Important Reminders

Third party designee.   You can check the Yes box in the Third Party Designee area of your return to authorize the IRS to discuss your return with a friend, family member, or any other person you choose. This allows the IRS to call the person you identified as your designee to answer any questions that may arise during the processing of your return. It also allows your designee to perform certain actions. See your income tax package for details.

Individual taxpayer identification number (ITIN).    The IRS will issue an ITIN to a nonresident or resident alien who does not have and is not eligible to get a social security number (SSN). To apply for an ITIN, Form W-7, Application for IRS Individual Taxpayer Identification Number, must be filed with the IRS. It usually takes four to six weeks to get an ITIN. The ITIN is entered wherever an SSN is requested on a tax return. If you are required to include another person's SSN on your return and that person does not have and cannot get an SSN, enter that person's ITIN.

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.

Earned income credit (EIC).   Generally, if you are a resident of a U.S. possession, you are not eligible for the EIC. For the EIC, 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, 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 the credit, see Publication 596, Earned Income Credit (EIC).

Change of address.    If you change your mailing address, be sure to notify the Internal Revenue Service using Form 8822, Change of Address. Mail it to the Internal Revenue Service Center for your old address (addresses for the Service Centers are on the back of the form).

Photographs of missing children.   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. 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 in U.S. possessions on your U.S. tax return.

It also discusses whether you are required to file a return with the possession. American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, the Virgin Islands, and Puerto Rico have their own independent tax departments. If you have income from one 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 considered a resident of one of the possessions. In some cases, you may have to file a U.S. return, but be able to exclude income earned in a possession from U.S. tax.

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

Internal Revenue Service
International Returns Section
P.O. Box 920
Bensalem, PA 19020-8518

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 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 e-mail us while visiting our web site at www.irs.gov.

You can write to us at the following address:

Internal Revenue Service
Tax Forms and Publications
W:CAR:MP:FP
1111 Constitution Avenue, N.W.
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

Useful Items You may want to see:

Publication

• 54   Tax Guide for U.S. Citizens and Resident Aliens Abroad
• 514   Foreign Tax Credit for Individuals

Form (and Instructions)

• 1040-SS   U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico)
• 1116   Foreign Tax Credit
• 2688   Application for Additional Extension of Time To File U.S. Individual Income Tax Return
• 4563   Exclusion of Income for Bona Fide Residents of American Samoa
• 4868   Application for Automatic Extension of Time To File U.S. Individual Income Tax Return
• 5074   Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands (CNMI)
• 8689   Allocation of Individual Income Tax to the Virgin Islands

See How To Get Tax Help near the end of this publication for information about getting these publications and forms. You can get any necessary possession tax forms at the appropriate possession tax office. The office addresses are given later.

Possession Exclusion

For 2002, the possession exclusion applies only to individuals who are bona fide residents of American Samoa. However, there are also similar provisions discussed later, applicable to income derived from sources in, or income earned by residents of, Guam, Commonwealth of Northern Mariana Islands (CNMI), Puerto Rico, and the U.S. Virgin Islands.

Individuals in the following U.S. possessions or territories are not eligible for the possession exclusion discussed here.

• Baker Island
• Commonwealth of Northern Mariana Islands (CNMI)
• Guam
• Howland Islands
• Jarvis Island
• Johnston Island
• Kingman Reef
• Midway Islands
• Palmyra
• Puerto Rico
• Virgin Islands
• Wake Island

Special filing requirements apply to individuals in the CNMI, Guam, Puerto Rico, and the Virgin Islands. See Filing Requirements for Individuals in U.S. Possessions, later. Individuals in the other possessions listed above should see If You Do Not Qualify, later.

Qualifications

To qualify for the possession exclusion, you must be a bona fide resident of American Samoa for the entire tax year. For example, if your tax year is the calendar year, you must be a bona fide resident from January 1 through December 31. In addition to this time requirement, the following factors may be considered in determining bona fide residence.

• Your intent to be a resident of American Samoa, as shown by the circumstances.
• The establishment of a permanent home for you and members of your family in American Samoa for an indefinite period of time.
• Your social, cultural, and economic ties to American Samoa.
• Your physical presence for the year.

Other factors that may be considered are the nature, extent, and reasons for temporary absences; assumption of economic burdens and payment of taxes to American Samoa; existence of other homes outside of American Samoa; and place of employment.

If you were not a bona fide resident of American Samoa for all of 2002, you cannot claim the possession exclusion. See If You Do Not Qualify, later.

What Income Can Be Excluded

If you qualify as a bona fide resident of American Samoa for 2002, you can exclude income from sources in American Samoa, Guam, or the CNMI and income effectively connected with your trade or business in these possessions.

Possession source income.   Excludable income from sources within the possessions includes the following.

1. Wages, salaries, and other kinds of pay for personal services performed in the possessions. (But see U.S. Government wages, later, for an exception.)
2. Dividends received from possession sources, including those paid by:
   1. U.S. corporations that do business in the possessions and elect the Puerto Rico and possession tax credit, and
   2. Possession and foreign corporations that do business mainly in the possessions.
3. Interest on deposits paid by banks that do business mainly in the possessions, including interest paid on deposits with the possession branches of:
   1. Domestic banks with commercial banking business in the possessions, and
   2. Savings and loan associations chartered under federal or state laws.
4. Gains from the sale of securities, such as stock certificates, are from sources in the possessions if the seller's residence is in a possession and the sale is not attributable to an office or other fixed place of business maintained by the seller in the United States.

U.S. Government wages.    For purposes of the possession exclusion, possession source income does not include wages, salaries, etc., paid by the U.S. Government or any of its agencies to civilian or military employees.

Scholarships and fellowships.   The source of a scholarship or fellowship grant is generally the residence of the payer. The result is the same if payments are made by an agency acting on behalf of the payer.

Examples.   In following examples, assume that corporations chartered in American Samoa (American Samoan corporations) do business only in American Samoa, and that the U.S. and foreign corporations do not carry on business in the possessions.

Example 1.   Frank Harris, who is single, is an engineer who went to work in American Samoa for a private construction company in August 2001. He lived there for all of 2002. He is a bona fide resident of American Samoa for 2002.

During 2002, he received the following amounts of income.

Possession source income:
Samoan wages		$23,300
Nonpossession source income:
Dividends (U.S.)	400
Dividends (foreign)	100
Interest (U.S.)	1,300	1,800
Total income		$25,100

Frank's possession source income eligible for the exclusion is $23,300. Frank's remaining income ($1,800) is not possession source income and is not eligible for the exclusion.

Example 2.   Oliver Hunter was employed by a private employer in American Samoa from June 2001, through December 31, 2002. He is a bona fide resident of American Samoa for 2002.

During 2002, he received the following amounts of income.

Possession source income:
Samoan wages	$16,000
Guam interest	500
		$16,500
Nonpossession source income:
U.S. dividends	2,000
Short-term capital gain from sale of U.S. stock	4,000	6,000
Total income		$22,500

Oliver's possession source income of $16,500 is eligible for the exclusion. Oliver's remaining income ($6,000) is not possession source income and is not eligible for the exclusion.

Deductions and Credits

You can neither deduct nor claim a credit for items connected to your possession income that you exclude from gross income on your U.S. income tax return. See Filing Tax Returns, later, to find out if you have to file a U.S. income tax return.

Items that do not apply to a particular type of income must be divided between your excluded income from possession sources and income from all other sources to find the amount you can deduct on your U.S. tax return. Examples of these items are medical expenses, real estate taxes, mortgage interest on your home, and charitable contributions.

Figuring the deduction.   To figure the amount of an item you can deduct on your U.S. income tax return, multiply the amount by the following fraction.

Gross income from sources outside the possessions / Total gross income from all sources (including excluded possession income)

Standard deduction.    The standard deduction does not apply to a particular type of income. It must be divided between your excluded income and income from other sources. This division must be made before you can determine if you must file a U.S. tax return, because the minimum income level at which you must file a return is based, in part, on the standard deduction for your filing status.

Example.   Barbara Jones, a U.S. citizen, is single, under 65, and a bona fide resident of American Samoa. During 2002, she received $20,000 of income from Samoan sources and $5,000 of income from sources outside the possessions. She does not itemize her deductions. Her allowable standard deduction for 2002 is figured as follows:

$5,000/$25,000

×

$4,700 (standard deduction)

=

$940

Foreign tax credit.    If you must report possession source income on your U.S. tax return, you can claim a foreign tax credit for income taxes paid in the possessions on that income. You cannot claim a foreign tax credit for taxes paid on excluded possession income. 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 have income from possession sources 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 must make this reduction for each separate income category. To find the amount of this reduction, use the following formula for each income category.

Formula 3

For more information on foreign tax credit, get Publication 514.

Personal exemptions.    Personal exemptions are allowed in full. They are not divided. However, they may be phased out depending upon your adjusted gross income and filing status.

Moving expenses.    If you are claiming expenses for a move to a U.S. possession from the United States, or from a U.S. possession to the United States, use Form 3903, Moving Expenses. These are not considered foreign moves. Get Publication 521, Moving Expenses, for more information.

If You Do Not Qualify

If you do not qualify for the possession exclusion because you are not a bona fide resident of American Samoa (as explained earlier), or not a bona fide resident of American Samoa for the entire year, figure your tax liability in the usual manner. Report all your taxable income, including income from foreign and possession sources, and claim all allowable exemptions, deductions, and credits, following the instructions for Form 1040.

You can take a credit against your U.S. tax liability if you paid income taxes to a foreign country or a possession and reported income from sources outside the United States on your U.S. tax return. Get Form 1116 to determine your credit and whether you must attach Form 1116 to your Form 1040. For more information, see Publication 514.

First | Next

Publication Index | 2002 Tax Help Archives | Tax Help Archives | Home