Publication 570 (2003) TAX GUIDE FOR INDIVIDUALS WITH INCOME FROM U.S. POSSESSIONS

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.

IRS Individual Taxpayer Identification Numbers (ITIN) 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 , Application for IRS Individual Taxpayer Identification Number, and its instructions. It usually takes 4 - 6 weeks to get an ITIN.

If you already have an ITIN, enter it wherever your SSN is requested on your tax return.

Note. 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 cannot claim the EIC on your U.S. tax return. To claim 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 at *taxforms@irs.gov . Please put "Publications Comment" on the subject line.

You can write to us at the following address:

Internal Revenue Service Individual Forms and Publications Branch SE:W:CAR:MP:T:I 1111 Constitution Ave. NW 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

For 2003, 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.

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.

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.

Caution. If you were not a bona fide resident of American Samoa for all of 2003, 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 2003, 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.

For purposes of the possession exclusion, possession source income does

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.

Example 1. Frank Harris, who is single, is an engineer who went to work in American Samoa for a private construction company in August 2002. He lived there for all of 2003. He is a bona fide resident of American Samoa for 2003.

During 2003, 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 2002, through December 31, 2003. He is a bona fide resident of American Samoa for 2003.

During 2003, 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 U.S. 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)

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 2003, 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 2003 is figured as follows:

   $5,000

   -------     x    $4,750 (standard deduction)   =   $950

   $25,000

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.

       Excluded income from possession

      sources less deductible expenses

            based on that income            Tax paid or      Reduction

     ---------------------------------   x   accrued to   =  in foreign

           Total income subject to          possessions      taxes.

       possession tax less deductible

       expenses based on that income

For more information on the foreign tax credit, get

.

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.

Filing U.S. Tax Returns

If you do not qualify for the possession exclusion, you must generally file a U.S. income tax return if your gross income was at least the amount shown below for your filing status.

  Filing status:              Gross income of at least:    

  Single                       $7,800

  Married, filing jointly

*

     15,600

  Married, filing separately    3,050

  Head of household            10,050

  Qualifying widow(er)         12,550

*

 If you did not live with your spouse at the end of 2003

 (or on the date your spouse died) and your gross income was

 at least $3,050, you must file a return.

If you were age 65 or over at the end of 2003, and you do not qualify for the possession exclusion, the minimum income levels for filing a return are higher. For these amounts, see the instructions for Form 1040.

Some persons (such as those who can be claimed as a dependent on another person's return) must file a tax return even though their gross income is less than the amount shown above for their filing status. For more information, see the instructions for Form 1040.

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.

If you qualify for the possession exclusion and you have income from sources outside American Samoa, Guam, or the CNMI, you must file a U.S. income tax return if your gross income is at least the amount shown on line 3 of the following worksheet.

  1.  Enter the allowable standard deduction you figured

      earlier under

Deductions and Credits.

                       _______

  2.  Personal exemption. (If your filing status is married

      filing jointly, enter $6,100. Otherwise, enter $3,050.)     _______

  3.  Add lines 1 and 2. You must file a U.S. income tax return

      if your gross income from sources outside American Samoa,

      Guam, and the CNMI is at least this amount.                 _______

Regina Gray, a U.S. citizen, uses a calendar tax year. She was employed in American Samoa from July 2002 to January 2004. Her 2003 income consisted of her salary from her job plus interest of $500 on deposits in a U.S. bank.

Regina does not have to file a U.S. income tax return for 2003 because she can claim the possession exclusion, and her U.S. income is below the amount that would require her to file a U.S. 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.

Tip. 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 http://www.irs.gov .

When and Where 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 this purpose, a legal holiday is a legal holiday in the District of Columbia or in the state where the return is required to be filed. It does not include a legal holiday in a foreign country, unless it is also a legal holiday described in the previous sentence.

Federal tax returns mailed by taxpayers are filed on time if they bear an official postmark dated on or before the due date, including any extensions. If you use a private delivery service designated by the IRS, the postmark date generally 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.

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.

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.

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

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 http://www.irs.gov .

Self-Employment Tax

A U.S. citizen 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).

Your payments of self-employment tax contribute to your coverage under the social security system. Social security coverage provides you with old age, survivor, and disability benefits and hospital insurance.

The self-employment tax rate is 15.3% (12.4% social security tax plus 2.9% Medicare tax). The maximum amount of earnings subject to social security (old age, survivor, and disability insurance) tax is $87,000 for 2003. All earnings are subject to Medicare (hospital insurance) tax.

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.

Tip. 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.

    Self-employment income that is not excluded

    -------------------------------------------

           Total self-employment income

            (including excluded income)

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

Double Taxation

A mutual agreement procedure exists to settle issues where there is an inconsistency between the tax treatment by the IRS and the taxing authorities of the following possessions.

These issues usually involve allocations of income, deductions, credits, or allowances between related persons, determinations of residency, and determinations of the source of income and related expenses.

Send your written request for assistance under this procedure to:

Internal Revenue Service Director, International Attn: Office of Tax Treaty 1111 Constitution Avenue, N.W. Washington, DC 20224

Your request must contain a statement that assistance is requested under the mutual agreement procedure with the possession. It must also contain all the facts and circumstances relating to your particular case. It must be signed and dated. To avoid unnecessary delays, make sure you include all of the following information.

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

,

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.

Filing Requirements for Individuals in U.S. Possessions

An individual who has income from Guam, the CNMI, American Samoa, the Virgin Islands, or Puerto Rico will probably have to file a tax return with the tax department of one of the possessions. It is possible that 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.

You should ask for forms and advice about the filing of possession tax returns from that possession's tax department and not the Internal Revenue Service. In some situations you may have to determine if you are a resident or a nonresident of a certain possession. Contact the tax department of that possession for advice about this point.

The following discussions cover the general rules for filing returns in Guam, the CNMI, American Samoa, the Virgin Islands, and Puerto Rico.

Caution. A U.S. person who becomes a resident of American Samoa, Guam, or the CNMI may be subject to U.S. tax on U.S. source income, including gain from sales of certain U.S. assets, during the 10-year period beginning when the person becomes a resident. The U.S. person will be subject to U.S. tax on any gain from the disposition of U.S. property (including appreciated stock issued by a U.S. corporation) during this period.

Guam

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

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

Department of Revenue and Taxation Government of Guam P.O. Box 23607 GMF, GU 96921

The telephone number is (671) 472-7471 . The fax number is (671) 472-2643 .

If you are a U.S. citizen with income from sources in Guam and the United States, you must file your income tax return as explained below with either Guam or the United States, but not both. You are not liable for any income tax to the jurisdiction with which you do not have to file.

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

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

Example. Gary Barker was a resident of Guam during the entire year. He received wages of $20,000 paid by a private employer and dividends of $4,000 from U.S. corporations that carry on business mainly in the United States.

He must file a 2003 income tax return with the Government of Guam. He reports his total income of $24,000 on the Guam 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 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 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.

Example. William Berry, a U.S. citizen, was employed by a private company in Guam from June 1 through December 31, 2003. He received a salary of $20,000 during that period for his work in Guam, $4,000 in dividends from U.S. corporations that carry on business mainly in the United States, and $1,000 in interest from deposits in U.S. banks. William was advised by the Guam Department of Revenue and Taxation that he was not a resident of Guam. He must file a U.S. tax return. On his U.S. tax return, he reports the $4,000 of dividends, the $1,000 of interest, and the $20,000 Guam salary in addition to any income he had in 2003 before June 1.

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.

Example. Bill White, a U.S. citizen, was a resident of the United States, and his wife, a citizen of Guam, was a resident of Guam at the end of the year. Bill earned $25,000 as an engineer in the United States. His wife earned $15,000 as a teacher in Guam. Mr. and Mrs. White will file a joint return. Because Bill has the greater adjusted gross income, the Whites must file their return with the United States and report the entire $40,000 on that return.

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.

Example. Bill West is single and files his return on a calendar year basis. He is a resident of the United States at the time that he must make his first payment of estimated income tax for the year. Since Bill does not expect to be a resident of Guam at the end of the year, he pays his estimated tax to the United States by April 15. Later in the year, however, Bill becomes a resident of Guam and receives income from Guam sources that causes him to refigure his estimated tax payments. The quarterly estimated tax payments must be made to the United States because he was a U.S. resident when his first payment of estimated tax was due. Because Bill is a resident of Guam at the end of his tax year, he must file his income tax return with Guam. On that return, he claims credit for the estimated tax payments made to the United States.

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.

Example. Lauren Post is single and files her return on a calendar year basis. On March 1, Lauren was a resident of the United States and made an early first payment of estimated income tax to the United States. She became a resident of Guam before the due date of her first payment of estimated tax (April 15), and remained a resident of Guam for the rest of the year. Lauren must make the rest of her payments of estimated tax to Guam because she is a resident of Guam on the date that her first payment of estimated tax is otherwise due. At the end of the year, Lauren will file her tax return with Guam and claim credit for all estimated tax payments on that return.

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.

Note. Guam and the United States have entered into an implementing agreement. The effective date of the agreement, however, has been indefinitely postponed. When the agreement goes into effect, the following rules may apply.

A mutual agreement procedure exists to settle cases of double taxation between the United States and Guam. See

under

earlier.

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.

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

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

The telephone number is (670) 664-1000 . The fax number is (670) 664-1015 .

If you are a U.S. citizen with income from the CNMI and the United States, you must file your income tax return with either the CNMI or the United States as explained below. Do not file with both. You are not liable for tax to the jurisdiction with which you do not have to file.

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.

Note. When the CNMI and the United States enter into an implementing agreement, the following rules may apply.

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.

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

Tax Division Government of American Samoa Pago Pago, American Samoa 96799

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.

The Virgin Islands

An important factor in Virgin Islands taxation is whether, on the last day of the tax year, you are a bona fide resident of the Virgin Islands. If you are a temporary worker on the last day of the tax year, you may or may not be a bona fide resident of the Virgin Islands. You should contact the Virgin Islands Bureau of Internal Revenue for more information.

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:

Virgin Islands Bureau of Internal Revenue 9601 Estate Thomas Charlotte Amalie St. Thomas, U.S. Virgin Islands 00802

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

Example. Mr. and Mrs. Maple left the United States on June 15, 2003, and arrived in the Virgin Islands on the same day. They qualified as bona fide residents of the Virgin Islands on the last day of their tax year, December 31, 2003.

Mr. and Mrs. Maple file Form 1040 with the Government of the Virgin Islands and attach a Form 1040 INFO. The Maples report their worldwide income and pay the entire tax for the year to the Virgin Islands. Even though they lived in the United States part of the year, their income tax obligations for that year are completely satisfied by filing their return with, and paying their tax to, the Virgin Islands Bureau of Internal Revenue.

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:

                                                              V.I. AGI

 Total tax on U.S. return (after certain adjustments)   x  -------------

                                                           Worldwide AGI

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:

Virgin Islands Bureau of Internal Revenue 9601 Estate Thomas Charlotte Amalie St. Thomas, U.S. Virgin Islands 00802

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.

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. If you are a U.S. citizen with income from Puerto Rico, you may be liable for Puerto Rican taxes. You may also be liable for filing a U.S. tax return.

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

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

The telephone number is (787) 721-2020 , extension 3611. To obtain Puerto Rican tax forms, contact the Forms and Publications Division Office at the above address or call (787) 721-2020 , extensions 2645 or 2646.

You can also access the Puerto Rican web site at http://www.hacienda.gobierno.pr .

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.

     Gross income subject to U.S. tax

   --------------------------------------

      Gross income from all sources

   (including exempt Puerto Rican income)

You and your spouse are both under 65 and U.S. citizens who are bona fide residents of Puerto Rico for the entire year. You file a joint income tax return. During 2003, you earned $15,000 from Puerto Rican sources and your spouse earned $25,000 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), by multiplying the deduction by the following fraction:

     Gross income subject to U.S. tax

   --------------------------------------

      Gross income from all sources

   (including exempt Puerto Rican income)

Itemized deductions should be modified as shown below:

Medical Expenses

  $25,000

  -------   X   $4,000   =   $2,500 (enter on line 1 of Schedule A)

  $40,000

  $25,000

  -------   X   $5,000   =   $3,125 (enter on line 6 of Schedule A)

  $40,000

  $25,000

  -------   X   $6,000   =   $3,750 (enter on line 10 or 11 of Schedule A)

  $40,000

(cash contributions)

  $25,000

  -------   X   $1,000   =   $625 (enter on line 15 of Schedule A)

  $40,000

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."

Tip. 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.

Example. James and Joan Brown, both under 65, are U.S. citizens and bona fide residents of Puerto Rico. They file a joint income tax return. During 2003, they received $15,000 of income from Puerto Rican sources and $8,000 of income from sources outside Puerto Rico. They do not itemize their deductions. Their allowable standard deduction for 2003 is figured as follows:

  $8,000

  -------   X   $9,500 (standard deduction)  =  $3,304

  $23,000

The Browns do not have to file a U.S. income tax return because their gross income ($8,000) is less than their allowable standard deduction plus their exemptions ($3,304 + $6,100 = $9,404).

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.

    Excluded income from P.R.

     sources less deductible

   expenses based on that income       Tax paid or     Reduction

 ---------------------------------  X  accrued to   =  in foreign

      Total income subject to          Puerto Rico     taxes

  Puerto Rican tax less deductible

   expenses based on that income

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

Example. John and Mary Reddy are U.S. citizens and were bona fide residents of Puerto Rico during all of 2003. They file a joint tax return. The following table shows their exempt and taxable income for U.S. federal income tax purposes.

                                             Taxable      Exempt      

  John's wages from U.S. Government          $25,000

  Mary's wages from a Puerto Rican corp.                  $15,000

  Dividend from Puerto Rican corp. doing

   business in Puerto Rico                                    200

  Dividend from U.S. corp. doing business

   in U.S.

*

                                    1,000

                                             -------      -------

Totals

                                     $26,000      $15,200

 *

Income from sources outside Puerto Rico is taxable.

John and Mary must file 2003 income tax returns with both Puerto Rico and the United States. They have gross income of $26,000 for U.S. tax purposes. They paid taxes to Puerto Rico of $4,000. The tax on the wages is $3,980 and the tax on the dividend from the Puerto Rican corporation is $20. They figure their foreign tax credit on two Forms 1116, which they must attach to their U.S. return. They fill out one Form 1116 for wages and one Form 1116 for the dividend. John and Mary figure the Puerto Rican taxes on exempt income as follows.

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

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.

Illustrated Example of Form 4563

John Black is a U.S. citizen and was a bona fide resident of American Samoa during all of 2003. He has to file Form 1040 because his gross income from sources outside the possessions ($8,000 of dividends from U.S. corporations) is at least the total of his personal exemption and allowable standard deduction for single filers. (See Filing U.S.Tax Returns, earlier.) Because he has to file Form 1040 (not illustrated), he fills out Form 4563 to determine the amount of possession income he can exclude.

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.

Gerald and Lily Smith live and work in the United States. In 2003, 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 (not illustrated), 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).

The Smiths also complete Form 8689 to determine how much of their U.S. tax shown on line 60 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. 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.

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.

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

,

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.

Internet. You can access the IRS web site 24 hours a day, 7 days a week at http://www.irs.gov to:

You can also reach us using File Transfer Protocol at

.

Fax. You can get over 100 of the most requested forms and instructions 24 hours a day, 7 days a week, by fax. Just call 703-368-9694 from your fax machine. Follow the directions from the prompts. When you order forms, enter the catalog number for the form you need. The items you request will be faxed to you.

For help with transmission problems, call 703-487-4608.

Long-distance charges may apply.

Phone. Many services are available by phone.

Many products and services are available on a walk-in basis.

You can send your order for forms, instructions, and publications to the Distribution Center nearest to you and receive a response within 10 workdays after your request is received. Use the address that applies to your part of the country.

You can order IRS Publication 1796,

and obtain:

Buy the CD-ROM from National Technical Information Service (NTIS) on the Internet at

for $22 (no handling fee) or call

toll free to buy the CD-ROM for $22 (plus a $5 handling fee). The first release is available in early January and the final release is available in late February.

CD-ROM for small businesses. IRS Publication 3207, Small Business Resource Guide, is a must for every small business owner or any taxpayer about to start a business. This handy, interactive CD contains all the business tax forms, instructions and publications needed to successfully manage a business. In addition, the CD provides an abundance of other helpful information, such as how to prepare a business plan, finding financing for your business, and much more. The design of the CD makes finding information easy and quick and incorporates file formats and browsers that can be run on virtually any desktop or laptop computer.

It is available in early April. You can get a free copy by calling 1-800-829-3676 or by visiting the web site at http://www.irs.gov/smallbiz .