us internal revenue service: p570--1997

8/14/2019 US Internal Revenue Service: p570--1997

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ContentsIntroduction ....................................... 1

Possession Exclusion ....................... 2

Filing Tax Returns .............................. 3

Filing Requirements for Individualsin U.S. Possessions .................... 5

How To Get More Information .......... 9

Illustrated Example of Form 4563 .... 9

Illustrated Example of Form 8689 .... 9

Index .................................................... 12

Important RemindersIndividual taxpayer identification number(ITIN). The IRS will issue an ITIN to a non-resident or resident alien who does not haveand is not eligible to get a social securitynumber (SSN). To apply for an ITIN, FormW7 must be filed with the IRS. It usually

takes about 30 days to get an ITIN. The ITINis entered wherever an SSN is requested ona tax return. If you are required to includeanother person's SSN on your return and thatperson does not have and cannot get anSSN, enter that person's ITIN.

An ITIN is for tax use only. It does notentitle you to social security benefits orchange your employment or immigration sta-tus under U.S. law.

Change of address. If you change yourmailing address, be sure to notify the InternalRevenue Service using Form 8822, Changeof Address. Mail it to the Internal RevenueService Center for your old address (ad-dresses for the Service Centers are on theback of the form).

IntroductionThis publication will help individuals in U.S.possessions file their U.S. income tax returns.It also gives information and addresses forfiling possession tax returns, if these returnsare required. This publication is generally foruse by U.S. citizens who have income fromAmerican Samoa, Guam, the Commonwealthof the Northern Mariana Islands, the VirginIslands, or Puerto Rico.

An individual who is a bona fide residentof American Samoa may qualify to excludeincome from sources in American Samoa,

Guam, and the Commonwealth of the North-ern Mariana Islands (CNMI) and income ef-fectively connected with a trade or businessin these possessions. This possession exclu-sion applies only to individuals.

For 1997, the exclusion applies only tobona fide residents of American Samoa.When implementing agreements between theUnited States and Guam and the CNMI gointo effect, bona fide residents of each ofthese possessions may qualify for the exclu-sion. An implementing agreement betweenthe United States and Guam has beensigned, but its effective date has been indefi-nitely postponed.

This publication also contains informationfor individuals who have income from the

Departmentof theTreasury

InternalRevenueService

Publication 570Cat. No. 15118B

Tax Guide

for Individuals

With Income

From U.S.

Possessions

For use in preparing

1997 Returns

Get forms and other information faster and easier by:COMPUTER

World Wide Web www.irs.ustreas.gov FTP ftp.irs.ustreas.gov IRIS at FedWorld (703) 321-8020

FAX From your FAX machine, dial (703) 368-9694See How To Get More Information in this publication.


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Virgin Islands and Puerto Rico. Those withincome from sources in the Virgin Islands,who are not bona fide residents of the VirginIslands on the last day of their tax year, mustattach Form 8689, Allocation of Individual In-come Tax to the Virgin Islands, to their Form1040. They must also file a copy of their Form1040 (with all attachments) with the VirginIslands Bureau of Internal Revenue. For moreinformation, see the discussion and the illus-trated example of Form 8689, later in thispublication.

If you need additional information onthe U.S. taxation of individuals in U.S.possessions, write to:

Internal Revenue ServiceAssistant Commissioner (International)Attention: CP:IN:D:CS950 L'Enfant Plaza South, S.W.Washington, DC 20024

Useful ItemsYou may want to see:

Publication

54 Tax Guide for U.S. Citizens andResident Aliens Abroad

514 Foreign Tax Credit for Individuals

Form (and Instructions)

1040 U.S. Individual Income Tax Return

1040-SS U.S. Self-Employment Tax Re-turn

1116 Foreign Tax Credit

4563 Exclusion of Income for Bona FideResidents of American Samoa

5074 Allocation of Individual IncomeTax to Guam or the Common-wealth of the Northern MarianaIslands (CNMI)

8689 Allocation of Individual IncomeTax to the Virgin Islands

See How To Get More Information nearthe end of this publication for informationabout getting these publications and forms.You can get any necessary possession taxforms at the appropriate possession tax of-fice. The office addresses are given later.

Office of Taxpayer Advocate. If you havea problem with the Internal Revenue Servicethat has not been resolved by your previouscontacts with the Service, the Taxpayer Ad-vocate's Office may be able to help you. Thisoffice has been established to assist taxpay-ers who have problems with the Service thathave not been resolved through normal

channels. You can reach this office by writingthe Taxpayer Advocate in your IRS Districtor Service Center. If you are outside theUnited States, contact:

Internal Revenue ServiceAssistant Commissioner (International)Attention: CP:IN:D:PRO950 L'Enfant Plaza South, S.W.Washington, DC 20024

The Taxpayer Advocate's Office will ensurethat your problem receives proper attention.Although this office cannot change the tax lawor technical decisions, it can frequently clearup misunderstandings that resulted from pre-vious contacts.

Possession Exclusion

For 1997, the possession exclusion appliesonly to bona fide residents of American Sa-moa.

Individuals in Guam, the CNMI, PuertoRico, or the Virgin Islands are not eligible forthe possession exclusion discussed here.The tax rules for each of these possessions

are discussed later.

QualificationsTo qualify for the possession exclusion, youmust be a bona fide resident of AmericanSamoa for the entire tax year. For example,if your tax year is the calendar year, you mustbe a bona fide resident from January 1through December 31. In addition to this timerequirement, the following factors may beconsidered in determining bona fide resi-dence.

Your intent to be a resident of AmericanSamoa, as shown by the circumstances.

The establishment of a permanent homefor you and members of your family inAmerican Samoa for an indefinite periodof time.

The reason for and duration of your ab-sences from American Samoa.

The type and duration of your job inAmerican Samoa.

CAUTION

!If you were not a bona fide residentof American Samoa for all of 1997,you cannot claim the possession ex-

clusion. SeeIf You Do Not Qualify, later.

Sources of Income

If you qualify as a bona fide resident ofAmerican Samoa for 1997, you can excludeincome from sources in American Samoa,Guam, or the CNMI and income effectivelyconnected with your trade or business inthese possessions.

Possession source income. Excludableincome from sources within the possessionsincludes the following.

1) Wages, salaries, and other kinds of payfor personal services performed in thepossessions. (But see U.S. Governmentwages, later, for an exception.)

2) Dividends received from possessionsources, including those paid by:

a) U.S. corporations that do businessin the possessions and elect thePuerto Rico and possession taxcredit, and

b) Possession and foreign corpo-rations that do business mainly inthe possessions.

3) Interest on deposits paid by banks thatdo business mainly in the possessions,including interest paid on deposits withthe possession branches of:

a) Domestic banks with commercialbanking business in the pos-sessions, and

b) Savings and loan associationschartered under federal or statelaws.

4) Gains from the sale of securities, suchas stock certificates, are from sources inthe possessions if the seller's residenceis in a possession and the sale is notattributable to an office or other fixedplace of business maintained by theseller in the United States.

U.S. Government wages. For purposes

of the possession exclusion, possessionsource income does not include wages, sal-aries, etc., paid by the U.S. Government orany of its agencies to individuals who are itscivilian or military employees.

Scholarships and fellowships. The sourceof a payment made as a scholarship or fel-lowship grant is generally the residence of thepayer. The result is the same if payments aremade by an agency acting on behalf of thepayer.

Examples. The following examples illustratethe sources of income. Assume that corpo-rations chartered in American Samoa (Amer-ican Samoan corporations) do business onlyin American Samoa, and that the U.S. andforeign corporations do not carry on businessin the possessions.

Example 1. Frank Harris, who is single,is an engineer who went to work in AmericanSamoa for a private construction company onAugust 3, 1996, and lived there through 1997.He is a bona fide resident of American Samoafor 1997.

During 1997, he received the followingamounts of income.

Frank's possession source income eligiblefor the exclusion is $23,300. Because Frank'sremaining income is less than $2,650, hedoes not have to file a U.S. tax return for1997. However, he must file a tax return inAmerican Samoa. See Filing Tax Returns,later.

Example 2. Oliver Hunter was employedby a private employer in American Samoafrom June 16, 1996, through December 31,1997. He is a bona fide resident of AmericanSamoa for 1997.

During 1997, he received the followingamounts of income.

Oliver's possession source income of$16,500 is eligible for the exclusion. Olivermust file a U.S. income tax return to reporthis income from outside the possessions.

Form 4563. To claim the exclusion, completeand attach Form 4563 to your U.S. return.

Samoan wages .......................................... $23,300Nonpossession source income:

Dividends (U.S.) .......................... 400Dividends (foreign) ...................... 100Interest (U.S.) .............................. 1,300 1,800

Total income $25,100

Possession source income:Samoan wages ....................... $16,000Guam interest .......................... 500

$16,500Nonpossession source income:

U.S. dividends ......................... 2,000Short-term capital gain fromsale of U.S. stock .................... 4,000 6,000

Total income $22,500

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Deductions and CreditsYou can neither deduct nor claim a credit foritems connected to your possession incomethat you exclude from gross income on yourU.S. income tax return.

Items that do not apply to a particular typeof income must be divided between your ex-cluded income from possession sources andincome from all other sources to find theamount you can deduct on your U.S. tax re-turn. Examples of these items are medicalexpenses, real estate taxes, mortgage inter-

est on your home, and charitable contribu-tions.

Standard deduction. The standard de-duction does not apply to a particular type ofincome. It must be divided between your ex-cluded income and income from othersources. This division must be made beforeyou can determine if you must file a U.S. taxreturn, because the minimum income level atwhich you must file a return is based, in part,on the standard deduction for your particularfiling status.

Figuring the deduction. To divide an itembetween your excluded income and incomefrom other sources, multiply it by the followingfraction:

Gross income from sourcesoutside the possessions

Total gross income from allsources (including excluded

possession income)

Example. Barbara Jones, a U.S. citizen,is single, under 65, and a bona fide residentof American Samoa. During 1997, she re-ceived $20,000 of income from Samoansources and $5,000 of income from sourcesoutside the possessions. She does not item-ize her deductions. Her allowable standarddeduction for 1997 is figured as follows:

$5,000

$25,000 $4,150 (standard deduction) = $830

Barbara must file a U.S. income tax returnbecause her gross income ($5,000) is morethan her allowable standard deduction plusher exemption ($830 + $2,650 = $3,480). SeeFiling Tax Returns, later.

Foreign tax credit. If you must reportpossession source income on your U.S. taxreturn, you can claim a foreign tax credit, fig-ured on Form 1116 for income taxes paid inthe possessions on that income. You cannotclaim a foreign tax credit for taxes paid onexcluded possession income.

If you have income, such as U.S. Gov-ernment wages, that is not excludable, and

you have income from possession sourcesthat is excludable, you must figure the creditby reducing your foreign taxes paid or ac-crued by the taxes based on the excludedincome. To find the amount of this reduction,use the following formula:Excluded incomefrom possessionsources lessdeductible expensesbased on thatincome

Total income subjectto possession taxless deductibleexpenses based onthat income

Tax paid oraccrued topossessions

=

Reductionin foreigntaxes

See the example under Foreign tax credit, inthe discussion The Commonwealth of PuertoRico, later. For more information on foreigntax credit, get Publication 514, Foreign TaxCredit for Individuals.

Personal exemptions. Personal exemptionsare allowed in full. They are not divided.

Moving expenses. If you are claiming ex-penses for a move to a U.S. possession fromthe United States, or from a U.S. possession

to the United States, use Form 3903, MovingExpenses. This type of move is not consid-ered a foreign move. Get Publication 521,Moving Expenses, for more information.

If You Do Not QualifyIf you do not qualify for the possession ex-clusion because you are not a bona fide res-ident of American Samoa (as explained ear-lier), or not a bona fide resident of AmericanSamoa for the entire year, figure your tax li-ability in the usual manner. Report all yourtaxable income, including income from foreignand possession sources, and claim all allow-able exemptions, deductions, and credits,following the instructions for Form 1040.

You can take a credit against your U.S. taxliability if you paid income taxes to a foreigncountry or a possession and reported incomefrom sources outside the United States onyour U.S. tax return. The amount of foreignor possession income taxes paid that you canclaim as a credit is figured on Form 1116,which must be attached to your Form 1040.For more information, see Publication 514.

Filing Tax ReturnsIf you can claim the possession exclusion,you may not have to file a U.S. income taxreturn.

You do not have to file a U.S. income tax

return if both of the following apply.

1) You were a bona fide resident of Ameri-can Samoa for all of 1997.

2) All of your income is from sources inAmerican Samoa, Guam, or the CNMI,or is effectively connected with yourtrade or business in these possessions.

You may have to file a return in AmericanSamoa. For information and an address forthe taxing authority in American Samoa, seethe discussion under American Samoa, later.

If you qualify for the possession exclusionas a bona fide resident of American Samoaand you have income from sources other thanAmerican Samoa, Guam, or the CNMI, you

must file a U.S. income tax return if yourgross income is at least the amount shownbelow for your filing status plus your allowablestandard deduction from the computationdiscussed earlier under Standard deduction.

Example. Regina Gray, a U.S. citizen,uses a calendar tax year. She was employedin American Samoa from July 2, 1996, toJanuary 1, 1998. Her 1997 income consisted

of her salary from her job plus interest of $500on deposits in a U.S. bank.

Regina does not have to file a U.S. incometax return for 1997 because she can claim thepossession exclusion, and her U.S. incomeis below the amount that would require her tofile a U.S. tax return.

If you do not qualify for the possessionexclusion, you must generally file a U.S. in-come tax return if your gross income was atleast the amount shown below.

If you were age 65 or over, at the end of1997, and you do not qualify for the pos-session exclusion, the minimum income lev-els for filing a return increase. For theseamounts, see the instructions for Form 1040.

Some persons must file a tax return eventhough their gross income is less than theamount shown above for their filing status.One of these situations is explained next. Forother situations, see the instructions for Form1040.

Dependents. Generally, a person whoreceives unearned income, such as interestand dividends, has total income of more than$650, and can be claimed as a dependent onanother person's return, must file a return. Formore information, see the instructions forForm 1040.

Form 4563. If you must file a U.S. incometax return and you qualify for the possessionexclusion, claim the exclusion by attachingForm 4563 to Form 1040. Form 4563 is notan income tax return. It is an information formto show that you qualified for the possessionexclusion during the tax year. Form 4563must be filed with your Form 1040 and cannotbe filed by itself. There is an example of a

filled-in Form 4563 at the end of this publica-tion.

When and Where To FileIf you file on a calendar year basis, the duedate for filing your U.S income tax return isApril 15 following the end of your tax year. Ifyou use a fiscal year (a year ending on thelast day of a month other than December), thedue date is the 15th day of the 4th month afterthe end of your fiscal year. If any due datefalls on a Saturday, Sunday, or legal holiday,your tax return is due on the next businessday.

Extensions of time to file. If you live out-side the United States and Puerto Rico andhave your main place of business or post ofduty outside the United States and PuertoRico on the regular due date of your return,you are automatically granted a 2-month ex-tension to file your return. If you file on a cal-endar year basis, you have until June 15. Thisextension is also available if you are on mili-tary duty outside the United States andPuerto Rico. Your assigned tour of duty out-side the United States and Puerto Rico mustinclude the entire due date of your return.

If you use this automatic 2-month exten-sion, you must attach a statement to your re-turn showing that you qualify for it. You mustpay interest on any unpaid tax from the due

Filing status: Gross income of at least:Single ........................................................ $ 6,800Married, filing jointly .................................. 12,200Married, filing separately .......................... 2,650Head of household ................................... 8,700Qualifying widow(er) ................................. 9,550

Filing status: Gross income of at least:

Single ........................................................ $ 2,650Married, filing jointly .................................. 5,300Married, filing separately .......................... 2,650Head of household ................................... 2,650Qualifying widow(er) ................................. 2,650

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date (April 15 if you file a calendar year re-turn) to the date you pay the tax.

Joint return. If you and your spouse filea joint return, only one of you needs to meetthe qualifications discussed above to takeadvantage of the automatic extension to June15 for filing your tax return.

If you file separate returns instead of a joint return, only the spouse who meets thequalifications can use the automatic exten-sion.

Form 4868, Application for AutomaticExtension of Time To File U.S. Individual In-come Tax Return. You can get an automatic4-month extension of time to file your tax re-turn by filing Form 4868. This 4-month ex-tension is not in addition to the automatic2-month extension explained earlier. The 4months and the 2 months both begin on April15. You must file Form 4868 by the due datefor filing your return, as extended by the2-month automatic extension (usually June15). Print Taxpayer Abroad across the topof Form 4868.

In filling out Form 4868, you must estimateyour tax liability for the year and you shouldpay any balance due with the application. Ifyou do not pay the tax due, you will becharged interest on any tax not paid by theregular due date of your return, and you may

be charged a penalty for the late payment.Any payment you made with the applica-

tion for extension should be entered on line57 of Form 1040. You cannot ask the InternalRevenue Service to figure your tax if you usethe extension of time to file.

Form 2688, Application for AdditionalExtension of Time To File U.S. Individual In-come Tax Return. Further extensions of thetime to file are granted only under very unu-sual circumstances. If you need additionaltime to file, apply for the extension either ina letter or by filing Form 2688. Extensionsbeyond the 4-month automatic extension arenot granted as a matter of course. You mustshow reasonable cause.

Except in undue hardship cases, an ap-

plication for extension on Form 2688 will notbe accepted until you have taken advantageof the automatic 4-month extension usingForm 4868.

TIP

Federal tax returns mailed by taxpay-ers in foreign countries are filed ontime if they bear an official postmark

dated by midnight of the due date, includingany extensions. The postmark can be foreign.

Where to file. If you have to file Form 1040with the United States, and you use Form4563 to exclude income from American Sa-moa, file your return with the Internal Reve-nue Service Center, Philadelphia, PA192550002.

Self-Employment TaxA U.S. citizen who is self-employed must payself-employment tax on net self-employmentearnings of $400 or more. This rule applieswhether or not the earnings are excludablefrom gross income (or whether or not a U.S.income tax return must otherwise be filed).

Your payments of self-employment taxcontribute to your coverage under the socialsecurity system. Social security coverageprovides you with old age, survivor, and dis-ability 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, anddisability insurance) tax is $65,400 for 1997.All earnings are subject to Medicare (hospitalinsurance) tax.

Self-employment tax form. Unless one ofthe following special income tax rules applies,figure your self-employment tax on ScheduleSE (Form 1040) and attach it to your U.S.income tax return.

Form 1040SS. If you are a resident ofAmerican Samoa, Guam, the CNMI, PuertoRico, or the Virgin Islands who has net self-employment income, and you do not have tofile Form 1040 with the United States, useForm 1040-SS, U.S. Self-Employment TaxReturn, to figure your self-employment tax.

TIP

If you are a resident of Puerto Rico,you can file Form 1040-PR insteadof Form 1040SS. Form 1040PR is

the Spanish-language equivalent of Form1040SS.

These forms must be filed with the InternalRevenue Service Center, Philadelphia, PA19255.

Self-employment tax deduction. You candeduct half of your self-employment tax online 26 of Form 1040 in figuring adjustedgross income. This is an income tax de-duction only; it is not a deduction in figuringnet earnings from self-employment.

If you are a bona fide resident of AmericanSamoa or Puerto Rico, and you exclude yourself-employment income from gross income,you cannot take the deduction on line 26 ofForm 1040. You cannot deduct items relatedto excluded income.

If part of your self-employment income isexcluded, only the part of the deduction thatis based on the nonexcluded income is al-lowed. This would happen i f, for instance, youhave 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 onnonexcluded income. You can deduct half ofthis amount on line 26 of Form 1040.

Credit for Excess FICAEmployee Tax WithheldIf you had more than one employer for 1997,and your total wages were over $65,400, youremployers may have withheld too much socialsecurity tax. If so, you can take a credit for theexcess amount on line 58 of Form 1040.

If you do not file Form 1040, you can claima refund of the excess amount withheld byfiling Form 843, Claim for Refund and Re-quest for Abatement. Residents of PuertoRico, the Virgin Islands, American Samoa,Guam, and the CNMI should file Form 843with the Internal Revenue Service Center,Philadelphia, PA 19255.

If any one employer withheld more than$4,054.80 of social security tax, you must askyour employer to refund the excess to you.You cannot claim it on your return.

Double TaxationA mutual agreement procedure exists to settleissues where there is an inconsistency be-tween the tax treatment by the IRS and thetaxing authorities of the following pos-sessions.

American Samoa.

Guam.

Puerto Rico.

The Virgin Islands.These issues usually involve allocations

of income, deductions, credits, or allowancesbetween related persons, determinations ofresidency, and determinations of the sourceof income and related expenses.

Send your written request for assist-ance under this procedure to the

Internal Revenue ServiceAssistant Commissioner (International)Attn: Tax Treaty DivisionP.O. Box 23598Washington, DC 200263598.

Your request must contain a statementthat assistance is requested under the mutualagreement procedure with the possession. Itmust also contain all the facts and circum-stances relating to your particular case. Toavoid unnecessary delays, make sure youinclude all of the following information.

1) Your name, address, and social securitynumber.

2) The name, address, and social securitynumber of the related person in thepossession (if one is involved).

3) The tax year(s) in question and theInternal Revenue Service Center whereyour return was filed.

4) If income tax is involved, the type of in-come, a description of the transaction,activities, or other pertinent circum-stances, and the positions taken by youand the possession tax agency.

5) The amount of the item (income, de-duction, or credit) involved and theamount of tax the possession assessedor proposed to assess.

6) A description of the control and businessrelationships between you and the re-lated person in the possession, if thatapplies.

7) A statement of the status of your tax li-ability for the year(s) in question and, ifit applies, the status of the tax liability of

the related person in the possession.

8) A statement whether you or the relatedperson, if one is involved, is entitled toany possession tax incentive or subsidyprogram benefits for the year(s) inquestion.

9) Copies of any correspondence receivedfrom the possession tax agency andcopies of any material you provided tothem.

10) Copy of the possession tax return(s) forthe year(s) in question.

11) A statement whether a foreign tax creditwas claimed on your federal tax return

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for all or part of the possession tax paidor accrued on the item in question.

12) A statement whether your federal returnor the return of the related person, ifthere is one, was examined, or is beingexamined.

13) A separate statement that you consentto the disclosure to the designated pos-session tax official of any or all of theitems of information set forth in, or en-closed with, the request for assistance

under this procedure.

All statements must be signed and dated.Credit or refund. In addition to the tax

assistance request, if you seek a credit orrefund of any overpayment of United Statestax paid on the income in question, youshould file a claim on Form 1040X, AmendedU.S. Individual Income Tax Return. Indicateon the form that a request for assistance un-der the mutual agreement procedure with thepossession has been filed. Attach a copy ofthe request to the form.

You should take whatever steps must betaken under the possession tax code to pre-vent the expiration of the statutory period forfiling a claim for credit or refund of a pos-

session tax.

Filing Requirementsfor Individuals inU.S. PossessionsGuam, the CNMI, American Samoa, the Vir-gin Islands, and Puerto Rico have their ownindependent tax departments. An individualwho has income from sources in these pos-sessions will probably have to file a tax returnwith one of the possessions' tax departments.It is possible that you may have to file two

annual tax returns: one with the possession'stax department and the other with the U.S.Internal Revenue Service.

You should ask for forms and adviceabout the filing of possession tax returns fromthat possession's tax department and not theInternal Revenue Service. In some situationsyou may have to determine if you are a resi-dent or a nonresident of a certain possession.Contact the tax department of that possessionfor advice about this point.

The following discussions cover the gen-eral rules for filing returns in Guam, the CNMI,American Samoa, the Virgin Islands, andPuerto Rico.

CAUTION!

A U.S. person who becomes a resi-

dent of American Samoa, Guam, orthe CNMI may be subject to U.S. taxon U.S. source income, including gain fromsales of certain U.S. assets, during the10-year period beginning when the personbecomes a resident. The U.S. person will besubject to U.S. tax on any gain from the dis-position of U.S. property (including appreci-ated stock issued by a U.S. corporation) dur-ing this period.

GuamGuam has its own tax system based on thesame tax laws and tax rates that apply in theUnited States.

Requests for advice about Guamresidency and tax matters should beaddressed to:

Department of Revenue and TaxationGovernment of GuamP.O. Box 23607GMF, GU 96921

Telephone number (671) 4755000Fax number (671) 4722643

If you are a U.S. citizen who derives in-come from sources in Guam and the UnitedStates, you must file your income tax returnas explained below with either Guam or theUnited States, but not both. You are relievedof any income tax liability to the jurisdictionwith which you do not have to file. If you haveto file a return, you must include income fromworldwide sources.

If you are a resident of Guam on thelast day of your tax year, you shouldfile your return with the:

Department of Revenue and TaxationGovernment of GuamP.O. Box 23607

GMF, GU 96921

Include any balance of tax due on incomederived from all sources with your tax return.

Example. Gary Barker was a resident ofGuam during the entire year of 1997. His in-come consisted of wages of $20,000 paid bya private employer and dividends of $4,000from U.S. corporations that carry on businessmainly in the United States.

He must file a 1997 income tax return withthe Government of Guam. He reports his totalincome of $24,000 on the Guam return.

If you are a resident of the UnitedStates on the last day of your taxyear, you should file your return with

the:

Internal Revenue ServicePhiladelphia, PA192550002

Include any balance of tax due on incomederived from all sources on your tax return.

If you are neither a resident of Guam nora resident of the United States at the endof your tax year, you should file with Guam if

you are a citizen of Guam but not otherwisea citizen of the United States (born or natu-ralized in Guam). If you are a U.S. citizen orresident but not otherwise a citizen or residentof Guam, you should file with the UnitedStates.

Example. William Berry, a U.S. citizen,was employed by a private company in Guamfrom June 1 through December 31, 1997. Hereceived a salary of $20,000 during that pe-riod for his work in Guam, $4,000 in dividendsfrom U.S. corporations that carry on businessmainly in the United States, and $1,000 ininterest from deposits in U.S. banks. Williamcontacted the Guam Department of Revenueand Taxation and was advised that he was

not a resident of Guam. He must file a U.S.tax return. On his U.S. tax return, he reportsthe $4,000 of dividends, the $1,000 of inter-est, and the $20,000 Guam salary in additionto any income he had in 1997 before June1.

Joint return. If you file a joint return, youshould file it (and pay the tax) with the juris-diction where the spouse who has the greateradjusted gross income would have to file (ifyou were filing separately). If the spouse with

the greater adjusted gross income is a resi-dent of Guam at the end of the tax year, filethe joint return with Guam. If the spouse withthe greater adjusted gross income is a resi-dent of the United States at the end of the taxyear, file the joint return with the UnitedStates. For this purpose, income is deter-mined without regard to community propertylaws.

Example. Bill White, a U.S. citizen, wasa resident of the United States, and his wife,a citizen of Guam, was a resident of Guamat the end of the year. Bill's income consistedof a $25,000 salary as an engineer. His wifeearned $15,000 as a teacher in Guam. Mr.and Mrs. White filed a joint return. BecauseBill has the greater adjusted gross income,

they must file their return with the UnitedStates and report the entire $40,000 on thatreturn.

U.S. military employees. If you are amember of the U.S. Armed Forces stationedon Guam, you are not considered a residentof Guam and you must file your return withthe United States. However, if you are amember of the military and a citizen of Guam,or if you are a civilian employee of the mili-tary, you are subject to the same rules de-scribed in the previous paragraphs.

Income taxes withheld and estimated taxpayments are taken into account in deter-mining if there is tax due or an overpayment,

whether or not the withholdings or paymentswere actually received by the jurisdiction withwhich the return must be filed.

Payment of estimated tax. If you have topay estimated tax, make your payment to the

jurisdiction (United States or Guam) whereyou would file your income tax return if yourtax year were to end on the date your esti-mated tax payment is first due. Generally, youshould make your quarterly payments of es-timated tax with the jurisdiction where youmade your original estimated tax payment.However, estimated tax payments to either

jurisdiction will be treated as payments to thecontrolling jurisdiction.

If you make a joint payment of estimated

tax, make your payment with the jurisdictionwhere the spouse who has the greater esti-mated adjusted gross income would have topay (if a separate payment were made). Forthis purpose, income is determined withoutregard to community property laws.

Example. Bill West is single and files hisreturn on a calendar-year basis. He is a resi-dent of the United States at the time that hemust make his first payment of estimated in-come tax for the year. Since Bill does notexpect to be a resident of Guam at the endof the year, he pays his estimated tax to theUnited States by April 15. Later in the year,however, Bill becomes a resident of Guamand receives income from Guam sources that

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causes him to refigure his estimated tax pay-ments. The quarterly estimated tax paymentsmust be made to the United States becausehe was a U.S. resident when his first paymentof estimated tax was due. Because Bill is aresident 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 esti-mated tax payments made to the UnitedStates.

Early payment of estimated tax. If youmake your first payment of estimated tax

early and you do not send it to the jurisdictionto which you would have sent it if you had notmade it early, make all later payments to theother jurisdiction.

Example. Peg Post is single and files herreturn on a calendar year basis. On March1, Peg was a resident of the United Statesand made an early first payment of estimatedincome tax to the United States. Before thedue date of her first payment of estimated tax(April 15), she becomes a resident of Guamfor the rest of the year. Peg must make therest of her payments of estimated tax toGuam because she is a resident of Guam onthe date that her first payment of estimatedtax is otherwise due. At the end of the year,

Peg will file her tax return with Guam andclaim credit for all estimated tax payments onthat return.

Estimated tax form. If your estimatedincome tax obligation is to the United States,use the worksheet in the Form 1040ESpackage to figure your estimated tax, includ-ing self-employment tax. Use the paymentvouchers in the Form 1040ES package foryour payments.

If your estimated income tax obligation isto Guam, use their forms to figure your esti-mated income tax and make your payments.You will have to separately figure your esti-mated self-employment tax (you can use theForm 1040ES package) and make pay-ments with the payment vouchers to the ad-dress given in the Form 1040ES in-structions.

Information return. If your adjusted grossincome from all sources is at least $50,000,your gross income consists of at least $5,000from sources in Guam, and you file a U.S.income tax return, attach Form 5074 to Form1040. You can get Form 5074 from mostInternal Revenue Service offices.

Note:Guam and the United States haveentered into an implementing agreement. Theeffective date of the agreement, however,has been indefinitely postponed. Under theagreement, Guam may enact its own laws fortaxing residents of Guam as well as for taxing

income sourced in Guam (or income effec-tively connected with a trade or business inGuam) and paid to a nonresident. Individualswho are bona fide residents of Guam andhave income sourced outside Guam, theCNMI, or American Samoa may have to filea U.S. tax return. Individuals who are bonafide residents of Guam and have incomesourced in any of the three possessions maybe able to treat that income as exempt fromU.S. income tax under the possession exclu-sion rules.

Double taxation. A mutual agreement pro-cedure exists to settle cases of double taxa-tion between the United States and Guam.

See Double Taxation, earlier under Filing TaxReturns.

The Commonwealth of theNorthern Mariana IslandsThe Commonwealth of the Northern MarianaIslands (CNMI) has its own tax system basedpartly on the same tax laws and tax rates thatapply to the United States and partly on localtaxes imposed by the CNMI government.

Requests for advice about CNMI res-idency and tax matters should be ad-dressed to:

Division of Revenue and TaxationCommonwealth of the NorthernMariana IslandsP. O. Box 5234, CHRBSaipan, MP 96950

If you are a U.S. citizen who derives in-come from CNMI and United States sources,you must file your income tax return with ei-ther the CNMI or the United States as ex-plained below. Do not file with both. You arerelieved of any income tax liability to the ju-risdiction with which you do not have to file.If you must file a return, be sure to include

income from worldwide sources.

If you are a resident of the CNMI on the lastday of your tax year, you should file your re-turn with the Division of Revenue and Taxa-tion at the address above. Include any bal-ance of tax due on income derived from allsources with your tax return.

If you are a resident of the United Stateson the last day of your tax year, you shouldfile your return with the Internal RevenueService Center, Philadelphia, PA 192550002. Include any balance of tax due on in-come derived from all sources on your U.S.tax return.

If you are neither a resident of the CNMInor a resident of the United States at theend of your tax year, but you are a citizen ofthe CNMI, you should file with the Division ofRevenue and Taxation. File with the InternalRevenue Service Center, Philadelphia, PA192550002, if you are a citizen of the UnitedStates.

Joint return. If you file a joint return, youshould file it (and pay the tax) with the juris-diction where the spouse who has the greateradjusted gross income would have to file (ifyou were filing separately). If the spouse withthe greater adjusted gross income is a resi-dent 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 in-come is a resident of the United States at theend of the tax year, file the joint return withthe United States. For this purpose, incomeis determined without regard to communityproperty laws.

Payment of estimated tax. If you must payestimated tax, make your payment to the ju-risdiction (United States or the CNMI) whereyou would file your income tax return if yourtax year were to end on the date your firstpayment of estimated tax is due. Generally,you should make your quarterly payments ofestimated tax with the jurisdiction where youmade your first payment of estimated tax.

However, estimated tax payments to eitherjurisdiction will be treated as payments to thecontrolling jurisdiction.

If you make a joint payment of estimatedtax, make the payment to the jurisdictionwhere the spouse who has the greater esti-mated adjusted gross income would have tofile (if a separate declaration were filed). Forthis purpose, income is determined withoutregard to community property laws.

Early payment of estimated tax. If youmake your first payment of estimated taxearly and you do not send it to the jurisdictionto which you should have made it, make alllater payments to the jurisdiction to which thefirst payment should have been made hadyou not made it early.

Estimated tax form. If your estimatedincome tax obligation is to the United States,use the worksheet in the Form 1040ESpackage to figure your estimated tax, includ-ing self-employment tax. Use the paymentvouchers in the Form 1040ES package foryour payments.

If your estimated income tax obligation isto the CNMI, use their forms to figure yourestimated income tax and make your pay-ments. You will have to separately figure yourestimated self-employment tax (you can usethe Form 1040ES package) and make pay-

ments with the payment vouchers to the ad-dress given in the Form 1040ES in-structions.

Income taxes withheld and estimated taxpayments are generally taken into accountin determining if there is tax due or an over-payment, whether or not the withholdings orpayments were actually received by the ju-risdiction with which the return must be filed.

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

1040. You can get Form 5074 from mostInternal Revenue Service offices.

Note: When the CNMI and the UnitedStates enter into an implementing agreement,the CNMI may enact its own laws for taxingresidents of the CNMI as well as for taxingincome sourced in the CNMI (or income ef-fectively connected with a trade or businessin the CNMI) and paid to a nonresident. Indi-viduals who are bona fide residents of theCNMI and have income sourced outside theCNMI, Guam, or American Samoa may haveto file a U.S. tax return. Individuals who arebona fide residents of the CNMI and haveincome sourced in any of the three pos-sessions may be able to exclude that incomeunder the possession exclusion rules when

an implementing agreement is in effect.

American SamoaAmerican Samoa has its own separate andindependent tax system. Although its tax lawsare modeled on the U.S. Internal RevenueCode, there are certain differences.

Requests for advice about mattersconnected with Samoan taxationshould be sent to:

Tax DivisionGovernment of American SamoaPago Pago, American Samoa 96799

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Residents of American Samoa. If you area U.S. citizen and a resident of AmericanSamoa, you must report your gross incomefrom worldwide sources on your Samoan taxreturn. If you report non-Samoan source in-come on your Samoan tax return, you canclaim a credit against your Samoan tax liabil-ity for income taxes paid on that income to theUnited States, a foreign country, or anotherpossession.

If you are a resident of American Samoafor part of the tax year and you then leaveAmerican Samoa, you must file a tax returnwith American Samoa for the part of the yearyou were present in American Samoa.

Bona fide residents of American Samoainclude military personnel whose official homeof record is American Samoa.

Nonresidents of American Samoa. If youare a nonresident of American Samoa, youshould report only income from Samoansources on your Samoan tax return. U.S. cit-izens residing in American Samoa are con-sidered residents of American Samoa for in-come tax purposes.

U.S. Government employees. If you areemployed in American Samoa by either theU.S. Government or any of its agencies, or

by the Government of American Samoa, youare subject to tax by American Samoa onyour pay from either government. Whetheryou are subject to tax by American Samoaon your non-Samoan source income dependson your status as a resident or nonresident.

Wages and salaries paid by the Govern-ments of the United States and AmericanSamoa to their employees are also subject toU.S. federal income tax. These payments donot qualify for the possession exclusion, dis-cussed earlier.

If you report government wages on bothyour U.S. and Samoan tax returns, you cantake a credit on your U.S. tax return for in-come taxes paid or accrued to American Sa-moa. Figure that credit on Form 1116, and

attach that form to your U.S. tax return, Form1040. Show your wages paid for servicesperformed in American Samoa on Form 1116as income from sources in a possession.

Estimated tax. If your estimated income taxobligation is to the United States, use theworksheet in the Form 1040ES package tofigure your estimated tax, including self-employment tax. Use the payment vouchersin the Form 1040ES package for your pay-ments.

Double taxation. A mutual agreement pro-cedure exists to settle cases of double taxa-tion between the United States and AmericanSamoa. See Double Taxation, earlier underFiling Tax Returns.

The Virgin IslandsAn important factor in Virgin Islands taxationis whether, on the last day of the tax year, youare a bona fide resident of the Virgin Islands.If you are a temporary worker on the last dayof the tax year, you may or may not be a bonafide resident of the Virgin Islands. You shouldcontact the Virgin Islands Bureau of InternalRevenue for more information.

If you are a bona fide resident of the VirginIslands on the last day of the tax year, youmust file your annual tax return on Form 1040with 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 anytax year in which you are a bona fide residentof the Virgin Islands on the last day of theyear, provided you report and pay tax on yourincome from all sources to the Virgin Islandsand identify the source(s) of the income onthe return. If you have non-Virgin Islandssource income, you must also file Virgin Is-lands Form 1040 INFO (Non-Virgin IslandsSource Income of Virgin Islands Residents)with the Virgin Islands Bureau of InternalRevenue.

You can get this form by contacting:

Virgin Islands Bureau of Internal Revenue9601 Estate ThomasCharlotte AmalieSt. Thomas, U.S. Virgin Islands 00802

Telephone number (809) 7745865Fax number (809) 7764037

Example. Mr. and Mrs. Maple left theUnited States on June 15, 1997, and arrivedin the Virgin Islands on the same day. Theyqualified as bona fide residents of the VirginIslands on the last day of their tax year, De-cember 31, 1997.

Mr. and Mrs. Maple file Form 1040 withthe Government of the Virgin Islands and at-tach a Form 1040 INFO. The Maples reporttheir worldwide income and pay the entire taxfor the year to the Virgin Islands. Even thoughthey lived in the United States part of theyear, their income tax obligations for that yearare completely satisfied by filing their returnwith, and paying their tax to, the Virgin IslandsBureau of Internal Revenue.

Non-Virgin Islands resident with Virgin Is-lands income. If you are not a bona fide

resident of the Virgin Islands on the last dayof your tax year, you must file identical taxreturns with the United States and the VirginIslands if you have:

1) Income from sources in the Virgin Is-lands, or,

2) Income effectively connected with theconduct of a trade or business in theVirgin Islands.

File the original return with the United Statesand file a copy of the U.S. return (includingall attachments, forms, and schedules) withthe Virgin Islands Bureau of Internal Revenueby the due date for filing Form 1040.

The amount of tax you must pay to the

Virgin Islands is figured by the followingcomputation:

V.I. AGI

worldwide AGI

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

Form 8689 is used for this computation.You must complete this form and attach it toeach copy of your return. You should pay anytax due to the Virgin Islands when you fileyour return with the Virgin Islands Bureau ofInternal Revenue. You receive credit for taxespaid to the Virgin Islands by including theamount on line 31, Form 8689, in the total onForm 1040, line 60. On the dotted line nextto line 60, write Form 8689 and show theamount.

Do not enter the amount from Form 8689,line 35 on Form 1040.

See the illustrated example at the end ofthis publication.

Where to file. If you are not a bona fideresident of the Virgin Islands but you haveincome from the Virgin Islands, you must fileForm 1040 and all attachments with theInternal Revenue Service Center, Philadel-phia, PA 192550002, and with the Virgin Is-lands Bureau of Internal Revenue.

If you are a bona fide resident of theVirgin Islands you should file your re-turn with:

Virgin Islands Bureau of Internal Revenue9601 Estate ThomasCharlotte AmalieSt. Thomas, U.S. Virgin Islands 00802

Contact that office for information aboutfiling your Virgin Islands tax return.

Extensions of time to file. You can get anautomatic 4-month extension of time to fileyour tax return by filing Form 4868, Applica-tion for Automatic Extension of Time To FileU.S. Individual Income Tax Return. Bona fide

residents of the Virgin Islands must file thisform with the Virgin Islands Bureau of InternalRevenue. Non-Virgin Islands residents shouldfile separate Forms 4868 with the IRS and theVirgin Islands Bureau of Internal Revenueand make any payments due to the respec-tive jurisdictions. However, the Virgin IslandsBureau of Internal Revenue will honor an ex-tension request that was timely filed with theIRS.

If you need more time after filing Form4868, file Form 2688, Application for Addi-tional Extension of Time To File U.S. Individ-ual Income Tax Return. For more information,see the Form 2688 instructions.

Double taxation. A mutual agreement pro-cedure exists to settle cases of double taxa-tion between the United States and the VirginIslands. See Double Taxation, earlier underFiling Tax Returns.

The Commonwealthof Puerto RicoThe Commonwealth of Puerto Rico has itsown separate and independent tax system.Although it is modeled after the U.S. system,there are differences in law and tax rates. Ifyou are a U.S. citizen who derives incomefrom Puerto Rican sources, you may be liablefor payment of Puerto Rican taxes. You mayalso be liable for filing a U.S. tax return.

Requests for information about the

filing of Puerto Rican tax returnsshould be addressed to the Bureau

of Income Tax at the following address:

Oficina de AsistenciaContributiva y LegislacionDepartmento de HaciendaP.O. Box 50065San Juan, Puerto Rico 00902-6265

The telephone number is (787)721-2020, extension 3611. To obtainPuerto Rican tax forms, contact the

Forms and Publications Division Office at theabove address or call (787) 721-2020, ex-tension 2645.

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Residents of Puerto Rico. If you are a U.S.citizen and also a resident of the Common-wealth of Puerto Rico for the entire tax year,you generally must include income fromworldwide sources on your Puerto Rican re-turn. Any wages and the cost-of-living allow-ance paid to you by the U.S. Government forworking in Puerto Rico are subject to PuertoRican tax. Advice about possible tax benefitsunder the Puerto Rican investment incentiveprograms is available from the Puerto Ricantax authorities. If you report U.S. source in-come on your Puerto Rican tax return, youcan claim a credit against your Puerto Ricantax, up to the amount allowable, for incometaxes paid to the United States.

Nonresidents of Puerto Rico. If you are aU.S. citizen and are not a resident of theCommonwealth of Puerto Rico, include onlyyour income from Puerto Rican sources onyour Puerto Rican return. Wages that youearn for services performed in Puerto Rico forthe U.S. Government or for private employersis income from Puerto Rican sources.

U.S. taxation. As a U.S. citizen, you are lia-ble for U.S. federal income tax on your grossincome from worldwide sources, no matter

where your residence may be. However, aspecial rule applies if you are a bona fideresident of Puerto Rico for an entire tax year,or have been a bona fide resident of PuertoRico for at least 2 years and later change yourresidence from Puerto Rico during a tax year.

Income. Income you receive from PuertoRican sources during your residence inPuerto Rico is exempt from U.S. tax. This in-cludes income for the period of Puerto Ricanresidence in the year you change your resi-dence from Puerto Rico if you resided thereat least 2 years before the change. However,income you receive for services performed inPuerto Rico as an employee of the UnitedStates cannot be excluded from income onyour U.S. income tax return.

Deductions and credits. Deductions andcredits that apply to your exempt PuertoRican income are not allowable on your fed-eral income tax return.

Deductions that do not specifically applyto any particular type of income must be di-vided between your income from PuertoRican sources and income from all othersources to find the part that you can deducton your U.S. tax return. Examples of de-ductions that do not specifically apply to aparticular type of income are alimony pay-ments, the standard deduction, and certainitemized deductions (such as medical ex-penses, charitable contributions, and real es-tate taxes and mortgage interest on yourhome).

To find the part of a deduction that is al-

lowable, multiply the deduction by the follow-ing fraction.

Gross income from sourcesoutside Puerto Rico

Gross income from all sources(including exempt Puerto Rican income)

Example. You and your spouse are bothunder 65 and U.S. citizens who are bona fideresidents of Puerto Rico for the entire year.You file a joint income tax return. During1997, you earned $15,000 from Puerto Ricansources and your spouse earned $25,000from the U.S. Government. You have $16,000of itemized deductions that do not apply to

any specific type of income. These are med-ical expenses (doctor's fees) of $4,000, realestate taxes of $5,000, home mortgage in-terest of $6,000, and charitable contributionsof $1,000 (cash contributions). You determinethe amount of each deduction that you canclaim on your Schedule A, Form 1040, bymultiplying the deduction by the followingfraction:

Gross income subject to U.S. taxGross income from all sources

(including exempt Puerto Rican income)

SCHEDULE A Itemized deductions shouldbe modified as shown below:

Medical Expenses(doctor's fees)

$25,000

$40,000 $4,000 = $2,500 (enter on line 1

of Schedule A)

Real Estate Taxes

$25,000

$40,000 $5,000 = $3,125 (enter on line 6

of Schedule A)

Home Mortgage Interest

$25,000

$40,000 $6,000 = $3,750 (enter on line 10 or

11 of Schedule A)

Charitable Contributions (cash contri-butions)

$25,000

$40,000 $1,000 = $625 (enter on line 15

of Schedule A)

Enter on Schedule A, Form 1040, only theallowable portion of each deduction.

Standard deduction. The standard de-duction does not apply to any specific typeof income. The part of the standard deductionthat is due to exempt Puerto Rican incomecannot be claimed on your U.S. tax return.The computation is the same as for itemizeddeductions that are not related to any specifictype of income (discussed above). Yourstandard deduction amount (see line 35 of

Form 1040) is multiplied by the followingfraction.

Gross income subject to U.S. taxGross income from all sources

(including exempt Puerto Rican income)

Make this computation before you deter-mine if you must file a U.S. tax return, be-cause the minimum income level at which youmust file a return is based, in part, on thestandard deduction for your particular filingstatus.

Example. James and Joan Brown, bothunder 65, are U.S. citizens and bona fideresidents of Puerto Rico. They file a joint in-come tax return. During 1997, they received

$15,000 of income from Puerto Rican sourcesand $8,000 of income from sources outsidePuerto Rico. They do not itemize their de-ductions. Their allowable standard deductionfor 1997 is figured as follows:

$8,000

$23,000 $6,900 (standard deduction) = $2,400

The Browns must file a U.S. income tax returnbecause their gross income ($8,000) is morethan their allowable standard deduction plustheir exemptions ($2,400 + $5,300 = $7,700).

The Browns should enter $2,400 on line35 of Form 1040 and they should print thefollowing above it: Standard deduction mod-ified due to exempt income under section933.

Personal exemptions are allowed in fulland need not be divided.

Foreign tax credit. If you are a U.S.citizen and are not a bona fide resident ofPuerto Rico for the entire tax year (or not abona fide resident for at least 2 years whochanges residence from Puerto Rico in a taxyear), you must report on your U.S. tax returnall of your Puerto Rican income as well as allother income from worldwide sources. If youmust report Puerto Rican income on yourU.S. tax return, you can claim a foreign taxcredit, figured on Form 1116, for incometaxes paid to Puerto Rico on that income.

You cannot claim a foreign tax credit fortaxes paid on exempt income from PuertoRico. If you have income from Puerto Ricansources, such as U.S. Government wages,that is not excludable, and you have incomefrom Puerto Rican sources that is excludable,you must figure the credit by reducing yourforeign taxes paid or accrued by the taxesbased on the exempt income. To find theamount of this reduction, use the followingformula:

Excluded incomefrom P.R. sourcesless deductibleexpenses based onthat income

Total income subjectto Puerto Rican taxless deductibleexpenses based onthat income

Tax paid or

accrued toPuerto Rico

=

Reduction

in foreigntaxes

Example. John and Mary Reddy are U.S.citizens and were bona fide residents ofPuerto Rico during all of 1997. They file a jointtax return for 1997. The following table showstheir exempt and taxable income for U.S.federal income tax purposes.

John and Mary must file 1997 income taxreturns with both Puerto Rico and the UnitedStates. They have gross income of $26,000for U.S. tax purposes. They paid taxes toPuerto Rico of $5,000. They figure the foreigntax credit on Form 1116, which they must at-tach to their U.S. tax return, Form 1040. John

and Mary figure the foreign taxes on exemptincome as follows:

$15,200$41,200

$5,000 = $1,845

John and Mary enter $1,845 on Form 1116,line 12.

Earned income credit. Even if youmaintain a household in Puerto Rico that isyour principal home and the home of yourqualifying child, you cannot claim the earnedincome credit on your U.S. tax return. Thiscredit is available only if you maintain thehousehold in the United States or you areserving on extended active duty in the ArmedForces of the United States.

Taxable ExemptJohn's wages from U.S. Govern-ment ............................................ $25,000Mary's wages from a PuertoRican corp. . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. $15,000Dividend from Puerto Rican corp.doing business in P.R. ................ 200Dividend from United Kingdomcorp. doing business in U.K.* ..... 400Dividend from U.S. corp. doingbusiness in U.S.* ......................... 600

Totals .......................................... $26,000 $15,200

*Income from sources outside Puerto Rico is taxa-ble.

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Estimated tax. If your estimated incometax obligation is to the United States, use theworksheet in the Form 1040ES package tofigure your estimated tax, including self-employment tax. Use the payment vouchersin the Form 1040ES package for your pay-ments.

Double taxation. A mutual agreement pro-cedure exists to settle cases of double taxa-tion between the United States and theCommonwealth of Puerto Rico. See DoubleTaxation, earlier under Filing Tax Returns.

How To GetMore Information

You can get help from the IRS in severalways.

Free publications and forms. To order freepublications and forms, call 1800TAXFORM (18008293676). You can alsowrite to the IRS Forms Distribution Center

nearest you. Check your income tax packagefor the address. Your local library or post of-fice also may have the items you need.

For a list of free tax publications, orderPublication 910, Guide to Free Tax Services.It also contains an index of tax topics andrelated publications and describes other freetax information services available from IRS,including tax education and assistance pro-grams.

If you have access to a personal computerand modem, you also can get many formsand publications electronically. See Quickand Easy Access to Tax Help and Forms inyour income tax package for details.

Tax questions. You can call the IRS withyour tax questions. Check your income taxpackage or telephone book for the localnumber, or you can call 18008291040.

TTY/TDD equipment. If you have access toTTY/TDD equipment, you can call18008294059 to ask tax questions or toorder forms and publications. See your in-come tax package for the hours of operation.

Evaluating the quality of our telephoneservices. To ensure that IRS representativesgive accurate, courteous, and professionalanswers, we evaluate the quality of our 800number telephone services in several ways.

A second IRS representative sometimesmonitors live telephone calls. That person

only evaluates the IRS assistor and doesnot keep a record of any taxpayer's nameor tax identification number.

We sometimes record telephone calls toevaluate IRS assistors objectively. We

hold these recordings no longer than oneweek and use them to measure thequality of assistance.

We value our customers' opinions.Throughout the year, we will be surveyingour customers for their opinions on ourservice.

Illustrated Exampleof Form 4563John Black is a U.S. citizen and was a bonafide resident of American Samoa during allof 1997. He fills out Form 4563 to determinethe amount of income he can exclude onForm 1040.

Line 1. John enters the date his bona fideresidence began in American Samoa, June2, 1996. Because he is still a bona fide resi-dent, he writes not ended in the secondblank space.

Line 2. He checks the box labeled Rentedhouse or apartment to describe his type ofliving quarters in American Samoa.

Lines 3a and 3b. He checks No on line 3abecause no family members lived with him.He leaves line 3b blank.

Lines 4a and 4b. He checks No on line 4abecause he did not maintain a home outsideAmerican Samoa. He leaves line 4b blank.

Line 5. He enters the name and address ofhis employer, Samoa Products Co. It is aprivate Samoan corporation.

Line 6. He enters the dates of his 2weekvacation to New Zealand from November 11to November 25. That was his only trip out-side American Samoa in 1997.

Line 7. He enters the $24,000 in wages hereceived from Samoa Products Co.

Line 9. He received dividends of $100 froma CNMI corporation and $220 from a Samoancorporation. He enters the total of thoseamounts. He does not enter his dividendsfrom U.S. corporations because they do notqualify for the possession exclusion.

Line 15. John totals the amounts on lines 7and 9 to get the amount he can exclude fromhis gross income in 1997.

Illustrated Exampleof Form 8689Bill and Jane Smith live and work in theUnited States. In 1997, they received $14,400

in income from the rental of a condominiumthey own in the Virgin Islands. The rental in-come was deposited in a bank in the VirginIslands and they received $500 of interest onthis income. They were not bona fide resi-dents of the Virgin Islands at the end of theyear.

The Smiths complete Form 1040, report-ing their income from all sources. They reporttheir wages, interest income, and the incomeand expenses from their Virgin Islands rentalproperty (Schedule E, Form 1040).

The Smiths also complete Form 8689, todetermine how much of their U.S. tax shownon line 53 of Form 1040 (with certain adjust-ments) is due to the Virgin Islands. This is theamount the Smiths must pay to the Virgin Is-lands.

The Smiths file their Form 1040, attachingForm 8689 and all other schedules, with theInternal Revenue Service.

At the same time, they send a copy of theirForm 1040 with all schedules, including Form8689, to the Virgin Islands Bureau of InternalRevenue. This copy will be processed as theiroriginal Virgin Islands return.

Completing Form 8689. To complete theirForm 8689, Bill and Jane Smith begin by en-tering their names, present home address,

and social security numbers at the top of theform.

Part I. The Smiths enter their income fromthe Virgin Islands in Part I. The interest in-come is entered on line 2 and the net rentalincome of $6,200 ($14,400 of rental incomeminus $8,200 of rental expenses) is enteredon line 11. The Smiths' total Virgin Islandsincome of $6,700 is entered on line 16.

Part II. The Smiths have no adjustmentsto their Virgin Islands income, so they enterzero (0) on line 24, and $6,700 on line 25.Their Virgin Islands adjusted gross income is$6,700.

Part III. On line 26, the Smiths enter theamount from line 53, Form 1040 ($5,833).The amount on Form 8689, line 26, is before

any credit for taxes paid to the Virgin Islands.The Smiths enter their worldwide adjustedgross income, $49,737, (line 32, Form 1040)on line 29. They divide their Virgin Islandsadjusted gross income, $6,700 (from line 25),by line 29. They multiply this decimal, .135,by the amount on line 28 to find the amountof tax due to the Virgin Islands (line 31). TheSmiths include this amount in the total onForm 1040, line 60. On the dotted line nextto line 60, they write Form 8689 and showthe amount. The Smiths do not completeForm 1116.

Part IV. Part IV is used to show paymentsof income tax to the Virgin Islands only. TheSmiths had no tax withheld by the Virgin Is-lands, but made estimated tax payments tothe Virgin Islands of $750, which are shown

on lines 33 and 35. The income tax theSmiths owe to the Virgin Islands ($37) isshown on line 39. They must pay their VirginIslands tax at the same time they file the copyof their return with the Virgin Islands.

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OMB No. 1545-0173Exclusion of Income for Bona Fide Residents

of American Samoa4563Form

See instructions below and on back.Department of the TreasuryInternal Revenue Service

AttachmentSequence No. 68 Attach to Form 1040.

Your social security numberName(s) shown on Form 1040

1 Date bona fide residence began , and ended

Rented house or apartmentRented room2 Type of living quarters in American Samoa Purchased homeQuarters furnished by employer

NoYes3a Did any of your family live with you in American Samoa during any part of the tax year?

If Yes, who and for what period?

NoYes4a Did you maintain any home(s) outside American Samoa?

If Yes, show address of your home(s), whether it was rented, the name of each occupant, and his or her relationship to

you.

5 Name and address of employer (state if self-employed)

6 Complete columns (a) through (d) below for days absent from American Samoa during the tax year.

(c) Number ofdays absent

(b) Datereturned

(a) Date left (d) Reason for absence

7Wages, salaries, tips, etc.78Taxable interest income89Dividend income910Rent and royalty income1011Business income11

12Farm income12

Capital gains13 13

Other income. List type and amount 1414

Add lines 7 through 14. This is the amount you may exclude from your gross income this taxyear

1515

InstructionsSection references are to the Internal Revenue Code.

Purpose of FormIf you qualify, use Form 4563 to figure the amount of incomeyou may exclude from your gross income.

Cat. No. 12909U Form 4563 (Rev. 10-97)

(Rev. October 1997)

Part I

Part II

General Information

b

b

Figure Your Exclusion. Include only income that qualifies for the exclusion. See instructions.

For Paperwork Reduction Act Notice, see back of form.

Bona Fide Residence Test

No specific rule determines if you are a bona fide residentof American Samoa. At the time this form went to print,regulations defining the bona fide residence test undersection 931 had not been published. The following factorsmay be considered:

Intent,

Establishment of a permanent home,

Assimilation into the social, cultural, and economicenvironment, and

To qualify under this test, you must be a bona fide residentof American Samoa for an uninterrupted period that includesa complete tax year (January 1December 31 if you file a

calendar year return).Who QualifiesYou qualify for the exclusion if you were a bona fide residentof American Samoa for the entire tax year. See Bona FideResidence Test on this page.

In future years, bona fide residents of Guam andthe Commonwealth of the Northern MarianaIslands (CNMI) may also qualify for the exclusion.They will not qualify, however, unless

implementation agreements are in effect with the UnitedStates. At the time this form went to print, the CNMI had not

entered into an implementation agreement. Also, the effectivedate of the agreement between the United States and Guamhad not been determined.

JOHN BLACK 1 1 1 0 0 1 1 1 1

6 -2-96 not ended

X

X

X

Samoa Product s Co , Pago Pago , American Samoa

11-11-97 11-25-97 14 Vacat ion t o New Zealand

24,000

320

24,320

Page 10


11/15

Bill Smit h

Jane Smit h

10 40 Elm St . Oldt own, VA 220 0 0

2 2 2 0 0 2 2 2 2

2 2 2 0 0 2 2 2 3

50 0

6,200

6,700

-0 -

5,833

5,833

6,700

78 7

135

750

37

750

49,737

OMB No. 1545-1032Allocation of Individual Income Tax tothe Virgin Islands

Form 8689

Department of the TreasuryInternal Revenue Service

Attach to Form 1040.AttachmentSequence No. 85For calendar year 1997, or fiscal year ending , 19 .

Your social security numberLast nameYour first name and initial

Last name Spouses social security numberIf a joint return, spouses first name and initial

Apt. no.Present home address (number and street) City, town or post office, state or territory, and ZIP code

Income From the Virgin Islands

1Wages, salaries, tips, etc.12Taxable interest income233 Dividend income44 Taxable refunds, credits, or offsets of local Virgin Islands taxes55 Alimony received66 Business income or (loss)77 Capital gain or (loss)8899

Other gains or (losses)

1010

IRA distributions (taxable amount)

1111Pensions and annuities (taxable amount)

1212

Rental real estate, royalties, partnerships, S corporations, trusts, etc.

1313

Farm income or (loss)

1414

Unemployment compensation

1515

Social security benefits (taxable amount)

1616Other income. List type and amount.

Add lines 1 through 15. This is your total income

Adjustments to Income From the Virgin Islands

17IRA deduction17

19

One-half of self-employment (SE) tax

192020

Self-employed health insurance deduction 21

Keogh and self-employed SEP and SIMPLE plans

2122

Penalty on early withdrawal of savings

22

Add lines 17 through 23. These are yourtotal adjustments

23

Subtract line 24 from line 16. This is your adjusted gross income 24 24

Allocation of Tax to the Virgin Islands

Enter amount from Form 1040, line 53

25

26

Enter amount from Form 1040, line 33

28

.Divide line 25 above by line 29. Enter the result as a decimal (carry to 3 places)

29

Multiply line 28 by line 30. This is your tax allocated to the Virgin Islands. Also, include this amount in thetotal on Form 1040, line 60. On the dotted line next to line 60, enter Form 8689 and show the amount

30 30

Payments of Income Tax to the Virgin IslandsIncome tax withheld by the Virgin Islands

31

32

1997 estimated tax payments and amount applied from 1996 return

3233

Amount paid with Form 4868 (extension request)

33

Add lines 32 through 34. These are yourtotal payments 34

35

If line 35 is more than line 31, subtract line 31 from line 35. This is the amount youOVERPAID to the

Virgin Islands

35

36

Amount of line 36 you want REFUNDED TO YOU

36

Amount of line 36 you want APPLIED TO YOUR 1998 ESTIMATED TAX

37

If line 31 is more than line 35, subtract line 35 from line 31. This is theAMOUNT YOU OWE to theVirgin Islands

38

For Paperwork Reduction Act Notice, see back of form. Form 8689 (1997)Cat. No. 64603D

Part IV

Part I

Part II

Part III

Enter the total of the amounts from Form 1040, lines 47, 49, and 56; any uncollected employee social

security and Medicare or RRTA tax or tax on golden parachute payments included on line 53; and

any amount from Form 5329, Parts II, III, or IV, included on line 50

25

26

27

Subtract line 27 from line 26

27

Moving expenses

1997

1818 Medical savings account deduction

39

23

29

34

38

37

39

28

31

Page 11


12/15

Index

AAmerican Samoa ..................... 6, 7

Estimated tax ......................... 7Nonresident ............................ 7Resident ................................. 7

U.S. Government employees . 7

CChange of address ...................... 1Commonwealth of the Northern

Mariana Islands ...................... 6Estimated tax payments ......... 6Income tax withheld ............... 6Credit:

Earned income ....................... 8Excess FICA .......................... 4Foreign tax ......................... 3, 8

DDouble taxation ............... 4, 6, 7, 9

American Samoa .................... 7Guam ...................................... 6Puerto Rico ............................ 9Virgin Islands .......................... 7

E Estimated tax:American Samoa .................... 7CNMI ...................................... 6Guam ...................................... 5

Excess FICA, credit for ............... 4Extension of time to file ........... 3, 4

Automatic ............................... 3Form 2688 .............................. 4Form 4868 .............................. 4

FFellowships .................................. 2

Filing requirements .......... 3, 5, 6, 7American Samoa .................... 7Commonwealth of the Northern

Mariana Islands ................. 6Dependents ............................ 3Guam ...................................... 5Puerto Rico ............................ 7Virgin Islands .......................... 7

Filing tax returns .......................... 3Form:

843 ......................................... 41040 (Schedule SE) ............... 4

1040 INFO .............................. 71040X ..................................... 5

1040ES ......................... 6, 7, 91040SS ................................. 4

1116 ............................... 3, 7, 82688 ................................... 4, 73903 ....................................... 34563 ................................... 2, 3

4868 ................................... 4, 75074 ....................................... 68689 ................................... 7, 98822 ....................................... 1W-7 ......................................... 1

GGuam ........................................... 5Estimated tax payments ......... 5Income taxes withheld ........... 5U.S. military employees ......... 5

HHelp from IRS .............................. 9

IIndividual taxpayer identification

number (ITIN) ......................... 1

MMoving expenses ........................ 3

PPossession exclusion .............. 2, 3Bona fide resident .................. 2Deductions and credits .......... 3Foreign tax credit ................... 3

Personal exemptions .............. 3Sources of income ................. 2

Standard deduction ................ 3Puerto Rico .............................. 7, 8Deductions and credits .......... 8Earned income credit ............. 8Foreign tax credit ................... 8

Nonresidents .......................... 8Personal exemptions .............. 8Residents ............................... 8Standard deduction ................ 8

SScholarships ................................ 2Self-employment tax .................... 4

TTaxpayer Advocate ..................... 2

VVirgin Islands ............................... 7

Form 8689 .............................. 7Nonresident ............................ 7Resident ................................. 7

WWhen to file ................................. 3Where to file ................................ 3Where to file:

CNMI ...................................... 6Form 1040 .............................. 4

Guam ...................................... 5U.S. ........................................ 5Virgin Islands .......................... 7

Page 12


13/15

Tax Publications for Individual Taxpayers

General Guides

Your Rights as a TaxpayerYour Federal Income Tax (ForIndividuals)Farmers Tax GuideTax Guide for Small BusinessTax Calendars for 1998Highlights of 1997 Tax Changes

Guide to Free Tax Services

Specialized Publications

Armed Forces Tax GuideFuel Tax Credits and RefundsTravel, Entertainment, Gift, and CarExpensesExemptions, Standard Deduction,and Filing InformationMedical and Dental ExpensesChild and Dependent Care ExpensesDivorced or Separated IndividualsTax Withholding and Estimated TaxEducational Expenses

Foreign Tax Credit for IndividualsU.S. Government Civilian EmployeesStationed AbroadSocial Security and OtherInformation for Members of theClergy and Religious WorkersU.S. Tax Guide for AliensScholarships and FellowshipsMoving ExpensesSelling Your HomeCredit for the Elderly or the DisabledTaxable and Nontaxable IncomeCharitable ContributionsResidential Rental Property

Commonly Used Tax Forms

Miscellaneous Deductions

Tax Information for First-TimeHomeownersReporting Tip IncomeSelf-Employment TaxDepreciating Property Placed inService Before 1987Installment SalesPartnershipsSales and Other Dispositions ofAssetsCasualties, Disasters, and Thefts(Business and Nonbusiness)Investment Income and ExpensesBasis of AssetsRecordkeeping for IndividualsOlder Americans Tax GuideFederal Tax Information onCommunity PropertyExamination of Returns, AppealRights, and Claims for RefundSurvivors, Executors, andAdministratorsDetermining the Value of DonatedPropertyMutual Fund DistributionsTax Guide for Individuals With

Income From U.S. PossessionsPension and Annuity IncomeNonbusiness Disaster, Casualty, andTheft Loss WorkbookBusiness Use of Your Home(Including Use by Day-CareProviders)Individual Retirement Arrangements(IRAs) (Including SEP-IRAs andSIMPLE IRAs)Tax Highlights for U.S. Citizens andResidents Going AbroadUnderstanding the Collection ProcessEarned Income CreditTax Guide to U.S. Civil ServiceRetirement Benefits

Tax Highlights for Persons withDisabilitiesBankruptcy Tax GuideDirect SellersSocial Security and EquivalentRailroad Retirement BenefitsIs My Withholding Correct for 1998?Passive Activity and At-Risk RulesHousehold Employers Tax GuideTax Rules for Children andDependentsHome Mortgage Interest DeductionHow To Depreciate PropertyPractice Before the IRS and Powerof AttorneyIntroduction to Estate and Gift TaxesIRS Will Figure Your Tax

Per Diem RatesReporting Cash Payments of Over$10,000The Problem Resolution Programof the Internal Revenue Service

Derechos del ContribuyenteCmo Preparar la Declaracin deImpuesto Federal

Crdito por Ingreso del TrabajoEnglish-Spanish Glossary of Wordsand Phrases Used in PublicationsIssued by the Internal RevenueService

U.S. Tax Treaties

Spanish Language Publications

U.S. Individual Income Tax ReturnItemized DeductionsInterest and Dividend IncomeProfit or Loss From Business

Net Profit From BusinessCapital Gains and LossesSupplemental Income and Loss

Earned Income CreditProfit or Loss From Farming

Credit for the Elderly or theDisabled

Income Tax Return for Single andJoint Filers With No Dependents

Self-Employment Tax

U.S. Individual Income Tax ReturnInterest and Dividend Income forForm 1040A Filers

Child and Dependent CareExpenses for Form 1040A FilersCredit for the Elderly or theDisabled for Form 1040A Filers

Estimated Tax for IndividualsAmended U.S. Individual Income TaxReturn

Unreimbursed Employee BusinessExpenses

Sale of Your HomeUnderpayment of Estimated Tax byIndividuals, Estates and Trusts

Power of Attorney and Declarationof Representative

Child and Dependent Care Expenses

Moving ExpensesDepreciation and Amortization

Application for Automatic Extensionof Time To File U.S. IndividualIncome Tax ReturnInvestment Interest ExpenseDeductionAdditional Taxes Attributable toQualified Retirement Plans (IncludingIRAs), Annuities, and ModifiedEndowment ContractsAlternative Minimum TaxIndividualsNoncash Charitable Contributions

Change of AddressExpenses for Business Use of Your

Home

Tax Highlights for CommercialFishermen

910

595

553509334225

171

Nondeductible IRAs (Contributions,Distributions, and Basis)

Passive Activity Loss Limitations

3378463

501

502503504505508

514516

517

519520521523524525526527529

530

531533534

537

544

547

550551552554

541

555

556

559

561

564570

575584

587

590

593

594596721

901907

908

915

919925926929

946

911

936

950

1542

967

1544

1546

596SP

1SP

850

579SP

Comprendiendo el Proceso de Cobro594SP

947

1040Sch ASch BSch CSch C-EZSch DSch ESch EICSch FSch H Household Employment TaxesSch R

Sch SE1040EZ

1040ASch 1

Sch 2

Sch 3

1040-ES1040X

2106 Employee Business Expenses2106-EZ

21192210

24412848

39034562

4868

4952

5329

6251828385828606

88228829

Tax Benefits for Adoption968

Informe de Pagos en Efectivo enExceso de $10,000 (Recibidos enuna Ocupacin o Negocio)

1544SP

Page 13


14/15

Tax Publications for Business Taxpayers

General Guides

Commonly Used Tax Forms

Spanish Language Publications

Your Rights as a TaxpayerYour Federal Income Tax (ForIndividuals)Farmers Tax GuideTax Guide for Small BusinessTax Calendars for 1998Highlights of 1997 Tax Changes

Guide to Free Tax Services

Employers Tax Guide (Circular E)Employers Supplemental Tax GuideAgricultural Employers Tax Guide(Circular A)Federal Tax Guide For Employers inthe Virgin Islands, Guam, AmericanSamoa, and the Commonwealth ofthe Northern Mariana Islands(Circular SS)

Household Employers Tax Guide

Gua Contributiva Federal ParaPatronos Puertorriqueos(Circular PR)

Travel, Entertainment, Gift, and CarExpensesTax Withholding and Estimated TaxExcise Taxes for 1998Withholding of Tax on NonresidentAliens and Foreign CorporationsSocial Security and OtherInformation for Members of theClergy and Religious Workers

Residential Rental PropertySelf-Employment TaxDepreciating Property Placed inService Before 1987Business ExpensesNet Operating LossesInstallment SalesAccounting Periods and Methods

CorporationsSales and Other Dispositions ofAssetsBasis of AssetsExamination of Returns, AppealRights, and Claims for RefundRetirement Plans for Small Business(SEP, Keogh, and SIMPLE Plans)

Determining the Value of DonatedPropertyStarting a Business and KeepingRecords

Understanding the Collection Process

Information on the United States-Canada Income Tax Treaty

Bankruptcy Tax GuideDirect SellersPassive Activity and At-Risk RulesHow To Depreciate Property

Reporting Cash Payments of Over$10,000The Problem Resolution Programof the Internal Revenue Service

Derechos del ContribuyenteCmo Preparar la Declaracin deImpuesto Federal

English-Spanish Glossary of Wordsand Phrases Used in PublicationsIssued by the Internal RevenueService

Tax on Unrelated Business Incomeof Exempt Organizations

Wage and Tax Statement

Itemized DeductionsInterest and Dividend IncomeProfit or Loss From Business

Net Profit From BusinessCapital Gains and LossesSupplemental Income and LossProfit or Loss From Farming

Credit for the Elderly or theDisabled

Estimated Tax for IndividualsSelf-Employment Tax

Amended U.S. Individual IncomeTax Return

Capital Gains and LossesPartners Share of Income,Credits, Deductions, etc.

U.S. Corporation Income Tax Return

U.S. Income Tax Return for an SCorporation

Employee Business ExpensesUnreimbursed EmployeeBusiness Expenses

Power of Attorney and Declaration ofRepresentative

Child and Dependent Care Expenses

General Business Credit

Application for Automatic Extensionof Time To File U.S. IndividualIncome Tax Return

Moving Expenses

Additional Taxes Attributable toQualified Retirement Plans(Including IRAs), Annuities, andModified Endowment ContractsInstallment Sale IncomeNoncash Charitable Contributions

Change of AddressExpenses for Business Use of YourHome

Tax Highlights for CommercialFishermen

910

595

553509334225

171

Nondeductible IRAs (Contributions,Distributions, and Basis)

Passive Activity Loss Limitations

1515-A

51

80

179

926

378

463

505510515

517

us internal revenue service: p570--1997

Documents