If you are a U.S. citizen with income from sources outside the United States (foreign income), you must report all of that income (except for amounts that U.S. law allows you to exclude) on your tax return. This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or a Form 1099. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties).

Certain taxpayers can exclude income earned in foreign countries. For 2006, this exclusion amount can be as much as $82,400. However, the foreign earned income exclusion does not apply to the wages and salaries of military and civilian employees of the U.S. Government. Employees of the U.S. Government include those who work at Armed Forces post exchanges, officers' and enlisted personnel clubs, and embassy commissaries, and similar personnel paid from nonappropriated funds. Other foreign income earned by military personnel or their spouses may be eligible for the foreign earned income exclusion. For more information on the exclusion, see Publication 54.

Residents of American Samoa may be able to exclude income from American Samoa. This possession exclusion does not apply to wages and salaries of military and civilian employees of the U.S. Government. If you need information on the possession exclusion, see Publication 570, Tax Guide for Individuals With Income From U.S. Possessions.

The pay you earn as a member of the Armed Forces may be subject to community property laws depending on your marital status, your domicile, and the nature of the payment. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

If you are a member of a reserve component of the Armed Forces and you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you can deduct your travel expenses as an adjustment to income on line 24 of Form 1040 rather than as a miscellaneous itemized deduction. The deduction is limited to the amount the federal government pays its employees for travel expenses. For more information about this limit, see Per Diem and Car Allowances in chapter 6 of Publication 463.

Generally, you can deduct the lesser of the contributions to your traditional individual retirement arrangement (IRA) for the year or the general limit (or spousal IRA limit, if applicable). However, if you or your spouse was covered by an employer-maintained retirement plan at any time during the year for which contributions were made, you may not be able to deduct all of the contributions. The Form W-2 you or your spouse receives from an employer has a box used to indicate whether you were covered for the year. The “Retirement plan” box should have a mark in it if you were covered.

For purposes of a deduction for contributions to a traditional IRA, Armed Forces members (including reservists on active duty for more than 90 days during the year) are considered covered by an employer-maintained retirement plan.

Individuals serving in the U.S. Armed Forces or in support of the U.S. Armed Forces in designated combat zones have additional time to make a qualified retirement contribution to an IRA. For more information on this extension of deadline provision, see Extension of Deadlines, later. For more information on IRAs, see Publication 590.

Qualified Reservist Distributions

A qualified reservist distribution is not subject to the 10% additional tax on early distributions from certain retirement plans.

Definition.   A distribution you receive is a qualified reservist distribution if the following requirements are met.

• You were ordered or called to active duty after September 11, 2001, and before December 31, 2007.

• You were ordered or called to active duty for a period of more than 179 days or for an indefinite period because you are a member of a reserve component (see Member of a reserve component, earlier under Armed Forces Reservists.)

• The distribution is from an IRA or from amounts attributable to elective deferrals under a section 401(k) or 403(b) plan or a similar arrangement.

• The distribution was made no earlier than the date of the order or call to active duty and no later than the close of the active duty period.

  

If you received a qualified reservist distribution before 2006 and paid the 10% additional tax, you can amend your return for the applicable year to claim a refund of the 10% additional tax on early distributions. Use Form 1040X to claim the refund. You have until August 16, 2007, to claim any refund or tax credit for years for which the statute of limitations (generally 3 years) has run its course.

To deduct moving expenses, you generally must meet certain time and distance tests. However, if you are a member of the Armed Forces on active duty and you move because of a permanent change of station, you do not have to meet these tests. You can deduct your unreimbursed moving expenses on Form 3903.

A combat zone is any area the President of the United States designates by Executive Order as an area in which the U.S. Armed Forces are engaging or have engaged in combat. An area usually becomes a combat zone and ceases to be a combat zone on the dates the President designates by Executive Order.

You are considered to be serving in a combat zone if you are either assigned on official temporary duty to a combat zone or you qualify for hostile fire/imminent danger pay while in a combat zone.

Service in a combat zone includes any periods you are absent from duty because of sickness, wounds, or leave. If, as a result of serving in a combat zone, a person becomes a prisoner of war or is missing in action, that person is considered to be serving in the combat zone so long as he or she keeps that status for military pay purposes.

If you are an enlisted member, warrant officer, or commissioned warrant officer and you serve in a combat zone during any part of a month, you can exclude all of your military pay for that month. It should not be included in the wages reported on your Form W-2. You also can exclude military pay earned while you are hospitalized as a result of wounds, disease, or injury incurred in the combat zone. If you are hospitalized, you cannot exclude any military pay received for any month of service that begins more than 2 years after the end of combat activities in the combat zone. Your hospitalization does not have to be in the combat zone.

If you are a commissioned officer (other than a commissioned warrant officer), you can exclude your pay according to the rules just discussed. However, the amount of your exclusion is limited to the highest rate of enlisted pay (plus imminent danger/hostile fire pay you received) for each month during any part of which you served in a combat zone or were hospitalized as a result of your service there.

You are considered a resident alien of the United States for tax purposes if you meet either the “green card test” or the “substantial presence test” for the calendar year (January 1 - December 31).

If you meet the substantial presence test for 2006, you did not meet either the green card test or the substantial presence test for 2004 or 2005, and you did not choose to be treated as a resident for part of 2004, you may be able to choose to be treated as a U.S. resident for part of 2005. See First-Year Choice in Publication 519.

These tests are explained in Publication 519. Generally, resident aliens are taxed on their worldwide income and file the same tax forms as U.S. citizens.

Making the choice.   Both you and your spouse must sign a statement and attach it to your joint return for the first tax year for which the choice applies. Include in the statement:

• A declaration that one spouse was a nonresident alien and the other was a U.S. citizen or resident alien on the last day of the year,

• A declaration that both spouses choose to be treated as U.S. residents for the entire tax year, and

• The name, address, and taxpayer identification number (social security number or individual taxpayer identification number) of each spouse. If the nonresident alien spouse is not eligible to get a social security number, he or she should file Form W-7, Application for IRS Individual Taxpayer Identification Number (ITIN).

  

Once you make this choice, the nonresident alien spouse's worldwide income is subject to U.S. tax. If the nonresident alien spouse has substantial foreign income, there may be no advantage to making this choice.

If you are an alien who does not meet the requirements discussed earlier to be a resident alien, you are a nonresident alien. If you are required to file a federal tax return, you must file either Form 1040NR, U.S. Nonresident Alien Income Tax Return, or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents. See the form instructions for information on who must file and filing status.

If you are a nonresident alien, you generally must pay tax on income from sources in the United States. Your income that is from conducting a trade or business in the United States is taxed at graduated U.S. tax rates. Other income from U.S. sources is taxed at a flat 30% (or lower treaty) rate. For example, dividends from a U.S. corporation paid to a nonresident alien generally are subject to a 30% (or lower treaty) rate.

You can be both a nonresident and resident alien during the same tax year. This usually occurs in the year you arrive in or depart from the United States. If you are a dual-status alien, you are taxed on income from all sources for the part of the year you are a resident alien. Generally, for the part of the year you are a nonresident alien, you are taxed only on income from sources in the United States.

You generally can exclude up to $250,000 of gain ($500,000, in most cases, if married filing a joint return) realized on the sale or exchange of a main home in 2006. The exclusion is allowed each time you sell or exchange a main home, but generally not more than once every 2 years. To be eligible, during the 5-year period ending on the date of the sale, you must have owned the home for at least 2 years (the ownership test), and lived in the home as your main home for at least 2 years (the use test).

See Rules for Sales Before May 7, 1997, in the 2004 Publication 3 if you sold your main home at a gain before May 7, 1997, and all three of the following statements are true.

The 2004 Publication 3 is available at www.irs.gov.

Deductible employee business expenses are miscellaneous itemized deductions subject to the 2% limit. For information on employee business expenses, see Publication 463.

Generally, you must file Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, to claim these expenses. You do not have to file Form 2106 or Form 2106-EZ if you are claiming only unreimbursed expenses for uniforms, professional society dues, and work-related educational expenses (all discussed later). You can deduct these expenses directly on Schedule A (Form 1040).

Reimbursement.   Generally, to receive advances, reimbursements, or other allowances from the government, you must adequately account for your expenses and return any excess reimbursement. Your reimbursed expenses are not deductible.

  If your expenses are more than your reimbursement, the excess expenses are deductible (subject to the 2% limit) if you can prove them. You must file Form 2106 to report these expenses.

  You can use the shorter Form 2106-EZ if you meet all three of the following conditions.

• You are an employee deducting expenses related to your job.

• You were not reimbursed by your employer for your expenses. (Amounts included in box 1 of Form W-2 are not considered reimbursements.)

• If you claim car expenses, you use the standard mileage rate.

  

For 2006, the standard mileage rate is 44.5 cents a mile for all business miles driven. This rate is adjusted periodically.

Travel Expenses

You can deduct unreimbursed travel expenses only if they are incurred while you are traveling away from home. If you are a member of the U.S. Armed Forces on a permanent duty assignment overseas, you are not traveling away from home. You cannot deduct your expenses for meals and lodging while at your permanent duty station. You cannot deduct these expenses even if you have to maintain a home in the United States for your family members who are not allowed to accompany you overseas.

A naval officer assigned to permanent duty aboard a ship that has regular eating and living facilities has a home aboard ship for travel expense purposes.

To be deductible, your travel expenses must be work related. You cannot deduct any expenses for personal travel, such as visits to family while on furlough, leave, or liberty.

Away from home.   Home is your permanent duty station (which can be a ship or base), regardless of where you or your family live. You are away from home if you are away from your permanent duty station substantially longer than an ordinary day's work and you need to get sleep or rest to meet the demands of your work while away from home.

  Examples of deductible travel expenses include:

• Expenses for business-related meals (generally limited to 50% of your unreimbursed cost), lodging, taxicabs, business telephone calls, tips, laundry, and dry cleaning while you are away from home on temporary duty or temporary additional duty, and

• Expenses of carrying out official business while on “No Cost” orders.

  

You cannot deduct any expenses for travel away from home if the temporary assignment in a single location is realistically expected to last (and does in fact last) for more than 1 year. This rule may not apply if you are participating in a federal crime investigation or prosecution. For more information, see Publication 463 and the Form 2106 instructions.

Transportation Expenses

These expenses include the ordinary and necessary costs of:

• Getting from one workplace to another when you are not away from home,

• Going to a business meeting away from your regular workplace, and

• Getting from your home to a temporary workplace when you have a regular place of work.

These expenses include the costs of transportation by air, bus, rail, taxi, and driving and maintaining your car. Transportation expenses incurred while traveling away from home are travel expenses. However, if you use your car while traveling away from home overnight, see the rules in chapter 4 of Publication 463 to figure your car expense deduction.

If you must go from one workplace to another while on duty (for example, as a courier or to attend meetings) without being away from home, your unreimbursed transportation expenses are deductible. However, the expenses of getting to and from your regular place of work (commuting) are not deductible.

Temporary work location.   If you have one or more regular places of business away from your home and you commute to a temporary work location in the same trade or business, you can deduct the expenses of the daily round-trip transportation between your home and the temporary location.

  Generally, if your employment at a work location is realistically expected to last (and does in fact last) for 1 year or less, the employment is temporary.

  If your employment at a work location is realistically expected to last for more than 1 year or if there is no realistic expectation that the employment will last for 1 year or less, the employment is not temporary, regardless of whether it actually lasts for more than 1 year. If employment at a work location initially is realistically expected to last for 1 year or less, but at some later date the employment is realistically expected to last more than 1 year, that employment will be treated as temporary (unless there are facts and circumstances that would indicate otherwise) until your expectation changes.

  

If you do not have a regular place of business, but you ordinarily work in the metropolitan area where you live, you can deduct daily transportation expenses between your home and a temporary work site outside your metropolitan area. However, you cannot deduct daily transportation costs between your home and temporary work sites within your metropolitan area. These are nondeductible commuting costs.

Armed Forces reservists.   A meeting of an Armed Forces reserve unit is a second place of business if the meeting is held on a day on which you work at your regular job. You can deduct the expense of getting from one workplace to the other. You usually cannot deduct the expense if the reserve meeting is held on a day on which you do not work at your regular job. In this case, your transportation generally is a nondeductible commuting expense. However, you can deduct your transportation expenses if the location of the meeting is temporary and you have one or more regular places of work.

  If you ordinarily work in a particular metropolitan area but not at any specific location and the reserve meeting is held at a temporary location outside that metropolitan area, you can deduct your transportation expenses. If you travel away from home overnight to attend a guard or reserve meeting, you can deduct your travel expenses. See Armed Forces Reservists under Adjustments to Income, earlier.

If you had to repay to your employer an amount that you included in your income in an earlier year, you may be able to deduct the repaid amount from your income for the year in which you repaid it.

The earned income credit (EIC) is a credit for certain persons who work. The credit reduces the amount of tax you owe (if any). It may also give you a refund.

The child tax credit is a credit that may reduce your tax by as much as $1,000 for each of your qualifying children.

The additional child tax credit is a credit you may be able to take if you are not able to claim the full amount of the child tax credit.

Tax liability is forgiven for an individual who:

The forgiveness applies to:

In addition, any unpaid taxes for years ending before the member began service in a combat zone will be forgiven and any of those taxes that are paid after the date of death will be refunded.

The beneficiary or trustee of the estate of a deceased service member does not have to pay tax on any amount received that would have been included (had the service member not died) in the deceased member's gross income for the year of death.

Tax liability is forgiven for an individual who:

The forgiveness applies to:

A terrorist or military action is any terrorist activity primarily directed against the United States or its allies or any military action involving the U.S. Armed Forces and resulting from violence or aggression against the United States or its allies.

Any multinational force in which the United States participates is considered an ally of the United States.

The beneficiary or trustee of the estate of a deceased service member does not have to pay tax on any amount received that would have been included (had the service member not died) in the deceased member's gross income for the year of death.

Returns reflecting forgiven tax and claims for refund of forgiven tax that has already been paid must be identified. Usually, Form 1040X is used to claim the refund.

Send your federal tax return to the Internal Revenue Service Center for the place where you live. The instructions for Forms 1040, 1040A, and 1040EZ give the addresses for the service centers. If you are overseas and have an APO or FPO address, file your return with the Internal Revenue Service Center in Austin, TX.

Most individuals must file their tax returns by the regular due date. If you are serving in a combat zone, qualified hazardous area, or outside the U.S., you may be eligible for an extension. See Extension of Deadlines, later.

Extensions

You can receive an extension of time to file your return. Different rules apply depending on whether you live inside or outside the United States.

Inside the United States.   You can receive an automatic 6-month extension to file your return if you file Form 4868 by the regular due date of your return. You can file it electronically or on paper. See Form 4868 for details.

  The extension of time to file is automatic, and you will not receive any notice of approval. However, your request for an extension will be denied if it is not made timely. The IRS will inform you of the denial.

  

You cannot use the automatic extension if you choose to have IRS figure the tax or you are under a court order to file your return by the regular due date.

When you file your return.   Enter the amount you paid on Form 1040, line 69. On Form 1040A, include the amount in the total on line 43. On Form 1040EZ, include the amount in the total on line 9. To the left of line 43 or line 9, enter “Form 4868” and show the amount paid.

Outside the United States and Puerto Rico.   If you are a U.S. citizen or resident alien, you qualify for an automatic extension of time until June 15 without filing Form 4868 if either of the following situations applies to you.

1. You live outside the United States and Puerto Rico and your main place of business or post of duty is outside the United States and Puerto Rico, or

2. You are in military or naval service on an assigned tour of duty outside the United States and Puerto Rico for a period that includes the entire due date of the return.

You will be charged interest on any amount not paid by the regular due date until the date the tax is paid.

  If you use this automatic extension, you must attach a statement to the return showing that you met the requirement.

  You can request an additional 4-month extension by filing Form 4868 by June 15, 2007, for a 2006 calendar year tax return. Check the box on line 8.

Joint returns.   For married persons filing a joint return, only one spouse needs to meet the requirements to take advantage of the automatic extension to June 15.

Separate returns.   For married persons filing separate returns, only the spouse who meets the requirements qualifies for the automatic extension to June 15.

Payment of tax.   An extension of time to file does not mean you have an extension of time to pay any tax due. You must estimate your tax due. You do not have to send in any payment of tax due when you file Form 4868. However, if you pay the tax after the regular due date, you will be charged interest from the regular due date to the date the tax is paid. You also may be charged a penalty for paying the tax late unless you have reasonable cause for not paying your tax when due.

  If you file Form 4868 electronically, you can make your tax payment by authorizing an electronic funds withdrawal from your checking or savings account or by using a credit card.

  For more details on how to pay the tax due, see the Form 4868 instructions.

Exception.   If you are a member of the Armed Forces, you may qualify to defer (delay) payment of income tax that becomes due before or during your military service. You must notify the Internal Revenue Service that your ability to pay the income tax has been materially affected by your military service.

  Your income tax will be deferred for a period not to exceed 180 days after termination or release from military service. If you pay the income tax in full by the end of the deferral period, you will not be charged interest or penalty for that period.

  This exception does not apply to the employee's share of social security and Medicare taxes you may owe.

If you are unable to pay the tax owed by the end of the extension period, you may want to file Form 9465 to arrange an installment payment agreement with the IRS that reflects your ability to pay the tax owed.

Generally, you must sign your return. However, if you are overseas or incapacitated, you can grant a power of attorney to an agent to file and sign your return.

If you are acting on behalf of someone serving in a combat zone, see Spouse in combat zone/qualified hazardous duty area, later.

A power of attorney also can be granted by filing Form 2848. These forms are available at your nearest legal assistance office. While other power of attorney forms can be used, they must contain the information required by Form 2848.

In Part I of the form, you must indicate that you are granting the power to sign the return, the tax form number, and the tax year for which the form is being filed. Attach the power of attorney to the tax return.

The deadline for filing tax returns, paying taxes, filing claims for refund, and taking other actions with the IRS is automatically extended if any of the following statements is true.

See Combat Zone, earlier, for the beginning dates for the Afghanistan area combat zone, the Kosovo area combat zone, the Persian Gulf area combat zone, and the qualified hazardous duty areas.

Your deadline for taking actions with the IRS is extended for 180 days after the later of:

In addition to the 180 days, your deadline is extended also by the number of days that were left for you to take the action with the IRS when you entered a combat zone (or began performing qualifying service outside the combat zone) or began serving in a contingency operation. If you entered the combat zone or began serving in the contingency operation before the period of time to take the action began, your deadline is extended by the entire period of time you have to take the action. For example, you had 3½ months (January 1 - April 15, 2006) to file your 2005 tax return. Any days of this 3½ month period that were left when you entered the combat zone (or the entire 3½ months if you entered the combat zone by January 1, 2006) are added to the 180 days when determining the last day allowed for filing your 2005 tax return.

The actions to which the deadline extension provision applies include:

If the IRS takes any actions covered by these provisions or sends you a notice of examination before learning that you are entitled to an extension of the deadline, contact your legal assistance office. No penalties or interest will be imposed for failure to file a return or pay taxes during the extension period.

Other actions to which the deadline extension provision applies are listed in Revenue Procedure 2005-27, 2005-20 I.R.B. 1050, available at
http://www.irs.gov/irb/2005-20_IRB/ar09.html.