IRS Releases Publication 570 (2016), Tax Guide for Individuals With Income from U.S. Possessions

Future Developments

For the latest information about developments related to Publication 570, such as legislation enacted after it was published, go to http://www.irs.gov/pub570.

What's New

Individual taxpayer identification number (ITIN). You may need to renew your ITIN. For more information, see Expired ITIN, under Reminders, later.

Maximum income subject to social security tax. For 2016, the maximum amount of self-employment income subject to social security is $118,500. This amount is unchanged from 2015. The amount will increase to $127,200 for 2017.

Optional methods to figure net earnings. For 2016, the maximum income for using the optional methods is $5,040. This amount will increase to $5,200 for 2017.

Reminders

Self-employment tax. Bona fide residents of a U.S. territory who have self-employment income must generally pay self-employment tax to the United States. Self-employment tax includes both social security and Medicare. Bona fide residents may be subject to U.S. self-employment tax even if they have no income tax filing obligation with the United States. See Self-Employment Tax in chapter 4 for more information.

Additional Medicare Tax. You may be required to pay Additional Medicare Tax. Also, you may need to report Additional Medicare Tax withheld by your employer. For more information, see Additional Medicare Tax under Special Rules for Completing Your U.S. Tax Return in chapter 4.

Net Investment Income Tax. The Net Investment Income Tax (NIIT) imposes a 3.8% tax on the lesser of an individual's net investment income or the excess of the individual's modified adjusted gross income over a specified threshold amount. Bona fide residents of Puerto Rico and American Samoa who have a federal income tax return filing obligation may be liable for the NIIT if the taxpayer's modified adjusted gross income from non-territory sources exceeds a specified threshold amount. Also, bona fide residents must take into account any additional tax liability associated with the NIIT when calculating their estimated tax payments.

The NIIT does not apply to any individual who is a nonresident alien with respect to the United States. For more information, see Net Investment Income Tax under Bona Fide Resident of American Samoa and Bona Fide Resident of Puerto Rico in chapter 3.

Because bona fide residents of the Commonwealth of the Northern Mariana Islands, Guam, and the U.S. Virgin Islands do not generally have a federal income tax return filing obligation, the NIIT generally does not directly apply to them. These residents should contact their local territorial tax department for guidance on the possible mirrored application of the NIIT in these jurisdictions.

Individual taxpayer identification numbers (ITINs) for aliens. If you are a nonresident or resident alien and you do not have and are not eligible to get a social security number (SSN), you must apply for an ITIN. For details on how to do so, see Form W-7, and its instructions. Allow 6 weeks for the IRS to notify you of your ITIN (8-10 weeks if submitted during peak processing periods (January 15 through April 30) or if you are filing from overseas). If you already have an ITIN, enter it wherever your SSN is requested on your tax return. ITINs expire if not used on a federal income tax return for five consecutive years.

For more information, go to http://www.irs.gov/Individuals/Individual-Taxpayer-Identification-Number-ITIN.

CAUTION: An ITIN is for tax use only. It does not entitle you to social security benefits or change your employment or immigration status under U.S. law.

Expired ITIN. Generally, ITINs issued after December 31, 2012, will remain in effect as long as the individual to whom the ITIN was issued files a tax return (or is included as a dependent on the tax return of another taxpayer) for three consecutive tax years. Otherwise, the ITIN will expire at the end of the third consecutive tax year. All expired ITINs must be renewed before being used on a U.S. tax return.

ITINs issued before January 1, 2013 will begin to expire if the individual to whom the ITIN was issued does not file a tax return (or is not included as a dependent on the tax return of another taxpayer) for three consecutive tax years. Regardless, all ITINs issued before 2008 will expire on January 1, 2017, starting with ITIN numbers that have middle digits of 78 and 79 (for example, 9XX-78-XXXX). ITINs issued in 2008 will expire on January 1, 2018, ITINs issued in 2009 and 2010 will expire on January 1, 2019, and ITINs issued in 2011 and 2012 will expire on January 1, 2020.

For more information, go to http://www.irs.gov/individuals/itin-expiration-faqs.

Electronic filing. You can e-file Form 1040-SS and Form 1040-PR. For general information about electronic filing, visit http://www.irs.gov/efile.

Earned income credit (EIC). Generally, if you are a bona fide resident of a U.S. possession, you cannot claim the EIC on your U.S. tax return. However, certain U.S. possessions may allow bona fide residents to claim the EIC on their possession tax return.

To claim the EIC on your U.S. tax return, your home (and your spouse's if filing a joint return) must have been in the United States for more than half the year. If you have a child, the child must have lived with you in the United States for more than half the year. For this purpose, the United States includes only the 50 states and the District of Columbia. Special rules apply to military personnel stationed outside the United States. For more information on this credit, see Publication 596.

Form 8938, Statement of Specified Foreign Financial Assets. If you have specified foreign financial assets in foreign jurisdictions valued above certain threshold dollar amounts, you may have to file Form 8938, when you file your U.S. income tax return with the IRS.

If you are required to file Form 8938, you do not have to report certain specified foreign financial assets on Form 8938. See Bona fide resident of a U.S. possession, in the Instructions for Form 8938 for more details.

For additional details, go to the Foreign Account Tax Compliance Act (FATCA) page at IRS.govFATCA.

TIP: If you do not have to file a federal income tax return with the United States, you are not required to file a Form 8938 with the IRS.

Change of address. If you change your mailing address, use Form 8822, to notify the IRS and U.S. possession tax administration, if appropriate. Mail Form 8822 to the Internal Revenue Service Center or U.S. possession tax administration for your old address (addresses for the Service Centers are on the back of the form).

If you change your address before filing your tax return, write the new address in the appropriate boxes of your tax return when you file.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children® (NMEC). Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

This publication discusses how to treat income received from the following U.S. possessions on your tax return(s).

Chapter 1 discusses the requirements for being considered a bona fide resident of the listed possessions.

Chapter 2 gives the rules for determining if your income is from sources within, or effectively connected with a trade or business in, those possessions.

Next, chapter 3 looks at the rules for filing tax returns when you receive income from any of these possessions. You may have to file a U.S. tax return only, a possession tax return only, or both returns. This generally depends on whether you are a bona fide resident of the possession. In some cases, you may have to file a U.S. return, but will be able to exclude income earned in a possession from U.S. tax. You can find illustrated examples of some of the additional forms required in chapter 5.

If you are not a bona fide resident of one of the possessions listed earlier, or are otherwise required to file a U.S. income tax return, the information in chapter 4 will tell you how to file your U.S. tax return. This information also applies if you have income from U.S. insular areas other than the five possessions listed earlier because that income will not qualify for any of the exclusions or other benefits discussed in chapter 3. These other U.S. insular areas include:

If you need information on U.S. taxation, write to:

Internal Revenue Service International Section Philadelphia, PA 19255-0725

If you need additional information on your tax obligations in a U.S. possession, write to the tax department of that possession. Their addresses are provided in chapter 3 under the individual headings for each possession.

Comments and suggestions. We welcome your comments about this publication and your suggestions for future editions.

You can send us comments from http://www.irs.gov/formspubs. Click on "More Information" and then on "Give us feedback."

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Internal Revenue Service Tax Forms and Publications 1111 Constitution Ave. NW, IR-6526 Washington, DC 20224

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Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products.

Ordering forms and publications. Visit http://www.irs.gov/formspubs/ to download forms and publications. Otherwise, you can go to http://www.irs.gov/orderforms or call 1-800-829-3676 to order current and prior-year forms and instructions. Your order should arrive within 10 business days.

Tax questions. If you have a tax question not answered by this publication, check the information available on IRS.gov and How To Get Tax Help at the end of this publication, or call 1-800-829-1040.

You can get the necessary possession tax forms at the tax office for the appropriate possession. The office addresses are given in chapter 3.

Useful Items

You may want to see:

Publication

In order to qualify for certain tax benefits (see chapter 3), you must be a bona fide resident of American Samoa, the CNMI, Guam, Puerto Rico, or the USVI for the entire tax year.

Generally, you are a bona fide resident of one of these possessions (the relevant possession) if, during the tax year, you:

Special rule for civilian spouse of active duty member of the U.S. Armed Forces. If you are the civilian spouse of an active duty servicemember, under Military Spouses Residency Relief Act (MSRRA) you can choose to keep your prior residence or domicile for tax purposes (tax residence) when accompanying the servicemember spouse, who is relocating under military orders, to a new military duty station in one of the 50 states, the District of Columbia, or a U.S. possession. Before relocating, you and your spouse must have the same tax residence. If you are a civilian spouse and choose to keep your prior tax residence after such relocation, the source of income for services performed (for example, wages, salaries, tips, or self-employment) by you is considered to be (the jurisdiction of) the prior tax residence. As a result, the amount of income tax withholding (from Form(s) W-2) that you are able to claim on your federal return, as well as the need to file a state or U.S. possession return, may be affected.

For more information see:

Presence Test

If you are a U.S. citizen or resident alien, you will satisfy the presence test for the entire tax year if you meet one of the following conditions.

Days of Presence in the United States or Relevant Possession

Generally, you are treated as being present in the United States or in the relevant possession on any day that you are physically present in that location at any time during the day.

Days of presence in a possession. You are considered to be present in the relevant possession on any of the following days.

Such treatment is generally provided by (or under the supervision of) a physician for an illness, injury, impairment, or physical or mental condition. The treatment generally involves:

You must keep the following documentation.

A charitable sports event is one that meets all of the following conditions.

Student

To qualify as a student, you must be, during some part of each of any 5 calendar months during the calendar year:

Full-time student. A full-time student is a person who is enrolled for the number of hours or courses the school considers to be full-time attendance. However, school attendance exclusively at night is not considered full-time attendance.

School. The term "school" includes elementary schools, middle schools, junior and senior high schools, colleges, universities, and technical, trade, and mechanical schools. It does not include on-the-job training courses, correspondence schools, and schools offering courses only through the Internet.

Significant Connection

One way in which you can meet the presence test is to have no significant connection to the United States during the tax year. This section looks at the factors that determine if a significant connection exists.

You are treated as having a significant connection to the United States if you:

Permanent home. A permanent home generally includes an accommodation such as a house, an apartment, or a furnished room that is either owned or rented by you or your spouse. The dwelling unit must be available at all times, continuously, not only for short stays.

Exception for rental property. If you or your spouse own the dwelling unit and at any time during the tax year it is rented to someone else at fair rental value, it will be considered your permanent home only if you or your spouse use that property for personal purposes for more than the greater of:

A day of personal use of a dwelling unit is also any day that the unit is used by any of the following persons.

Example--significant connection. Ann Green, a U.S. citizen, is a sales representative for a company based in Guam. Ann lives with her spouse and young children in their house in Guam, where she is also registered to vote. Her business travel requires her to spend 120 days in the United States and another 120 days in foreign countries. When traveling on business, Ann generally stays at hotels but sometimes stays with her brother, who lives in the United States. Ann's stays are always of short duration and she asks her brother's permission to stay with him. Her brother's house is not her permanent home, nor does she have any other accommodations in the United States that would be considered her permanent home. Ann satisfies the presence test because she has no significant connection to the United States.

Example--presence test. Eric and Wanda Brown live for part of the year in a condominium, which they own, in the CNMI. They also own a house in Maine where they live for 120 days every year to be near their grown children and grandchildren. The Browns are retired and their only income is from pension payments, dividends, interest, and social security benefits. In 2016, they spent only 175 days in the CNMI because of a 70-day vacation to Europe and Asia.

Thus, in 2016, the Browns were not present in the CNMI for at least 183 days, were present in the United States for more than 90 days, and had a significant connection to the United States because of their permanent home. However, the Browns still satisfied the presence test with respect to the CNMI because they had no earned income in the United States and were physically present for more days in the CNMI than in the United States.

Tax Home

You will have met the tax home test if you did not have a tax home outside the relevant possession during any part of the tax year.

Your tax home is your regular or main place of business, employment, or post of duty regardless of where you maintain your family home. If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work.

Exceptions

There are some special rules regarding tax home that provide exceptions to the general rule stated above.

Students and Government Officials

Disregard the following days when determining whether you have a tax home outside the relevant possession.

You will not be considered to have a tax home outside the relevant possession solely because you are employed on a ship or other seafaring vessel that is predominantly used in local and international waters. For this purpose, a vessel is considered to be predominantly used in local and international waters if, during the tax year, the total amount of time it is used in international waters and in the waters within 3 miles of the relevant possession exceeds the total amount of time it is used in the territorial waters of the United States, another possession, or any foreign country.

Example. In 2016, Sean Silverman, a U.S. citizen, was employed by a fishery and spent 250 days at sea on a fishing vessel. When not at sea, Sean lived with his spouse at a house they own in American Samoa. The fishing vessel on which Sean works departs and arrives at various ports in American Samoa, other possessions, and foreign countries, but was in international or American Samoa's local waters for 225 days. For purposes of determining bona fide residency of American Samoa, Sean will not be considered to have a tax home outside that possession solely because of his employment on board the fishing vessel.

Year of Move

If you are moving to or from a possession during the year, you may still be able to meet the tax home test for that year. See Special Rules in the Year of a Move, later in this chapter.

Closer Connection

You will have met the closer connection test if, during any part of the tax year, you do not have a closer connection to the United States or a foreign country than to the relevant U.S. possession.

You will be considered to have a closer connection to a possession than to the United States or to a foreign country if you have maintained more significant contacts with the possession(s) than with the United States or foreign country. In determining if you have maintained more significant contacts with the relevant possession, the facts and circumstances to be considered include, but are not limited to, the following.

Example--closer connection to the United States. Marcos Reyes, a U.S. citizen, moved to Puerto Rico in 2016 to start an investment consulting and venture capital business. His spouse and two teenage children remained in California to allow the children to complete high school. He traveled back to the United States regularly to see his spouse and children, to engage in business activities, and to take vacations. Marcos had an apartment available for his full-time use in Puerto Rico, but remained a joint owner of the residence in California where his spouse and children lived. Marcos and his family had automobiles and personal belongings such as furniture, clothing, and jewelry located at both residences. Although Marcos was a member of the Puerto Rico Chamber of Commerce, he also belonged to and had current relationships with social, political, cultural, and religious organizations in California. Marcos received mail in California, including bank and brokerage statements and credit card bills. He conducted his personal banking activities in California. He held a California driver's license and was also registered to vote there. Based on all of the particular facts and circumstances pertaining to Marcos, he was not a bona fide resident of Puerto Rico in 2016 because he had a closer connection to the United States than to Puerto Rico.

Closer connection to another possession. Generally, possessions are not treated as foreign countries. Therefore, a closer connection to a possession other than the relevant possession will not be treated as a closer connection to a foreign country.

Example--tax home and closer connection to possession. Pearl Blackmon, a U.S. citizen, is a permanent employee of a hotel in Guam, but works only during the tourist season. For the remainder of each year, Pearl lives with her spouse and children in the CNMI, where she has no outside employment. Most of Pearl's personal belongings, including her automobile, are located in the CNMI. She is registered to vote in, and has a driver's license issued by, the CNMI. She does her personal banking in the CNMI and routinely lists her CNMI address as her permanent address on forms and documents. Pearl satisfies the presence test with respect to both Guam and the CNMI. She satisfies the tax home test with respect to Guam, because her regular place of business is in Guam. Pearl satisfies the closer connection test with respect to both Guam and the CNMI, because she does not have a closer connection to the United States or to any foreign country. Pearl is considered a bona fide resident of Guam, the location of her tax home.

Exception for Year of Move

If you are moving to or from a possession during the year, you may still be able to meet the closer connection test for that year. See Special Rules in the Year of a Move next.

Special Rules in the Year of a Move

If you are moving to or from a possession during the year, you may still be able to meet the tax home and closer connection tests for that year.

Year of Moving to a Possession

You will satisfy the tax home and closer connection tests in the tax year of changing your residence to the relevant possession if you meet all of the following.

Year of Moving From a Possession

In the year you cease to be a bona fide resident of American Samoa, the CNMI, Guam, or the USVI, you will satisfy the tax home and closer connection tests with respect to the relevant possession if you meet all of the following.

Puerto Rico

You will be considered a bona fide resident of Puerto Rico for the part of the tax year preceding the date on which you move if you:

Reporting a Change in Bona Fide Residence

If you became or ceased to be a bona fide resident of a U.S. possession, you may need to file Form 8898. This applies to the U.S. possessions of American Samoa, the CNMI, Guam, Puerto Rico, and the USVI.

Who Must File

You must file Form 8898 for the tax year in which you meet both of the following conditions.

Example. You are a U.S. citizen who moved to the CNMI in December 2015, but did not become a bona fide resident of that possession until the 2016 tax year. You must file Form 8898 for the 2016 tax year if your worldwide gross income for that year was more than $75,000.

Penalty for Not Filing Form 8898

If you are required to file Form 8898 for any tax year and you fail to file it, you may owe a penalty of $1,000. You may also owe this penalty if you do not include all the information required by the form or the form includes incorrect information. In either case, you will not owe this penalty if you can show that such failure is due to reasonable cause and not willful neglect. This is in addition to any criminal penalty that may be imposed.

2. Possession Source Income

In order to determine where to file your return and which form(s) you need to complete, you must determine the source of each item of income you received during the tax year. Income you received from sources within, or that was effectively connected with the conduct of a trade or business within, the relevant possession must be identified separately from U.S. or foreign source income.

This chapter discusses the rules for determining if the source of your income is from:

U.S. income rule. This rule states that income is not possession source income if, under the rules of Internal Revenue Code sections 861-865, it is treated as income:

Table 2-1. General Rules for Determining U.S. Source of Income

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Compensation for Labor or Personal Services

Income from labor or personal services includes wages, salaries, commissions, fees, per diem allowances, employee allowances and bonuses, and fringe benefits. It also includes income earned by sole proprietors and general partners from providing personal services in the course of their trade or business.

Services performed wholly within a relevant possession. Generally, all pay you receive for services performed in a relevant possession is considered to be from sources within that possession. However, there is an exception for income earned as a member of the U.S. Armed Forces or a civilian spouse.

U.S. Armed Forces. If you are a bona fide resident of a relevant possession, your military service pay will be sourced in that possession even if you perform the services in the United States or another possession. However, if you are not a bona fide resident of a possession, your military service pay will be income from the United States even if you perform services in a possession.

Civilian spouse of active duty member of the U.S. Armed Forces.

If you are a bona fide resident of a U.S. possession and choose to keep that possession as your tax residence under MSRRA when relocating with your service member spouse under military orders, the source of income for your labor or personal services is considered to be that possession. Likewise, if your tax residence is in one of the 50 states or the District of Columbia before relocating and you choose to keep it as your tax residence, the source of income for services performed in any of the U.S. possessions is considered to be the United States and, specifically, your state of residence or the District of Columbia.

For more information, see:

Services performed partly inside and partly outside a relevant possession. If you are an employee and receive compensation for labor or personal services performed both inside and outside the relevant possession, special rules apply in determining the source of the compensation. Compensation (other than certain fringe benefits) is sourced on a time basis. Certain fringe benefits (such as housing and education) are sourced on a geographical basis.

Or, you may be permitted to use an alternative basis to determine the source of compensation. See Alternative basis, later.

If you are self-employed, determine the source of your income for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next.

Time basis. Use a time basis to figure your compensation for labor or personal services from the relevant possession (other than the fringe benefits discussed later). Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:

                  Number of days you performed

Example. In 2016, you worked in your employer's office in the United States for 60 days and in the Puerto Rico office for 180 days, earning a total of $80,000 for the year. Your Puerto Rico source income is $60,000, figured as follows.

                    180 days

Certain fringe benefits sourced on a geographical basis. If you received any of the following fringe benefits as compensation for labor or services performed as an employee partly inside and partly outside a relevant possession, you must source that income on a geographical basis.

Alternative basis. You can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your income than the time or geographical basis. If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your income.

De minimis exception. There is an exception to the rule for determining the source of income earned in a possession. Generally, you will not have income from a possession if during a tax year you:

Example. You are a U.S. citizen who worked in Puerto Rico for a U.S. company. All services were performed in Puerto Rico. Upon retirement you remained in Puerto Rico and began receiving your pension from the U.S. pension trust of your employer. Distributions from the U.S. pension trust must be allocated between (1) contributions, which are Puerto Rico source income, and (2) investment earnings, which are U.S. source income.

Investment Income

This category includes such income as interest, dividends, rents, and royalties.

Interest income. The source of interest income is generally determined by the residence of the payer. Interest paid by corporations created or organized in a relevant possession (possession corporation) or by individuals who are bona fide residents of a relevant possession is considered income from sources within that possession.

However, there is an exception to this rule if you are a bona fide resident of a relevant possession, receive interest from a corporation created or organized in that possession, and are a shareholder of that corporation who owns, directly or indirectly, at least 10% of the total voting stock of the corporation. See Regulations section 1.937-2(i) for more information.

Dividends. Generally, dividends paid by a corporation created or organized in a relevant possession will be considered income from sources within that possession. There are additional rules for bona fide residents of a relevant possession who receive dividend income from possession corporations, and who own, directly or indirectly, at least 10% of the voting stock of the corporation. For more information, see Regulations section 1.937-2(g).

Rental income. Rents from property located in a relevant possession are treated as income from sources within that possession.

Royalties. Royalties from natural resources located in a relevant possession are considered income from sources within that possession.

Also considered possession source income are royalties received for the use of, or for the privilege of using, in a relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property.

Sales or Other Dispositions of Property

The source rules for sales or other dispositions of property are varied. The most common situations are discussed below.

Real property. Real property includes land and buildings, and generally anything built on, growing on, or attached to land. The location of the property generally determines the source of income from the sale. For example, if you are a bona fide resident of Guam and sell your home that is located in Guam, the gain on the sale is sourced in Guam. If, however, the home you sold was located in the United States, the gain is U.S. source income.

Personal property. The term "personal property" refers to property (such as machinery, equipment, or furniture) that is not real property. Generally, gain (or loss) from the sale or other disposition is sourced according to the seller's tax home. If personal property is sold by a bona fide resident of a relevant possession, the gain (or loss) from the sale is treated as sourced within that possession.

This rule does not apply to the sale of inventory, intangible property, depreciable personal property, or property sold through a foreign office or fixed place of business. The rules applying to sales of inventory are discussed below. For information on sales of the other types of property mentioned, see Internal Revenue Code section 865.

Inventory. Your inventory is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. The source of income from the sale of inventory depends on whether the inventory was purchased or produced.

Purchased. Income from the sale of inventory that you purchased is sourced where you sell the property. Generally, this is where title to the property passes to the buyer.

Produced. Income from the sale of inventory that you produced in a relevant possession and sold outside that possession (or vice versa) is sourced based on an allocation. For information on making the allocation, see Regulations section 1.863-3(f).

Special Rules for Gains From Dispositions of Certain Property

There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt instruments, diamonds, and gold) owned by a U.S. citizen or resident alien prior to becoming a bona fide resident of a possession. You are subject to these special rules if you meet both of the following conditions.

For details, see Regulations section 1.937-2(f)(1) and Examples 1 and 2 of section 1.937-2(k).

Example 1. In 2010, Cheryl Jones, a U.S. citizen, lived in the United States and paid $1,000 for 100 shares of stock in the Rose Corporation, a U.S. corporation listed on the New York Stock Exchange. On March 1, 2013, she moved to Puerto Rico and changed her tax home to Puerto Rico on the same date. Cheryl satisfied the presence test in 2013 and, under the year-of-move exception, she was considered a bona fide resident of Puerto Rico for the rest of 2013. On March 1, 2013, the closing value of Cheryl's stock in the Rose Corporation was $2,000. On January 5, 2016, while still a bona fide resident of Puerto Rico, Cheryl sold all her Rose Corporation stock for $7,000. Under the special rules discussed earlier, none of Cheryl's $6,000 gain will be treated as income from sources within Puerto Rico.

CAUTION: The source rules discussed in the preceding paragraphs supplement, and may apply in conjunction with, an existing special rule. This existing special rule applies if you are a U.S. citizen or resident alien who becomes a bona fide resident of American Samoa, the CNMI, or Guam, and who has gain from the disposition of certain U.S. assets during the 10-year period beginning when you became a bona fide resident. The gain is U.S. source income that generally is subject to U.S. tax if the property is either (1) located in the United States; (2) stock issued by a U.S. corporation or a debt obligation of a U.S. person or of the United States, a state (or political subdivision), or the District of Columbia; or (3) property that has a basis in whole or in part by reference to property described in (1) or (2). See chapter 3 for filing information.

Special election. You can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of the relevant possession (the possession holding period) as gain (or loss) from sources within that possession. Make the election by reporting the gain attributable to the possession holding period on your income tax return for the year of disposition. This election overrides both of the special rules discussed earlier.

There are two methods for figuring the gain for the possession holding period, one for marketable securities and another for other types of investment property.

Marketable securities. Marketable securities are those actively traded on an established financial market, such as stock in a publicly held corporation. Under the special election, allocate the gain (or loss) by figuring the appreciation separately for your possession and U.S. holding periods.

Your possession holding period begins on the first day you do not have a tax home outside the relevant possession. The gain (or loss) attributable to the possession holding period is the difference in fair market value of the security at the close of the market on the first and last days of this holding period. This is your gain (or loss) that is treated as being from sources within the relevant possession. If you were a bona fide resident of the relevant possession for more than one continuous period, combine the gains (or losses) from each possession holding period.

Example 2. Assume the same facts as in Example 1, except that Cheryl makes the special election to allocate the gain between her U.S. and possession holding periods. Cheryl's possession holding period began March 1, 2013, the date her tax home changed to Puerto Rico. Therefore, the portion of gain attributable to her possession holding period is $5,000 ($7,000 sale price - $2,000 closing value on first day of the possession holding period). By reporting $5,000 of her $6,000 gain as Puerto Rico source income on her 2016 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income.

Other personal property. For personal property other than marketable securities, use a time-based allocation. Figure the gain (or loss) attributable to the possession holding period by multiplying your total gain (or loss) by the following fraction.

                 Number of days in the

Example 3. In addition to the stock in Rose Corporation, Cheryl acquired a 5% interest in the Alder Partnership on January 1, 2012. On March 1, 2013, when she established bona fide residency in Puerto Rico, her partnership interest was not considered a marketable security. On September 15, 2016, while still a bona fide resident of Puerto Rico, Cheryl sold her interest in Alder Partnership for a $100,000 gain. She had owned the interest for a total of 1,720 days. Cheryl's possession holding period (from March 1, 2013, through September 15, 2016) is 1,295 days. The portion of her gain attributable to Puerto Rico is $75,349 ($100,000 x (1,295 Puerto Rico days ÷ 1,720 total days)). By reporting $75,349 of her $100,000 gain as Puerto Rico source income on her 2016 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income.

Scholarships, Fellowships, Grants, Prizes, and Awards

The source of these types of income is generally the residence of the payer, regardless of who actually disburses the funds. Therefore, in order to be possession source income, the payer must be a resident of the relevant possession, such as an individual who is a bona fide resident or a corporation created or organized in that possession.

CAUTION: These rules do not apply to amounts paid as salary or other compensation for services. See Compensation for Labor or Personal Services, earlier in this chapter, for the source rules that apply.

Effectively Connected Income

In limited circumstances, some kinds of income from sources outside the relevant possession must be treated as effectively connected with a trade or business in that possession. These circumstances are listed below.

The three kinds of income from sources outside the relevant possession to which these rules apply are the following.

Example. Marcy Jackson is a bona fide resident of American Samoa. Her business, which she conducts from an office in American Samoa, is developing and selling specialized computer software. A software purchaser will frequently pay Marcy an additional amount to install the software on the purchaser's operating system and to ensure that the software is functioning properly. Marcy installs the software at the purchaser's place of business, which may be in American Samoa, in the United States, or in another country. The income from selling the software is effectively connected with the conduct of Marcy's business in American Samoa, even though the product's destination may be outside the possession. However, the compensation she receives for installing the software (personal services) outside of American Samoa is not effectively connected with the conduct of her business in the possession--the income is sourced where she performs the services.

3. Filing Information for Individuals in Certain U.S. Possessions

If you have income from American Samoa, the CNMI, Guam, Puerto Rico, or the USVI, you may have to file a tax return with the tax department of that possession. Or, you may have to file two annual tax returns, one with the possession's tax department and the other with the U.S. Internal Revenue Service. This chapter covers the general rules for filing returns in the five possessions.

You must first determine if you are a bona fide resident of the relevant possession. See chapter 1 for a discussion of the requirements you must meet.

You should ask for forms and advice about the filing of possession tax returns from that possession's tax department, not the Internal Revenue Service. Contact information is listed in this chapter under the heading for each possession.

American Samoa

American Samoa has its own separate and independent tax system. Although its tax laws are modeled on the U.S. Internal Revenue Code, there are certain differences.

Where To Get Forms and Information

Requests for advice about matters connected with Samoan taxation should be sent to:

American Samoa Government Tax Office Executive Office Building Pago Pago, AS 96799

The phone number is 684-633-4181.

You can access the American Samoa Government Tax Office at http://www.americansamoa.gov.

The fax number is 684-633-1513.

CAUTION: The addresses and phone numbers listed above are subject to change.

Which Returns To File

Your residency status and your source of income with regard to American Samoa determine whether you file your return and pay your tax to American Samoa, to the United States, or to both.

In addition to the information below that is categorized by residency status, the Special Rules for American Samoa section (later) contains important information for determining the correct forms to file.

Bona Fide Resident of American Samoa

Bona fide residents of American Samoa are generally exempt from U.S. tax on their American Samoa source income.

U.S. citizen or resident alien. If you are a U.S. citizen or resident alien and a bona fide resident of American Samoa during the entire tax year, you generally must file the following returns.

Nonresident alien. If you are a bona fide resident of American Samoa during the entire tax year, but a nonresident alien of the United States, you generally must file the following returns.

Form 4563. If you must file a U.S. income tax return and you qualify to exclude any of your income from American Samoa, claim the exclusion by completing Form 4563 and attaching it to your Form 1040. Form 4563 cannot be filed by itself. There is an example of a filled-in Form 4563 in chapter 5.

Where to file. If you are a bona fide resident of American Samoa during the entire tax year and you are not including a check or a money order, send your U.S. tax return and all attachments (including Form 4563) to:

Department of the Treasury Internal Revenue Service Austin, TX 73301-0215 USA

If you are including a check or a money order, send your U.S. tax return and all attachments (including Form 4563) to:

Internal Revenue Service P.O. Box 1303 Charlotte, NC 28201-1303 USA

Send your American Samoa tax return and all attachments to the address given under Where To Get Forms and Information, earlier.

Self-employment tax. If you are not required to file a U.S. tax return but have income that is effectively connected with a trade or business in American Samoa, you must file Form 1040-SS with the United States. On this form you will report your self-employment income to the United States and, if necessary, pay self-employment tax on that income.

Additional Medicare Tax. You may be required to pay Additional Medicare Tax. Also, you may need to report Additional Medicare Tax withheld by your employer. For more information see Additional Medicare Tax under Special Rules for Completing Your U.S. Tax Return in chapter 4.

Net Investment Income Tax. The Net Investment Income Tax (NIIT) is 3.8 percent of the lesser of an individual's net investment income or the excess of the individual's modified adjusted gross income over a specified threshold amount. The NIIT will apply to a bona fide resident of American Samoa if a taxpayer has modified adjusted gross income from sources outside of American Samoa that exceeds a specified threshold amount, e.g., $200,000 for single filers. The NIIT does not apply to any individual who is a nonresident alien with respect to the United States. See Form 8960 and its instructions for more information on the NIIT.

Estimated tax payments. To see if you are required to make payments of estimated income tax, self-employment tax, Additional Medicare Tax, and/or Net Investment Income Tax to the IRS, get Form 1040-ES.

To pay by check or money order, send your payment with the Form 1040-ES payment voucher to:

Internal Revenue Service P.O. Box 1300 Charlotte, NC 28201-1300 USA

To get information on paying electronically (by credit or debit card, or through the Electronic Federal Tax Payment System (EFTPS)), go to http://www.irs.gov/payments.

For information on making estimated income tax payments to American Samoa, see Where To Get Forms and Information, earlier.

Not a Bona Fide Resident of American Samoa

An individual who is not a bona fide resident of American Samoa for the tax year generally files both U.S. and American Samoa tax returns, and claims a foreign tax credit on the U.S. return for taxes paid to American Samoa.

U.S. citizen or resident alien. If you are a U.S. citizen or resident alien but not a bona fide resident of American Samoa during the entire tax year, you generally must file the following returns.

Nonresident alien. If you are a nonresident alien of the United States who does not qualify as a bona fide resident of American Samoa for the entire tax year, you generally must file the following returns.

Department of the Treasury Internal Revenue Service Austin, TX 73301-0215 USA

If you are including a check or a money order, send your U.S. tax return and all attachments to:

Internal Revenue Service P.O. Box 1303 Charlotte, NC 28201-1303 USA

Send your American Samoa tax return and all attachments to the address given under Where To Get Forms and Information, earlier.

Special Rules for American Samoa

Some special rules apply to certain types of income and employment connected with American Samoa.

Wages of U.S. Government employees. U.S. government wages, including for services performed in American Samoa, are considered U.S. source income and must be reported on both your U.S. and American Samoa income tax returns.

If you are a bona fide resident of American Samoa, you may have to file an income tax return with both the United States and American Samoa.

For further information about your American Samoa income tax obligations, contact the American Samoa Tax Office at the address and phone number indicated in chapter 3.

Active duty member of the U.S. Armed Forces. If you are an active duty member of the U.S. Armed Forces, you are not required to file an income tax return with both the United States and American Samoa. Instead, you will only be required to file an income tax return with one of those jurisdictions, depending upon whether or not you are a bona fide resident of American Samoa.

Civilian spouse of active duty member of the U.S. Armed Forces. If you are a civilian spouse of an active duty member of the U.S. Armed Forces, see Special rule for civilian spouse of active duty member of the U.S. Armed Forces in chapter 1 for more information.

Federal retiree pension income. Federal retirees who are bona fide residents of American Samoa must file an income tax return with American Samoa to report all income from all sources, including federal pension income. The retiree may also have an income tax filing requirement with the United States, depending upon the source of the retiree's pension income. Pension income can have multiple sources. See Pensions and other source of income rules in chapter 2 for more information. If any part of the pension income is sourced in the United States, the retiree must also file an income tax return with the United States.

Moving expense deduction. Generally, expenses of a move to American Samoa are directly attributable to American Samoa wages, salaries, and other earned income. Likewise, the expenses of a move back to the United States are generally attributable to U.S. earned income.

If your move was to American Samoa, report your deduction for moving expenses as follows.

Double Taxation

A mutual agreement procedure exists to settle cases of double taxation between the United States and American Samoa. See Double Taxation in chapter 4.

The Commonwealth of Puerto Rico

The Commonwealth of Puerto Rico has its own separate and independent tax system. Although it is modeled after the U.S. system, there are differences in law and tax rates.

Where To Get Forms and Information

Requests for information about the filing of Puerto Rico tax returns should be addressed to:

Departamento de Hacienda Negociado de Asistencia Contributiva P.O. Box 9024140 San Juan, Puerto Rico 00902-4140

The phone numbers are 787-622-0123 and 787-620-2323.

You can access the Hacienda website at http://www.hacienda.gobierno.pr.

CAUTION: The addresses and phone numbers listed above are subject to change.

Which Returns To File

Generally, you will file returns with both Puerto Rico and the United States. The income reported on each return depends on your residency status in Puerto Rico. To determine if you are a bona fide resident of Puerto Rico, see the information in chapter 1.

Bona Fide Resident of Puerto Rico

Bona fide residents of Puerto Rico will generally pay tax to Puerto Rico on their worldwide income.

U.S. citizen or resident alien. If you are a U.S. citizen or resident alien and also a bona fide resident of Puerto Rico during the entire tax year, you generally must file the following returns.

If all of your income is from Puerto Rico sources, you are not required to file a U.S. tax return. However, if you have self-employment income, see Self-employment tax, later.

U.S. citizen only. If you are a U.S. citizen, you may also qualify under these rules if you have been a bona fide resident of Puerto Rico for at least 2 years before moving from Puerto Rico. In this case, you can exclude your income derived from sources within Puerto Rico (but not wages and salaries received as an employee of the U.S. Government or its agencies) that you earned before the date you changed your residence. For more information, see Puerto Rico under Year of Moving From a Possession in chapter 1.

Nonresident alien. If you are a bona fide resident of Puerto Rico during the entire tax year, but a nonresident alien of the United States, you generally must file the following returns.

Additional Medicare Tax. You may be required to pay Additional Medicare Tax. Also, you may need to report Additional Medicare Tax withheld by your employer. For more information see Additional Medicare Tax under Special Rules for Completing Your U.S. Tax Return in chapter 4.

Net Investment Income Tax. The Net Investment Income Tax (NIIT) is 3.8 percent of the lesser of an individual's net investment income or the excess of the individual's modified adjusted gross income over a specified threshold amount. The NIIT will apply to a bona fide resident of Puerto Rico if a taxpayer has modified adjusted gross income from sources outside of Puerto Rico that exceeds a specified threshold amount, e.g., $200,000 for single filers. The NIIT does not apply to any individual who is a nonresident alien with respect to the United States. See Form 8960 and its instructions for more information on the NIIT.

Estimated tax payments. To see if you are required to make payments of estimated income tax, self-employment tax, Additional Medicare Tax, and/or Net Investment Income Tax to the IRS, get Form 1040-ES (or Form 1040-ES(PR)).

To pay by check or money order, send your payment with the Form 1040-ES (or Form 1040-ES(PR)) payment voucher to:

Internal Revenue Service P.O. Box 1300 Charlotte, NC 28201-1300 USA

To get information on paying electronically (by credit or debit card, or through the Electronic Federal Tax Payment System (EFTPS)), go to http://www.irs.gov/payments.

For information on making estimated income tax payments to Hacienda, see Where To Get Forms and Information, earlier.

Not a Bona Fide Resident of Puerto Rico

An individual who is not a bona fide resident of Puerto Rico for the tax year generally files tax returns with both Puerto Rico and the United States.

U.S. citizen or resident alien. If you are a U.S. citizen or resident alien but not a bona fide resident of Puerto Rico during the entire tax year, you generally must file the following returns.

Where to file Use the addresses listed below to file your U.S. and Puerto Rico income tax returns.

If you are not including a check or a money order, send your U.S. tax return and all attachments to:

Department of the Treasury Internal Revenue Service Austin, TX 73301-0215 USA

If you are including a check or a money order, send your U.S. tax return and all attachments to:

Internal Revenue Service P.O. Box 1303 Charlotte, NC 28201-1303 USA

If you request a refund on your Puerto Rico return, send your Puerto Rico tax return and all attachments to:

Departamento de Hacienda P.O. Box 50072 San Juan, PR 00902-6272

Send all other Puerto Rico tax returns, with all attachments, to:

Departamento de Hacienda P.O. Box 9022501 San Juan, PR 00902-2501

Special Rules for Puerto Rico

In addition to the general rules given earlier for filing U.S. and Puerto Rico tax returns, there are some special rules that apply to certain individuals and types of income.

U.S. Government employees. Wages and cost-of-living allowances paid by the U.S. Government (or one of its agencies) for working in Puerto Rico are subject to Puerto Rico tax. However, the cost-of-living allowances are excluded from Puerto Rico gross income up to the amount exempt from U.S. tax. In order to claim this exclusion, you must:

U.S. Armed Forces. Bona fide residents of Puerto Rico include military personnel whose official home of record is Puerto Rico.

Civilian spouse of active duty member of the U.S. Armed Forces. If, under the rule discussed at the beginning of chapter 1 (see Special rule for civilian spouse of active duty member of the U.S. Armed Forces), your tax residence is Puerto Rico, follow the guidance in the section for bona fide residents under Which Returns To File, earlier. However, if your tax residence is one of the 50 states or the District of Columbia and your only income from Puerto Rico is from wages, salaries, tips, or self-employment, you will be taxed on your worldwide income and file only a U.S. tax return (Form 1040) and a state and/or local tax return, if required. If you have income from Puerto Rico other than wages, salaries, tips, or self-employment that is considered to be sourced in that possession (see Table 2-1), contact the Hacienda for guidance.

Income from sources outside Puerto Rico and the United States. If you are a U.S. citizen and bona fide resident of Puerto Rico and you have income from sources outside both Puerto Rico and the United States, that income is treated as foreign source income under both tax systems. In addition to your Puerto Rico and U.S. tax returns, you may also have to file a return with the country or possession from which your outside income was derived. To avoid double taxation, a foreign tax credit is generally available for either the U.S. or Puerto Rico return.

Example. Thomas Red is a bona fide resident of Puerto Rico and a U.S. citizen. He traveled to the Dominican Republic and worked in the construction industry for 1 month. His wages were $20,000. Because the wages were earned outside Puerto Rico and outside the United States, Thomas must file a tax return with Puerto Rico and the United States. He may also have to file a tax return with the Dominican Republic.

Moving expense deduction. Generally, expenses of a move to Puerto Rico are directly attributable to wages, salaries, and other earned income from Puerto Rico. Likewise, the expenses of a move back to the United States are generally attributable to U.S. earned income.

If your move was to Puerto Rico, report your deduction for moving expenses as follows.

Additional child tax credit. If you are not required to file a U.S. income tax return, this credit is available only if you meet all three of the following conditions.

TIP: Advice about possible tax benefits under the Puerto Rico investment incentive programs is available from the Puerto Rico tax authorities.

Double Taxation

A mutual agreement procedure exists to settle cases of double taxation between the United States and the Commonwealth of Puerto Rico. See Double Taxation in chapter 4.

The Commonwealth of the Northern Mariana Islands

The Commonwealth of the Northern Mariana Islands (CNMI) has its own tax system based partly on the same tax laws and tax rates that apply to the United States and partly on local taxes imposed by the CNMI government.

Where To Get Forms and Information

Requests for advice about CNMI residency and tax matters should be addressed to:

Commonwealth of the Northern Mariana Islands Division of Revenue and Taxation P.O. Box 5234 CHRB Dandan Commercial Center Saipan, MP 96950

You can order forms and publications by calling 670-664-1000.

You can order forms and publications through the fax at 670-664-1015.

CAUTION: The addresses and phone numbers listed above are subject to change.

Which Return To File

In general, all individuals with income from the CNMI will file only one return, either to the CNMI or to the United States. Your residency status with regard to the CNMI determines which return you will file. Be sure to check the Special Rules for the CNMI, later, for additional information about filing your tax return.

Bona Fide Resident of the CNMI

If you are a U.S. citizen, resident alien, or nonresident alien and a bona fide resident of the CNMI during the entire tax year, file your income tax return with the CNMI.

Where to file. If you are a bona fide resident of the CNMI for the entire tax year, send your return and all attachments to the Division of Revenue and Taxation at the address given earlier.

U.S. Citizen or Resident Alien (Other Than a Bona Fide Resident of the CNMI)

If you have income from sources within the CNMI and are a U.S. citizen or resident alien, but you are not a bona fide resident of the CNMI during the entire tax year, file your income tax return with the United States.

If you file a U.S. income tax return, attach a completed Form 5074 if you (and your spouse if filing a joint return) have:

There is an example of a filled-in Form 5074 in chapter 5.

De minimis exception to determining source of income. In certain situations you will not have income from a possession. See De minimis exception under Compensation for Labor or Personal Services in chapter 2.

Citizen or resident alien of the United States but not a bona fide resident of the CNMI. If you are a citizen or resident alien of the United States but not a bona fide resident of the CNMI during the entire tax year and you are not including a check or a money order, send your return and all attachments to:

Department of the Treasury Internal Revenue Service Austin, TX 73301-0215 USA

If you are including a check or a money order, send your U.S. tax return and all attachments to:

Internal Revenue Service P. O. Box 1303 Charlotte, NC 28201-1303 USA

Nonresident Alien (Other Than a Bona Fide Resident of the CNMI)

If you are a nonresident alien of the United States who does not qualify as a bona fide resident of the CNMI for the entire tax year, you generally must file the following returns.

Department of the Treasury Internal Revenue Service Austin, TX 73301-0215 USA

If you are including a check or a money order, send your U.S. tax return and all attachments to:

Internal Revenue Service P. O. Box 1303 Charlotte, NC 28201-1303 USA

Send your CNMI tax return and all attachments to:

Department of Finance Division of Revenue and Taxation Commonwealth of the Northern Mariana Islands P.O. Box 5234 CHRB Saipan, MP 96950

Citizen of the CNMI

If you are a citizen of the CNMI (meaning that you were born or naturalized in the CNMI) but not otherwise a U.S. citizen or a U.S. resident alien during the tax year, file your income tax return with the CNMI. Include income from worldwide sources on your CNMI return. Take into account tax withheld by both jurisdictions in determining if there is tax overdue or an overpayment. Pay any balance of tax due with your tax return. Send your return and all attachments to:

Department of Finance Division of Revenue and Taxation Commonwealth of the Northern Mariana Islands P.O. Box 5234 CHRB Saipan, MP 96950

Special Rules for the CNMI

Special rules apply to certain types of income, employment, and filing status.

Joint return. If you file a joint return, file your return (and pay the tax) with the jurisdiction where the spouse who has the greater adjusted gross income (AGI) would have to file if you were filing separately. If the spouse with the greater AGI is a bona fide resident of the CNMI during the entire tax year, file the joint return with the CNMI. If the spouse with the greater AGI is a U.S. citizen or resident alien but not a bona fide resident of the CNMI during the entire tax year, file your joint return with the United States. For this purpose, income is determined without regard to community property laws.

Example. Marsha Blue, a U.S. citizen, was a resident of the United States, and her spouse, a citizen of the CNMI, was a bona fide resident of the CNMI during the entire tax year. Marsha earned $65,000 as a computer programmer in the United States. Her spouse earned $20,000 as an artist in the CNMI. Marsha and her spouse will file a joint return. Because Marsha has the greater AGI, she and her spouse must file their return with the United States and report the entire $85,000 on that return.

U.S. Armed Forces. If you are a member of the U.S. Armed Forces who qualified as a bona fide resident of the CNMI in a prior tax year, your absence from the CNMI solely in compliance with military orders will not change your bona fide residency. If you did not qualify as a bona fide resident of the CNMI in a prior tax year, your presence in the CNMI solely in compliance with military orders will not qualify you as a bona fide resident of the CNMI.

Civilian spouse of active duty member of the U.S. Armed Forces. If, under the rule discussed at the beginning of chapter 1 (see Special rule for civilian spouse of active duty member of the U.S. Armed Forces), your tax residence is the CNMI, follow the guidance in the section for bona fide residents under Which Return To File, earlier. However, if your tax residence is one of the 50 states or the District of Columbia and your only income from the CNMI is from wages, salaries, tips, or self-employment, you will be taxed on your worldwide income and file only a U.S. tax return (Form 1040) and a state and/or local tax return, if required. If you have income from the CNMI other than wages, salaries, tips, or self-employment that is considered to be sourced in that possession (see Table 2-1), you may need to file Form 5074 with your U.S. tax return.

Moving expense deduction. Generally, expenses of a move to the CNMI are directly attributable to wages, salaries, and other earned income from the CNMI. Likewise, the expenses of a move back to the United States are generally attributable to U.S. earned income.

If your move was to the CNMI, report your deduction for moving expenses as follows.

Foreign tax credit. Under the filing rules explained earlier, individuals with CNMI source income normally will not claim a foreign tax credit on a U.S. income tax return for tax paid to the CNMI.

Self-employment tax. If you have no U.S. filing requirement, but have income that is effectively connected with a trade or business in the CNMI, you must file Form 1040-SS with the United States to report your self-employment income and, if necessary, pay self-employment tax.

Additional Medicare Tax. You may be required to pay Additional Medicare Tax. Also, you may need to report Additional Medicare Tax withheld by your employer. For more information see Additional Medicare Tax under Special Rules for Completing Your U.S. Tax Return in chapter 4.

Estimated tax payments. To see if you are required to make payments of estimated income tax, self-employment tax, and/or Additional Medicare Tax to the IRS, get Form 1040-ES.

Payment of estimated tax. If you must pay estimated tax, make your payment to the jurisdiction where you would file your income tax return if your tax year were to end on the date your first estimated tax payment is due. Generally, you should make the rest of your quarterly payments of estimated tax to the jurisdiction where you made your first payment of estimated tax. However, estimated tax payments to either jurisdiction will be treated as payments to the jurisdiction with which you file the tax return.

If you make a joint payment of estimated tax, make your payment to the jurisdiction where the spouse who has the greater estimated AGI would have to pay (if a separate payment were made). For this purpose, income is determined without regard to community property laws.

Early payment. If you make your first payment of estimated tax early, follow the rules given earlier to determine where to send it. If you send it to the wrong jurisdiction, make all later payments to the jurisdiction to which the first payment should have been sent.

To pay by check or money order, send your payment with the Form 1040-ES payment voucher to:

Internal Revenue Service P.O. Box 1300 Charlotte, NC 28201-1300 USA

To get information on paying electronically (by credit or debit card, or through the Electronic Federal Tax Payment System (EFTPS)), go to http://www.irs.gov/payments.

For information on making estimated income tax payments to the CNMI, see Where To Get Forms and Information, earlier.

Double Taxation

A mutual agreement procedure exists to settle cases of double taxation between the United States and the CNMI. See Double Taxation in chapter 4.

Guam

Guam has its own tax system based on the same tax laws and tax rates that apply in the United States.

Where To Get Forms and Information

Requests for advice about Guam residency and tax matters should be addressed to:

Department of Revenue and Taxation Taxpayer Services Division P.O. Box 23607 GMF, Guam 96921

You can order forms and publications by calling 671-635-1840 or 671-635-1841.

You can order forms and publications through the fax at 671-633-2643.

You can get forms and publications at http://www.guamtax.com.

CAUTION: The addresses and phone numbers listed above are subject to change.

Which Return To File

Bona fide residents of Guam are subject to special U.S. tax rules. In general, all individuals with income from Guam will file only one return--either to Guam or the United States.

Bona Fide Resident of Guam

If you are a bona fide resident of Guam during the entire tax year, file your return with Guam. This applies to all bona fide residents who are citizens, resident aliens, or nonresident aliens of the United States.

If you are a bona fide resident of Guam for the entire tax year, send your return and all attachments to:

Department of Revenue and Taxation Taxpayer Services Division P.O. Box 23607 GMF, Guam 96921

U.S. Citizen or Resident Alien (Other Than a Bona Fide Resident of Guam)

If you have income from sources within Guam and are a U.S. citizen or resident alien, but you are not a bona fide resident of Guam during the entire tax year, file your income tax return with the United States.

See the Illustrated Example of Form 5074 in chapter 5.

De minimis exception to determining source of income. In certain situations you will not have income from a possession. See De minimis exception under Compensation for Labor or Personal Services in chapter 2.

If you are a citizen or resident alien of the United States but not a bona fide resident of Guam during the entire tax year and you are not including a check or money order, send your U.S. tax return and all attachments (including Form 5074) to:

Department of the Treasury Internal Revenue Service Austin, TX 73301-0215 USA

If you are including a check or a money order, send your U.S. tax return and all attachments (including Form 5074) to:

Internal Revenue Service P.O. Box 1303 Charlotte, NC 28201-1303 USA

Nonresident Alien (Other Than a Bona Fide Resident of Guam), Where to File

If you are a nonresident alien of the United States who does not qualify as a bona fide resident of Guam for the entire tax year, you generally must file the following returns.

Department of the Treasury Internal Revenue Service Austin, TX 73301-0215 USA

If you are including a check or a money order, send your U.S. tax return and all attachments to:

Internal Revenue Service P.O. Box 1303 Charlotte, NC 28201-1303 USA

Send your Guam tax return and all attachments to:

Department of Revenue and Taxation Taxpayer Services Division P.O. Box 23607 GMF, Guam 96921

Citizen of Guam

If you are a citizen of Guam (meaning that you were born or naturalized in Guam) but not otherwise a U.S. citizen or a U.S. resident alien during the tax year, file your income tax return with Guam. Include income from worldwide sources on your Guam return. Take into account tax withheld by both jurisdictions in determining if there is tax overdue or an overpayment. Pay any balance of tax due with your tax return.

If you are a citizen of Guam, send your return and all attachments to:

Department of Revenue and Taxation Taxpayer Services Division P.O. Box 23607 GMF, Guam 96921

Special Rules for Guam

Special rules apply to certain types of income, employment, and filing status.

Joint return. If you file a joint return, you should file your return (and pay the tax) with the jurisdiction where the spouse who has the greater adjusted gross income (AGI) would have to file if you were filing separately. If the spouse with the greater AGI is a bona fide resident of Guam during the entire tax year, file the joint return with Guam. If the spouse with the greater AGI is a U.S. citizen or resident alien but not a bona fide resident of Guam during the entire tax year, file the joint return with the United States. For this purpose, income is determined without regard to community property laws.

Example. Bill Whiting, a U.S. citizen, was a resident of the United States, and his spouse, a citizen of Guam, was a bona fide resident of Guam during the entire tax year. Bill earned $45,000 as an engineer in the United States. His spouse earned $15,000 as a teacher in Guam. Bill and his spouse will file a joint return. Because Bill has the greater AGI, he and his spouse must file their return with the United States and report the entire $60,000 on that return.

U.S. Armed Forces. If you are a member of the U.S. Armed Forces who qualified as a bona fide resident of Guam in a prior tax year, your absence from Guam solely in compliance with military orders will not change your bona fide residency. If you did not qualify as a bona fide resident of Guam in a prior tax year, your presence in Guam solely in compliance with military orders will not qualify you as a bona fide resident of Guam.

Civilian spouse of active duty member of the U.S. Armed Forces. If, under the rule discussed at the beginning of chapter 1 (see Special rule for civilian spouse of active duty member of the U.S. Armed Forces), your tax residence is Guam, follow the guidance in the section for bona fide residents under Which Return To File, earlier. However, if your tax residence is one of the 50 states or the District of Columbia and your only income from Guam is from wages, salaries, tips, or self-employment, you will be taxed on your worldwide income and file only a U.S. tax return (Form 1040) and a state and/or local tax return, if required. If you have income from Guam other than wages, salaries, tips, or self-employment that is considered to be sourced in that possession (see Table 2-1), you may need to file Form 5074 with your U.S. tax return.

Moving expense deduction. Generally, expenses of a move to Guam are directly attributable to wages, salaries, and other earned income from Guam. Likewise, the expenses of a move back to the United States are generally attributable to U.S. earned income.

If your move was to Guam, report your deduction for moving expenses as follows.

Foreign tax credit. Under the filing rules explained earlier, individuals with Guam source income normally will not claim a foreign tax credit on a U.S. income tax return for tax paid to Guam.

Self-employment tax. If you have no U.S. filing requirement, but have income that is effectively connected with a trade or business in Guam, you must file Form 1040-SS with the United States to report your self-employment income and, if necessary, pay self-employment tax.

Additional Medicare Tax. You may be required to pay Additional Medicare Tax. Also, you may need to report Additional Medicare Tax withheld by your employer. For more information see Additional Medicare Tax under Special Rules for Completing Your U.S. Tax Return in chapter 4.

Estimated tax payments. To see if you are required to make payments of estimated income tax, self-employment tax, and/or Additional Medicare Tax, to the IRS, get Form 1040-ES.

Payment of estimated tax. If you must pay estimated tax, make your payment to the jurisdiction where you would file your income tax return if your tax year were to end on the date your first estimated tax payment is due. Generally, you should make the rest of your quarterly payments of estimated tax to the jurisdiction where you made your first payment of estimated tax. However, estimated tax payments to either jurisdiction will be treated as payments to the jurisdiction with which you file the tax return.

If you make a joint payment of estimated tax, make your payment to the jurisdiction where the spouse who has the greater estimated AGI would have to pay (if a separate payment were made). For this purpose, income is determined without regard to community property laws.

Early payment. If you make your first payment of estimated tax early, follow the rules given earlier to determine where to send it. If you send it to the wrong jurisdiction, make all later payments to the jurisdiction to which the first payment should have been sent.

To pay by check or money order, send your payment with the Form 1040-ES payment voucher to:

Department of Revenue and Taxation Taxpayer Services Division P.O. Box 23607 GMF, Guam 96921

To get information on paying electronically (by credit or debit card, or through the Electronic Federal Tax Payment System (EFTPS)), go to http://www.irs.gov/payments.

For information on making estimated income tax payments to the Department of Revenue and Taxation, see Where To Get Forms and Information, earlier.

Double Taxation

A mutual agreement procedure exists to settle cases of double taxation between the United States and Guam. See Double Taxation in chapter 4.

The U.S. Virgin Islands

The U.S. Virgin Islands has its own tax system based on the same tax laws and tax rates that apply in the United States. An important factor in USVI taxation is whether, during the entire tax year, you are a bona fide resident of the USVI.

Where To Get Forms and Information

For information about filing your U.S. Virgin Islands tax return or about Form 1040INFO, in St. Thomas contact:

Bureau of Internal Revenue 6115 Estate Smith Bay Suite 225 St. Thomas, VI 00802

You can order forms and publications by calling 340-715-1040.

You can order forms and publications through the fax at 340-774-2672.

For information about filing your U.S. Virgin Islands tax return or about Form 1040INFO, in St. Croix contact:

Bureau of Internal Revenue 4008 Estate Diamond Plot 7-B Christiansted, V.I. 00820-4421

You can order forms and publications by calling 340-773-1040.

You can order forms and publications through the fax at 340-773-1006.

You can access the USVI website at http://www.vibir.gov.

CAUTION: The addresses and phone numbers listed above are subject to change.

Which Return To File

In general, bona fide residents of the USVI pay taxes only to the USVI. U.S. citizens or resident aliens (but not bona fide residents of the USVI) with USVI source income pay a portion of the tax to each jurisdiction.

Bona Fide Resident of the USVI

File your tax return with the USVI if you are a U.S. citizen, resident alien, or nonresident alien and a bona fide resident of the USVI during the entire tax year.

If you are a bona fide resident of the USVI for the entire tax year, file your return and all attachments with the Virgin Islands Bureau of Internal Revenue at:

Bureau of Internal Revenue 6115 Estate Smith Bay St. Thomas, VI 00802

U.S. Citizen or Resident Alien (Other Than a Bona Fide Resident of the USVI)

If you are a U.S. citizen or resident alien but not a bona fide resident of the USVI during the entire tax year, you must file your original Form 1040 with the United States and an identical copy of that return with the USVI if you have:

Form 8689. Complete this form and attach it to both the return you file with the United States and the copy you file with the USVI. Figure the amount of tax you must pay to the USVI as follows:

    Total tax on

See the illustrated example in chapter 5.

De minimis exception to determining source of income. In certain situations you will not have income from a possession. See De minimis exception under Compensation for Labor or Personal Services in chapter 2.

If you are not a bona fide resident of the USVI during the entire tax year, but you have USVI source income, and you are not including a check or a money order, file Form 1040 and all attachments (including Form 8689) with the:

Department of the Treasury Internal Revenue Service Austin, TX 73301-0215 USA

If you are including a check or a money order, send your U.S. tax return and all attachments (including Form 8689) to:

Internal Revenue Service P. O. Box 1303 Charlotte, NC 28201-1303 USA

File a copy of your U.S. Form 1040 with the Virgin Islands Bureau of Internal Revenue at:

Bureau of Internal Revenue 6115 Estate Smith Bay St. Thomas, VI 00802

Nonresident Alien (Other Than a Bona Fide Resident of the USVI)

If you are a nonresident alien of the United States who does not qualify as a bona fide resident of the USVI for the entire tax year, you generally must file the following returns.

Department of the Treasury Internal Revenue Service Austin, TX 73301-0215 USA

If you are including a check or a money order, send your U.S. tax return and all attachments (including Form 8689) to:

Internal Revenue Service P.O. Box 1303 Charlotte, NC 28201-1303 USA

Send your USVI tax return and all attachments to:

Bureau of Internal Revenue 6115 Estate Smith Bay St. Thomas, VI 00802

Special Rules for the USVI

There are some special rules for certain types of income, employment, and filing status.

Joint return. If you file a joint return, you should file your return (and pay the tax) with the jurisdiction where the spouse who has the greater adjusted gross income (AGI) would have to file if you were filing separately. If the spouse with the greater AGI is a bona fide resident of the USVI during the entire tax year, file the joint return with the USVI. If the spouse with the greater AGI is a U.S. citizen or resident alien of the United States but not a bona fide resident of the USVI during the entire tax year, file the joint return with the United States. For this purpose, income is determined without regard to community property laws.

Example. Marge Birch, a U.S. citizen, was a resident of the United States, and her spouse, a citizen of the USVI, was a bona fide resident of the USVI during the entire tax year. Marge earned $55,000 as an architect in the United States. Her spouse earned $30,000 as a librarian in the USVI. Marge and her spouse will file a joint return. Because Marge has the greater AGI, she and her spouse must file their return with the United States and report the entire $85,000 on that return.

U.S. Armed Forces. If you are a member of the U.S. Armed Forces who qualified as a bona fide resident of the U.S. Virgin Islands in a prior tax year, your absence from the U.S. Virgin Islands solely in compliance with military orders will not change your bona fide residency. If you did not qualify as a bona fide resident of the U.S. Virgin Islands in a prior tax year, your presence in the U.S. Virgin Islands solely in compliance with military orders will not qualify you as a bona fide resident of the U.S. Virgin Islands.

Civilian spouse of active duty member of the U.S. Armed Forces. If, under the rule discussed at the beginning of chapter 1 (see Special rule for civilian spouse of active duty member of the U.S. Armed Forces), your tax residence is the USVI, follow the guidance in the section for bona fide residents under Which Return To File, earlier. However, if your tax residence is one of the 50 states or the District of Columbia and your only income from the USVI is from wages, salaries, tips, or self-employment, you will be taxed on your worldwide income and file only a U.S. tax return (Form 1040) and a state and/or local tax return, if required. If you have income from the USVI other than wages, salaries, tips, or self-employment that is considered to be sourced in that possession (see Table 2-1), you may need to file Form 8689 with your U.S. tax return. In this case, follow the guidance under U.S. Citizen or Resident Alien (Other Than a Bona Fide Resident of the USVI), earlier.

Moving expense deduction. Generally, expenses of a move to the USVI are directly attributable to wages, salaries, and other earned income from the USVI. Likewise, the expenses of a move back to the United States are generally attributable to U.S. earned income.

If your move was to the USVI, report your deduction for moving expenses as follows.

Foreign tax credit. Under the filing rules explained earlier, individuals with USVI source income normally will not claim a foreign tax credit on a U.S. income tax return for tax paid to the USVI. However, individuals other than bona fide residents of the USVI may claim a direct credit for such tax (see Form 8689 earlier in this section).

Self-employment tax. If you have no U.S. filing requirement, but have income that is effectively connected with a trade or business in the USVI, you must file Form 1040-SS with the United States to report your self-employment income and, if necessary, pay self-employment tax.

Additional Medicare Tax. You may be required to pay Additional Medicare Tax. Also, you may need to report Additional Medicare Tax withheld by your employer. For more information see Additional Medicare Tax under Special Rules for Completing Your U.S. Tax Return in chapter 4.

Estimated tax payments. To see if you are required to make payments of estimated income tax, self-employment tax, and/or Additional Medicare Tax, to the IRS, get Form 1040-ES.

To pay by check or money order, send your payment with the Form 1040-ES payment voucher to:

Bureau of Internal Revenue 6115 Estate Smith Bay St. Thomas, VI 00802

To get information on paying electronically (by credit or debit card, or through the Electronic Federal Tax Payment System (EFTPS)), go to http://www.irs.gov/payments.

For information on making estimated income tax payments to the Bureau of Internal Revenue, see Where To Get Forms and Information, earlier.

Extension of time to file. You can get an automatic 6-month extension of time to file your tax return. See Extension of Time To File in chapter 4. Bona fide residents of the USVI during the entire tax year must file a paper Form 4868 with the Virgin Islands Bureau of Internal Revenue. Nonresidents of the USVI should file separate extension requests with the IRS and the Virgin Islands Bureau of Internal Revenue and make any payments due to the respective jurisdictions. However, the Virgin Islands Bureau of Internal Revenue will honor an extension request that is timely filed with the IRS.

Double Taxation

A mutual agreement procedure exists to settle cases of double taxation between the United States and the U.S. Virgin Islands. See Double Taxation in chapter 4.

4. Filing U.S. Tax Returns

The information in chapter 3 will tell you if a U.S. income tax return is required for your situation. If a U.S. return is required, your next step is to see if you meet the filing requirements. If you do meet the filing requirements, the information presented in this chapter will help you understand the special procedures involved. This chapter discusses:

If you are not required to file a possession tax return that includes your worldwide income, you must generally file a U.S. income tax return if your gross income is at least the amount shown in Table 4-1, later, for your filing status and age.

If you were a bona fide resident of American Samoa or Puerto Rico and are able to exclude your possession income from your U.S. tax return, your filing requirement may be less than the amount in Table 4-1. For details, see the information under Filing Requirement if Possession Income Is Excluded, later.

Some individuals (such as those who can be claimed as a dependent on another person's return or who owe certain taxes, such as self-employment tax) must file a tax return even though the gross income is less than the amount shown in Table 4-1 for their filing status and age. For more information, see the Form 1040 instructions.

Table 4-1. 2016 Filing Requirements Chart for Most Taxpayers

 Keep for Your Records

Personal exemption. When figuring your filing requirement, your personal exemption is allowed in full. Do not reduce it for this purpose. Do not include exemptions for your dependents.

Allowable standard deduction. Unless your filing status is married filing separately, the minimum income level at which you must file a return is based, in part, on the standard deduction for your filing status and age. Because the standard deduction applies to all types of income, it must be divided between your excluded income and income from other sources. Multiply the regular standard deduction for your filing status and age (this is zero if you are married filing a separate return; all others, see Form 1040 instructions) by the following fraction:

 Gross income subject to U.S. income

               $6,300

 1. Enter the allowable standard deduction

              $13,850

Example 2. Barbara Spruce (see Example under Allowable standard deduction, earlier), however, must file a U.S. income tax return because her gross income subject to U.S. tax ($8,000) is more than her allowable standard deduction plus her personal exemption ($1,800 + $4,050 = $5,850).

TIP: If you must file a U.S. income tax return, you may be able to file electronically using IRS e-file. See your form instructions or visit IRS.gov.

When To File

If you file on a calendar year basis, the due date for filing your U.S. income tax return is April 15 following the end of your tax year. If you use a fiscal year (a year ending on the last day of a month other than December), the due date is the 15th day of the 4th month after the end of your fiscal year. If any due date falls on a Saturday, Sunday, or legal holiday, your tax return is due on the next business day.

For your 2016 tax return, the due date is April 18, 2017.

If you mail your federal tax return, it is considered timely if it bears an official postmark dated on or before the due date, including any extensions. If you use a private delivery service designated by the IRS, generally the postmark date is the date the private delivery service records in its database or marks on the mailing label. See your form instructions for a list of designated private delivery services.

Extension of Time To File

You can get an extension of time to file your U.S. income tax return. Special rules apply for those living outside the United States.

Automatic 6-Month Extension

If you cannot file your 2016 return by the due date, you can get an automatic 6-month extension of time to file.

Example. If your return must be filed by April 18, 2017, you will have until October 16, 2017, to file.

CAUTION: Although you are not required to make a payment of the tax you estimate as due, Form 4868 does not extend the time to pay taxes. If you do not pay the amount due by the regular due date (generally April 15), you will owe interest on any unpaid tax from the original due date to the date you pay the tax. You may also be charged penalties (see the Instructions for Form 4868).

How to get the automatic extension. You can get the automatic 6-month extension if you do one of the following by the due date for filing your return.

When to file. You must request the automatic extension by the due date for your return. You can file your return any time before the 6-month extension period ends.

When you file your return. Enter any payment you made related to the extension of time to file on Form 1040A, or Form 1040EZ, include that payment in your total payments on Form 1040A, line 46, or Form 1040EZ, line 9. Also enter "Form 4868" and the amount paid in the space to the left of the entry space for line 46 or line 9.

TIP: You cannot ask the Internal Revenue Service to figure your tax if you use the extension of time to file.

Individuals Outside the United States and Puerto Rico

You are allowed an automatic 2-month extension (until June 15, 2017, if you use the calendar year) to file your 2016 return and pay any federal income tax due if:

If you serve in a combat zone or qualified hazardous duty area, you may be eligible for a longer extension of time to file. For more information, see Publication 3.

Married taxpayers. If you file a joint return, only one spouse has to qualify for this automatic extension. However, if you and your spouse file separate returns, this automatic extension applies only to the spouse who qualifies.

How to get the extension. To use this special automatic extension, you must attach a statement to your return explaining what situation qualified you for the extension. (See the situations listed under (2), earlier.)

Extension beyond 2 months. If you cannot file your 2016 return within the automatic 2-month extension period, you can get an additional 4-month extension, for a total of 6 months. File Form 4868 by the end of the automatic extension period (June 15, 2017 for calendar year taxpayers). Be sure to check the box on Form 4868, line 8, if appropriate.

Extension beyond 6 months. In addition to this 6-month extension, taxpayers who are out of the country (as defined under (2) earlier) can request a discretionary 2-month additional extension of time to file their returns (to December 15 for calendar year taxpayers).

To request this extension, you must send the IRS a letter explaining the reasons why you need the additional 2 months. Send the letter by the extended due date (October 16 for calendar year taxpayers) to:

Department of the Treasury Internal Revenue Service Austin, TX 73301-0215 USA

You will not receive any notification from the IRS unless your request is denied for being untimely.

Where To File

Use the addresses listed below if you have to file Form 1040 with the United States and you are excluding possession income from American Samoa or Puerto Rico.

If you are not including a check or a money order, send your U.S. tax return and all attachments to:

Department of the Treasury Internal Revenue Service Austin, TX 73301-0215 USA

If you are including a check or a money order, send your U.S. tax return and all attachments to:

Internal Revenue Service P.O. Box 1303 Charlotte, NC 28201-1303 USA

Also send your U.S. return to these addresses if you are attaching Form 5074 or Form 8689.

If you are not in either of the above categories, send your return to the address shown in the Form 1040 instructions for the possession or state in which you reside.

Special Rules for Completing Your U.S. Tax Return

If you are not excluding possession income from your U.S. tax return, follow the instructions for the specific forms you file. However, you may not qualify to claim the earned income credit (EIC).

Earned income credit. Even if you maintain a household in one of the possessions discussed in this publication that is your main home and the home of your qualifying child, you cannot claim the earned income credit on your U.S. tax return. This credit is available only if you maintain the household in the United States or you are serving on extended active duty in the U.S. Armed Forces.

U.S. Armed Forces. U.S. military personnel stationed outside the United States on extended active duty are considered to live in the United States during that duty period for purposes of the EIC. Extended active duty means you are called or ordered to duty for an indefinite period or for a period of more than 90 days. Once you begin serving your extended active duty, you are still considered to have been on extended active duty even if you do not serve more than 90 days.

Income from American Samoa or Puerto Rico excluded. You will not be allowed to take deductions and credits that apply to the excluded income. The additional information you need follows.

Deductions if Possession Income Is Excluded

Deductions that specifically apply to your excluded possession income, such as employee business expenses, are not allowable on your U.S. income tax return.

Deductions that do not specifically apply to any particular type of income must be divided between your excluded income from sources in the relevant possession and income from all other sources to find the part that you can deduct on your U.S. tax return. Examples of such deductions are alimony payments, the standard deduction, and certain itemized deductions (such as medical expenses, charitable contributions, real estate taxes, and mortgage interest on your home).

Figuring the deduction. To find the part of a deduction that is allowable, multiply the deduction by the following fraction.

          Gross income subject to U.S. income

Your adjusted gross income equals your gross income minus certain deductions (adjustments).

Moving expense deduction. Generally, expenses of a move to a possession are directly attributable to wages, salaries, and other earned income from that possession. Likewise, the expenses of a move back to the United States are generally attributable to U.S. earned income.

If you are claiming expenses for a move to a relevant possession, how and where you will deduct the expenses depends on your status as a bona fide resident and if any of your possession income is excluded on your U.S. tax return. For more information, see Moving expense deduction in chapter 3 under the name of the relevant possession.

If you are claiming expenses for a move from a U.S. possession to the United States, use Form 1040, line 26. For purposes of deducting moving expenses, the possessions are considered part of the United States. See Publication 521, for information about what expenses are deductible.

Self-employment tax deduction. Generally, if you are reporting self-employment income on your U.S. return, you can include the deductible part of your self-employment tax on Form 1040, line 27. This is an income tax deduction only; it is not a deduction in figuring net earnings from self-employment (for self-employment tax).

However, if you are a bona fide resident of American Samoa or Puerto Rico and you exclude all of your self-employment income from gross income, you cannot take the deduction on Form 1040, line 27, because the deduction is related to excluded income.

If only part of your self-employment income is excluded, the part of the deduction that is based on the nonexcluded income is allowed. This would happen if, for instance, you have two businesses and only the income from one of them is excludable.

For purposes of the deduction only, figure the self-employment tax on the nonexcluded income by multiplying your total self-employment tax (from Schedule SE (Form 1040)), by the following fraction.

                Self-employment income

Individual retirement arrangement (IRA) deduction. Do not take excluded income into account when figuring your deductible IRA contribution.

Standard Deduction

The standard deduction is composed of the regular standard deduction amount and the additional standard deduction for taxpayers who are blind or age 65 or over.

To find the amount you can claim on Form 1040, line 40, first figure your full standard deduction according to the Instructions for Form 1040. Then multiply your full standard deduction by the following fraction.

           Gross income subject to U.S. income

CAUTION: This calculation may not be the same as the one you used to determine if you need to file a U.S. tax return.

Itemized Deductions

Most itemized deductions do not apply to a particular type of income. However, itemized deductions can be divided into three categories.

Example. In 2016, you and your spouse are both under 65 and U.S. citizens who are bona fide residents of Puerto Rico during the entire tax year. You file a joint income tax return. During 2016, you earned $20,000 from Puerto Rican sources (excluded from U.S. gross income) and your spouse earned $60,000 from the U.S. Government. You have $16,000 of itemized deductions that do not apply to any specific type of income. These are medical expenses of $4,000, real estate taxes of $5,000, home mortgage interest of $6,000, and charitable contributions of $1,000 (cash contributions). You determine the amount of each deduction that you can claim on your Schedule A (Form 1040), Itemized Deductions, by multiplying the deduction by the fraction shown under Figuring the deduction, earlier under Deductions if Possession Income is Excluded.

 Medical Expenses

Overall limitation on itemized deductions. If your adjusted gross income (discussed earlier) is over $311,300 if married filing jointly or qualifying widow(er); $285,350 if head of household; $259,400 if single; or $155,650 if married filing separately; see the Itemized Deductions Worksheet in the Instructions for Schedule A (Form 1040), to figure your itemized deductions.

Personal Exemptions

Personal exemptions are allowed in full even if excluding possession income. However, depending upon your adjusted gross income and filing status, the amount you can deduct may be reduced. See the Deduction for Exemptions Worksheet--Line 42 in the instructions for Form 1040.

Foreign Tax Credit if Possession Income Is Excluded

If you must report American Samoa or Puerto Rico source income on your U.S. tax return, you can claim a foreign tax credit for income taxes paid to the possession on that income. However, you cannot claim a foreign tax credit for taxes paid on possession income that is excluded on your U.S. tax return. The foreign tax credit is generally figured on Form 1116.

If you have income, such as U.S. Government wages, that is not excludable, and you also have possession source income that is excludable, you must figure the credit by reducing your foreign taxes paid or accrued by the taxes based on the excluded income. You make this reduction for each separate income category. To find the amount of this reduction, use the following formula for each income category.

      Excluded income

For more information on the foreign tax credit, see Publication 514.

Example. Jason and Lynn Reddy are U.S. citizens who were bona fide residents of Puerto Rico during all of 2016. They file a joint tax return. The following table shows their excludable and taxable income for U.S. federal income tax purposes.

                             Taxable      Excludable

Wages: ($15,000 ÷ $40,000) × $3,980 = $1,493

Dividend: ($200 ÷ $200) × $20 = $20

They enter $1,493 on Form 1116, line 12, for wages and $20 on the second Form 1116, line 12, for the dividend.

Self-Employment Tax

Self-employment tax includes both social security and Medicare taxes for individuals who are self-employed.

A U.S. citizen or resident alien who is self-employed must pay self-employment tax on net self-employment earnings of $400 or more. This rule applies whether or not the earnings are excludable from gross income (or whether or not a U.S. income tax return must otherwise be filed). Bona fide residents of the possessions discussed in this publication are considered U.S. residents for this purpose and are subject to the self-employment tax.

Forms to file. If you have net self-employment income and are subject to self-employment tax, file one of the following with the United States.

Use Schedule SE (Form 1040), Form 1040-SS, or Form 1040-PR, as determined above, to figure your correct amount of self-employment tax.

For other reporting requirements, see Chapter 11 Bankruptcy Cases in the Instructions for Form 1040.

Additional Medicare Tax

A 0.9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 if single, head of household, or qualifying widow(er).

Medicare wages and self-employment income are combined to determine if income exceeds the threshold. A self-employment loss should not be considered for purposes of this tax. RRTA compensation should be separately compared to the threshold.

Your employer is responsible for withholding the 0.9% Additional Medicare Tax on Medicare wages or RRTA compensation it pays to you in excess of $200,000. You should consider this withholding, if applicable, in determining whether you need to make estimated tax payments.

There are no special rules for U.S. citizens and nonresident aliens living abroad for purposes of this provision. Wages, RRTA compensation, and self-employment income that are subject to Medicare tax will also be subject to Additional Medicare Tax if in excess of the applicable threshold.

For more information, see Form 8959, and its instructions or visit http://www.irs.gov and enter the following words in the search box: Additional Medicare Tax.

CAUTION: You cannot include the Additional Medicare Tax as a deductible part of your self-employment tax.

Net Investment Income Tax

The Net Investment Income Tax (NIIT) imposes a 3.8% tax on the lesser of an individual's net investment income or the excess of the individual's modified adjusted gross income over a specified threshold amount. Bona fide residents of Puerto Rico and American Samoa who may have a federal income tax return filing obligation may be liable for the NIIT if the taxpayer's modified adjusted gross income from non-territory sources exceeds a specified threshold amount. The NIIT does not apply to any individual who is a nonresident alien with respect to the United States. Bona fide residents must take into account any additional tax liability associated with the NIIT when calculating your estimated tax payments.

Forms to file. If you are a bona fide resident of American Samoa and Puerto Rico and you are required to pay the NIIT, you must file Form 1040 with the United States and attach Form 8960. For more information, see Form 8960 and its instructions.

Paying Your Taxes

You may find that not all of your income tax has been paid through withholding by either the United States or the possession. This is often true if you have income that is not subject to withholding, such as self-employment, interest, or rental income. In this situation, you may need to make estimated tax payments.

Estimated Tax

If your estimated income tax obligation is to the United States, use the worksheet in the Form 1040-ES package to figure your estimated tax, including self-employment tax. Include the Additional Medicare Tax and Net Investment Income Tax if applicable. If you are paying by check or money order, use the payment vouchers in the Form 1040-ES package; or, you can make your payments electronically and not have to file any paper forms. See the Form 1040-ES instructions for information on making payments.

Double Taxation

Mutual agreement procedures exist to settle issues where there is inconsistent tax treatment between the IRS and the taxing authorities of the following possessions.

Competent Authority Assistance

The tax coordination agreements between the United States and the possession tax departments contain provisions allowing the competent authorities of the United States and the relevant possession to resolve, by mutual agreement, inconsistent tax treatment by the two jurisdictions.

How to make your request. Your request for competent authority assistance must be in the form of a letter addressed to the Deputy Commissioner (International) Large Business & International Division. It must contain a statement that competent authority assistance is requested under the mutual agreement procedure with the possession. You (or a person having authority to sign your federal return) must sign and date the request. For more information, see Revenue Procedure 2006-23, 2006-20 I.R.B. 900 available at http://www.irs.gov/pub/irs-irbs/irb06-49.pdf.

TIP: Revenue Procedure. 2015-40 includes procedures for requests for assistance from the U.S. competent authority arising under U.S. tax treaties. Procedures for requesting assistance of the U.S. competent authority in addressing inconsistencies in tax treatment by the IRS and a U.S. territory, are under Revenue Procedure. 2006-23 available at http://www.irs.gov/irb/2006-20_IRB/ar12.html.

Send your written request for U.S. assistance under this procedure to:

Deputy Commissioner (International) Large Business and International Division Internal Revenue Service 1111 Constitution Avenue, N.W. Routing: NC-570-03 Washington, DC 20224 (Attention: TAIT)

CAUTION: Nonresident aliens generally must present their initial request for assistance to the relevant possession tax agency.

Credit or Refund

In addition to the tax assistance request, if you seek a credit or refund of any overpayment of U.S. tax paid on the income in question, you should file a claim on Form 1040X, Amended U.S. Individual Income Tax Return. Indicate on the form that a request for assistance under the mutual agreement procedure with the possession has been filed. Attach a copy of the request to the form.

Also, you should take whatever steps must be taken under the possession tax code to prevent the expiration of the statutory period for filing a claim for credit or refund of a possession tax.

See Revenue Procedure 2006-23 (or its successor), section 5. Illustrated Examples

Use the following examples to help you complete the correct attachment to your Form 1040. The completed form for each example is shown on the pages that follow.

Illustrated Example of Form 4563

John Black is a U.S. citizen, single, and under 65. He was a bona fide resident of American Samoa during all of 2016. John received $10,800 from the rental of a condominium he owns in Florida, and $800 of dividends from U.S. corporations. John must file Form 1040 because his gross income from U.S. sources is $11,600 ($10,800 rental income, and $800 of dividends), which is more than his adjusted filing requirement for single filers under 65 ($10,350). (See Filing Requirement if Possession Income Is Excluded in chapter 4.)

Because he must file Form 1040 (not illustrated), he fills out Form 4563 to determine the amount of income from American Samoa he can exclude. See Bona Fide Resident of American Samoa in chapter 3.

Completing Form 4563. John enters his name and social security number at the top of the form.

Line 1. On Form 4563 (see later), John enters the date his bona fide residence began in American Samoa, June 2, 2015. Because he is still a bona fide resident, he enters "not ended" in the second blank space.

Line 2. He checks the box labeled "Rented house or apartment" to describe his type of living quarters in American Samoa.

Lines 3a and 3b. He checks "No" on line 3a because no family members lived with him. He leaves line 3b blank.

Lines 4a and 4b. He checks "Yes" on line 4a because he owns a rental property outside American Samoa (Florida), which he rents to an unrelated individual. He enters the relevant information on line 4b.

Line 5. He enters the name and address of his employer, Samoa Products Co. It is a private American Samoa corporation.

Line 6. He enters the dates of his 2-week vacation to New Zealand from November 11 to November 25. That was his only trip outside American Samoa during the year.

Line 7. He enters the $24,000 in wages he received from Samoa Products Co.

Line 9. He received $220 in dividends from an American Samoa corporation, which he enters here. He also received $800 of dividends from a U.S. corporation, but he will enter that amount only on his Form 1040 because the U.S. dividends do not qualify for the possession exclusion.

Line 12. John received $10,800 in rental income from his condominium in Florida, but he will enter that amount only on his Form 1040 because the rental income does not qualify for the possession exclusion.

Line 15. John totals the amounts on lines 7 and 9 to get the amount he can exclude from his gross income in 2016. He will not enter his excluded income on Form 1040. However, he will attach his completed Form 4563 to his Form 1040.

Illustrated Example of Form 5074

Tracy Grey is a U.S. citizen who is a self-employed fisheries consultant with a tax home in New York. Her only income for 2016 was net self-employment income of $80,000. Of the $80,000, $20,000 was from consulting work in Guam and the rest was earned in the United States. Thinking she would owe tax to Guam on the $20,000, Tracy made estimated tax payments of $1,409 to Guam. She was not a bona fide resident of Guam during 2016.

Tracy completes Form 1040 (not illustrated), reporting her worldwide income. Because the adjusted gross income on her Form 1040 was $50,000 or more and at least $5,000 of her gross income is from Guam, Tracy must file Form 5074 with her Form 1040. All amounts reported on Form 5074 are also reported on her Form 1040. See U.S. Citizen or Resident Alien (Other Than a Bona Fide Resident of Guam) in chapter 3.

Completing Form 5074. Tracy enters her name and social security number at the top of the form.

Part I. On Form 5074 (see later), Tracy enters her self-employment income from Guam ($20,000) on line 6. She has no other income from Guam, so the total on line 16 is $20,000.

Part II. Tracy's only adjustment in Part II is the deductible part of the self-employment tax on her net income earned in Guam. She enters $1,413 on line 21 and line 28. Her adjusted gross income on line 29 is $18,587.

Part III. Tracy made estimated tax payments of $1,409. She enters this amount on line 30, and again on line 34 as the total payments.

Illustrated Example of Form 8689

Juan and Carla Moreno live and work in the United States. In 2016, they received $14,400 in income from the rental of a condominium they own in the U.S. Virgin Islands (USVI). The rental income was deposited in a bank in the USVI and they received $500 of interest on this income. They were not bona fide residents of the USVI during the entire tax year.

The Morenos complete Form 1040 (not illustrated), reporting their income from all sources, including their interest income and the income and expenses from their USVI rental property (reported on Schedule E (Form 1040)). The Morenos take the standard deduction for married filing jointly, both are under 65, and they have no dependents.

The Morenos also complete Form 8689 to determine how much of their U.S. tax shown on Form 1040, line 63 (with certain adjustments), must be paid to the U.S. Virgin Islands. See U.S. Citizen or Resident Alien (Other Than a Bona Fide Resident of the USVI) in chapter 3.

The Morenos file their Form 1040, attaching Form 8689 and all other schedules, with the Internal Revenue Service.

At the same time, they send a copy of their Form 1040 with all attachments, including Form 8689, to the Virgin Islands Bureau of Internal Revenue. The Virgin Islands Bureau of Internal Revenue will process this copy.

Completing Form 8689. Juan and Carla enter their names and Juan's social security number at the top of the form.

Part I. The Morenos enter their income from the USVI in Part I (see later). The interest income is entered on line 2 and the net rental income of $6,200 ($14,400 of rental income minus $8,200 of rental expenses) is entered on line 11. The Morenos' total USVI income of $6,700 is entered on line 16.

Part II. The Morenos have no adjustments to their USVI income, so they enter zero (-0-) on line 28, and $6,700 on line 29. Their USVI adjusted gross income (AGI) is $6,700.

Part III. On line 30, the Morenos enter the amount from Form 1040, line 63 ($4,539). Their Form 1040 does not show any entries required on line 31, so they leave that line blank and enter $4,539 on line 32.

The Morenos enter their worldwide AGI, $54,901 (Form 1040, line 38), on line 33. Next, they find what percentage of their AGI is from USVI sources ($6,700 ÷ $54,901 = 0.122) and enter that as a decimal on line 34. They then apply that percentage to the U.S. tax entered on line 32 to find the amount of U.S. tax allocated to USVI income ($4,539 × 0.122 = $554), and enter that amount on line 35.

Part IV. Part IV is used to show payments of income tax to the USVI only. The Morenos had no tax withheld by the U.S. Virgin Islands, but made estimated tax payments to the USVI of $400, which they entered on lines 37 and 39. They include this amount ($400) in the total payments on Form 1040, line 74. On the dotted line next to the entry space for line 74, they enter "Form 8689" and show the amount. The Morenos do not complete Form 1116 because they receive credit on Form 1040, line 74, for the tax paid to the USVI.

The income tax they owe to the USVI ($154) is shown on Form 8689, line 44. They enter this amount on line 45. They also include this additional amount ($154) on the dotted line next to the entry space and in the total on Form 1040, line 74. The Morenos will pay their USVI tax at the same time they file the copy of their U.S. income tax return with the U.S. Virgin Islands.

Assistance for overseas taxpayers is available in the U.S and certain foreign locations.

Taxpayer Assistance Inside the United States

If you have questions about a tax issue, need help preparing your tax return, or want to download free publications, forms, or instructions, go to IRS.gov and find resources that can help you right away.

Preparing and filing your tax return. Find free options to prepare and file your return on IRS.gov or in your local community if you qualify.

The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally make $54,000 or less, persons with disabilities, the elderly, and limited-English-speaking taxpayers who need help preparing their own tax returns. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors.

You can go to IRS.gov and click on the Filing tab to see your options for preparing and filing your return which include the following.

Using direct deposit. The fastest way to receive a tax refund is to combine direct deposit and IRS e-file. Direct deposit securely and electronically transfers your refund directly into your financial account. Eight in 10 taxpayers use direct deposit to receive their refund. IRS issues more than 90% of refunds in less than 21 days.

Delayed refund for returns claiming certain credits. Due to changes in the law, the IRS can't issue refunds before February 15, 2017, for returns that claim the earned income credit (EIC) or the additional child tax credit (ACTC). This applies to the entire refund, not just the portion associated with these credits.

Getting a transcript or copy of a return. The quickest way to get a copy of your tax transcript is to go to IRS.gov/transcripts. Click on either "Get Transcript Online" or "Get Transcript by Mail" to order a copy of your transcript. If you prefer, you can:

Understanding an IRS notice or letter. Go to IRS.gov/notices to find additional information about responding to an IRS notice or letter.

Contacting your local IRS office. Keep in mind, many questions can be resolved on IRS.gov without visiting an IRS Tax Assistance Center (TAC). Go to IRS.gov/letushelp for the topics people ask about most. If you still need help, IRS TACs provide tax help when a tax issue can't be handled online or by phone. All TACs now provide service by appointment so you'll know in advance that you can get the service you need without waiting. Before you visit, go to IRS.gov/taclocator to find the nearest TAC, check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on "Local Offices."

Watching IRS videos. The IRS Video portal (IRSvideos.gov) contains video and audio presentations for individuals, small businesses, and tax professionals.

Getting tax information in other languages. For taxpayers whose native language isn't English, we have the following resources available. Taxpayers can find information on IRS.gov in the following languages.

The Taxpayer Advocate Service Is Here To Help You

What is the Taxpayer Advocate Service?

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights.

What Can the Taxpayer Advocate Service Do For You?

We can help you resolve problems that you can't resolve with the IRS. And our service is free. If you qualify for our assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:

We have offices in every state, the District of Columbia, and Puerto Rico. Your local advocate's number is in your local directory and at taxpayeradvocate.irs.gov. You can also call us at 1-877-777-4778.

How Can You Learn About Your Taxpayer Rights?

The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Our Tax Toolkit at taxpayeradvocate.irs.gov can help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.

How Else Does the Taxpayer Advocate Service Help Taxpayers?

TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, please report it to us at IRS.gov/sams.

Low Income Taxpayer Clinics

Low Income Taxpayer Clinics (LITCs) serve individuals whose income is below a certain level and need to resolve tax problems such as audits, appeals, and tax collection disputes. Some clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. To find a clinic near you, visit IRS.gov/litc or see IRS Publication 4134, Low Income Taxpayer Clinic List.

Taxpayer Assistance Outside the United States

If you are outside the United States, you can call 267-941-1000 (English-speaking only). This number is not toll free.

If you wish to write instead of calling, please address your letter to:

Internal Revenue Service International Accounts Philadelphia, PA 19255-0725 U.S.A.

Additional contacts for taxpayers who live outside the United States are available at http://www.irs.gov/uac/Contact-My-Local-Office-Internationally.

Taxpayer Advocate Service. If you live outside of the United States, you can call the Taxpayer Advocate at (787) 522-8601 in English or (787) 522-8600 in Spanish. You can contact the Taxpayer Advocate at:

Internal Revenue Service Taxpayer Advocate Service City View Plaza, 48 Carr 165, Guaynabo, P.R. 00968-8000

You can call the Taxpayer Advocate toll-free at 1-877-777-4778. For more information on the Taxpayer Advocate Service and contacts if you are outside of the United States go to http://www.irs.gov/Advocate/Local-Taxpayer-Advocate/Contact-Your-Local-Taxpayer-Advocate.