TTY/TDD equip- 950 L'Enfant Plaza South, S.W. protocol services, connect to ment, you can call 1–800–829–4059 to ask Washington, DC 20024. ftp.irs.ustreas.gov. If you are using the World tax questions or to order forms and publica- (You can also contact one of the IRS offices Wide Web, connect to www.irs.ustreas.gov. tions. See your income tax package for the located abroad, listed earlier.) hours of operation. If your tax problem causes (or will cause) Within the United States. To order free you to suffer a significant hardship, additional publications and forms, call assistance is available. A significant hardship 1–800–TAX–FORM (1–800–829–3676). You may occur if you cannot maintain necessities can also write to the IRS Forms Distribution such as food, clothing, shelter, transportation, Center nearest you. Check your income tax Problem Resolution and medical treatment. You can apply for re- package for the address. Your local library lief by submitting Form 911, Application for or post office also may have the items you Program (PRP) Taxpayer Assistance Order (ATAO). The need. We have a Problem Resolution Program for Taxpayer Advocate or other official will then For a list of free tax publications, order taxpayers who have been unable to resolve review your case and may issue a Taxpayer Publication 910, Guide to Free Tax Services. their problems with IRS. If you have a tax Assistance Order (TAO), to suspend IRS It also contains an index of tax topics and problem that you cannot clear up through action.

Chapter 7 How To Get More Information Page 33 Table 6-1. Table of Tax Treaties Official Text Effective Applicable Treasury Explanations or Country Citation Symbol Date Treasury Decisions (T.D.)

Australia TIAS1 10773 Dec. 1, 1983 1986-2 C.B. 220 1986-2 C.B. 246. Austria TIAS 3923 Jan. 1, 1957 1957-2 C.B. 985 T.D. 6322,1958-2 C.B. 1038. Barbados TIAS 11090 Jan. 1, 1984 1991-2 C.B. 436 1991-2 C.B. 466. Protocol TIAS Jan. 1, 1994 Belgium TIAS 7463 Jan. 1, 1971 1973-1 C.B. 619 Protocol TIAS Various Canada2 TIAS 11087 Jan. 1, 1985 1986-2 C.B. 258 1987-2 C.B. 298. Protocol TIAS Jan. 1, 1996 China, People’s Republic of 3 TIAS Jan. 1, 1987 1988-1 C.B. 414 1988-1 C.B. 447. Commonwealth of TIAS 8225 Jan. 1, 1976 1976-2 C.B. 463 1976-2 C.B. 475. Independent States4 Cyprus TIAS 10965 Jan. 1, 1986 1989-2 C.B. 280 1989-2 C.B. 314. Czech Republic TIAS Jan. 1, 1993 Denmark TIAS 1854 Jan. 1, 1948 1950-1 C.B. 77 T.D. 5692, 1949-1 C.B. 104; T.D. 5777, 1950-1 C.B.76. Egypt TIAS 10149 Jan. 1, 1982 1982-1 C.B. 219 1982-2 C.B. 243. Finland TIAS Jan. 1, 1991 France TIAS Jan. 1, 1996 Germany TIAS Jan. 1, 19905 Greece TIAS 2902 Jan. 1, 1953 1958-2 C.B. 1054 T.D. 6109, 1954-2 C.B. 638. Hungary TIAS 9560 Jan. 1, 1980 1980-1 C.B. 333 1980-1 C.B. 354. Iceland TIAS 8151 Jan. 1, 1976 1976-1 C.B. 442 1976-1 C.B. 456. India TIAS Jan. 1, 1991 Indonesia TIAS Jan. 1, 1990 Ireland TIAS 2356 Jan. 1, 1951 1958-2 C.B. 1060 T.D. 5897, 1952-1 C.B. 89. Israel TIAS Jan. 1, 1995 Italy TIAS 11064 Jan. 1, 1985 1992-1 C.B. 442 1992-1 C.B. 442. Jamaica TIAS 10207 Jan. 1, 1982 1982-1 C.B. 257 1982-1 C.B. 291. Japan TIAS 7365 Jan. 1, 1973 1973-1 C.B. 630 1973-1 C.B. 653. Kazakstan TIAS Jan. 1, 1996 Korea, Republic of TIAS 9506 Jan. 1, 1980 1979-2 C.B. 435 1979-2 C.B. 458. Luxembourg TIAS 5726 Jan. 1, 1964 1965-1 C.B. 615 1965-1 C.B. 642. Mexico TIAS Jan. 1, 1994 1994-34 I.R.B. 4 Protocol TIAS Oct. 26, 1995 Morocco TIAS 10195 Jan. 1, 1981 1982-2 C.B. 405 1982-2 C.B. 427. Netherlands TIAS Jan. 1, 1994 New Zealand TIAS 10772 Nov. 2, 1983 1990-2 C.B. 274 1990-2 C.B. 303. Norway TIAS 7474 Jan. 1, 1971 1973-1 C.B. 669 1973-1 C.B. 693. Protocol TIAS 10205 Jan. 1, 1982 1982-2 C.B. 440 1982-2 C.B. 454. Pakistan TIAS 4232 Jan. 1, 1959 1960-2 C.B. 646 T.D. 6431, 1960-1 C.B. 755. Philippines TIAS 10417 Jan. 1, 1983 1984-2 C.B. 384 1984-2 C.B. 412. Poland TIAS 8486 Jan. 1, 1974 1977-1 C.B. 416 1977-1 C.B. 427. Portugal TIAS Jan. 1, 1996 Romania TIAS 8228 Jan. 1, 1974 1976-2 C.B. 492 1976-2 C.B. 504. Russia TIAS Jan. 1, 1994 Slovak Republic TIAS Jan. 1, 1993 Spain TIAS Jan. 1, 1991 Sweden TIAS Jan. 1, 1996 Switzerland TIAS 2316 Jan. 1, 1951 1955-2 C.B. 815 T.D. 5867, 1951-2 C.B. 75; T.D. 6149, 1955- 2 C.B. 814. Trinidad and Tobago TIAS 7047 Jan. 1, 1970 1971-2 C.B. 479 Tunisia TIAS Jan. 1, 1990 United Kingdom TIAS 9682 Jan. 1, 1975 1980-1 C.B. 394 1980-1 C.B. 455.

1Treaties and Other International Act Series. 2The Canadian Treaty also may be found in Publication 597, Information on the United States—Canada Income Tax Treaty. 3The U.S.–China Treaty does not apply to Hong Kong. 4The U.S.–U.S.S.R. Income tax treaty applies to the countries of Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. 5The general effective date for the area that was the German Democratic Republic is January 1, 1991.

Page 34 Chapter 7 How To Get More Information Questions and Answers

This section answers the a) You should file Form 2350 by Yes. All U.S. citizens and resi- Yes. A Form 2555 (or Form tax-related questions commonly the due date of your return to dent aliens, depending on the 2555–EZ) must be filed with asked by taxpayers living request an extension of time to amount of the foreign source in- each Form 1040 tax return on abroad. file. Form 2350 is a special form come, are subject to U.S. tax on which the benefits of income for those U.S. citizens or resi- their worldwide income. If you earned abroad are claimed. dents abroad who expect to paid taxes to a foreign govern- Filing Requirements— qualify under either the bona fide ment on income from sources Where, When, and How residence test or physical pres- outside the United States, you 11) Does a Form 2555 (or ence test and would like to have may receive a foreign tax credit 2555–EZ) with a Schedule C an extension of time to delay fil- against your U.S. income tax li- or Form W–2 attached consti- 1) When are U.S. income tax ing until after they have qualified. ability for the foreign taxes paid. tute a return? returns due? b) If the extension is granted, Form 1116 is used to figure the you should file your return after allowable credit. No. The Form 2555 (or you qualify, but by the approved 2555–EZ), Schedule C, and Generally, for calendar year tax- extension date. 7) I am a U.S. citizen who has Form W–2 are merely attach- payers, U.S. income tax returns c) You must file your Form retired, and I expect to remain ments and do not relieve you of are due on April 15. If you are a 1040 with Form 2555 (or Form in a foreign country. Do I have the requirement to file a Form U.S. citizen or resident and both 2555–EZ). your tax home and your abode any further U.S. tax obli- 1040 to show the sources of in- are outside the United States gations? come reported and the exclu- and Puerto Rico on the regular 4) My entire income qualifies sions or deductions claimed. due date, an automatic extension for the foreign earned income Your U.S. tax obligation on your is granted to June 15 for filing the exclusion. Must I file a tax re- income is the same as that of a 12) On Form 2350, Application return. Interest will be charged turn? retired person living in the United for Extension of Time to File on any tax due, as shown on the States. (See the discussion in U.S. Income Tax Return, I return, from April 15. chapter 1 of this publication for stated that I would qualify un- Maybe. Every U.S. citizen or filing requirements.) U.S. payers der the physical presence test. resident must file a U.S. income of certain pension benefits must If I qualify under the bona fide 2) Where do I file my U.S. in- tax return if certain income levels withhold tax from payments un- come tax return? residence test, can I file my are reached. Income for filing less the recipient provides a return on that basis? requirement purposes is figured residence address in the United without regard to the foreign States or a U.S. possession. If you claim the foreign earned earned income exclusion. The Yes. You can claim the foreign income exclusion, the foreign income levels for filing purposes earned income exclusion and the 8) I have been a bona fide housing exclusion, or the foreign are discussed under Filing Re- foreign housing exclusion or de- resident of a foreign country housing deduction on Form quirements in chapter 1. duction under either test as long for over 5 years. Is it neces- 2555, the foreign earned income as you meet the qualification re- sary for me to pay estimated exclusion on Form 2555–EZ, or quirements. You are not bound tax? an exclusion of income for bona 5) I was sent abroad by my by the test indicated in the ap- fide residents of American Sa- company in November of last plication for extension of time. moa on Form 4563, you should year. I plan to secure an ex- U.S. taxpayers overseas have You must be sure, however, that file your return with the Internal tension of time on Form 2350 the same requirements for pay- you file the Form 1040 return by Revenue Service Center, Phila- to file my tax return for last ing estimated tax as those in the the date approved on Form delphia, PA 19255–0002. year because I expect to qual- United States. See the dis- 2350, since a return filed after If you are not claiming one ify for the foreign earned in- cussion under Estimated Tax in that date may be subject to a of these exclusions or the de- come exclusion under the chapter 1. failure to file penalty. duction, but are living in a foreign physical presence test. How- Overseas taxpayers should If you will not qualify under country or U.S. possession and ever, if my company recalls not include in their estimated in- the bona fide residence test until have no legal residence or prin- me to the United States before come any income they receive a date later than the extension cipal place of business in the the end of the qualifying pe- that is, or will be, exempt from granted under the physical pres- United States, you should file riod and I find I will not qualify U.S. taxation. ence rule, apply for a new ex- your return with the Internal for the exclusion, how and Overseas taxpayers can de- tension to a date 30 days beyond Revenue Service Center, Phila- when should I file my return? duct their estimated housing de- the date you expect to qualify as delphia, PA 19255–0002. duction in figuring their estimated a bona fide resident. If you are not sure of the tax. place of your legal residence and If your regular filing date has The first installment of esti- have no principal place of busi- passed, you should file a return, mated tax is due on April 15 of 13) I am a U.S. citizen who ness in the United States, you Form 1040, as soon as possible the year for which the tax is paid. worked in the United States for also can file with the Philadelphia for last year. Include a statement 6 months last year. I accepted Service Center. However, you with this return noting that you employment overseas in July should not file with the Philadel- have returned to the United 9) Will a check payable in for- of last year and expect to phia Service Center if you are a States and will not qualify for the eign currency be acceptable in qualify for the foreign earned bona fide resident of the Virgin foreign earned income exclusion. payment of my U.S. tax? income exclusion. Should I file Islands or a resident of Guam or You must report your worldwide a return and pay tax on the the Commonwealth of the income on the return. If you paid Generally, only U.S. currency is income earned in the United Northern Mariana Islands on the a foreign tax on the income acceptable for payment of in- States during the first 6 last day of your tax year. See the earned abroad, you may be able come tax. However, if you are a months and then, when I discussion in chapter 1. to either deduct this tax or claim Fulbright grantee, see the disqualify, file another return it as a credit against your U.S. cussion under Fulbright grants in covering the last 6 months of income tax. chapter 1. the year? 3) I am going abroad this year and expect to qualify for the foreign earned income exclu- 6) I am a U.S. citizen and have 10) I have met the test for No. You have the choice of one sion. How can I secure an ex- no taxable income from the physical presence in a foreign of the following two methods of tension of time to file my re- United States, but I have sub- country and am filing returns filing your return for the year you turn, when should I file my stantial income from a foreign for 2 years. Must I file a sepa- go abroad and have not qualified return, and what forms are re- source. Am I required to file a rate Form 2555 (or Form for the foreign earned income quired? U.S. income tax return? 2555–EZ) with each return? exclusion either as a bona fide Page 35 resident or under the physical than $650, an income tax return matter of being physically fide resident of a foreign presence test: must be filed. However, if a child present in a foreign country country for 1997, or must I wait a) You can file your return under age 14 has only interest for at least 330 days within 12 for the entire year of 1998 to when due under the regular filing or dividend income, the parents consecutive months; but what qualify? rules, report all your income may be able to report it on their are the criteria of the bona fide without excluding your foreign return. If they do, the child will residence test? earned income, and pay the tax not have to file a return. Since you did not break your due. After you have qualified for In addition, certain unearned period of foreign residence, you the exclusion, you can file an income of children who are To be a bona fide resident of a would continue to qualify as a amended return, Form 1040X, younger than 14 at the end of the foreign country, you must show bona fide resident for 1997. accompanied by Form 2555 (or tax year is taxed at their parents' that you entered a foreign coun- 2555–EZ), for a refund of any rates. For more information, see try intending to remain there for 5) Due to illness, I returned to excess tax paid. Publication 929, Tax Rules for an indefinite or prolonged period the United States before I b) You can postpone the filing Children and Dependents. and, to that end, you are making completed my qualifying pe- of your tax return by applying on your home in that country. Con- riod to claim the foreign sideration is given to the type of Form 2350 for an extension of 16) In 1991 I qualified to ex- earned income exclusion. Can time to file to a date 30 days quarters occupied, whether your I figure the exclusion for the empt my income earned family went with you abroad, the beyond the date you expect to abroad, but I did not claim this period I resided abroad? qualify under either the bona fide type of visa, the employment exemption on the return I filed agreement, and any other factor residence test or the physical in 1992. I paid all outstanding presence test, then file your re- pertinent to show whether your No. You are not entitled to any taxes with the return. Can I file stay in the foreign country is in- exclusion of foreign earned in- turn reflecting the exclusion of a claim for refund now? foreign earned income. This al- definite or prolonged. come since you did not complete lows you to file only once and To claim the foreign earned your qualifying period under ei- saves you from paying the tax It is too late to claim this refund income exclusion or foreign ther the bona fide residence test and waiting for a refund. How- since a claim for refund must be housing exclusion or deduction or physical presence test. If you ever, interest is charged on any filed within 3 years from the date under this test, the period of for- paid foreign tax on the income tax due on the postponed tax the return was filed or 2 years eign residence must include 1 earned abroad, you may be able return, but interest is not paid on from the date the tax was paid, full tax year (usually January to claim that tax as a deduction refunds paid within 45 days after whichever is later. For this pur- 1—December 31), but once you or as a credit against your U.S. the return is filed. (If you have pose, a return filed before the meet this time requirement, you tax. moving expenses that are for due date is considered filed on figure the exclusions and the services performed in two years, the due date. deduction from the date the residence actually began. 6) Can a resident alien of the you can be granted an extension United States qualify under the to 90 days beyond the close of Meeting the bona fide residence test or the the year following the year of first Requirements physical presence test? arrival in the foreign country.) 3) To meet the qualification of of Either the Bona Fide “an uninterrupted period Residence Test or the which includes an entire taxa- Resident aliens of the United 14) I am a U.S. citizen. I have Physical Presence Test ble year” do I have to be States can qualify for the foreign lived abroad for a number of physically present in a foreign earned income exclusion, the years and have only recently country for the entire year? foreign housing exclusion, or the 1) I recently came to Country realized that I should have foreign housing deduction if they X to work for the Orange been filing U.S. income tax re- meet the requirements of the Tractor Co., and I expect to be No. Uninterrupted refers to the turns. How do I correct this physical presence test. Certain here for 5 or 6 years. I under- bona fide residence proper and oversight in not having filed resident aliens can qualify under stand that upon the com- not to the physical presence of returns for these years? the bona fide residence test. pletion of 1 full year I will the individual. During the period qualify under the bona fide of bona fide residence in a for- You must file the late returns as residence test. Is this correct? eign country, even during the 7) On August 13 of last year I soon as possible, stating your first full year, you can leave the left the United States and ar- reason for filing late. For advice country for brief and temporary rived in Country Z to work for on filing the returns, you should Not entirely. The law provides that to qualify under this test for trips back to the United States the Gordon Manufacturing contact the Internal Revenue or elsewhere for vacation, or Company. I expected to be Service representative serving the foreign earned income exclusion, the foreign housing ex- even for business. To preserve able to exclude my foreign your area, or the Internal Reve- your status as a bona fide resi- earned income under the nue official who travels through clusion, or the foreign housing deduction, a person must be a dent of a foreign country, you physical presence test be- your area (details can be ob- must have a clear intention of cause I planned to be in tained from your nearest U.S. “bona fide resident of a foreign country or countries for an unin- returning from those trips, with- Country Z for at least 1 year. consulate or Embassy), or you out unreasonable delay, to your However, I was reassigned can write to the: terrupted period that includes an entire taxable year.” foreign residence. back to the United States and Internal Revenue Service left Country Z on July 1 of this Assistant Commissioner (Inter- If, like most U.S. citizens, you file your return on a calendar year. Can I exclude any of my national) 4) I am a U.S. citizen and dur- foreign earned income? Attn: CP:IN:D:CS year basis, the taxable year re- ing 1996 was a bona fide resi- 950 L'Enfant Plaza South, S.W. ferred to in the law would be from dent of Country X. On January Washington, DC 20024. January 1 to December 31 of any 15, 1997, I was notified that I You cannot exclude any of the particular year. Unless you es- was to be assigned to Country income you earned in Country Z tablished residence in Country X because you were not in a for- 15) Under what circumstances Y. I was recalled to New York on January 1, it would be more eign country for at least 330 full must a dependent child file an for 90 days orientation and than 1 year before you could days as required under the income tax return for 1997? then went to Country Y, where qualify as a bona fide resident I have been since. Although I physical presence test. of a foreign country. Once you was not in Country X on Jan- have completed your qualifying If an unmarried dependent has uary 1, I was a bona fide resi- Foreign Earned Income no unearned income, an income period, however, you are entitled dent of Country X and was in tax return must be filed if total to exclude the income or to claim Country Y on December 31, gross income is more than the housing exclusion or de- 1997. My family remained in 1) I am an employee of the U.S. $4,150 ($5,150 if the child is duction from the date you estab- Country X until completion of Government working abroad. blind). lished bona fide residence. the orientation period, and my Can all or part of my govern- If a dependent receives any household goods were ment income earned abroad unearned income for 1997 and 2) I understand the physical shipped directly to my new qualify for the foreign earned has gross (total) income of more presence test to be simply a post. Can I qualify as a bona income exclusion? Page 36 No. The foreign earned income place where you perform the Your tax home must be in the (Also see Question 14 under exclusion applies to your foreign services. foreign country or countries General Tax Questions, later. ) earned income, and amounts throughout your period of resi- A U.S. citizen or resident paid by the United States or its dence or presence. For this pur- married to a nonresident alien agencies to their employees, for 6) What is considered a for- pose, your period of physical also can choose to treat the this purpose, are not treated as eign country? presence is the 330 full days nonresident alien as a U.S. resi- foreign earned income. during which you are present in dent for all federal income tax For the purposes of the foreign a foreign country, not the 12 purposes. This allows you to file consecutive months during a joint return, but also subjects 2) I qualify under the bona fide earned income exclusion and the which those days occur. the alien's worldwide income to residence test. Does my for- foreign housing exclusion or de- U.S. income tax. eign earned income include duction, foreign country means my U.S. dividends and the in- any territory under the sover- 3) Is it true that my foreign terest I receive on a foreign eignty of a country other than the earned income exclusion can- 2) What exemptions can be bank account? United States. Possessions of not exceed my foreign earned claimed by a U.S. citizen for a the United States are not treated income? nonresident alien spouse who as foreign countries. was blind and 65 years of age? No. The only income that is for- The spouse did not have in- eign earned income is income Yes. The amount of the exclu- 7) What is meant by the source come from U.S. sources and from the performance of per- sion is limited each year to the of earned income? was not a dependent of an- sonal services abroad. Invest- amount of your foreign earned other U.S. taxpayer. ment income, including income income after reducing that in- from foreign investments, is not The word “source” refers to the come by the foreign housing ex- A U.S. taxpayer can generally earned income, but must be in- place where the work or personal clusion. The foreign earned in- claim one exemption for his or cluded in gross income reported services that produce earned income must be earned during the her spouse. In addition, if the on your Form 1040. come are performed. In other part of the tax year that you have U.S. taxpayer does not itemize words, income received for work your tax home abroad and meet deductions on Schedule A (Form in a foreign country has a source either the bona fide residence 3) My company pays my for- 1040), the taxpayer may be en- in that country. The foreign test or the physical presence eign income tax on my foreign titled to a higher standard de- earned income exclusion and the test. earnings. Does this constitute duction if his or her spouse is foreign housing exclusion or de- additional taxable compen- age 65 or older or is blind at the duction are limited to earned in- sation? 4) My wife and I are both em- end of the year. come from sources within foreign ployed, reside together, and countries. Yes. The amount is compen- file a joint return. We meet the 3) My wife is a nonresident al- sation for services performed. qualifications for claiming the ien who receives interest in- The tax paid by your company Foreign Earned foreign earned income exclu- come from deposits in a U.S. should be reported on Form Income Exclusion sion. Do we each figure a bank. Is this income taxable to 1040 and in item 22(f) of Part IV, separate foreign earned in- her? Form 2555 (or Line 17 of Part IV, come exclusion and foreign 1) I qualify for the foreign housing exclusion? Form 2555–EZ). earned income exclusion and Your nonresident alien spouse's earned more than $70,000 bank deposit interest income is 4) I live in an apartment in a during the year. Am I entitled You can each claim a foreign not taxed by the United States foreign city for which my em- to the maximum $70,000 ex- earned income exclusion since unless it is effectively connected ployer pays the rent. Am I re- clusion? you both have foreign earned with a U.S. trade or business. quired to include in my income income. The amount of the ex- The exclusion of interest on bank the cost to my employer clusion for each of you cannot deposits also applies to interest Not necessarily. Although you ($1,200 a month) or the fair exceed your separate foreign on deposits or withdrawable ac- qualify for the foreign earned in- market value of equivalent earned incomes. counts with savings and loan come exclusion, you may not housing in the United States If you each have a housing associations, credit unions, mu- have met either the bona fide ($800 a month)? amount, you can figure your tual savings banks, and similar residence test or the physical housing exclusion either sepa- institutions, and on amounts held presence test for your entire tax rately or jointly. See the dis- by insurance companies under The amount included on your year. If you did not meet either cussion, Married Couples Living an agreement to pay interest. return is the fair market value of these tests for your entire tax Apart, in chapter 4 for further Interest received by your (FMV) of the facility provided, year, you must prorate the details. spouse from deposits in the for- where it is provided. You must $70,000 maximum exclusion eign branches of U.S. banks is include $1,200 per month as ad- based on the number of days Exemptions and from foreign sources and is not ditional compensation on Form that you did meet either test subject to U.S. tax. 1040 and on your Form 2555 during the year. Dependency Allowances However, if you choose to (item 21(a) of Part IV) or Form treat your nonresident alien 2555–EZ (Line 17 of Part IV). 2) How do I qualify for the for- 1) I am a U.S. citizen married spouse as a U.S. resident as There are situations when the eign earned income exclu- to a nonresident alien who has explained in question 1, all of the FMV is not included in income. sion? no income from U.S. sources. interest income is subject to tax Can I claim an exemption for and must be included on a U.S. 5) My U.S. employer pays my my spouse on my U.S. tax re- tax return. To be eligible, you must have a salary into my U.S. bank ac- turn? tax home in a foreign country count. Is this considered U.S. and you must be a U.S. citizen 4) I spend $375 a month to income or foreign income? or a resident alien who is a citi- Yes. You can claim an ex- support my parents who live zen or national of a country with emption for your nonresident al- in Italy. I am sure this provides If you performed the services to which the United States has an ien spouse on your tax return if the bulk of their support. Can earn this salary outside the income tax treaty in effect. You your spouse has no income from I claim exemptions for them? United States, your salary is must be a bona fide resident of sources within the United States considered earned abroad. It a foreign country or countries for and is not the dependent of an- It depends on whether they are does not matter that you are paid an uninterrupted period that in- other U.S. taxpayer. U.S. citizens or residents. If your by a U.S. employer or that your cludes an entire tax year, or you You must use the married fil- parents are not U.S. citizens or salary is deposited in a U.S. must be a U.S. citizen or resident ing separately column in the Tax residents, you cannot claim ex- bank account in the United and be physically present in a Table or the Tax Rate Schedule emptions for them even if you States. The source of salary, foreign country or countries for for married individuals filing a provide most of their support. To wages, commissions, and other at least 330 full days during any separate return, unless you qualify as a dependent, a person personal service income is the period of 12 consecutive months. qualify as a head of household. generally must be either a citizen Page 37 or national of the United States The part of a tier 1 railroad re- tax use only. It does not entitle File a statement in duplicate with or a resident of the United tirement benefit that is equivalent a person to social security ben- your employer stating that with- States, Canada, or Mexico for to the social security benefit you efits or change their employment holding should be reduced be- some part of the tax year. The would have been entitled to re- or immigration status under U.S. cause you meet the bona fide other tests of dependency also ceive if the railroad employee's law. residence test or physical pres- must be met. work had been covered under ence test. See also the following the social security system rather question. than the railroad retirement sys- 6) I know U.S. savings banks 5) Should I prorate my own tem is treated the same as a need my social security num- 2) Does the Internal Revenue personal exemption and the social security benefit, discussed ber, but do the U.S. companies Service provide forms to be exemptions for my spouse and above. in which I own stock require used by employees requesting dependents, since I expect to The other part of a tier 1 the number? employers to discontinue exclude part of my income? benefit that is not considered a withholding income tax from social security equivalent benefit Yes. Corporations are required wages they expect to be ex- is treated like a private pension No. Do not prorate exemptions to request your number and included as income earned or annuity, as are tier 2 railroad for yourself, your spouse, and clude it when reporting dividend abroad? retirement benefits. Pensions your dependents. Claim the full payments to the IRS. amount for each exemption per- and annuities are explained in mitted. chapter 4 under Earned and Un- Yes. Form 673 is a sample earned Income. Vested dual 7) I am a minister with earned statement that can be used by benefits and supplemental an- individuals who expect to qualify Social Security Benefits income from abroad and ex- nuities are also treated like pri- pect to qualify for the foreign under the bona fide residence and vate pensions but are fully taxa- earned income exclusion. How test or the physical presence Self-Employment Tax ble. do I pay the self-employment test. A copy of this form is dis- The proper amounts of the tax that results from social played in chapter 2. You can get social security equivalent part of security coverage? this form by writing to the: 1) Are U.S. social security tier 1 benefits and any special Internal Revenue Service benefits taxable? guaranty benefits are shown on Assistant Commissioner (Inter- the Form RRB–1099, Payments Ministers, even if exempt from national) Benefits received by U.S. citi- by the Railroad Retirement income tax under the foreign Attn: CP:IN:D:CS zens and resident aliens may be Board, that you receive from the earned income exclusion, must 950 L'Enfant Plaza South, S.W. taxable, depending on the total Railroad Retirement Board. The file a Form 1040 accompanied Washington, DC 20024. amount of income and the filing taxable amounts of the non- by a Schedule SE and Form social security equivalent part of 2555. The self-employment tax status of the taxpayer. 3) I am a U.S. citizen residing Benefits similar to social se- tier 1, tier 2, vested dual benefits, figured on Schedule SE is en- and supplemental annuities are tered on Form 1040 as the tax overseas, and I receive divi- curity received from other coun- dend and interest income from tries by U.S. citizens or residents shown on the Form due with the return. Form 2555 RRB–1099–R, Annuities or Pen- will show why the earned income U.S. sources from which tax is may be taxable. U.S. social se- being withheld at a rate of curity benefits are taxed by some sions by the Railroad Retirement is not taxable for income tax Board, that you receive from the purposes. 30%. How can I have this situ- foreign countries. (Refer to our ation corrected? tax treaties with various coun- Railroad Retirement Board. tries for any benefit granted by 8) Because I expect to qualify the treaty.) Write a letter in duplicate to the 4) How do I get a social secu- for the foreign earned income withholding agents who are pay- rity number when I am over- exclusion, I have requested ing you the dividends and inter- 2) As a U.S. citizen or resident, seas? and received an extension of est and inform them you are a how do I figure the amount of time until January 30, 1999, to U.S. citizen residing abroad and my U.S. social security bene- file my 1997 return. However, are not subject to the withholding If you are 18 years of age or fits to include in gross in- since I will be paying self- at source rules that apply to older, you must apply in person come? employment tax on my nonresident aliens. This letter is at a U.S. Embassy, consulate, spouse's income, should I file their authority to stop withholding or military installation. During a 1997 return when due, pay the 30% income tax at the You may have to include part of your interview, you will be asked the self-employment tax, and source on payments due you. your social security benefits in to show evidence of your iden- then file another return when I They must withhold this tax on income depending on the tity, age, and citizenship. If you qualify for the exclusion? any payment of income going amount of your benefits and your are under 18 years old, you outside the United States unless modified adjusted gross income. should ask your local U.S. Em- they have the authority to do Modified adjusted gross in- bassy or consulate how to apply No. You do not need to file a otherwise. come is adjusted gross income for a social security number. 1997 Form 1040 (the regular in- plus the foreign earned income come tax return) when due if you exclusion, foreign housing ex- have received an extension to 4) As a U.S. citizen receiving clusion and deduction, Puerto 5) Do I need social security file it by January 30, 1999. To dividend and interest income Rican and possession income numbers for my dependents? stop interest from accruing on from the United States from exclusions, exclusion for interest the self-employment tax due for which tax has been withheld, on certain U.S. Savings Bonds, 1997, you can pay enough esti- do I report the net dividend You must provide a social secu- and any tax-exempt interest re- mated tax to cover the self- and interest income on my re- rity number on the return for any ceived or accrued during the tax employment tax and any income turn, or do I report the gross dependent for whom you claim year. tax that would be due after taking amount and take credit for the an exemption. You should apply See Publication 915, Social out the amount of excludable in- tax withheld? Security and Equivalent Railroad for this number early enough so come. Retirement Benefits, to figure if that it can be assigned before any of your benefits are your return is due. Nonresident You must report the gross includible in income. alien dependents are not exempt Problems on amount of the income received If you think the rules will in- from this requirement. If your Withholding and take a tax credit for the tax crease your taxable benefit for nonresident alien dependent is withheld. This is to your advan- next year, you should take that not eligible to get an SSN, you tage since the tax withheld is increase into account when you must apply for an IRS individual 1) How can I get my employer deducted in full from the tax due. figure your estimated tax. taxpayer identification (ITIN) for to discontinue withholding It is also advisable to attach a the dependent. To apply for an federal income taxes from statement to your return explain- ITIN file Form W–7 with the IRS. wages while I am overseas ing this tax credit so there will be 3) How are railroad retirement It usually takes about 30 days to and eligible for the foreign no question as to the amount of benefits taxed? get an ITIN. Note. An ITIN is for earned income exclusion? credit allowable. Page 38 Deductions 6) What types of foreign taxes if my wife and children live individual taxpayer identification are deductible? with me in an apartment and number) in the letter. my wife does the cooking? 1) Not having many de- Generally, real estate and for- 5) I forgot to include interest ductions to itemize, how do I eign income taxes are deductible Keep a day-to-day record of ex- income when I filed my return figure the standard de- as itemized deductions. Foreign penses, with receipts where last week. What should I do? duction? income taxes are deductible only possible. Allocate meals by di- if you do not claim the foreign tax viding the total expense by the To correct a mistake of this sort credit. Foreign income taxes paid number in your family and take For 1997 the standard deduction you should prepare Form 1040X. on excluded income are not your proportionate share. Gen- is $6,900 for married persons fil- Complete this form, including the deductible as an itemized de- erally, your deduction for rent will ing a joint return and for certain omitted interest income, refigure duction. be limited to the amount you widows or widowers; $4,150 for the tax, and send the form as Note. Foreign income taxes would have paid had you been a single person; $6,050 for a soon as possible along with any are usually claimed under the abroad alone. head of household; and $3,450 additional tax due to the Internal credit provisions, if they apply, for a married person filing a Revenue Service Center where because this is more advanta- separate return. General Tax Questions you filed your return. Form geous in most cases. The standard deduction is 1040X can be used to correct an higher if you are age 65 or older individual Form 1040 income tax or blind, and different amounts 1) Will the Internal Revenue 7) I rented an apartment in the Service representatives at the return filed for any year for which apply to dependents. See Publi- United Kingdom and had to the period of limitation has not cation 501, Exemptions, Stand- Embassies and those who pay a local tax called a “gen- provide taxpayer assistance expired (usually 3 years after the ard Deduction, and Filing Infor- eral rates” tax, which is based due date of the return filed, or 2 mation. answer questions about tax on occupancy of the apart- laws of our home state and the years after the tax was paid, ment. Can I deduct this tax as laws of the foreign country whichever is later). 2) My wife and I are consider- a foreign real estate tax? where we reside as well as ing filing separate returns. Can U.S. federal income tax laws? 6) I am a U.S. citizen and, be- I itemize deductions while she No. This tax does not qualify as cause I expect to qualify for figures her tax using the a real estate tax since it is levied No. The IRS representatives are the foreign earned income ex- standard deduction? on the occupant of the premises authorized only to answer tax clusion, all my foreign income rather than on the owner of the questions on U.S. federal income (which consists solely of sal- property. tax. You should write your home ary) will be exempt from U.S. Yes. However if you itemize de- tax. Do I get any tax benefit ductions, your wife's standard state's tax office for state tax in- Scholarship and formation and contact the tax of- from income tax I paid on this deduction is zero, therefore you salary to a foreign country wife should also itemize. Fellowship Grantees ficials of the country where you reside for information regarding during the tax year? their taxes. 3) Can I claim a foreign tax 1) I am a Fulbright grantee. No. You cannot take either a tax credit even though I do not What documentation must I credit or a tax deduction for for- attach to my return? 2) Can Internal Revenue Ser- itemize deductions? vice personnel recommend tax eign income taxes paid on in- practitioners who prepare re- come that is exempt from U.S. a) There are no special tax forms turns? tax because of the foreign Yes. You can claim the foreign for Fulbright grantees. File on a earned income exclusion. tax credit even though you do not regular Form 1040. itemize deductions. b) If you claim exemption as No. IRS employees are not per- 7) I am a U.S. citizen stationed a scholarship or fellowship mitted to recommend tax practi- abroad. I made a personal loan grantee, submit brochures and tioners who prepare income tax 4) I had to pay customs duty to a nonresident alien who correspondence describing the returns. on a few things I brought back later went bankrupt. Can I grant and your duties. with me from Europe last claim a bad debt loss for this c) If you are located in a for- summer. Can I include cus- 3) I just filed my return. How money? toms fees with my other eign country and wish to pay tax long will it take to get my re- deductible taxes? in foreign currency, you should fund? submit a certified statement The loss should be reported as showing that you were a a short-term capital loss on It may take up to 10 weeks to No. Customs duties, like federal Fulbright grantee and at least Schedule D (Form 1040). You issue a refund on a return that is excise taxes, are not deductible. 70% of the grant was paid in have the burden of proving the properly made out. A refund may nonconvertible foreign currency validity of the loan, the subse- take longer than that if the return (see Publication 520). quent bankruptcy, and the re- 5) Some taxes paid in the is filed just before the filing covery or nonrecovery from the United States are not deduct- deadline. loan. ible if I itemize my deductions. 2) I taught and lectured abroad An error on the return will Which ones are they? under taxable grants. What also delay the refund. Among the expenses can I deduct? most common causes of delay in 8) With which countries do the receiving refunds are unsigned United States have tax trea- Sales taxes, as well as the state ties? You may be able to deduct your returns and incorrect social se- and local taxes levied specifically curity numbers. on cigarettes, tobacco, and al- travel, meals, and lodging ex- Table 6–1, Table of Tax Treaties, coholic beverages are not penses if you are temporarily earlier in this publication lists deductible. In addition, no de- absent from your regular place 4) I have not received my re- those countries with which the duction can be taken for drivers' of employment. For more infor- fund from last year's return. United States has income tax licenses or gasoline taxes. Auto mation about deducting travel, Can I claim the credit against treaties. registration fees cannot be de- meals, and lodging expenses, this year's tax? ducted except when they qualify get Publication 463. as personal property taxes. To No. That would cause problems 9) I am a retired U.S. citizen qualify as personal property 3) I am a professor who is to both years' returns. If your last living in Europe. My only in- taxes they must be based on the teaching abroad while on sab- year's refund is overdue, write to come is from U.S. sources on value of the auto. batical leave from my position the Internal Revenue Service which I pay U.S. taxes. I am Some state and local taxes in the United States. What re- Center where you filed your re- taxed on the same income in are deductible, such as those on cords am I required to keep to turn and ask about the status of the foreign country where I personal property, real estate, prove my expenses? How do I the refund. Be sure to include reside. How do I avoid double and income. allocate my meals and lodging your social security number (or taxation? Page 39 If you reside in a country that has the old home and the new home that was the principal home for It may be advantageous to an income tax treaty with the are used by both you and your the whole year for your mother choose to treat your nonresident United States, that country may spouse as your principal resi- or father for whom you can claim alien spouse as a U.S. resident allow a credit against the tax you dence) have a tax home outside an exemption (your parent does and file a joint income tax return. owe them for the U.S. tax paid the United States after the date not have to have lived with you), Once you make the choice, on U.S. source income. Non- of the sale of the old home. This or however, you must report the treaty countries, depending on suspension applies only if your b) You paid more than half worldwide income of both your- their laws, may give the same stay abroad begins before the the cost of keeping up the home self and your spouse. type of credit against the tax you end of the 2–year replacement in which you lived and in which owe them for the U.S. tax paid period. However, the replace- one of the following also lived for Penalties and Interest on U.S. source income. ment period plus the period of more than half the year: If double taxation exists and suspension is limited to 4 years 1) Does the June 15 extended you cannot resolve the problem from the date of the sale of the • Your unmarried child, due date for filing my return with the tax authorities of the old home. grandchild, stepchild, foster because both my tax home foreign country, you can contact Sales after May 6, 1997. If child, or adopted child. A and my abode are outside the the your old home was sold after foster child will qualify you United States and Puerto Rico Internal Revenue Service May 6, 1997, you may be able for this status only if you can on the regular due date relieve Assistant Commissioner (Inter- to exclude part or all of the gain claim an exemption for the me from having to pay interest national) from gross income. child. on tax not paid by April 15? Attn: CP:IN:D:CS Get Publication 523, Selling 950 L'Enfant Plaza South, S.W. Your Home, for more informa- • Your married child, grand- Washington, DC 20024. tion. child, stepchild, or adopted No. An extension, whether an child for whom you can claim automatic extension or one re- an exemption, or for whom quested in writing, does not re- 10) My total income after 12) Last May my employer you could claim an ex- lieve you of the payment of in- claiming the foreign earned transferred me to our office in emption except that you terest on the tax due as of April income and housing exclu- Puerto Rico. I understand that signed a statement allowing 15 following the year for which sions consists of $5,000 taxa- my salary earned in Puerto the noncustodial parent to the return is filed. The interest ble wages. Am I entitled to Rico is tax exempt. Is this claim the exemption, or the should be included in your pay- claim the refundable earned correct? noncustodial parent provides ment. income credit? at least $600 support and As long as your employer is not claims the exemption under 2) If I wait to file my return until No, if you claim the foreign the U.S. Government, all income a pre–1985 agreement. I qualify for the foreign earned earned income exclusion, the from sources within Puerto Rico • Any relative listed below for income exclusion, I will be foreign housing exclusion, or the is exempt from U.S. tax if you are whom you can claim an ex- charged interest on the U.S. foreign housing deduction, you a bona fide resident of Puerto emption. tax I will owe. To avoid being cannot claim the earned income Rico during the entire tax year. charged interest, can I file my credit. The income you received from Parent Father-in-law return on time, reporting only Puerto Rican sources the year Grandparent Brother-in-law my taxable income, excluding you moved to Puerto Rico is not Brother Sister-in-law my salary for services abroad 11) Before being transferred Half-brother Half-sister exempt. The tax paid to Puerto that will be exempt after I have overseas by my company, I Sister Son-in-law Rico in the year you moved to met the qualifications? sold my old home at a gain. Stepbrother Daughter-in-law, or Puerto Rico can be claimed as How long do I have to buy a Stepsister If related by blood: a foreign tax credit on Form Stepmother —Uncle No. If you file a return before you replacement home and post- 1116. Stepfather —Aunt qualify for the exclusion, you pone recognizing the gain? Mother-in-law —Nephew must report all income, including —Niece all income for services performed 13) I am a U.S. citizen married Sales before May 7, 1997. If your spouse was a nonres- abroad, and pay tax on all of it. to a nonresident alien. I be- Generally, to postpone recogniz- ident alien at any time during the After you meet the qualifications, lieve I have all the qualifica- ing gain on the sale of a home, year and you do not choose to you can file a claim for refund by tions to claim the head of you must buy or build and live in treat your nonresident spouse as excluding the income earned household tax rates. Can I your replacement home within a a resident alien, then you are abroad. If you defer the filing of claim the head of household period beginning 2 years before treated as unmarried for head of your return, you can avoid inter- tax rates? and ending 2 years after the date household purposes. You must est on tax due on your return to of sale of your old home. The have another qualifying relative be filed by paying the tax you replacement home may be lo- Yes. Although your nonresident and meet the other tests to be estimate you will owe with your cated outside the United States. alien spouse cannot qualify you eligible to file as head of house- request for an extension of time However, the replacement as a head of household, you can hold. You can use the head of to file on Form 2350, or by pay- period after the sale of your old qualify if (a) or (b) applies: household column in the Tax ing enough estimated tax to home is suspended during any a) You paid more than half Table or the head of household cover any tax that you expect time that you (or your spouse if the cost of keeping up a home Tax Rate Schedule. will be due on the return.

Page 40 Index

Foreign taxes: Professors and teachers ...... 31 A Credit ...... 7, 29 Reimbursement of employee R American Samoa, residents of .. 12 Deduction ...... 30 expenses ...... 16 Railroad retirement benefits ...... 38 Paid on excluded income ..... 29 Reimbursement of moving ex- Recapture of moving expenses 29 Form: penses ...... 16 Reimbursement of moving ex- B 673 ...... 7, 38 Rental ...... 16 penses ...... 16 Binational social security agree- 911 ...... 33 Royalties ...... 16 Revocation of choice to exclude 19 ments ...... 9 1040 ...... 21, 38 Source of ...... 15 Blocked income ...... 4 1040X ...... 4, 32, 36, 39 Stock options ...... 16 Bona fide residence test ...... 13 1040–ES ...... 6 Students ...... 31 S Part of a year ...... 13 1078 ...... 9 Trade or business ...... 16 Scholarship and fellowship Special agreements and trea- 1099 ...... 7 Unearned ...... 15 grants ...... 39 ties ...... 13 1116 ...... 29, 40 Indefinite assignment ...... 11 Second foreign household ...... 20 Voting by absentee ballot .... 13 2032 ...... 9 Individual retirement arrange- Self-employment tax ...... 10, 38 2106 ...... 30 ments ...... 29 Exemption from ...... 10 2350 ...... 4, 35, 40 Individual taxpayer identification Who must pay ...... 10 C 2555 ...... 13, 15, 19, 21, 22, number (ITIN) ...... 27 Social security and Medicare 30, 35, 37, 38 Information returns ...... 6 taxes ...... 9 Camps, employees living in ...... 18 2555–EZ ...... 15, 19, 21, 22, 30, Investment income ...... 31 Social security benefits ...... 38 Carryover of housing amount de- 35, 37 Social security number: duction ...... 20 3115 ...... 4 Dependents ...... 1 Choosing the exclusion ...... 19 3520 ...... 6 Nonresident spouse ...... 5 Clergy, self-employment tax on 10 3903 ...... 29 L Social security numbers for depen- Community income ...... 18 3903–F ...... 29 Limit on excludable amount ...... 18 dents ...... 1 Competent authority assistance 32 4361 ...... 10 Source of earned income ...... 15 Contributions ...... 27 4563 ...... 12, 35 Special agreements and treaties 13 Controlled foreign corporations ... 6 4790 ...... 6 Students ...... 31 Conventions, income tax ...... 31 4868 ...... 3 M 5471 ...... 6 Married couples living apart ...... 20 8689 ...... 5 Meals and lodging, exclusion of 18 8822 ...... 2 Moving expenses ...... 27 T D Taiwan, American Institute in .... 17 Deductions ...... 27, 39 RRB–1099 ...... 38 Tax home ...... 11 Contributions ...... 27 RRB–1099–R ...... 38 Tax treaty benefits ...... 31 Moving expenses ...... 27 Schedule SE ...... 10 N Taxpayer assistance ...... 39 Deductions and Credits ...... 27 TD F 90–22.1 ...... 7 Nonresident spouse ...... 5 Teachers ...... 31 Dependents: W–2 ...... 7 Northern Mariana Islands, resi- Temporary assignment ...... 11 Exemption for ...... 27 W–4 ...... 7 dents of ...... 5, 12 Terrorist or military action ...... 5 Individual taxpayer identification Fulbright grants ...... 4 Totalization agreements ...... 9 number ...... 1 Travel restrictions, U.S...... 15 Social security number ...... 1 Treaties, income tax ...... 32 G O General tax questions ...... 39 Optional method for self- E Guam, residents of ...... 5, 12 employment tax ...... 10 U Earned income credit ...... 40 U.S. Government allowance ..... 20 Earned income: U.S. Government employees .... 17 Source of ...... 15 Types of ...... 15 H P Estimated tax ...... 6 Head of household status ...... 40 Panama Canal Commission, U.S. Exemptions and dependency Help from IRS ...... 32 employees of ...... 17 V allowances ...... 27, 37 Home, sale of ...... 40 Part-year exclusion ...... 18 Virgin Islands: Extension of time to file income tax Housing amount ...... 19 Pay for personal services .... 15, 31 Nonresident ...... 5 return ...... 3 Housing deduction ...... 20 Payment of tax ...... 3 Resident ...... 5 Housing exclusion ...... 20 Penalties and interest ...... 40 Where to file ...... 5 Pension payments, withholding from ...... 7 F Pensions and annuities ...... 16, 31 Filing information ...... 2, 3, 6 I Physical presence test ...... 14, 19 W Filing requirements ...... 3 Illustrated example ...... 21 12–month period ...... 14 Waiver of time requirements ..... 14 Information returns and reports 6 Income: Full day ...... 14 When to file and pay ...... 3, 35 Filing requirements ...... 3, 4, 35 Artist ...... 16 Problem Resolution Program Where to file ...... 4, 5, 35 When to file and pay ...... 3, 35 Blocked income ...... 4 (PRP) ...... 33 Commonwealth of the Northern Where to file ...... 4, 35 Community ...... 18 Professors and teachers ...... 31 Mariana Islands, resident of 5 Foreign country, defined ...... 12 Corporation ...... 16 Puerto Rico, residents of ...... 12 Resident of Guam ...... 5 Foreign currency ...... 4 Earned ...... 15 Virgin Islands resident, nonresi- Foreign earned income ...... 15 Employer's property or dent ...... 5 Foreign earned income exclu- facilities ...... 16 Withholding ...... 7 sion ...... 18, 37 Investment ...... 31 Q Withholding tax ...... 7, 38 Foreign housing exclusion or de- Pensions and annuities .. 16, 31 Qualified second household ...... 20 Ⅵ duction ...... 19 Personal service ...... 31 Questions and answer ...... 35

Page 41 Tax Publications for Individual Taxpayers

General Guides 530 Tax Information for First-Time 901 U.S. Tax Treaties Homeowners 907 Tax Highlights for Persons with 1 Your Rights as a Taxpayer 531 Reporting Tip Income Disabilities 17 Your Federal Income Tax (For 533 Self-Employment Tax 908 Bankruptcy Tax Guide Individuals) 534 Depreciating Property Placed in 911 Direct Sellers 225 Farmer’s Tax Guide Service Before 1987 915 Social Security and Equivalent 334 Tax Guide for Small Business 537 Installment Sales Railroad Retirement Benefits 509 Tax Calendars for 1998 541 Partnerships 919 Is My Withholding Correct for 1998? 553 Highlights of 1997 Tax Changes 544 Sales and Other Dispositions of 925 Passive Activity and At-Risk Rules 595 Tax Highlights for Commercial Assets 926 Household Employer’s Tax Guide Fishermen 547 Casualties, Disasters, and Thefts 929 Tax Rules for Children and 910 Guide to Free Tax Services (Business and Nonbusiness) Dependents 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Specialized Publications 551 Basis of Assets 946 How To Depreciate Property 552 Recordkeeping for Individuals 947 Practice Before the IRS and Power 3 Armed Forces’ Tax Guide 554 Older Americans’ Tax Guide of Attorney 378 Fuel Tax Credits and Refunds 555 Federal Tax Information on 950 Introduction to Estate and Gift Taxes 463 Travel, Entertainment, Gift, and Car Community Property 967 IRS Will Figure Your Tax Expenses 556 Examination of Returns, Appeal 968 Tax Benefits for Adoption 501 Exemptions, Standard Deduction, Rights, and Claims for Refund 1542 Per Diem Rates and Filing Information 559 Survivors, Executors, and 502 Medical and Dental Expenses 1544 Reporting Cash Payments of Over Administrators $10,000 503 Child and Dependent Care Expenses 561 Determining the Value of Donated 1546 The Problem Resolution Program 504 Divorced or Separated Individuals Property of the Internal Revenue Service 505 Tax Withholding and Estimated Tax 564 Mutual Fund Distributions 508 Educational Expenses 570 Tax Guide for Individuals With 514 Foreign Tax Credit for Individuals Income From U.S. Possessions Spanish Language Publications 516 U.S. Government Civilian Employees 575 Pension and Annuity Income Stationed Abroad 584 Nonbusiness Disaster, Casualty, and 1SP Derechos del Contribuyente 517 Social Security and Other Theft Loss Workbook 579SP Cómo Preparar la Declaración de Information for Members of the 587 Business Use of Your Home Impuesto Federal Clergy and Religious Workers (Including Use by Day-Care 594SP Comprendiendo el Proceso de Cobro 519 U.S. Tax Guide for Aliens Providers) 596SP Crédito por Ingreso del Trabajo 520 Scholarships and Fellowships 590 Individual Retirement Arrangements 850 English-Spanish Glossary of Words 521 Moving Expenses (IRAs) (Including SEP-IRAs and and Phrases Used in Publications 523 Selling Your Home SIMPLE IRAs) Issued by the Internal Revenue 524 Credit for the Elderly or the Disabled 593 Tax Highlights for U.S. Citizens and Service 525 Taxable and Nontaxable Income Residents Going Abroad 1544SP Informe de Pagos en Efectivo en 526 Charitable Contributions 594 Understanding the Collection Process Exceso de $10,000 (Recibidos en 527 Residential Rental Property 596 Earned Income Credit una Ocupación o Negocio) 529 Miscellaneous Deductions 721 Tax Guide to U.S. Civil Service Retirement Benefits

Commonly Used Tax Forms

1040 U.S. Individual Income Tax Return Sch 2 Child and Dependent Care 4868 Application for Automatic Extension Sch A Itemized Deductions Expenses for Form 1040A Filers of Time To File U.S. Individual Sch B Interest and Dividend Income Sch 3 Credit for the Elderly or the Income Tax Return Sch C Profit or Loss From Business Disabled for Form 1040A Filers 4952 Investment Interest Expense Sch C-EZ Net Profit From Business 1040-ES Estimated Tax for Individuals Deduction Sch D Capital Gains and Losses 1040X Amended U.S. Individual Income Tax 5329 Additional Taxes Attributable to Sch E Return Qualified Retirement Plans (Including Supplemental Income and Loss IRAs), Annuities, and Modified Sch EIC Earned Income Credit 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Endowment Contracts Sch F Profit or Loss From Farming 6251 Alternative Minimum Tax–Individuals Sch H Household Employment Taxes Expenses 2119 Sale of Your Home 8283 Noncash Charitable Contributions Sch R Credit for the Elderly or the 8582 Passive Activity Loss Limitations Disabled 2210 Underpayment of Estimated Tax by Individuals, Estates and Trusts 8606 Nondeductible IRAs (Contributions, Sch SE Self-Employment Tax Distributions, and Basis) 2441 Child and Dependent Care Expenses 1040EZ Income Tax Return for Single and 8822 Change of Address 2848 Power of Attorney and Declaration Joint Filers With No Dependents 8829 Expenses for Business Use of Your 1040A U.S. Individual Income Tax Return of Representative 3903 Home Sch 1 Interest and Dividend Income for Moving Expenses Form 1040A Filers 4562 Depreciation and Amortization

Page 42 Tax Publications for Individual Taxpayers

Commonly Used Tax Forms

1040 U.S. Individual Income Tax Return Sch 2 Child and Dependent Care 4868 Application for Automatic Extension Sch A Itemized Deductions Expenses for Form 1040A Filers of Time To File U.S. Individual Sch B Interest and Dividend Income Sch 3 Credit for the Elderly or the Income Tax Return Sch C Profit or Loss From Business Disabled for Form 1040A Filers 4952 Investment Interest Expense Sch C-EZ Net Profit From Business 1040-ES Estimated Tax for Individuals Deduction Sch D Capital Gains and Losses 1040X Amended U.S. Individual Income Tax 5329 Additional Taxes Attributable to Sch E Return Qualified Retirement Plans (Including Supplemental Income and Loss IRAs), Annuities, and Modified Sch EIC Earned Income Credit 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Endowment Contracts Sch F Profit or Loss From Farming 6251 Alternative Minimum Tax–Individuals Sch H Household Employment Taxes Expenses 2119 Sale of Your Home 8283 Noncash Charitable Contributions Sch R Credit for the Elderly or the 8582 Passive Activity Loss Limitations Disabled 2210 Underpayment of Estimated Tax by Individuals, Estates and Trusts 8606 Nondeductible IRAs (Contributions, Sch SE Self-Employment Tax Distributions, and Basis) 2441 Child and Dependent Care Expenses 1040EZ Income Tax Return for Single and 8822 Change of Address Joint Filers With No Dependents 2848 Power of Attorney and Declaration of Representative 8829 Expenses for Business Use of Your 1040A U.S. Individual Income Tax Return 3903 Moving Expenses Home Sch 1 Interest and Dividend Income for Form 1040A Filers 4562 Depreciation and Amortization

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