International Tax Gap Series
Every year, people move to or from a U.S. territory such as American Samoa, Guam, the Northern Mariana Islands, Puerto Rico or the U.S. Virgin Islands. What many don’t realize is this can trigger new filing requirements and the need to determine whether they are considered a bona fide resident of the U.S. territory.
Notifying the IRS about Residency in a U.S. Territory
If a taxpayer moves to or from a territory and has worldwide income of more than $75,000 that year, it is necessary to file Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession, with the Internal Revenue Service (IRS). If married, the $75,000 threshold applies to each spouse separately.
File Form 8898 by the due date (including extensions) for filing the Form 1040 or Form 1040NR. File this form by itself at the following address:
Department of the Treasury
Internal Revenue Service Center
Philadelphia, PA 19255-0549
There may be a $1,000 penalty for not filing a required Form 8898 or for not providing all of the required information.
Determining Bona Fide Residency in a U.S. Territory
Bona fide residents (BFR) may be citizens, resident aliens or nonresident aliens of the U.S. In general, a “bona fide resident” means an individual who satisfies 1, 2, and 3 below:
Present 183 days (or more) in the U.S. territory during the tax year, or
Present 549 days (or more) in the U.S. territory during the tax year AND 2 immediately preceding tax years, with a minimum of 60 days presence in the U.S. territory in each of these 3 years, or
Present no more than 90 days in the U.S. during the tax year, or
Present in the U.S. territory for more days in tax year than in the U.S. AND U.S. earned income is not greater than $3,000, or
No significant connection to the U.S. (e.g., no permanent home, voter registration, spouse or minor child in the U.S.)-.
No tax home outside the U.S. territory during the tax year.
No closer connection to the U.S. or a foreign country than to the U.S. territory during the tax year.
Certain days count as days present in the relevant U.S. territory, even if the taxpayer was not physically present in the U.S. territory. These days include:
days spent outside the U.S. territory for qualified medical reasons for the taxpayer or a family member whom the taxpayer accompanies,
days outside the U.S. territory because a disaster prevented the taxpayer from being in the U.S. territory, or
days spent outside the U.S. territory due to a mandatory evacuation.
Also, certain days spent in the U.S. do not count as days of presence in the U.S. for the purposes of the presence test. These include:
days the taxpayer spends less than 24 hours while traveling between two places outside the U.S,
days the taxpayer is in the US. as a professional athlete to compete in a charitable sports event,
days the taxpayer is temporarily present in the U.S. as a full time student, and
days the taxpayer is in the U.S. serving as an elected representative of a U.S. territory, or serving full time as an elected or appointed official or employee of the government of the U.S. territory or its political subdivisions.
There are limited exceptions to the tax home and closer connection requirements that apply for the year of the move to (or from) a U.S. territory. These exceptions are described in the Instructions for Form 8898 .
Filing Income Tax Returns
Once the residency status and the source of each item of income received during the tax year is known, the taxpayer is ready to identify any U.S. and/or U.S. territory filing requirements. It may be necessary to file income tax returns with more than one jurisdiction, e.g., the U.S. and the U.S. territory.
Generally, the same rules that apply for determining U.S. source income also apply for determining U.S. territory source income. There is a table in Publication 570 showing the general rules for determining U.S. source income.
References and Links
The International Tax Gap Series