| Pub. 570, Tax Guide for Individuals With Income From U.S. Possessions |
2005 Tax Year |
1.
Bona Fide Residence
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:
-
Meet the presence test,
-
Do not have a tax home outside the relevant possession, and
-
Do not have a closer connection to the United States or to a foreign country than to the relevant possession.
New rules.
Recently issued temporary and final regulations define the requirements for meeting these three tests. Each regulation
has a different effective
date. The rules under the final regulation are mandatory for your 2006 return (for tax years ending after January 31, 2006).
However, transition rules
allow you to choose which set of requirements to apply to your 2004 and 2005 tax returns.
2005 tax year—tax years beginning after October 22, 2004.
For 2005, you may choose to meet the three bona fide residence tests using either of the following.
-
Final regulation: follow the rules discussed in this chapter.
-
Temporary regulation: see Temporary Regulations section 1.937-1T on page 1039 of Internal Revenue Bulletin 2005-20, available
at
www.irs.gov/pub/irs-irbs/irb05-20.pdf.
Generally, it will be to your advantage to use the rules discussed in this chapter rather than those in the temporary regulation.
2004 tax year—tax years beginning before October 23, 2004, and ending after October 22, 2004.
For 2004, you may use either of the following to determine if you are a bona fide resident.
-
Temporary regulation: see Temporary Regulations section 1.937-1T(b)(4) for requirements, which generally include the tax home
and closer
connection tests.
-
Old rules (facts-and-circumstances test for U.S. citizens and resident aliens): see the rules in effect for tax years beginning
before
October 23, 2004, in the 2004 revision of Publication 570.
Special rule for members of the U.S. Armed Forces.
If a member of the U.S. Armed Forces qualified as a bona fide resident of the relevant possession in an earlier tax
year, his or her absence from
that possession during the current tax year in compliance with military orders will not affect the individual's status as
a bona fide resident.
Likewise, being in a possession solely in compliance with military orders will not qualify an individual for bona fide residency.
Also see the special
income source rule for members of the U.S. Armed Forces in chapter 2, under Personal Services.
If you became a bona fide resident before October 23, 2004, you must meet the new presence test for tax years beginning after
October 22, 2004, in
order to continue in that status. If you are a calendar year taxpayer, this applies to your tax returns for 2005 and later
years.
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.
-
You were present in the relevant possession for at least 183 days during the tax year.
-
You were present in the United States for no more than 90 days during the tax year.
-
You had earned income in the United States of no more than a total of $3,000 and were present for more days in the relevant
possession than
in the United States during the tax year. Earned income is pay for personal services performed, such as wages, salaries, or
professional
fees.
-
You had no significant connection to the United States during the tax year.
Special rule for nonresident aliens.
Conditions (1) through (4) above do not apply to nonresident aliens of the United States. Instead, nonresident aliens
must meet the substantial
presence test discussed in chapter 1 of Publication 519. In that discussion, substitute the name of the possession for “ United States” and
“ U.S.” wherever they appear. Also disregard the discussion in that chapter about a Closer Connection to a Foreign Country.
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.
-
Any day you are physically present in that possession at any time during the day,
-
Any day you are outside of the relevant possession in order to receive, or to accompany any of the following family members
to receive,
qualifying medical treatment (defined on the next page).
-
Your parent.
-
Your spouse.
-
Your child, who is your son, daughter, stepson, stepdaughter, adopted child, or eligible foster child.
-
Any day you are outside the relevant possession because you leave or are unable to return to the relevant possession during
any:
-
14-day period within which a major disaster occurs in the relevant possession for which a Federal Emergency Management Agency
(FEMA) notice
of a Presidential declaration of a major disaster is issued in the Federal Register, or
-
Period for which a mandatory evacuation order is in effect for the geographic area in the relevant possession in which your
main home is
located.
If, during a single day, you are physically present:
-
In the United States and in the relevant possession, that day is considered a day of presence in the relevant possession;
and
-
In two possessions, that day is considered a day of presence in the possession where your tax home is located (see Tax Home,
later).
Adopted child.
An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for
legal adoption.
Eligible foster child.
An eligible foster child is any child placed with you by an authorized placement agency or by judgment, decree, or
other order of any court of
competent jurisdiction.
Days of presence in the United States.
You are considered to be present in the United States on any day that you are physically present in the United States
at any time during the day.
However, do not count the following days as days of presence in the United States.
-
Any day you are temporarily present in the United States in order to receive, or to accompany a parent, spouse, or child who
is receiving,
qualifying medical treatment. “Child” is defined under item 2c in the previous column. “Qualifying medical treatment” is defined on the next
page.
-
Any day you are in the United States for less than 24 hours when you are traveling between two places outside the United States.
-
Any day you are temporarily present in the United States as a professional athlete to compete in a charitable sports event
(defined on the
next page).
-
Any day you are temporarily in the United States as a student (defined on the next page).
-
Any day you are in the United States serving as an elected representative of the relevant possession, or serving full time
as an elected or
appointed official or employee of the government of that possession (or any of its political subdivisions).
-
Any day you are temporarily present in the United States because you leave or are unable to return to the relevant possession
during
any:
-
14-day period within which a major disaster occurs in the relevant possession for which a Federal Emergency Management Agency
(FEMA) notice
of a Presidential declaration of a major disaster is issued in the Federal Register, or
-
Period for which a mandatory evacuation order is in effect for the geographic area in the relevant possession in which your
main home is
located.
Qualifying Medical Treatment
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:
-
Any period of inpatient care that requires an overnight stay in a hospital or hospice, and any period immediately before or
after that
inpatient care to the extent it is medically necessary, or
-
Any temporary period of inpatient care in a residential medical care facility for medically necessary rehabilitation services.
With respect to each qualifying medical treatment, you must prepare (or obtain) and maintain documentation supporting your
claim that such
treatment meets the criteria to be considered days of presence in the relevant possession. You must keep the following documentation.
-
Records that provide:
-
The patient's name and relationship to you (if the medical treatment is provided to a person you accompany);
-
The name and address of the hospital, hospice, or residential medical care facility where the medical treatment was provided;
-
The name, address, and telephone number of the physician who provided the medical treatment;
-
The date(s) on which the medical treatment was provided; and
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Receipt(s) of payment for the medical treatment.
-
Signed certification by the providing or supervising physician that the medical treatment met the requirements for being qualified
medical
treatment, and setting forth:
-
The patient's name,
-
A reasonably detailed description of the medical treatment provided by (or under the supervision of) the physician,
-
The dates on which the medical treatment was provided, and
-
The medical facts that support the physician's certification and determination that the treatment was medically necessary.
A charitable sports event is one that meets all of the following conditions.
-
The main purpose is to benefit a qualified charitable organization.
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The entire net proceeds go to charity.
-
Volunteers perform substantially all the work.
In figuring the days of presence in the United States, you can exclude only the days on which you actually competed in the
charitable sports event.
You cannot exclude the days on which you were in the United States to practice for the event, to perform promotional or other
activities related to
the event, or to travel between events.
To qualify as a student, you must be, during some part of each of any 5 calendar months during the calendar year:
-
A full-time student at a school that has a regular teaching staff, course of study, and regularly enrolled body of students
in attendance,
or
-
A student taking a full-time, on-farm training course given by a school described in (1) above or by a state, county, or local
government
agency.
The 5 calendar months do not have to be consecutive.
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.
School.
The term “ school” includes elementary 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 Internet schools.
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:
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Have a permanent home in the United States,
-
Are currently registered to vote in any political subdivision of the United States, or
-
Have a spouse or child (see item 2c under Days of presence in a possession, earlier) who is under age 18 whose main home is in
the United States, other than:
-
A child who is in the United States because he or she is the child of divorced or legally separated parents and who is living
with a
custodial parent under a custodial decree or multiple support agreement, or
-
A child who is in the United States as a student.
For the purpose of determining if you have a significant connection to the United States, the term “spouse” does not include a spouse from
whom you are legally separated under a decree of divorce or separate maintenance.
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 a permanent home only if you or your spouse uses that property for personal purposes for more than the greater
of:
You are treated as using rental property for personal purposes on any day the property is not being rented to someone
else at fair rental value for
the entire day.
A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons.
-
You or any other person who has an interest in it, unless you rent it to another owner as his or her main home under a shared
equity
financing agreement.
-
A member of your family or a member of the family of any other person who has an interest in it, unless the family member
uses the dwelling
unit as his or her main home and pays a fair rental price. Family includes only brothers and sisters, half-brothers and half-sisters,
spouses,
ancestors (parents, grandparents, etc.) and lineal descendants (children, grandchildren, etc.).
-
Anyone under an arrangement that lets you use some other dwelling unit.
-
Anyone at less than a fair rental price.
However, any day you spend working substantially full time repairing and maintaining (not improving) your property
is not counted as a day of
personal use. Whether your property is used mainly for this purpose is determined in light of all the facts and circumstances,
such as:
-
The amount of time you devote to repair and maintenance work,
-
How often during the tax year you perform repair and maintenance work on this property, and
-
The presence and activities of companions.
See Publication 527, Residential Rental Property, for more information about personal use of a dwelling unit.
Example—significant connection.
Ann Green, a U.S. citizen, is a sales representative for a company based in Guam. Ann lives with her husband 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 2005, they spent only 175 days in the CNMI because of a 70-day vacation
to Europe and Asia.
Thus, in 2005, 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.
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.
There are some special rules that provide exceptions to the general rule stated above. You will be considered to have met
the tax home test if any
of the following situations apply.
Students and Government Officials
Disregard the following days when determining whether you have a tax home outside the relevant possession.
-
Days you were temporarily in the United States as a student (see Student under Days of Presence in the United States or
Relevant Possession).
-
Days you were in the United States serving as an elected representative of the relevant possession, or serving full time as
an elected or
appointed official or employee of the government of that possession (or any of its political subdivisions).
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 three 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 2005, 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 wife 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.
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.
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.
-
The location of your permanent home.
-
The location of your family.
-
The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by you and your family.
-
The location of social, political, cultural, or religious organizations with which you have a current relationship.
-
The location where you conduct your routine personal banking activities.
-
The location where you conduct business activities (other than those that go into determining your tax home).
-
The location of the jurisdiction in which you hold a driver's license.
-
The location of the jurisdiction in which you vote.
-
The country of residence you designate on forms and documents.
-
The types of official forms and documents you file, such as Form W-8BEN, Certificate of Foreign Status of Beneficial Owner
for United States
Tax Withholding, or Form W-9, Request for Taxpayer Identification Number and Certification.
Your connections to the relevant possession will be compared to the total of your connections with the United States and foreign
countries. Your
answers to the questions on Form 8898, Part III, will help establish the jurisdiction to which you have a closer connection.
Example—closer connection to the United States.
Marcos Reyes, a U.S. citizen, moved to Puerto Rico in 2005 to start an investment consulting and venture capital business.
His wife 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 wife 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 wife 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 2005 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 husband 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.
-
You have not been a bona fide resident of the relevant possession in any of the 3 tax years immediately preceding your move.
-
You do not have a tax home outside the relevant possession or a closer connection to the United States or a foreign country
than to the
relevant possession during any of the last 183 days of the tax year.
-
You are a bona fide resident of the relevant possession for each of the 3 tax years immediately following your move.
Example.
Dwight Wood, a U.S. citizen, files returns on a calendar year basis. He lived in the United States from January 2000 through
May 2005. In June
2005, he moved to the USVI, purchased a house, and accepted a permanent job with a local employer. From July 1 through December
31, 2005 (more than
183 days), Dwight's principal place of business was in the USVI and, during that time, he did not have a closer connection
to the United States or a
foreign country than to the USVI. If he continues to live and work in the USVI during all of 2006 through 2008, and maintains
a closer connection to
the USVI than to the United States or any foreign country, he will satisfy the tax home and closer connection tests for 2005.
If Dwight also satisfies
the presence test in 2005, he will be considered a bona fide resident for the entire 2005 tax year.
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.
-
You have been a bona fide resident of the relevant possession for each of the 3 tax years immediately preceding your change
of
residence.
-
You do not have a tax home outside the relevant possession or a closer connection to the United States or a foreign country
than to the
relevant possession during any of the first 183 days of the tax year.
-
You are not a bona fide resident of the relevant possession for any of the 3 tax years immediately following your move.
Example.
Jean Aspen, a U.S. citizen, files returns on a calendar year basis. From January 2002 through December 2004, Jean was a bona
fide resident of
American Samoa. Jean continued to live there until September 6, 2005, when she accepted new employment and moved to Hawaii.
Jean's principal place of
business from January 1 through September 5, 2005 (more than 183 days), was in American Samoa, and during that period Jean
did not have a closer
connection to the United States or a foreign country than to American Samoa. If Jean continues to live and work in Hawaii
for the rest of 2005 and
throughout years 2006 through 2008, she will satisfy the tax home and closer connection tests for 2005 with respect to American
Samoa. If Jean also
satisfies the presence test in 2005, she will be considered a bona fide resident for the entire 2005 tax year.
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:
-
Are a U.S. citizen,
-
Are a bona fide resident of Puerto Rico for at least 2 tax years immediately preceding the tax year of the move,
-
Cease to be a bona fide resident of Puerto Rico during the tax year,
-
Cease to have a tax home in Puerto Rico during the tax year, and
-
Have a closer connection to Puerto Rico than to the United States or a foreign country throughout the part of the tax year
preceding the
date on which you cease to have a tax home in Puerto Rico.
Example.
Randy White, a U.S. citizen, files returns on a calendar year basis. For all of 2003 and 2004, Randy was a bona fide resident
of Puerto Rico. From
January through April 2005, Randy continued to reside and maintain his principal place of business in and closer connection
to Puerto Rico. On May 5,
2005, Randy moved and changed his tax home to Nevada. Later that year he established a closer connection to the United States
than to Puerto Rico.
Randy did not satisfy the presence test for 2005 with respect to Puerto Rico, nor the tax home or closer connection tests.
However, because Randy was
a bona fide resident of Puerto Rico for at least 2 tax years before he moved to Nevada in 2005, he was a bona fide resident
of Puerto Rico from
January 1 through May 4, 2005.
Reporting a Change in Bona Fide Residence
Beginning with tax year 2001, if you became or ceased to be a bona fide resident of certain possessions, you may need to file
Form 8898, Statement
for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession. For this purpose, the following are considered
U.S. possessions: American
Samoa, the CNMI, Guam, Puerto Rico, and the USVI.
You must file Form 8898 for the tax year (beginning with tax year 2001) in which you meet both of the following conditions.
-
Your worldwide gross income (defined below) in that tax year is more than $75,000.
-
You meet one of the following.
-
You take a position for U.S. tax purposes that you became a bona fide resident of a U.S. possession after a tax year for which
you filed a
U.S. income tax return as a citizen or resident alien of the United States but not as a bona fide resident of the possession.
-
You are a citizen or resident alien of the United States who takes the position for U.S. tax purposes that you ceased to be
a bona fide
resident of a U.S. possession after a tax year for which you filed an income tax return as a bona fide resident of the possession.
-
You take the position for U.S. tax purposes that you became a bona fide resident of Puerto Rico or American Samoa after a
tax year for which
you were required to file an income tax return as a bona fide resident of the CNMI, Guam, or the USVI.
Worldwide gross income.
Worldwide gross income means all income you received in the form of money, goods, property, and services, including
any income from sources outside
the United States (even if you can exclude part or all of it) and before any deductions, credits, or rebates.
Example.
You are a U.S. citizen who moved to the CNMI in December 2002, but did not become a bona fide resident of that possession
until the 2003 tax year.
You must file Form 8898 for the 2003 tax year if your worldwide gross income for that year is 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.
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