Possession source income.

Excludable income from sources within the possessions includes the following.

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 the 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.

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.

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.

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.

For more information on the 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.

Bona fide residents of American Samoa.

If you qualify for the possession exclusion and all of your income is from sources in American Samoa, Guam, or the CNMI, or is effectively connected with your trade or business in these possessions, you do not have to file a U.S. income tax return.

Form 4563.

If you must file a U.S. income tax return and you qualify for the possession exclusion, claim the exclusion by attaching Form 4563 to Form 1040. Form 4563 cannot be filed by itself. There is an example of a filled-in Form 4563 near the end of this publication.

Extensions of time to file.

If you live outside the United States and Puerto Rico and have your main place of business or post of duty outside the United States and Puerto Rico on the regular due date of your return, you are automatically granted a 2-month extension to file your return. If you file on a calendar year basis, you have until June 15. This extension is also available if you are on military duty outside the United States and Puerto Rico. Your assigned tour of duty outside the United States and Puerto Rico must include the entire due date of your return.

If you use this automatic 2-month extension, you must attach a statement to your return showing that you qualify for it. You must pay interest on any unpaid tax from the original due date (April 15 if you file a calendar year return) to the date you pay the tax.

Married persons.

If you and your spouse file a joint return, only one of you needs to meet the qualifications discussed above to take advantage of the automatic extension to June 15 for filing your tax return.

If you file separate returns instead of a joint return, only the spouse who meets the qualifications can use the automatic extension.

4-month extension.

You can get an automatic 4-month extension of time to file your tax return if you do one of the following by the due date for filing your return.

See Form 4868 for information on getting an extension using these options.

You must estimate your tax liability for the year and, if you think you owe tax, you can make a payment. You will be charged interest on any tax not paid by the regular due date of your return, and you may be charged a penalty for the late payment. Any payment you made with the application for extension should be entered on line 66 of Form 1040.

U.S. citizens or residents living outside the United States.

If you live outside the United States and Puerto Rico and you qualify for the automatic 2-month extension (discussed earlier), you can file a paper Form 4868 by June 15 to get an additional 2 months to file. Print “Taxpayer Abroad” across the top of Form 4868. You cannot request this extension by phone or computer.

Extension beyond 4 months.

Further extensions of the time to file are granted only under very unusual circumstances. If you need additional time to file, apply for the extension either in a letter or by filing Form 2688. Extensions beyond the 4-month automatic extension are not granted as a matter of course. You must show reasonable cause.

Except in undue hardship cases, an application for extension on Form 2688 will not be accepted until you have taken advantage of the automatic 4-month extension.

Where to file.

If you have to file Form 1040 with the United States, and you use Form 4563 to exclude income from American Samoa, Guam, and the CNMI, file your return with the Internal Revenue Service Center, Philadelphia, PA 19255–0215. If you do not qualify for the possession exclusion, mail your return to the address shown for the possession or state in which you reside in the Form 1040 instructions.

E-file.

If you must file a U.S. income tax return, you may be able to file a paperless return using IRS e-file. See your form instructions or visit our web site at www.irs.gov.

Self-employment tax form.

If you have to file Form 1040 with the United States, figure your self-employment tax on Schedule SE (Form 1040) and attach it to Form 1040.

If you are a resident of American Samoa, Guam, the CNMI, Puerto Rico, or the Virgin Islands who has net self-employment income, and you do not have to file Form 1040 with the United States, use Form 1040–SS to figure your self-employment tax.

If you are a resident of Puerto Rico, you can file Form 1040–PR instead of Form 1040–SS. Form 1040–PR is the Spanish-language version of Form 1040–SS.

Self-employment tax deduction.

You can deduct one-half of your self-employment tax on line 28 of Form 1040 in figuring adjusted gross income. This is an income tax deduction only; it is not a deduction in figuring net earnings from self-employment.

If you are a bona fide resident of American Samoa or Puerto Rico, and you exclude your self-employment income from gross income, you cannot take the deduction on line 28 of Form 1040 because the deduction is related to excluded income.

If part of your self-employment income is excluded, only 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.

Figure the tax on the nonexcluded income by multiplying your total self-employment tax (from Schedule SE) by the following fraction.

The result is your self-employment tax on nonexcluded income. You can deduct one-half of this amount on line 28 of Form 1040.

Credit or refund.

In addition to the tax assistance request, if you seek a credit or refund of any overpayment of United States 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.

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.

If you are neither a resident of Guam nor a resident of the United States at the end of your tax year, you should file with Guam if you are a citizen of Guam but not otherwise a citizen of the United States (born or naturalized in Guam). If you are a U.S. citizen or resident but not otherwise a citizen or resident of Guam, you should file with the United States.

Joint return.

If you file a joint return, you should file it (and pay the tax) with the jurisdiction where the spouse who has the greater adjusted gross income would have to file (if you were filing separately). If the spouse with the greater adjusted gross income is a resident of Guam at the end of the tax year, file the joint return with Guam. If the spouse with the greater adjusted gross income is a resident of the United States at the end of the tax year, file the joint return with the United States. For this purpose, income is determined without regard to community property laws.

U.S. military employees.

If you are a member of the U.S. Armed Forces stationed on Guam, you are not considered a resident of Guam and you must file your return with the United States. However, if you are a member of the military and a citizen of Guam, or if you are a civilian employee of the military, you are subject to the same rules described in the previous paragraphs.

Income tax withheld.

Take into account tax withheld by both jurisdictions in determining if there is tax due or an overpayment.

Payment of estimated tax.

If you have to 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 estimated tax payment is first due. Generally, you should make your quarterly payments of estimated tax to the jurisdiction where you made your original estimated tax payment. 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 adjusted gross income would have to pay (if a separate payment were made). For this purpose, income is determined without regard to community property laws.

Early payment of estimated tax.

If you make your first payment of estimated tax early and you do not send it to the jurisdiction to which you should have sent it if you had not made it early, make all later payments to the jurisdiction to which the first payment should have been made had you not made it early.

Estimated tax form.

If your estimated 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. 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.

Information return.

If your adjusted gross income from all sources is at least $50,000, your gross income consists of at least $5,000 from sources in Guam, and you file a U.S. income tax return, attach Form 5074 to Form 1040.

Double taxation.

A mutual agreement procedure exists to settle cases of double taxation between the United States and Guam. See Double Taxation under Filing U.S. Tax Returns, earlier.

If you are a resident of the CNMI on the last day of your tax year, you should file your return with the Division of Revenue and Taxation at the address above.

Include income from worldwide sources on the CNMI return. Include any balance of tax due with your tax return.

If you are a resident of the United States on the last day of your tax year, you should file your return with the Internal Revenue Service Center, Philadelphia, PA 19255–0215.

Include income from worldwide sources on the U.S. return. Include any balance of tax due with your tax return.

If you are neither a resident of the CNMI nor a resident of the United States at the end of your tax year, but you are a citizen of the CNMI, you should file with the CNMI Division of Revenue and Taxation. File with the Internal Revenue Service Center if you are a citizen of the United States.

Joint return.

If you file a joint return, you should file it (and pay the tax) with the jurisdiction where the spouse who has the greater adjusted gross income would have to file (if you were filing separately). If the spouse with the greater adjusted gross income is a resident of the CNMI at the end of the tax year, file the joint return with the CNMI. If the spouse with the greater adjusted gross income is a resident of the United States at the end of the tax year, file the joint return with the United States. For this purpose, income is determined without regard to community property laws.

Income tax withheld.

Take into account income tax withheld by both jurisdictions in determining if there is tax due or an overpayment.

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

Early payment of estimated tax.

If you make your first payment of estimated tax early and you do not send it to the jurisdiction to which you should have sent it if you had not made it early, make all later payments to the jurisdiction to which the first payment should have been made had you not made it early.

Estimated tax form.

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. 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.

Information return.

If your adjusted gross income from all sources is at least $50,000, your gross income consists of at least $5,000 from sources in the CNMI, and you file a U.S. income tax return, attach Form 5074 to Form 1040.

Residents of American Samoa.

If you are a U.S. citizen and a resident of American Samoa, you must report your gross income from worldwide sources on your Samoan tax return. If you report non-Samoan source income on your Samoan tax return, you can claim a credit against your Samoan tax liability for income taxes paid on that income to the United States, a foreign country, or another possession.

If you are a resident of American Samoa for part of the tax year and you then leave American Samoa, you must file a tax return with American Samoa for the part of the year you were present in American Samoa.

Bona fide residents of American Samoa include military personnel whose official home of record is American Samoa.

Nonresidents of American Samoa.

If you are a nonresident of American Samoa, you should report only income from Samoan sources on your Samoan tax return. U.S. citizens residing in American Samoa are considered residents of American Samoa for income tax purposes.

U.S. Government employees.

If you are employed in American Samoa by either the U.S. Government or any of its agencies, or by the Government of American Samoa, you are subject to tax by American Samoa on your pay from either government. Whether you are subject to tax by American Samoa on your non-Samoan source income depends on your status as a resident or nonresident.

Wages and salaries paid by the Governments of the United States and American Samoa to U.S. citizens are also subject to U.S. federal income tax. These payments do not qualify for the possession exclusion, discussed earlier.

If you report government wages on both your U.S. and Samoan tax returns, you can take a credit on your U.S. tax return for income taxes paid or accrued to American Samoa. Figure that credit on Form 1116, and attach that form to your U.S. tax return, Form 1040. Show your wages paid for services performed in American Samoa on line 1 of Form 1116 as income from sources in a possession.

Estimated tax.

Use the worksheet in the Form 1040–ES package to figure your estimated tax, including self-employment tax. 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.

A mutual agreement procedure exists to settle cases of double taxation between the United States and American Samoa. See Double Taxation under Filing U.S. Tax Returns, earlier.

Resident of the Virgin Islands.

If you are a bona fide resident of the Virgin Islands on the last day of the tax year, you must file your tax return on Form 1040 with the Government of the Virgin Islands and pay the entire tax due to the Virgin Islands. You do not have to file with the IRS for any tax year in which you are a bona fide resident of the Virgin Islands on the last day of the year, provided you report and pay tax on your income from all sources to the Virgin Islands and identify the source(s) of the income on the return. If you have non-Virgin Islands source income, you must also file Virgin Islands Form 1040 INFO, Non-Virgin Islands Source Income of Virgin Islands Residents, with the Virgin Islands Bureau of Internal Revenue.

You can get Form 1040 INFO by contacting:

The telephone number is (340) 774–5865. The fax number is (340) 714–9336.

Non-Virgin Islands resident with Virgin Islands income.

If you are not a bona fide resident of the Virgin Islands on the last day of your tax year, you must file identical tax returns with the United States and the Virgin Islands if you have:

File the original return with the United States and file a copy of the U.S. return (including all attachments, forms, and schedules) with the Virgin Islands Bureau of Internal Revenue by the due date for filing Form 1040.

The amount of tax you must pay to the Virgin Islands is figured as follows:

Form 8689.

Use Form 8689 to make this computation. You must complete this form and attach it to each copy of your return. You should pay any tax due to the Virgin Islands when you file your return with the Virgin Islands Bureau of Internal Revenue. You receive credit for taxes paid to the Virgin Islands by including the amount on Form 8689, line 38, in the total on Form 1040, line 68. On the dotted line next to line 68, enter “Form 8689” and show the amount.

See the illustrated example at the end of this publication.

Where to file.

If you are not a bona fide resident of the Virgin Islands, but you have income from the Virgin Islands, you must file Form 1040 and all attachments with the Internal Revenue Service Center, Philadelphia, PA 19255–0215, and with the Virgin Islands Bureau of Internal Revenue.

If you are a bona fide resident of the Virgin Islands, you should file your return with:

Contact that office for information about filing your Virgin Islands tax return.

Extensions of time to file.

You can get an automatic 4-month extension of time to file your tax return. See Extensions of time to file under Filing U.S. Tax Returns, earlier. Bona fide residents of the Virgin Islands must file paper Form 4868 with the Virgin Islands Bureau of Internal Revenue. Non-Virgin Islands residents 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 was timely filed with the IRS.

If you need more time after filing Form 4868, file Form 2688. For more information, see the Form 2688 instructions.

Double taxation.

A mutual agreement procedure exists to settle cases of double taxation between the United States and the Virgin Islands. See Double Taxation under Filing U.S. Tax Returns, earlier.

Residents of Puerto Rico.

If you are a U.S. citizen and also a resident of the Commonwealth of Puerto Rico for the entire tax year, you generally must include income from worldwide sources on your Puerto Rican return. Wages and cost-of-living allowances paid by the U.S. Government for working in Puerto Rico are subject to Puerto Rican tax. However, cost-of-living allowances paid by the U.S. government are exempt from Puerto Rican tax if you meet certain requirements. Advice about possible tax benefits under the Puerto Rican investment incentive programs is available from the Puerto Rican tax authorities. If you report U.S. source income on your Puerto Rican tax return, you can claim a credit against your Puerto Rican tax, up to the amount allowable, for income taxes paid to the United States.

Nonresidents of Puerto Rico.

If you are a U.S. citizen and are not a resident of Puerto Rico, include only your income from Puerto Rican sources on your Puerto Rican return. Wages for services performed in Puerto Rico for the U.S. Government or for private employers is income from Puerto Rican sources.

U.S. taxation.

As a U.S. citizen, you must report gross income from worldwide sources, regardless of where you live. However, a special rule applies if you are a bona fide resident of Puerto Rico for an entire tax year, or have been a bona fide resident of Puerto Rico for at least 2 years and later change your residence from Puerto Rico during a tax year.

Income.

Under the special rule, income you receive from Puerto Rican sources during your residence in Puerto Rico is exempt from U.S. tax. This includes income for the period of Puerto Rican residence in the year you change your residence from Puerto Rico if you resided there at least 2 years before the change. However, income you receive for services performed in Puerto Rico as an employee of the United States is not exempt from U.S. income tax.

Deductions and credits.

Deductions and credits that specifically apply to your exempt Puerto Rican income 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 income from Puerto Rican sources and income from all other sources to find the part that you can deduct on your U.S. tax return. Examples of deductions that do not specifically apply to a particular type of income are alimony payments, the standard deduction, and certain itemized deductions (such as medical expenses, charitable contributions, and real estate taxes and mortgage interest on your home).

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

SCHEDULE A (Form 1040) –

Itemized deductions should be modified as shown below:

Medical Expenses

Real Estate Taxes

Home Mortgage Interest

Charitable Contributions

(cash contributions)

Enter on Schedule A (Form 1040) only the allowable portion of each deduction.

Personal exemptions

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

Standard deduction.

The standard deduction does not specifically apply to any particular type of income. To find the amount you can claim on line 37 of Form 1040, multiply your standard deduction by the fraction given earlier. In the space above line 37, print “Standard deduction modified due to exempt income under section 933.”

Make this computation before you 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.

Foreign tax credit.

If you are a U.S. citizen and your Puerto Rican income is not exempt, you must report that income on your U.S. tax return along with income from sources outside Puerto Rico. However, you can claim a foreign tax credit, figured on Form 1116, for income taxes paid to Puerto Rico on the Puerto Rican income that is not exempt.

You cannot claim a foreign tax credit for taxes paid on exempt income. If you have income from Puerto Rican sources, such as U.S. Government wages, that is not exempt, and you have income from Puerto Rican sources that is exempt, you must figure the credit by reducing your foreign taxes paid or accrued by the taxes based on the exempt 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.

You enter the amount of the reduction on line 12 of Form 1116.

Earned income credit.

Even if you maintain a household in Puerto Rico that is your principal 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 Armed Forces of the United States.

Additional child 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.

If your income exceeds certain levels, you may be disqualified from receiving this credit. This credit may be claimed using Form 1040–PR or Form 1040–SS.

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. 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.

A mutual agreement procedure exists to settle cases of double taxation between the United States and the Commonwealth of Puerto Rico. See Double Taxation under Filing U.S. Tax Returns, earlier.

Line 1.

John enters the date his bona fide residence began in American Samoa, June 2, 2002. Because he is still a bona fide resident, he prints “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 “No” on line 4a because he did not maintain a home outside American Samoa. He leaves line 4b blank.

Line 5.

He enters the name and address of his employer, Samoa Products Co. It is a private Samoan 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 dividends of $100 from a CNMI corporation and $220 from a Samoan corporation. He enters the total of those amounts. He does not enter his dividends from U.S. corporations because they do 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 2003.

Completing Form 8689.

Gerald and Lily enter their names and Gerald's social security number 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 26, and $6,700 on line 27. Their Virgin Islands adjusted gross income is $6,700.

Part III. On line 28, the Smiths enter the amount from line 60, Form 1040 ($5,199). They leave line 29 blank and put this same amount on line 30.

The Smiths enter their worldwide adjusted gross income, $54,901, (line 35, Form 1040) on line 31. They divide their Virgin Islands adjusted gross income, $6,700 (from line 27), by line 31. They multiply this decimal, .122, by the amount on line 30 to find the amount of tax allocated to the Virgin Islands (line 33).

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 $600, which are shown on lines 35 and 37. The Smiths include this amount ($600) in the total on Form 1040, line 68. On the dotted line next to line 68, they print “Form 8689” and show the amount. The Smiths do not complete Form 1116. The income tax the Smiths owe to the Virgin Islands ($34) is shown on line 42. They must pay their Virgin Islands tax at the same time they file the copy of their return with the Virgin Islands.

Contacting your Taxpayer Advocate.

If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.

The Taxpayer Advocate independently represents your interests and concerns within the IRS by protecting your rights and resolving problems that have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.

To contact your Taxpayer Advocate:

For more information, see Publication 1546, The Taxpayer Advocate Service of the IRS.

Free tax services.

To find out what services are available, get Publication 910, Guide to Free Tax Services. It contains a list of free tax publications and an index of tax topics. It also describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics.