us internal revenue service: p3--2006

8/14/2019 US Internal Revenue Service: p3--2006

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ContentsDepartment of the TreasuryInternal Revenue Service

Whats New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Reminders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Publication 3Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Cat. No. 46072M

Gross Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Foreign Source Income . . . . . . . . . . . . . . . . . . . 4

Community Property . . . . . . . . . . . . . . . . . . . . . . 5

Armed Forces Adjustments to Income . . . . . . . . . . . . . . . . . . . . . 5Armed Forces Reservists . . . . . . . . . . . . . . . . . . 5Tax GuideIndividual Retirement Arrangements . . . . . . . . . . 6

Moving Expenses . . . . . . . . . . . . . . . . . . . . . . . . 7For use in preparing

Combat Zone Exclusion . . . . . . . . . . . . . . . . . . . . . 8Combat Zone . . . . . . . . . . . . . . . . . . . . . . . . . . . 82006 ReturnsServing in a Combat Zone . . . . . . . . . . . . . . . . . 9

Amount of Exclusion . . . . . . . . . . . . . . . . . . . . . . 10

Alien Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Resident Aliens . . . . . . . . . . . . . . . . . . . . . . . . . 10

Nonresident Aliens . . . . . . . . . . . . . . . . . . . . . . . 11Dual-Status Aliens . . . . . . . . . . . . . . . . . . . . . . . 11

Sale of Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Rules for Sales in 2006 . . . . . . . . . . . . . . . . . . . 11

Sale of a Home Before May 7, 1997 . . . . . . . . . . 12

Itemized Deductions . . . . . . . . . . . . . . . . . . . . . . . . 12Employee Business Expenses . . . . . . . . . . . . . . 12

Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Earned Income Credit . . . . . . . . . . . . . . . . . . . . . 14

Child Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . 17

Forgiveness of Decedents Tax Liability . . . . . . . . 18Combat Zone Related Forgiveness . . . . . . . . . . . 19Terrorist or Military Action Related

Forgiveness . . . . . . . . . . . . . . . . . . . . . . . . . 19

Claims for Tax Forgiveness . . . . . . . . . . . . . . . . 19

Filing Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Where To File . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

When To File . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Signing Returns . . . . . . . . . . . . . . . . . . . . . . . . . 21

Extension of Deadlines . . . . . . . . . . . . . . . . . . . . . 22Service That Qualifies for an

Extension of Deadline . . . . . . . . . . . . . . . . . 22Length of Extension . . . . . . . . . . . . . . . . . . . . . . 23

Actions for Which Deadlines Are Extended . . . . . 24

Deferral of Payment . . . . . . . . . . . . . . . . . . . . . . . . 24

Maximum Rate of Interest . . . . . . . . . . . . . . . . . . . 24Get forms and other informationfaster and easier by: How To Get Tax Help . . . . . . . . . . . . . . . . . . . . . . . 25

Internet www.irs.gov Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26


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Photographs of missing children. The Internal Reve-nue Service is a proud partner with the National Center forWhats NewMissing and Exploited Children. Photographs of missingchildren selected by the Center may appear in this publica-

Individual retirement arrangement (IRA) contributions tion on pages that would otherwise be blank. You can helpand deductions. You can treat nontaxable combat pay bring these children home by looking at the photographsas compensation for purposes of the limits on contributions and calling 1-800-THE-LOST (1-800-843-5678) if you rec-and deduction of contributions to IRAs. You may be able to ognize a child.amend your 2004 or 2005 return. See Individual Retire-ment Arrangementsunder Adjustments to Income.

IntroductionQualified reservist distributions. If you were a memberof a reserve component and you were ordered or called to This publication covers the special tax situations of activeactive duty after September 11, 2001, you may not have to members of the U.S. Armed Forces. It does not cover

military pensions or veterans benefits or give the basic taxpay the 10% tax on early distributions from certain retire-rules that apply to all taxpayers. For information on militaryment plans you received after you were ordered or calledpensions or veterans benefits, see Publication 525, Tax-to active duty. See Qualified Reservist Distributionsin theable and Nontaxable Income. If you need the basic taxIndividual Retirement Arrangementsdiscussion under Ad-rules or information on another subject not covered here,justments to Income.you can check our other free publications. See Publication910, IRS Guide to Free Tax Services, for a list and descrip-Qualified reservist repayments. You may be able totions of the different tax publications.repay any qualified reservist distributions you received

For federal tax purposes, the U.S. Armed Forces in-even if the repayment would cause your total contributions

cludes commissioned officers, warrant officers, and en-to your IRA to be more than the limit on contributions. See listed personnel in all regular and reserve units underQualified Reservist Repayments in the Individual Retire-control of the Secretaries of the Defense, Army, Navy, andment Arrangementsdiscussion under Adjustments to In-Air Force. The U.S. Armed Forces also includes the Coastcome.Guard. It does not include members of the U.S. MerchantMarine or the American Red Cross.Earned income credit. The maximum amount of income

Members serving in an area designated or treated as ayou can earn and still claim the earned income credit hascombat zone are granted special tax benefits. In the eventincreased. You may be able to take the credit if you earnedan area ceases to be a combat zone (by Presidential

less than $36,348 ($38,348 for married filing jointly) if youExecutive Order or by statute), the IRS will do its best to

have two or more qualifying children; $32,001 ($34,001 fornotify you. Many of the relief provisions will end at that

married filing jointly) if you have one qualifying child; and,time.

$12,120 ($14,120 for married filing jointly) if you do nothave any qualifying children. See Earned Income Credit. Comments and suggestions. We welcome your com-

ments about this publication and your suggestions forStandard mileage rate. The standard mileage rate for the future editions.cost of operating your car is 44.5 cents a mile for all You can write to us at the following address:business miles driven during 2006. The standard mileagerate for operating your car during 2006 to get medical care

Internal Revenue Serviceor to move is 18 cents a mile.

Individual Forms and Publications BranchSE:W:CAR:MP:T:I1111 Constitution Ave. NW, IR-6406

Reminders Washington, DC 20224

We respond to many letters by telephone. Therefore, itChange of address. If you change your mailing address,would be helpful if you would include your daytime phonebe sure to notify the Internal Revenue Service (IRS) usingnumber, including the area code, in your correspondence.

Form 8822, Change of Address. Mail it to the Internal You can email us at *[email protected]. (The asteriskRevenue Service Center for your old address. (Addressesmust be included in the address.) Please put Publicationsfor the Service Centers are on the back of the form.)Comment on the subject line. Although we cannot re-spond individually to each email, we do appreciate yourThird party designee. You can check the Yesbox in thefeedback and will consider your comments as we reviseThird Party Designeearea of your return to authorize theour tax products.IRS to discuss your return with a friend, family member, or

any other person you choose. This allows the IRS to call Ordering forms and publications. Visitthe person you identified as your designee to answer any www.irs.gov/formspubs to download forms and publica-questions that may arise during the processing of your tax tions, call 1-800-829-3676, or write to the address belowreturn. It also allows your designee to perform certain and receive a response within 10 business days after youractions. See your income tax package for details. request is received.

Page 2 Publication 3 (2006)


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596 Earned Income Credit (EIC)National Distribution Center

970 Tax Benefits for EducationP.O. Box 8903

3920 Tax Relief for Victims of Terrorist AttacksBloomington, IL 61702-8903

Form (and Instructions)Tax questions. If you have a tax question, visit

1040X Amended U.S. Individual Income Taxwww.irs.gov or call 1-800-829-1040. We cannot answertax questions sent to either of the above addresses. Return

1310 Statement of Person Claiming Refund Due a

Useful Items Deceased TaxpayerYou may want to see: 2848 Power of Attorney and Declaration of

RepresentativePublication

3903 Moving Expenses 54 Tax Guide for U.S. Citizens and ResidentAliens Abroad

4868 Application for Automatic Extension of TimeTo File U.S. Individual Income Tax Return 463 Travel, Entertainment, Gift, and Car

Expenses 8822 Change of Address

501 Exemptions, Standard Deduction, and Filing 9465 Installment Agreement Request

InformationSee How To Get Tax Help, near the end of this publica-

503 Child and Dependent Care Expenses tion, for information about getting IRS publications and

forms. 505 Tax Withholding and Estimated Tax

516 U.S. Government Civilian EmployeesStationed Abroad

Gross Income 519 U.S. Tax Guide for Aliens

Members of the Armed Forces receive many different 521 Moving Expensestypes of pay and allowances. Some are included in gross

523 Selling Your Home income while others are excluded from gross income.Included items (Table 1) are subject to tax and must be 525 Taxable and Nontaxable Incomereported on your tax return. Excluded items (Table 2) are

527 Residential Rental Propertynot subject to tax, but may have to be shown on your tax

529 Miscellaneous Deductions return.

For information on the exclusion of pay for service in a

553 Highlights of 2006 Tax Changes combat zone and other tax benefits for combat zone par- 559 Survivors, Executors, and Administrators

ticipants, see Combat Zone Exclusion and Extension of 590 Individual Retirement Arrangements (IRAs) Deadlines, later.

Publication 3 (2006) Page 3


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Table 1. Included ItemsThese items are included in gross income, unless the pay is for service in a combat zone.

Basic pay Active duty Bonuses Career status Attendance at a designated service school Enlistment Back wages Officer CONUS COLA Overseas extension Drills Reenlistment Reserve training Training duty

Other payments Accrued leaveSpecial Aviation career incentives High deployment per diempay Career sea Personal money allowances paid to

Diving duty high-ranking officers Foreign duty (outside the 48 contiguous Student loan repayment from programs

states and the District of Columbia) such as the Department of Defense Foreign language proficiency Educational Loan Repayment Program Hardship duty when years service (requirement) is not Hostile fire or imminent danger attributable to a combat zone Medical and dental officers Nuclear-qualified officers Incentive pay Submarine Optometry Flight Pharmacy Hazardous duty Special duty assignment pay High altitude/Low altitude (HALO)

Veterinarian

Death gratuity. Any death gratuity paid to a survivor of a reside inside or outside the United States and whether ormember of the Armed Forces is nontaxable. not you receive a Form W-2, Wage and Tax Statement, or

a Form 1099. This applies to earned income (such asMilitary base realignment and closure benefit. Pay-

wages and tips) as well as unearned income (such asments made under the Homeowners Assistance Programinterest, dividends, capital gains, pensions, rents, and roy-(HAP) generally are excluded from income. However, thealties).excludable amount cannot be more than the following limit:

Certain taxpayers can exclude income earned in foreign 95% of the fair market value of the property for countries. For 2006, this exclusion amount can be as much

which the payments were made, as determined by as $82,400. However, the foreign earned income exclu-the Secretary of Defense before public announce- sion does not apply to the wages and salaries of militaryment of intent to close all or part of the military base and civilian employees of the U.S. Government. Employ-or installation, minus ees of the U.S. Government include those who work at

Armed Forces post exchanges, officers and enlisted per- The fair market value of the property as determinedsonnel clubs, and embassy commissaries, and similarby the Secretary of Defense at the time of sale.personnel paid from nonappropriated funds. Other foreign

Any part of the payment that is more than this limit isincome earned by military personnel or their spouses may

included in income.be eligible for the foreign earned income exclusion. Formore information on the exclusion, see Publication 54.

Residents of American Samoa may be able to excludeForeign Source Incomeincome from American Samoa. This possession exclusiondoes not apply to wages and salaries of military and civilianIf you are a U.S. citizen with income from sources outsideemployees of the U.S. Government. If you need informa-the United States (foreign income), you must report all oftion on the possession exclusion, see Publication 570, Taxthat income (except for amounts that U.S. law allows you

to exclude) on your tax return. This is true whether you Guide for Individuals With Income From U.S. Possessions.



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Table 2. Excluded ItemsThe exclusion for certain items applies whether the item is furnished in kind or is a reimbursement or allowance. There is noexclusion for the personal use of a government-provided vehicle.

Living BAH (Basic Allowance for Housing). Combat zone pay Compensation for active service while in aallowances You can deduct mortgage interest and combat zone or a qualified hazardous

real estate taxes on your home even if duty area.you pay these expenses with your BAH Note: Limited amount for officers

BAS (Basic Allowance for Subsistence) Housing and cost-of-living allowances Family Certain educational expenses for

abroad whether paid by the U.S. allowances dependentsGovernment or by a foreign Emergenciesgovernment Evacuation to a place of safety

OHA (Overseas Housing Allowance) Separation

Moving Dislocation Death Burial servicesallowances Military base realignment and allowances Death gratuity payments to

closure benefit eligible survivors(the exclusion is limited as Travel of dependents to burial site

described on page 4) Move-in housing Other payments Defense counseling Moving household and Disability, including payments received

personal items for injuries incurred as a direct result Moving trailers or mobile homes of a terrorist or military action

Storage

Group-term life insurance Temporary lodging and Professional education

temporary lodging expenses ROTC educational and subsistenceallowances

Travel Annual round trip for dependent Survivor and retirement protectionallowances students plan premiums

Leave between consecutive Uniform allowancesoverseas tours Uniforms furnished to enlisted personnel

Reassignment in a dependentrestricted status In-kind military Dependent-care assistance program

Transportation for you or your benefits Legal assistancedependents during ship overhaul Medical/dental care

or inactivation Commissary/exchange discounts Per diem Space-available travel on

government aircraft

For more information on community property laws, seeCommunity PropertyPublication 555, Community Property.

The pay you earn as a member of the Armed Forces maybe subject to community property laws depending on yourmarital status, your domicile, and the nature of the pay- Adjustments to Incomement. The community property states are Arizona, Califor-nia, Idaho, Louisiana, Nevada, New Mexico, Texas, Adjusted gross income is your total income minus certainWashington, and Wisconsin. adjustments. The following adjustments are of particular

interest to members of the Armed Forces.Marital status. Community property rules apply to mar-ried persons whose domicile during the tax year was in a

Armed Forces Reservistscommunity property state. The rules may affect your taxliability if you file separate returns or are divorced during

If you are a member of a reserve component of the Armedthe year.Forces and you travel more than 100 miles away fromhome in connection with your performance of services as aDomicile. Your domicile is the permanent legal home youmember of the reserves, you can deduct your travel ex-intend to use for an indefinite or unlimited period, and topenses as an adjustment to income on line 24 of Formwhich, when absent, you intend to return. It is not always1040 rather than as a miscellaneous itemized deduction.where you presently live.The deduction is limited to the amount the federal govern-

Nature of the payment. Active duty military pay is subject ment pays its employees for travel expenses. For moreto community property laws. Armed Forces retired or re- information about this limit, see Per Diem and Car Al-tainer pay may be subject to community property laws. lowancesin chapter 6 of Publication 463.



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Member of a reserve component. You are a member of include it in your compensation when figuring the limits oncontributions and deductions of contribution to IRAs.a reserve component of the Armed Forces if you are in the

Army, Navy, Marine Corps, Air Force, or Coast GuardPrior tax years. If you received nontaxable combat pay inReserve, the Army National Guard of the United States,2004 or 2005, and the treatment of combat pay as com-the Air National Guard of the United States, or the Reservepensation means that you can contribute more for thoseCorps of the Public Health Service.years than you already have, you can make additionalcontributions to an IRA for 2004 or 2005 by May 28, 2009.How to report. If you have reserve-related travel thatThe contributions will be treated as having been made ontakes you more than 100 miles from home, you should firstthe last day of the year for which they were made. If youcomplete Form 2106, Employee Business Expenses, or

have already filed your return for a year for which you makeForm 2106-EZ, Unreimbursed Employee Business Ex- a contribution, you must file Form 1040X, Amended U.S.penses. Then enter on Form 1040, line 24, the part of yourIndividual Income Tax Return by the latest of:expenses, up to the federal rate, included on Form 2106,

line 10, or Form 2106-EZ, line 6, that is for reserve-related 3 years from the date you filed your original returntravel more than 100 miles from your home. Subtract this for the year for which you made the contribution,amount from the total on Form 2106, line 10, or Form

2 years from the date you paid the tax due for the2106-EZ, line 6, and deduct the balance as an itemized

year for which you made the contribution, ordeduction on Schedule A (Form 1040), line 20. See Armed

1 year from the date on which you made the contri-Forces reservistsunder Itemized Deductions, later.bution.

Example. Captain Harris, a member of the Army Re-serve, had $1,500 of expenses related to his work in the

Qualified Reservist Distributionsreserves that took him more than 100 miles from home. He

also had other travel expenses of $1,000. His total travel A qualified reservist distribution is not subject to the 10%expenses of $2,500 were shown on Form 2106, line 10. He additional tax on early distributions from certain retiremententered the $1,500 for travel over 100 miles from home on plans.Form 1040, line 24. He then subtracted the $1,500 fromthe amount on Form 2106, $2,500, and reported $1,000 on Definition. A distribution you receive is a qualified reserv-Schedule A (Form 1040), line 20. ist distribution if the following requirements are met.

You were ordered or called to active duty after Sep-Individual Retirement Arrangements tember 11, 2001, and before December 31, 2007.

You were ordered or called to active duty for a pe-Generally, you can deduct the lesser of the contributions toriod of more than 179 days or for an indefinite periodyour traditional individual retirement arrangement (IRA) forbecause you are a member of a reserve componentthe year or the general limit (or spousal IRA limit, if applica-(see Member of a reserve component, earlier underble). However, if you or your spouse was covered by an

Armed Forces Reservists.)employer-maintained retirement plan at any time duringthe year for which contributions were made, you may not

The distribution is from an IRA or from amountsbe able to deduct all of the contributions. The Form W-2 attributable to elective deferrals under a sectionyou or your spouse receives from an employer has a box 401(k) or 403(b) plan or a similar arrangement.used to indicate whether you were covered for the year.

The distribution was made no earlier than the date ofThe Retirement plan box should have a mark in it if youthe order or call to active duty and no later than thewere covered.close of the active duty period.

For purposes of a deduction for contributions to a tradi-tional IRA, Armed Forces members (including reservistson active duty for more than 90 days during the year) are If you received a qualified reservist distribution

before 2006 and paid the 10% additional tax, youconsidered covered by an employer-maintained retirementcan amend your return for the applicable year toplan.

TIP

claim a refund of the 10% additional tax on early distribu-Individuals serving in the U.S. Armed Forces or in sup-tions. Use Form 1040X to claim the refund. You have untilport of the U.S. Armed Forces in designated combat zonesAugust 16, 2007, to claim any refund or tax credit for yearshave additional time to make a qualified retirement contri-for which the statute of limitations (generally 3 years) hasbution to an IRA. For more information on this extension ofrun its course.deadline provision, see Extension of Deadlines, later. For

more information on IRAs, see Publication 590.

Qualified Reservist RepaymentsCombat Pay

You may be able to contribute (repay) to an IRA amountsFor IRA purposes, your compensation includes nontaxable equal to any qualified reservist distributions (defined ear-combat pay. This means that even though you do not have lier) you received. You can make these repayment contri-to include the combat pay in your gross income, you do butions even if they would cause your total contributions to



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the IRA to be more than the general limit on contributions. Services or reimbursements provided by the govern-You make these repayment contributions to an IRA, even if ment. Do not include in your income the value of movingyou received a qualified reservist distribution from a sec- and storage services provided by the government becausetion 401(k) or 403(b) plan or a similar arrangement. of a permanent change of station. Similarly, do not include

in income amounts received as a dislocation allowance,Limit. Your qualified reservist repayments cannot be temporary lodging expense, temporary lodging allowance,more than your qualified reservist distributions. or move-in housing allowance.

Generally, if the total reimbursements or allowancesWhen repayment contributions can be made. You can-that you receive from the government because of the movenot make these repayment contributions after the later ofare more than your actual moving expenses, the excess isthe following 2 dates.included in your wages on Form W-2. However, if any

The date that is 2 years after your active duty period reimbursements or allowances (other than dislocation,ends. temporary lodging, temporary lodging expense, or move-in

housing allowances) exceed the cost of moving and the August 16, 2008.

excess is not included in your wages on Form W-2, theexcess still must be included in gross income on Form

No deduction. You cannot deduct qualified reservist re- 1040, line 7.payments. Use Form 3903 to deduct qualified expenses that ex-

ceed your reimbursements and allowances (including dis-Figuring your IRA deduction. The repayment of quali-

location, temporary lodging, temporary lodging expense,fied reservist distributions does not affect the amount you

or move-in housing allowances that are excluded fromcan deduct as an IRA contribution.

gross income).If you must relocate and your spouse and dependentsReporting the repayment. If you repay a qualified re-

move to or from a different location, do not include inservist distribution, include the amount of the repaymentincome reimbursements, allowances, or the value of mov-with nondeductible contributions on line 1 of Form 8606.ing and storage services provided by the government tomove you and your spouse and dependents to and fromMoving Expensesthe separate locations.

Do not deduct any expenses for moving services thatTo deduct moving expenses, you generally must meetwere provided by the government. Also, do not deduct anycertain time and distance tests. However, if you are aexpenses that were reimbursed by an allowance you didmember of the Armed Forces on active duty and you movenot include in income.because of a permanent change of station, you do not

have to meet these tests. You can deduct your un-reimbursed moving expenses on Form 3903. Deductible Moving ExpensesPermanent change of station. A permanent change of

If you move because of a permanent change of station,

station includes: you can deduct the reasonable unreimbursed expenses of A move from your home to your first post of active moving you and members of your household.

duty, You can deduct expenses (if not reimbursed or fur-nished in kind) for:

A move from one permanent post of duty to another,and Moving household goods and personal effects, and

A move from your last post of duty to your home or Travel.to a nearer point in the United States. The movemust occur within 1 year of ending your active duty

Moving household goods and personal effects. Youor within the period allowed under the Joint Federalcan deduct the expenses of moving your household goodsTravel Regulations.and personal effects, including expenses for hauling atrailer, packing, crating, in-transit storage, and insurance.

Spouse and dependents. If you are the spouse or de- You cannot deduct expenses for moving furniture or otherpendent of a member of the Armed Forces who deserts, is goods you bought on the way from your old home to yourimprisoned, or dies, a permanent change of station for you new home.includes a move to:

Storing and insuring household goods and personal The members place of enlistment or induction, effects. You can include only the cost of storing and

insuring your household goods and personal effects within Your, or the members, home of record, or

any period of 30 consecutive days after the day these A nearer point in the United States. goods and effects are moved from your former home and

before they are delivered to your new home.If the military moves you to or from a different location

than the member, the moves are treated as a single move Travel. You can deduct the expenses of traveling (includ-to your new main job location. ing lodging but not meals) from your old home to your new



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home, including car expenses and air fare. You can deduct amounts from your income. (Other officer personnel areas car expenses either: discussed under Amount of Exclusion, later.)

Your actual out-of-pocket expenses such as gas and Active duty pay earned in any month you served in aoil, or combat zone.

The standard mileage rate of 18 cents a mile. Imminent danger/hostile fire pay.

A reenlistment bonus if the voluntary extension orYou can add parking fees and tolls to the amount

reenlistment occurs in a month you served in a com-claimed under either method. You cannot deduct any ex-

bat zone.penses for meals. You cannot deduct the cost of unneces-

sary side trips or lavish and extravagant lodging. Pay for accrued leave earned in any month youserved in a combat zone. The Department of De-

Member of your household. A member of your house- fense must determine that the unused leave washold is anyone who has both your former home and your earned during that period.new home as his or her main home. It does not include a

Pay received for duties as a member of the Armedtenant or employee unless you can claim that person as aForces in clubs, messes, post and station theaters,dependent.and other nonappropriated fund activities. The paymust be earned in a month you served in a combatzone.Foreign Moves

Awards for suggestions, inventions, or scientificA foreign move is a move from the United States or itsachievements you are entitled to because of a sub-possessions to a foreign country or from one foreign coun-mission you made in a month you served in a com-try to another foreign country. It is not a move from a

bat zone.foreign country to the United States or its possessions.For a foreign move, the deductible moving expenses Student loan repayments. If the entire year of serv-

described earlier are expanded to include the reasonable ice required to earn the repayment was performed inexpenses of: a combat zone, the entire repayment made because

of that year of service is excluded. If only part of that Moving your household goods and personal effects

year of service was performed in a combat zone,to and from storage, and

only part of the repayment qualifies for exclusion. Storing these items for part or all of the time the new For example, if you served in a combat zone for 5

job location remains your main job location. The new months, 5/12 of your repayment qualifies for exclu-job location must be outside the United States. sion.

Retirement pay and pensions do not qualify for thecombat zone exclusion.

Reporting Moving Expenses Partial (month) service. If you serve in a combat zone forFigure moving expense deductions on Form 3903. Carryany part of one or more days during a particular month, youthe deduction from Form 3903 to Form 1040, line 26. Forare entitled to an exclusion for that entire month.more information, see Publication 521 and Form 3903.

Form W-2. The wages shown in box 1 of your 2006 FormW-2 should not include military pay excluded from your

Combat Zone Exclusion income under the combat zone exclusion provisions. If itdoes, you will need to get a corrected Form W-2 from your

If you are a member of the U.S. Armed Forces who serves finance office.in a combat zone (defined later), you can exclude certain You cannot exclude as combat pay any wages shown inpay from your income. This pay is generally referred to as box 1 of Form W-2.combat pay. You do not actually need to show the exclu-

sion on your tax return because income that qualifies for Combat Zonethe combat zone exclusion is not included in the wagesreported on your Form W-2. (See Form W-2, later.) A combat zone is any area the President of the United

The month for which you receive the pay must be a States designates by Executive Order as an area in whichmonth in which you either served in a combat zone or were the U.S. Armed Forces are engaging or have engaged inhospitalized as a result of wounds, disease, or injury in- combat. An area usually becomes a combat zone andcurred while serving in the combat zone. You do not have ceases to be a combat zone on the dates the Presidentto receive the excluded pay while you are in a combat designates by Executive Order.zone, are hospitalized, or in the same year you served in acombat zone. Afghanistan area. By Executive Order No. 13239, Af-

If you are an enlisted member, warrant officer, or com- ghanistan (and airspace above) was designated as a com-missioned warrant officer, you can exclude the following bat zone beginning September 19, 2001.



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The Kosovo area. By Executive Order No. 13119 and person is considered to be serving in the combat zone soPublic Law 106-21, the following locations (including air long as he or she keeps that status for military pay pur-space above) were designated as a combat zone and a poses.qualified hazardous duty area beginning March 24, 1999.

Federal Republic of Yugoslavia (Serbia/Montene- Hospitalized While Serving in agro). Combat Zone

Albania.If you are hospitalized while serving in a combat zone, the

The Adriatic Sea. wound, disease, or injury causing the hospitalization will be

presumed to have been incurred while serving in the com- The Ionian Seanorth of the 39th parallel.bat zone unless there is clear evidence to the contrary.

Persian Gulf area. By Executive Order No. 12744, the Example. You are hospitalized for a specific disease infollowing locations (and airspace above) were designated a combat zone where you have been serving for 3 weeks,as a combat zone beginning January 17, 1991. and the disease for which you are hospitalized has an

incubation period of 2 to 4 weeks. The disease is pre- The Persian Gulf.sumed to have been incurred while you were serving in the

The Red Sea.combat zone. On the other hand, if the incubation period of

The Gulf of Oman. the disease is 1 year, the disease would not have beenincurred while you were serving in the combat zone.

The part of the Arabian Sea that is north of 10degrees north latitude and west of 68 degrees eastlongitude.

Hospitalized After Leaving a Combat Zone The Gulf of Aden.In some cases, the wound, disease, or injury may have

The total land areas of Iraq, Kuwait, Saudi Arabia, been incurred while you were serving in the combat zone,Oman, Bahrain, Qatar, and the United Arab Emir- even though you were not hospitalized until after you left.ates. In that case, you can exclude military pay earned while you

are hospitalized as a result of the wound, disease, orinjury.Qualified hazardous duty area. Beginning November

21, 1995, a qualified hazardous duty area in the formerExample. You were hospitalized for a specific diseaseYugoslavia is treated as if it were a combat zone. The

3 weeks after you left the combat zone. The incubationqualified hazardous duty area includes:period of the disease is from 2 to 4 weeks. The disease is

Bosnia and Herzegovina. presumed to have been incurred while serving in the com-bat zone. Croatia.

Macedonia.

Nonqualifying Presence in Combat Zone

None of the following types of military service qualify asNote. Members of the Armed Forces deployed over-service in a combat zone.seas away from their permanent duty station in support of

operations in a qualified hazardous duty area, but outside Presence in a combat zone while on leave from a

the qualified hazardous duty area, are treated as if they areduty station located outside the combat zone.

in a combat zone solely for the purposes of the extension Passage over or through a combat zone during a tripof deadlines. These personnel are not entitled to other

between two points that are outside a combat zone.combat zone tax benefits. However, if they satisfy addi-tional requirements, they may be entitled to full combat

Presence in a combat zone solely for your personalzone tax benefits. See Service Outside Combat Zone

convenience.

Considered Service in Combat Zone, later.

Service Outside Combat Zone ConsideredServing in a Combat ZoneService in Combat Zone

You are considered to be serving in a combat zone if youMilitary service outside a combat zone is considered to beare either assigned on official temporary duty to a combat

zone or you qualify for hostile fire/imminent danger pay performed in a combat zone if:while in a combat zone.

The service is in direct support of military operationsService in a combat zone includes any periods you are

in the combat zone, andabsent from duty because of sickness, wounds, or leave.

The service qualifies you for special military pay forIf, as a result of serving in a combat zone, a personbecomes a prisoner of war or is missing in action, that duty subject to hostile fire or imminent danger.



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Military pay received for this service will qualify for the If you meet the substantial presence test for 2006, youcombat zone exclusion if all of the requirements (other did not meet either the green card test or the substantialthan service in a combat zone) are met and the pay is presence test for 2004 or 2005, and you did not choose toverifiable by reference to military pay records. 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 Choicein Publication 519.Amount of Exclusion

These tests are explained in Publication 519. Generally,If you are an enlisted member, warrant officer, or commis- resident aliens are taxed on their worldwide income andsioned warrant officer and you serve in a combat zone

file the same tax forms as U.S. citizens.during any part of a month, you can exclude all of your

military pay for that month. It should not be included in theTreating nonresident alien spouse as resident alien. Awages reported on your Form W-2. You also can excludenonresident alien spouse can be treated as a resident alienmilitary pay earned while you are hospitalized as a result ofif all the following conditions are met.wounds, disease, or injury incurred in the combat zone. If

you are hospitalized, you cannot exclude any military pay One spouse is a U.S. citizen or resident alien at the

received for any month of service that begins more than 2 end of the tax year.years after the end of combat activities in the combat zone.

That spouse is married to the nonresident alien atYour hospitalization does not have to be in the combatthe end of the tax year.zone.

If you are a commissioned officer (other than a commis- You both choose to treat the nonresident aliensioned warrant officer), you can exclude your pay accord- spouse as a resident alien.ing to the rules just discussed. However, the amount ofyour exclusion is limited to the highest rate of enlisted pay Making the choice. Both you and your spouse must(plus imminent danger/hostile fire pay you received) for sign a statement and attach it to your joint return for the firsteach month during any part of which you served in a tax year for which the choice applies. Include in the state-combat zone or were hospitalized as a result of your ment:service there.

A declaration that one spouse was a nonresidentalien and the other was a U.S. citizen or residentalien on the last day of the year,Alien Status

A declaration that both spouses choose to be treatedas U.S. residents for the entire tax year, andFor tax purposes, an alien is an individual who is not a U.S.

citizen. An alien is in one of three categories: resident, The name, address, and taxpayer identification num-

nonresident, or dual-status. Placement in the correct cate-ber (social security number or individual taxpayer

gory is crucial in determining what income to report andidentification number) of each spouse. If the nonresi-

what forms to file.dent alien spouse is not eligible to get a social secur-Under peacetime enlistment rules, you generally cannot ity number, he or she should file Form W-7,

enlist in the Armed Forces unless you are a citizen or have Application for IRS Individual Taxpayer Identificationbeen legally admitted to the United States for permanent

Number (ITIN).residence. If you are an alien enlistee in the Armed Forces,you are probably a resident alien. If, under an income tax

Once you make this choice, the nonresident alientreaty, you are considered a resident of a foreign country,spouses worldwide income is subject to U.S. tax.see your base legal officer. Other aliens who are in theIf the nonresident alien spouse has substantialUnited States only because of military assignments and

TIP

foreign income, there may be no advantage to making thiswho have a home outside the United States are nonresi-choice.dent aliens. Guam and Puerto Rico have special rules.

Residents of those areas should contact their taxing au-Ending the choice. Once you make this choice, it ap-thority with their questions.

plies to all later years unless one of the following situations

Most members of the Armed Forces are U.S. citizens or occurs.resident aliens. However, if you have questions about youralien status or the alien status of your dependents or You or your spouse revokes the choice.spouse, you should read the information in the following

You or your spouse dies.paragraphs and see Publication 519.

You and your spouse become legally separatedunder a decree of divorce or separate maintenance.Resident Aliens

The Internal Revenue Service ends the choice be-You are considered a resident alien of the United States for

cause of inadequate records.tax purposes if you meet either the green card test or the

For specific details on these situations, see Publicationsubstantial presence test for the calendar year (January519.1 December 31).



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If the choice is ended for any of these reasons, neither Cooperative apartment, orspouse can make the choice for any later year.

Condominium.Choice not made. If you and your nonresident alien

See Publication 523 for more information.spouse do not make this choice:

You cannot file a joint return. You can file as marriedRules for Sales in 2006filing separately, or head of household if you qualify.

You can claim an exemption for your nonresident You generally can exclude up to $250,000 of gainalien spouse if he or she has no gross income for ($500,000, in most cases, if married filing a joint return)

U.S. tax purposes and is not another taxpayers de- realized on the sale or exchange of a main home in 2006.pendent. The exclusion is allowed each time you sell or exchange amain home, but generally not more than once every 2

The nonresident alien spouse generally does notyears. To be eligible, during the 5-year period ending on

have to file a federal income tax return if he or shethe date of the sale, you must have owned the home for at

had no income from sources in the United States. Ifleast 2 years (the ownership test), and lived in the home as

a return has to be filed, see the next discussion.your main home for at least 2 years (the use test).

The nonresident alien spouse is not eligible for theException to ownership and use tests. You can ex-earned income credit if he or she has to file a return.clude gain, but the maximum amount of gain you canexclude will be reduced if you do not meet the ownershipand use tests due to a move to a new permanent dutyNonresident Aliensstation.

If you are an alien who does not meet the requirements 5-year test period suspended. You can choose to havediscussed earlier to be a resident alien, you are a nonresi-the 5-year test period for ownership and use suspendeddent alien. If you are required to file a federal tax return,during any period you or your spouse serve on qualifiedyou must file either Form 1040NR, U.S. Nonresident Alienofficial extended duty as a member of the Armed Forces.Income Tax Return, or Form 1040NR-EZ, U.S. Income TaxThis means that you may be able to meet the 2-year useReturn for Certain Nonresident Aliens With No Depen-test even if, because of your service, you did not actuallydents. See the form instructions for information on wholive in your home for at least the required 2 years during themust file and filing status.5-year period ending on the date of sale.

If you are a nonresident alien, you generally must paytax on income from sources in the United States. Your Example. David bought and moved into a home inincome that is from conducting a trade or business in the 1998. He lived in it as his main home for 21/2 years. For theUnited States is taxed at graduated U.S. tax rates. Other next 6 years, he did not live in it because he was onincome from U.S. sources is taxed at a flat 30% (or lower qualified official extended duty with the Army. He then sold

treaty) rate. For example, dividends from a U.S. corpora- the home at a gain in 2006. To meet the use test, Davidtion paid to a nonresident alien generally are subject to a chooses to suspend the 5-year test period for the 6 years30% (or lower treaty) rate. he was on qualifying official extended duty. This means he

can disregard those 6 years. Therefore, Davids 5-year testperiod consists of the 5 years before he went on qualifyingDual-Status Aliensofficial extended duty. He meets the ownership and use

You can be both a nonresident and resident alien during tests because he owned and lived in the home for 21/2the same tax year. This usually occurs in the year you years during this test period.arrive in or depart from the United States. If you are a

Period of suspension. The period of suspension can-dual-status alien, you are taxed on income from all sources

not last more than 10 years. You cannot suspend thefor the part of the year you are a resident alien. Generally,

5-year period for more than one property at a time. You canfor the part of the year you are a nonresident alien, you are

revoke your choice to suspend the 5-year period at anytaxed only on income from sources in the United States.

time.

Qualified official extended duty. You are on qualifiedofficial extended duty if you serve on extended duty either:Sale of Home At a duty station at least 50 miles from your main

You may not have to pay tax on all or part of the gain from home, orthe sale of your main home. Usually, your main home is the

While you live in Government quarters under Gov-one you live in most of the time. It can be a:

ernment orders. House,

You are on extended duty when you are called or or- Houseboat,

dered to active duty for a period of more than 90 days or for Mobile home, an indefinite period.



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Property used for rental or business. You may be able Generally, you must file Form 2106, Employee Busi-to exclude your gain from the sale of a home that you have ness Expenses, or Form 2106-EZ, Unreimbursed Em-used as a rental property or for business. However, you ployee Business Expenses, to claim these expenses. Youmust meet the ownership and use tests discussed in Publi- do not have to file Form 2106 or Form 2106-EZ if you arecation 523. claiming only unreimbursed expenses for uniforms, profes-

sional society dues, and work-related educational ex-penses (all discussed later). You can deduct theseLoss. You cannot deduct a loss from the sale of your mainexpenses directly on Schedule A (Form 1040).home.

Reimbursement. Generally, to receive advances, reim-More information. For more information on the laws af-

bursements, or other allowances from the government,fecting the sale of a home in 2006, see Publication 523.you must adequately account for your expenses and returnany excess reimbursement. Your reimbursed expensesSale of a Home Before May 7, 1997are not deductible.

If your expenses are more than your reimbursement,See Rules for Sales Before May 7, 1997, in the 2004the excess expenses are deductible (subject to the 2%Publication 3 if you sold your main home at a gain beforelimit) if you can prove them. You must file Form 2106 toMay 7, 1997, and all three of the following statements arereport these expenses.true.

You can use the shorter Form 2106-EZ if you meet all1. You postponed the gain. three of the following conditions.

2. The 2-year period you had to replace that home You are an employee deducting expenses related to(your replacement period) was suspended while you your job.served in the Armed Forces.

You were not reimbursed by your employer for your3. You have not already reported to the IRS either your expenses. (Amounts included in box 1 of Form W-2

purchase of a new home within your replacement are not considered reimbursements.)period or a taxable gain resulting from the end of

If you claim car expenses, you use the standardyour replacement period.mileage rate.

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

For 2006, the standard mileage rate is 44.5 centsa mile for all business miles driven. This rate is

Itemized Deductions adjusted periodically.TIP

To figure your taxable income, you must subtract eitheryour standard deduction or your itemized deductions from Travel Expenses

adjusted gross income. For information on the standarddeduction, see Publication 501. You can deduct unreimbursed travel expenses only if theyare incurred while you are traveling away from home. If youItemized deductions are figured on Schedule A (Formare a member of the U.S. Armed Forces on a permanent1040). This chapter discusses miscellaneous itemized de-duty assignment overseas, you are not traveling away fromductions of particular interest to members of the Armedhome. You cannot deduct your expenses for meals andForces. For information on other itemized deductions, seelodging while at your permanent duty station. You cannotthe publications listed below.deduct these expenses even if you have to maintain a

Publication 502, Medical and Dental Expenses. home in the United States for your family members whoare not allowed to accompany you overseas.

Publication 526, Charitable Contributions.A naval officer assigned to permanent duty aboard a

Publication 547, Casualties, Disasters, and Thefts. ship that has regular eating and living facilities has a homeaboard ship for travel expense purposes. Publication 550, Investment Income and Expenses.

To be deductible, your travel expenses must be workrelated. You cannot deduct any expenses for personalYou must reduce the total of most miscellaneous item-travel, such as visits to family while on furlough, leave, orized deductions by 2% of your adjusted gross income. Forliberty.information on deductions that are not subject to the 2%

limit, see Publication 529.Away from home. Home is your permanent duty station(which can be a ship or base), regardless of where you orEmployee Business Expensesyour family live. You are away from home if you are awayfrom your permanent duty station substantially longer thanDeductible employee business expenses are miscellane-an ordinary days work and you need to get sleep or rest toous itemized deductions subject to the 2% limit. For infor-meet the demands of your work while away from home.mation on employee business expenses, see Publication

Examples of deductible travel expenses include:463.



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Expenses for business-related meals (generally lim- employment will be treated as temporary (unless there areited to 50% of your unreimbursed cost), lodging, facts and circumstances that would indicate otherwise)taxicabs, business telephone calls, tips, laundry, and until your expectation changes.dry cleaning while you are away from home on tem-

If you do not have a regular place of business, butporary duty or temporary additional duty, andyou ordinarily work in the metropolitan area

Expenses of carrying out official business while on where you live, you can deduct daily transporta-CAUTION!

No Cost orders. tion expenses between your home and a temporary worksite outside your metropolitan area. However, you cannotdeduct daily transportation costs between your home andYou cannot deduct any expenses for travel away

temporary work sites within your metropolitan area. Thesefrom home if the temporary assignment in a sin-are nondeductible commuting costs.gle location is realistically expected to last (andCAUTION!

does in fact last) for more than 1 year. This rule may notapply if you are participating in a federal crime investiga- Armed Forces reservists. A meeting of an Armedtion or prosecution. For more information, see Publication Forces reserve unit is a second place of business if the463 and the Form 2106 instructions.

meeting is held on a day on which you work at your regular job. You can deduct the expense of getting from oneworkplace to the other. You usually cannot deduct theTransportation Expensesexpense if the reserve meeting is held on a day on whichyou do not work at your regular job. In this case, yourThese expenses include the ordinary and necessary coststransportation generally is a nondeductible commuting ex-of:pense. However, you can deduct your transportation ex-

Getting from one workplace to another when you arepenses if the location of the meeting is temporary and you

not away from home, have one or more regular places of work. Going to a business meeting away from your regular If you ordinarily work in a particular metropolitan area

workplace, and but not at any specific location and the reserve meeting isheld at a temporary location outside that metropolitan area, Getting from your home to a temporary workplaceyou can deduct your transportation expenses. If you travelwhen you have a regular place of work.away from home overnight to attend a guard or reserve

These expenses include the costs of transportation by meeting, you can deduct your travel expenses. See Armedair, bus, rail, taxi, and driving and maintaining your car. Forces Reservistsunder Adjustments to Income, earlier.Transportation expenses incurred while traveling awayfrom home are travel expenses. However, if you use your

Uniformscar while traveling away from home overnight, see therules in chapter 4 of Publication 463 to figure your car

You usually cannot deduct the expenses for uniform cost

expense deduction. and upkeep. Generally, you must wear uniforms when onIf you must go from one workplace to another while on

duty and you are allowed to wear them when off duty.duty (for example, as a courier or to attend meetings)

If military regulations prohibit you from wearing certainwithout being away from home, your unreimbursed trans-uniforms when off duty, you can deduct the cost andportation expenses are deductible. However, the ex-upkeep of the uniforms, but you must reduce your ex-penses of getting to and from your regular place of workpenses by any allowance or reimbursement you receive.(commuting) are not deductible.

Expenses for the cost and upkeep of the followingTemporary work location. If you have one or more regu- articles are deductible.lar places of business away from your home and you

Military battle dress uniforms and utility uniforms thatcommute to a temporary work location in the same trade oryou cannot wear when off duty.business, you can deduct the expenses of the daily

round-trip transportation between your home and the tem- Articles not replacing regular clothing, including in-porary location.

signia of rank, corps devices, epaulets, aiguillettes,Generally, if your employment at a work location is and swords.realistically expected to last (and does in fact last) for 1

Reservists uniforms if you can wear the uniformyear or less, the employment is temporary.only while performing duties as a reservist.

If your employment at a work location is realisticallyexpected to last for more than 1 year or if there is norealistic expectation that the employment will last for 1 year Professional Duesor less, the employment is not temporary, regardless of

You can deduct dues paid to professional societies directlywhether it actually lasts for more than 1 year. If employ-related to your military position. However, you cannot de-ment at a work location initially is realistically expected toduct amounts paid to an officers club or a noncommis-last for 1 year or less, but at some later date the employ-sioned officers club.ment is realistically expected to last more than 1 year, that



14/27

Example. Lieutenant Margaret Allen, an electrical engi- include the actual costs of bus, subway, cab, or otherneer at Maxwell Air Force Base, can deduct professional fares, as well as the costs of using your car.dues paid to the American Society of Electrical Engineers. If you need more information on educational expenses,

see Publication 970.

Educational ExpensesRepayments

You can deduct the costs of qualifying work-related educa-If you had to repay to your employer an amount that yoution. This is education that meets at least one of theincluded in your income in an earlier year, you may be ablefollowing two tests.to deduct the repaid amount from your income for the year

The education is required by your employer or the in which you repaid it.law to keep your present salary, status, or job. Therequired education must serve a bona fide business Repayment of $3,000 or less. If the amount you repaidpurpose of your employer. was $3,000 or less, deduct it from your income in the year

you repaid it. If you reported it as wages, deduct it as a The education maintains or improves skills needed

miscellaneous itemized deduction on Schedule A (Formin your present work.1040), line 22.

You can deduct the costs of qualifying education.Repayment over $3,000. If the amount you repaid was

However, even if the education meets one or both of the more than $3,000, see Repaymentsin Publication 525.above tests, it is not qualifying education if it:

Is needed to meet the minimum educational require-ments of your present trade or business, or Credits

Is part of a program of study that will qualify you forAfter you have figured your taxable income and tax liability,a new trade or business.you can determine if you are entitled to any tax credits.This publication discusses the earned income credit andYou can deduct the expenses for qualifying work-relatedthe child tax credit. For information on other credits, seeeducation even if the education could lead to a degree.your tax form instructions.

Example 1. Lieutenant Colonel Mason has a degree infinancial management and is in charge of base finances at Earned Income Credither post of duty. She took an advanced finance course.

The earned income credit (EIC) is a credit for certainShe already meets the minimum qualifications for her job.persons who work. The credit reduces the amount of taxBy taking the course, she is improving skills in her currentyou owe (if any). It may also give you a refund.position. The course does not qualify her for a new trade or

business. She can deduct educational expenses that areIf you claim the EIC and it is later disallowed, you

more than the educational allowance she received. may have to complete an additional form if youwant to claim the credit in a following year. SeeCAUTION

!Example 2. Major Williams worked in the military base

chapter 5 in Publication 596 for more information, includinglegal office as a legal intern. He was placed in excess leave

how to claim the EIC after disallowance.status by his employer to attend law school. He paid all hiseducational expenses and was not reimbursed. After ob-taining his law degree, he passed the state bar exam and Persons With a Qualifying Childworked as a judge advocate. His educational expenses arenot deductible because the law degree qualified him for a If you have a qualifying child (defined later), you must meetnew trade or business, even though the education main- all the following rules to claim the earned income credit.tained and improved his skills in his work.

1. You must have earned income (defined later).

Travel to obtain education. If your work-related educa- 2. Your earned income and adjusted gross income

tion qualifies, you can deduct the costs of travel, including (AGI) must each be less than:meals (subject to the 50% limit), and lodging, if the mainpurpose of the trip is to obtain the education. a. $36,348 ($38,348 for married filing jointly) if you

You cannot deduct the cost of travel that is itself a form have two or more qualifying children, orof education, even if it is directly related to your duties in

b. $32,001 ($34,001 for married filing jointly) if youyour work or business.

have one qualifying child.

Transportation for education. If your work-related edu-3. Your filing status cannot be married filing separately.

cation qualifies, you can deduct the costs of transportationto obtain that education. However, you cannot deduct the 4. You cannot be a qualifying child of another person. Ifcost of services provided in kind, such as base-provided filing a joint return, your spouse also cannot be atransportation to or from class. Transportation expenses qualifying child of another person.



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5. Your qualifying child cannot be used by more than state. In addition, it includes an Indian tribal government orone person to claim the credit. If your qualifying child an organization authorized by an Indian tribal governmentis the qualifying child of more than one person, you to place Indian children.must be the person who can treat the child as a If your child was married at the end of the year, he or shequalifying child. For details, see Rule 9in Publication does not meet the relationship test unless either of these596. two situations applies to you:

6. You cannot file Form 2555, Foreign Earned Income,1. You can claim the childs exemption, or

or Form 2555-EZ, Foreign Earned Income Exclusion,2. The reason you cannot claim the childs exemption isto exclude income earned in foreign countries, or to

that you gave that right to your childs other parentdeduct or exclude a foreign housing amount. See under the Special rule for divorced or separated par-Publication 54 for more information about these

ents, described in Publication 596.forms.

7. You must be a U.S. citizen or resident alien all yearAge test. Your child must be:

unless:

1. Under age 19 at the end of 2006,a. You are married to a U.S. citizen or a resident

2. Under age 24 at the end of 2006 and a full-timealien, andstudent, or

b. You choose to be treated as a resident alien forthe entire year. If you need more information 3. Permanently and totally disabled at any time duringabout making this choice, see Resident Aliens, 2006, regardless of age.earlier.

A full-time student is a student who is enrolled for thenumber of hours or courses the school considers to be

8. Your investment income must be $2,800 or less dur- full-time attendance.ing the year. For most people, investment income is

To qualify as a student, your child must be, during sometaxable interest and dividends, tax-exempt interest,part of each of any 5 calendar months during the calendarand capital gain net income.year:

9. You must have a valid social security number for1. A full-time student at a school that has a regularyourself, your spouse (if filing a joint return), and any

teaching staff, course of study, and regular studentqualifying child.body at the school, or

How to report. If you meet all these rules, fill out Sched- 2. A student taking a full-time, on-farm training courseule EIC and attach it to either Form 1040 or Form 1040A. given by a school described in (1), or a state, county,

or local government.Qualifying child. Your child is a qualifying child if your

The 5 calendar months need not be consecutive.child meets three tests. The three tests are:You may be able to treat your child as a student for each

1. Relationship, month of the enrollment period, in 2005 or 2006, he or shewas unable to attend class because of Hurricane Katrina,2. Age, andRita or Wilma. For details, see Publication 596.

3. Residency. A school can be an elementary school, junior or seniorhigh school, college, university, or technical, trade, or

Relationship test. To be your qualifying child, a child mechanical school. However, on-the-job training courses,must be your:

correspondence schools, and schools offering coursesonly through the Internet do not count as schools for the Son, daughter, stepchild, eligible foster child, or aEIC.descendant of any of them (for example, your

grandchild), or Students who work in co-op jobs in private industry as apart of a schools regular course of classroom and practical

Brother, sister, half brother, half sister, stepbrother,training are considered full-time students.

stepsister, or a descendant of any of them (for ex- Your child is permanently and totally disabled if both ofample, your niece or nephew).the following apply.

An adopted child is always treated as your own child.1. He or she cannot engage in any substantial gainful

The term adopted child includes a child who was lawfullyactivity because of a physical or mental condition.

placed with you for legal adoption.2. A doctor determines the condition has lasted or canFor the EIC, a person is your eligible foster child if the

be expected to last continuously for at least a year orchild is placed with you by an authorized placementcan lead to death.agency or by judgement, decree, or other order of any

court of competent jurisdiction. An authorized placementResidency test. Your child must have lived with you inagency includes a state or local government agency. It

the United States for more than half of 2006.also includes a tax-exempt organization licensed by a



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The United States includes the 50 states and the District Persons Without a Qualifying Childof Columbia. It does not include Puerto Rico or U.S. pos-

If you do not have a qualifying child, you can take the creditsessions such as Guam.if you meet all the following rules.U.S. military personnel stationed outside the United

States on extended active duty are considered to live in the 1. You must have earned income (defined later).United States during that duty period for purposes of the

2. Your earned income and adjusted gross incomeEIC. Extended active duty means you are called or orderedmust each be less than $12,120 ($14,120 for marriedto duty for an indefinite period or for a period of more thanfiling jointly).90 days. Once you begin serving your extended active

duty, you are still considered to have been on extended3. Your filing status cannot be married filing separately.active duty even if you do not serve more than 90 days.4. You cannot be a qualifying child of another person. IfA child who was born or died in 2006 is treated as

filing a joint return, your spouse also cannot be ahaving lived with you for all of 2006 if your home was thequalifying child of another person.childs home the entire time he or she was alive in 2006.

5. You must be at least age 25 but under age 65 at theCount time that you or your child is away from home onend of the year. If filing a joint return, either you ora temporary absence due to a special circumstance asyour spouse must be at least age 25 but under agetime lived with you.65 at the end of the year.A kidnapped child is treated as living with you for more

than half of the year if the child lived with you for more than 6. You cannot be claimed as a dependent by anyonehalf the part of the year before the date of the kidnapping. else on that persons return. If filing a joint return,The child must be presumed by law enforcement authori- your spouse also cannot be claimed as a dependentties to have been kidnapped by someone who is not a by anyone else on that persons return.

member of your family or your childs family. This treatment 7. Your main home must be in the United States forapplies for all years until the child is returned. However, themore than half the year. (U.S. military personnel sta-last year this treatment can apply is the earlier of:tioned outside the United States on extended activeduty are considered to live in the United States.)1. The year there is a determination that the child is

dead, or 8. You cannot file Form 2555, Foreign Earned Income,or Form 2555-EZ, Foreign Earned Income Exclusion.2. The year the child would have reached age 18.

9. You must be a U.S. citizen or resident alien all yearIf your qualifying child has been kidnapped and meetsunless:these requirements, enter KC, instead of a number, on

line 6 of Schedule EIC.a. You are married to a U.S. citizen or a resident

Social security number. Your qualifying child must alien, andhave a valid social security number (SSN) unless the child

b. You choose to be treated as a resident alien forwas born and died in 2006. You cannot claim the EIC on the entire year.the basis of a qualifying child if:

10. Your investment income must be $2,800 or less dur-1. Your qualifying childs SSN is missing from your taxing the year. For most people, investment income isreturn or is incorrect,taxable interest and dividends, tax-exempt interest,

2. Your qualifying childs social security card says Not and capital gain net income.valid for employment and was issued for use in

11. You (and your spouse, if filing a joint return) mustgetting a federally funded benefit, orhave a valid social security number.

3. Instead of an SSN, your qualifying child has

How to report. If you meet all of these rules, fill out thea. An individual taxpayer identification number

EIC worksheet in your tax form instructions to figure the(ITIN), which is issued to a noncitizen who cannot

amount of your credit.get an SSN, or

More information. For more information, see Publicationb. An adoption taxpayer identification number596.(ATIN), which is issued to adopting parents who

cannot get an SSN for the child being adopteduntil the adoption is final. Earned Income

If you have two qualifying children and only one has a For purposes of the earned income credit, earned incomevalid SSN, you can claim the EIC only on the basis of that includes the following.child.

Wages, salaries, tips, and other taxable employeepay.

More information. For more information, see Publication596. Net earnings from self-employment.



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Gross income received as a statutory employee. Example 1election increases the EIC. George andJanice are married and will file a joint return. They have

Nontaxable combat pay if you elect to include it inone qualifying child. George was in the Army and earned

earned income. See Nontaxable combat pay elec-$11,000 ($5,000 taxable wages + $6,000 nontaxable com-

tion, later.bat pay). Janice worked part of the year and earned$2,000. Their taxable earned income and AGI are both

For purposes of the earned income credit, earned in-$7,000. George and Janice qualify for the earned income

come does not include:credit and fill out the Earned Income Credit (EIC) Work-sheet in the Form 1040A instructions and Schedule EIC. Basic pay or special, bonus, or other incentive pay

When they complete the worksheet without adding thethat is subject to the combat zone exclusion (unless

nontaxable combat pay to their earned income, they findyou make the nontaxable combat pay election de-their credit to be $2,389. When they complete the EICscribed later),worksheet with the nontaxable combat pay added to their

Basic Allowance for Housing (BAH),earned income, they find their credit to be $2,747. Becausemaking the election will increase their EIC, they elect to Basic Allowance for Subsistence (BAS),add the nontaxable combat pay to their earned income for

Any other nontaxable employee compensation,the EIC. They enter $2,747 on line 40a of their Form 1040Aand enter the amount of their nontaxable combat pay on Interest and dividends,line 40b.

Social security and railroad retirement payments,

Example 2 election does not increase the EIC. The Certain workfare payments,facts are the same as in Example 1 except George had

Pensions or annuities,nontaxable combat pay of $14,000. When George and

Janice add their nontaxable combat pay to their earned

Veterans benefits (including VA rehabilitation pay- income, they find their credit to be $2,074. Because thements),credit they can get if they do not add the nontaxable

Workers compensation,combat pay to their earned income is $2,389, they decidenot to make the election. They enter $2,389 on line 40a of Unemployment compensation, ortheir Form 1040A.

Alimony and child support.

IRS Will Figure Your Credit for YouNontaxable combat pay election. You can elect to haveyour nontaxable combat pay included in earned income for

There are certain instructions you must follow before thethe earned income credit. If you make the election, you

IRS can figure the credit for you. See Publication 967, Themust include in earned income all nontaxable combat pay

IRS Will Figure Your Tax.you received. If you are filing a joint return and both youand your spouse received nontaxable combat pay, you caneach make your own election. The amount of your nontax- Advance Earned Income Creditable combat pay should be shown on your Form W-2 in

If you expect to qualify for the earned income credit forbox 12 with code Q. Electing to include nontaxable combat2007, you can choose to get part of the credit in advancepay in earned income may increase or decrease your EIC.by giving a completed 2007 Form W-5 to your appropriateFigure the credit with and without your nontaxable com-finance office. The credit will be included regularly in yourbat pay before making the election. Whether the electionpay. To get this advance payment, you must have a quali-increases or decreases your EIC depends on your totalfying child. For details, see Form W-5 and its instructionsearned income, filing status, and number of qualifying

If you received advance earned income credit paymentschildren. If your earned income without your combat pay isin 2006, you must file either Form 1040 or Form 1040A forless than the amount shown below for your number of2006 to report the payments.children, you may benefit from electing to include your

nontaxable combat pay in earned income and you shouldfigure the credit both ways. If your earned income without

Child Tax Credityour combat pay is equal to or more than these amounts,The child tax credit is a credit that may reduce your tax byyou will not benefit from including your combat pay in youras much as $1,000 for each of your qualifying children.earned income.

The additional child tax credit is a credit you may be able $5,350 if you have no qualifying children.

to take if you are not able to claim the full amount of thechild tax credit. $8,050 if you have one qualifying child.

The child tax credit is not the same as the credit $11,300 if you have two qualifying children.for child and dependent care expenses. See Pub-

The following examples illustrate the effect of including lication 503 for information on the credit for childCAUTION!

nontaxable combat pay in earned income for the EIC. and dependent care expenses.



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Married filing jointly $110,000.Qualifying Child

Single, head of household,A qualifying child for purposes of the child tax credit is aor qualifying widow(er) $75,000.child who:

Married filing separately $55,000.1. Is your son, daughter, stepchild, foster child, brother,

sister, stepbrother, stepsister, or a descendant of any Modified AGI. For purposes of the child tax credit, yourof them (for example, your grandchild), modified AGI is the amount on Form 1040, line 38, or Form

1040A, line 22, plus the following amounts that may apply2. Was under age 17 at the end of 2006,to you.

3. Did not provide over half of his or her own support for Any amount excluded from income because of the2006,exclusion of income from Puerto Rico.

4. Lived with you for more than half of 2006 (see Ex- Any amount on line 45 or line 50 of Form 2555,ceptions to time lived with youbelow), and

Foreign Earned Income.5. Was a U.S. citizen, a U.S. national, or a resident of

Any amount on line 18 of Form 2555-EZ, Foreignthe United States. If the child was adopted, seeEarned Income Exclusion.Adopted childbelow.

Any amount on line 15 of Form 4563, Exclusion ofFor each qualifying child you must either check the boxIncome for Bona Fide Residents of American Sa-on Form 1040 or Form 1040A, line 6c, column (4), ormoa.complete Form 8901 (if the child is not your dependent).

If you do not have any of the above, your modified AGI isExceptions to time lived with you. A child is considered

the same as your AGI.to have lived with you for all of 2006 if the child was born ordied in 2006 and your home was this childs home for theentire time he or she was alive. Temporary absences for

Claiming the Creditspecial circumstances, such as for school, vacation, medi-cal care, military service, or detention in a juvenile facility, To claim the child tax credit, you must file Form 1040 orcount as time lived at home. Form 1040A. For more information on the child tax credit,

There are also exceptions for kidnapped children and see the instructions for Form 1040 or Form 1040A.children of divorced or separated parents. For details, seePublication 501.

Additional Child Tax CreditQualifying child of more than one person. A special

This credit is for certain individuals who get less than therule applies if your qualifying child is the qualifying child offull amount of the child tax credit. The additional child taxmore than one person. For details, see Publication 501.credit may give you a refund even if you do not owe anytax.Adopted child. An adopted child is always treated as

your own child. An adopted child includes a child lawfully For more information, see the instructions for Formplaced with you for legal adoption. 1040 or Form 1040A, and Form 8812, Additional Child Tax

Credit.If you are a U.S. citizen or U.S. national and youradopted child lived with you as a member of your house-hold all year, that child meets condition (5) above to be aqualifying child for the child tax credit. Forgiveness of Decedents Tax

LiabilityAmount of CreditTax liability can be forgiven, or if already paid, refunded, ifThe maximum amount you can claim for the credit isa member of the U.S. Armed Forces dies:$1,000 for each qualifying child.

While in active service in a combat zone,Limits on the credit. You must reduce your child tax From wounds, disease, or other injury received in acredit if either (1) or (2), below, applies.

combat zone, or1. The amount on Form 1040, line 46, or Form 1040A,

From wounds or injury incurred in a terrorist or mili-line 28, is less than the credit. If the amount is zero,

tary action.you cannot take this credit because there is no tax toreduce. However, you may be able to take the addi- Tax for the year of death and possibly for earlier years cantional child tax credit. See Additional Child Tax be forgiven.Credit, later.

In addition, any unpaid tax liability at the date of death2. Your modified adjusted gross income (AGI) is more may be forgiven. Any tax liability that is forgiven does not

than the amount shown below for your filing status. have to be paid.



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If a member of the Armed Forces dies, a surviving Service outside combat zone. These rules also apply tospouse or personal representative handles duties such as a member of the Armed Forces serving outside the combatfiling any tax returns and claims for refund of withheld or zone if the service:estimated tax. A personal representative can be an execu-

Was in direct support of military operations in thetor, administrator, or anyone who is in charge of the dece-

zone, anddents assets.

Qualified the member for special military pay for dutyJoint returns. Only the decedents part of the joint income subject to hostile fire or imminent danger.tax liability is eligible for the refund or tax forgiveness. To

For a description of combat zone, see Combat Zone,determine the decedents part, the person filing the claim

earlier.must:1. Figure the income tax for which the decedent would Missing status. The date of death for a member of the

have been liable if a separate return had been filed, Armed Forces who was in a missing status (missing inaction or prisoner of war) is the date his or her name is2. Figure the income tax for which the spouse wouldremoved from missing status for military pay purposes.have been liable if a separate return had been filed,This is true even if death actually occurred earlier.and

3. Multiply the joint tax liability by a fraction. The top Terrorist or Military Actionnumber of the fraction is the amount in (1), above.

Related ForgivenessThe bottom number of the fraction is the total of (1)and (2).

Tax liability is forgiven for an individual who:The amount in (3) is the decedents tax liability that is

Is a member of the U.S. Armed Forces at death, and

eligible for the refund or tax forgiveness. If you are unableto complete this process, you should attach a statement of Dies from wounds or injury incurred while a memberall income and deductions, indicating the part that belongs of the U.S. Armed Forces in a terrorist or militaryto each spouse. The IRS will determine the amount eligible action.for forgiveness.

The forgiveness applies to:Residents of community property states. If the dece-

The tax year death occurred, anddents legal residence was in a community property stateand the spouse reported half the military pay on a separate

Any earlier tax year in the period beginning with thereturn, the spouse can get a refund of taxes paid on his or year before the year in which the wounds or injuryher share of the pay for the years involved. The forgive- occurred.ness of unpaid tax on the military pay also would apply to

A terrorist or military action is any terrorist activity primarilythe half owed by the spouse for the years involved.directed against the United States or its allies or any

military action involving the U.S. Armed Forces and result-Combat Zone Related Forgiveness ing from violence or aggression against the United Statesor its allies.Tax liability is forgiven for an individual who:

Any multinational force in which the United States partic- Is a member of the U.S. Armed Forces at death, and

ipates is considered an ally of the United States. Dies while in active service in a combat zone, or at The beneficiary or trustee of the estate of a deceased

any place from wounds, disease, or injury incurred service member does not have to pay tax on any amountwhile in active service in a combat zone. received that would have been included (had the service

member not died) in the deceased members gross incomeThe forgiveness applies to: for the year of death.

The tax year death occurred, andExample. Army Private John Kane died in 2006 of

Any earlier tax year ending on or after the first day wounds incurred in a terrorist attack in 2005. His income

the member served in a combat zone in active serv- tax liability is forgiven for all tax years from 2004 throughice. 2006.

In addition, any unpaid taxes for years ending before the Claims for Tax Forgivenessmember began service in a combat zone will be forgivenand any of those taxes that are paid after the date of death

Returns reflecting forgiven tax and claims for refund ofwill be refunded. forgiven tax that has already been paid must be identified.

The beneficiary or trustee of the estate of a deceased Usually, Form 1040X is used to claim the refund.service member does not have to pay tax on any amountreceived that would have been included (had the servicemember not died) in the deceased members gross incomefor the year of death.



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filed before they are due are considered filed on the dueHow to Claim Forgiveness or Refunddate, usually April 15.

If the decedents tax liability is forgiven, the personal repre- If death occurred in a combat zone or from wounds,sentative should take the following steps. disease, or injury incurred in a combat zone, the deadline

for filing a claim for credit or refund is extended using the File Form 1040 if a tax return has not been filed for

rules discussed later under Extension of Deadlines.the tax year. Form W-2 must accompany the return.

File Form 1040X if a tax return has been filed. AWhere to File Return or Claim for Refundseparate Form 1040X must be filed for each year in

question.These returns and claims must be filed at one of the

Properly identify the return as explained next. following addresses.

U.S. Postal Service. If you use the U.S. Postal Service,All returns and claims must be identified by writing En-file these returns and claims at the following address.during FreedomKIA, Kosovo OperationKIA, De-

sert StormKIA, or Former YugoslaviaKIA in bold Internal Revenue Serviceletters on the top of page 1 of the return or claim. On Forms P.O. Box 40531040 and 1040X, the phrase Enduring FreedomKIA, Woburn, MA 01888Kosovo OperationKIA, Desert StormKIA, or For-mer YugoslaviaKIA must be written on the line for totaltax. If the individual was killed in a terrorist action, write Designated private delivery service. Private deliveryKITA on the front of the return and on the line for total tax. services cannot deliver items to P.O. boxes. If you use a

An attachment that includes a computation of the dece- private delivery service, file these returns and claims at thedents tax liability before any amount is forgiven and the following address.

amount that is to be forgiven should accompany any return Internal Revenue Serviceor claim. For joint returns, see Joint returns, earlier.Stop 661Andover, MA 05501Necessary documents. The following documents must

accompany all returns and claims for refund.Designated private delivery services include only the

Form 1310, Statement of Person Claiming Refundfollowing.

Due a Deceased Taxpayer, and DHL Express (DHL): DHL Same Day Service, DHL

A certification from the Department of Defense or theNext Day 10:30 am, DHL Next Day 12:00 pm, DHL

Department of State.Next Day 3:00 pm, and DHL 2nd Day Service.

For military and civilian employees of the Department of Federal Express (FedEx): FedEx Prio

us internal revenue service: p3--2006

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