Individuals Living or Working in U.S. Territories / Possessions
American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, and Puerto Rico all have their own independent tax departments. If you have income from one of these U.S. territories, you may have to file a U.S. tax return only, a territory tax return only, or both returns. This generally depends on whether you are considered a resident of one of the U.S. territories. In some cases, you may have to file a U.S. return, but be able to exclude income earned in a territory from U.S. tax. Filing requirements for specific U.S. territories are explained in Publication 570, Tax Guide for Individuals With Income From U.S. Possessions.
Possession Exclusion Under IRC 931
Currently, the possession exclusion applies only to U.S. citizens or resident aliens who are bona fide residents of American Samoa. Individuals qualifying for this exclusion may have to attach Form 4563 Exclusion of Income for Bona Fide Residents of American Samoa to their U.S. federal individual income tax returns.
Individuals in the following U.S. territories are not eligible for the possession exclusion: Baker Island, Commonwealth of Northern Mariana Islands (CNMI), Guam, Howland Islands, Jarvis Island, Johnston Island, Kingman Reef, Midway Islands, Palmyra, Puerto Rico, U.S. Virgin Islands, and Wake Island.
Please refer to Publication 570 for the exclusions, credits, and deductions which apply to residents of Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, and Puerto Rico.
Filing Requirements for Individuals in U.S. Territories
An individual who has income from Guam, the CNMI, American Samoa, the U.S. Virgin Islands, or Puerto Rico will probably have to file a tax return with the tax department of one of these territories. It is possible that you may have to file two annual tax returns: one with the territory's tax department and the other with the U.S. Internal Revenue Service. You should ask for forms and advice about the filing of territory tax returns from that territory's tax department and not the U.S. Internal Revenue Service.
In some situations you may have to determine if you are a resident or a nonresident of a certain territory. Contact the tax department of that territory for advice about this point. The addresses and telephone numbers for the tax departments of the U.S. territories may be found in Publication 570. In addition please refer to information about the U.S. territories found at State and Local Government On The Net.
Section 908 of the American Jobs Creation Act of 2004 created a new Internal Revenue Code Section 937. Section 937 establishes new criteria for determining the residency of an individual in American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, and Puerto Rico. Section 937 also establishes the filing requirement for the new tax Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession (PDF). This form reports each change of residency to or from a U.S. territory / possession. The IRS is authorized to impose a $1,000 penalty on any taxpayer who is liable to file this form, but who fails to file it.
Per Section 937, an individual is generally considered a bona fide resident of a territory / possession if he or she (1) is physically present in the territory for 183 days during the taxable year, (2) does not have a tax home outside the territory during the tax year, and (3) does not have a closer connection to the U.S. or a foreign country. However, U.S. citizens and resident aliens are permitted certain exceptions to the 183-day rule.
Section 937 also establishes new criteria for determining whether income is sourced in a U.S. territory.
Individuals who are required to file Form 8898 generally must do so by the due date (including extensions) for filing Form 1040 or Form 1040NR. Form 8898 must be filed by itself and not with Form 1040 or Form 1040NR. Refer to Residents of U.S. Possessions - Form 8898 Bona Fide Residence for more information. For a detailed explanation of the U.S. possession residency rules and income sourcing rules, please refer to Publication 570.
A U.S. citizen who is self-employed in a U.S. territory 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.
Refer to Publication 15, Circular E, Employer's Tax Guide for the current self-employment tax rates and the maximum amount of earnings subject to social security (old age, survivor, and disability insurance) tax. All earnings are subject to Medicare (hospital insurance) tax.
Self-Employment Tax Form
If you have to file Form 1040 (PDF) with the United States, figure your self-employment tax on Form 1040 (Schedule SE) Self-Employment Tax and attach it to Form 1040.
If you are a resident of American Samoa, Guam, the CNMI, Puerto Rico, or the U.S. 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, U.S. Self-Employment Tax Return, to figure your self-employment tax.
Note: If you are a resident of Puerto Rico, you can file Form 1040-PR (PDF) instead of Form 1040-SS. Form 1040-PR is the Spanish-language equivalent of Form 1040-SS (PDF). These forms must be filed with the U.S. Internal Revenue Service at the address shown in the instructions for Form 1040-PR and Form 1040-SS.
Credit for Excess FICA Employee Tax Withheld
If you had more than one employer during the tax year, and your total wages were more than the maximum amount of wages subject to Social Security Tax (Refer to Chapter 9 of Publication 15), your employers may have withheld too much social security tax. If so, you can take a credit for the excess amount on the line entitled "Excess Social Security and Tier 1 RRTA Tax Withheld", located in the Payments section of page 2, Form 1040.
If you do not file Form 1040, you can claim a refund of the excess amount withheld by filing Form 843, Claim for Refund and Request for Abatement (PDF). Residents of Puerto Rico, the U.S. Virgin Islands, American Samoa, Guam, and the CNMI should file Form 843 with the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.
If any one employer withheld more than the maximum amount of Social Security Tax allowable for tax year, you must ask your employer to refund the excess to you. You cannot claim the excess Social Security Tax withheld by one employer on your income tax return. However, if the employer refuses to refund the excess Social Security Tax withheld, then you can claim a refund of the excess amount withheld by filing Form 843, Claim for Refund and Request for Abatement (PDF)