Illustrated Example of Form 8689

Bill and Jane Smith live and work in the United States. In 2001, they received $14,400 in income from the rental of a condominium they own in the Virgin Islands. The rental income was deposited in a bank in the Virgin Islands and they received $500 of interest on this income. They were not bona fide residents of the Virgin Islands at the end of the year.

The Smiths complete Form 1040, reporting their income from all sources. They report their wages, interest income, and the income and expenses from their Virgin Islands rental property (Schedule E, Form 1040). They got the full advance payment of their 2001 taxes in 2001.

The Smiths also complete Form 8689 to determine how much of their U.S. tax shown on line 58 of Form 1040 (with certain adjustments) is due to the Virgin Islands. This is the amount the Smiths must pay to the Virgin Islands.

The Smiths 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 schedules, including Form 8689, to the Virgin Islands Bureau of Internal Revenue. This copy will be processed as their original Virgin Islands return.

Completing Form 8689. Bill and Jane enter their names, present home address, and social security numbers at the top of the form.

Part I. The Smiths enter their income from the Virgin Islands in Part I. 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 Smiths' total Virgin Islands income of $6,700 is entered on line 16.

Part II. The Smiths have no adjustments to their Virgin Islands income, so they enter zero (-0-) on line 25, and $6,700 on line 26. Their Virgin Islands adjusted gross income is $6,700.

Part III. On line 27, the Smiths enter the amount from line 58, Form 1040 ($5,449). The amount on Form 8689, line 27, is before any credit for taxes paid to the Virgin Islands.

The Smiths enter their worldwide adjusted gross income, $49,737, (line 34, Form 1040) on line 30. They divide their Virgin Islands adjusted gross income, $6,700 (from line 26), by line 30. They multiply this decimal, .135, by the amount on line 29 to find the amount of tax due to the Virgin Islands (line 32). The Smiths include this amount ($736) in the total on Form 1040, line 66. On the dotted line next to line 66, they print "Form 8689" and show the amount. The Smiths do not complete Form 1116.

Part IV. Part IV is used to show payments of income tax to the Virgin Islands only. The Smiths had no tax withheld by the Virgin Islands, but made estimated tax payments to the Virgin Islands of $700, which are shown on lines 34 and 36. The income tax the Smiths owe to the Virgin Islands ($36) is shown on line 40. They must pay their Virgin Islands tax at the same time they file the copy of their return with the Virgin Islands.

Form 8689, page 1 for Bill and Jane Smith

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