YouTube video text script - Webinar: Determining Residency in a U.S. Territory for Federal Tax Purposes

Hello, and welcome to today’s webinar, Determining Residency in a U.S. Territory for Federal Tax Purposes. I say it’s the top of the hour. We’re glad you’ve joined us today. My name is David Higgins, and I am a Stakeholder Liaison with the Internal Revenue Service, and I will be your moderator for today’s webinar. It’s slated for approximately 120 continuous minutes.

Before we begin, if there’s anyone in the audience that’s with the media, please send an email to the address on the slide. Be sure to include your contact information and the news publication you’re with. Our Media Relations and Stakeholder Liaison staff will assist you and answer any questions you may have. As a reminder, this webinar will be recorded and made available for future viewing. If you’re just joining, I want to quickly mention some virtual webinar housekeeping items.

First, closed captioning is available for today’s presentation and will be available throughout the webinar. Second, you can download several documents by clicking on the Materials dropdown arrow on the left side of your screen. We’ve included technical help documents along with a copy of today’s PowerPoint and other resources. Third, if you have a topic-specific question today, please submit it by clicking the Ask Question dropdown arrow to reveal the text box. Type your question in the text box and click Send. Please do not enter any sensitive or taxpayer-specific information.

During the presentation, we’ll take a few breaks to check in and engage with you. At those times, a polling style feature will pop-up on your screen with a question and multiple choice answers. Select the response you believe is correct by clicking on the radio button next to your selection and then click Submit. If you do not get the polling question, this may be because you have your pop-up blocker on. So please take a moment to disable your pop-up blocker now so you can answer the questions.

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We’re going to take some time and test the polling feature. Here’s your opportunity to ensure your pop-up blocker is not on so you can receive the polling questions throughout today’s presentation. This webinar offers two IRS continuing education credits. You can earn two IRS CE credits and a related certificate of completion by attending the live broadcast of the webinar for at least 100 minutes after the top of the hour start time and responding to at least four polling questions during the live broadcast.

Audience, this polling question example to test your pop-up blocker will count towards the polling questions requirement to earn CE. How comfortable are you using IRS.gov to research tax information and/or resolve tax-related issues? A, for comfortable; B, neither comfortable nor uncomfortable; C, uncomfortable; D, I rarely or never use IRS.gov. Take a moment and click the radio button that corresponds to your answer. I’ll give you a few more seconds to make your selection.

Okay, we’re going to stop the polling now. And I see that the majority of you chose answer one, A, comfortable. So do appreciate that, glad to hear it. If you did not receive the polling question and were unable to submit your answer, now is the time to check your pop-up blocker and make sure that you have it turned off. Now that we’ve concluded our administrative items, let’s move along with our session.

So, welcome and thank you for joining us for today’s webinar, Determining Residency in a U.S. Territory for Federal Tax Purposes. This webinar is scheduled for approximately 120 minutes from the top of the hour. Audience, please note that the information contained in this presentation is current as of the date it was presented. It should not be considered official guidance. The material presented is solely for informational purposes related to tax administration.

Now, let me introduce today’s speakers. Today, we are joined by Senior Revenue Agents, Emma Sadikovich and Kathy Bishop with the Large Business and International, LB&I Division. They are technical specialists in international individual compliance and are responsible for facilitating and coordinating the identification and development of issues on examinations involving U.S. tax residency status and the taxation of U.S. individuals living or working outside the United States.

Emma has expertise in a variety of topics, including the foreign earned income exclusion, expatriation, and taxation of individuals with income from U.S. territories. Prior to joining the IRS, Emma worked for PWC prior to law school and practiced corporate law for a few years. Emma is a certified public accountant in active status. Emma has a BBA with high distinction with emphasis in accounting and finance from the University of Michigan Ann Arbor, as well as a Master of Accounting from the University of Michigan Ann Arbor. She also has a Juris Doctor degree from Chicago-Kent College of Law.

Kathy has been with the IRS for 16 years. She previously worked numerous examinations as a revenue agent in SPSC, including international issues. Kathy has expertise in a variety of topics, including residency status, the foreign earned income exclusion, taxation of individuals with income from U.S. territories, and employees of foreign governments and international organizations. Kathy holds a BS in accounting with a Minor in Computer Technology and an MS in Accounting and Taxation. Let’s all give a virtual welcome to Emma and Kathy.

And I’ll turn it over to you, Emma, to kick off the presentation.

Thank you, David. And let me add my welcome and thank you to everyone for attending today’s webinar. We’re very excited. Our topic today is Determining Residency in a U.S. Territory for Federal Tax Purposes. During today’s webinar, we will identify the three tests to determine whether an individual is a bona fide resident of a U.S. territory. Discuss the federal income tax filing requirements for individuals with income from a U.S. territory. Provide an overview of Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Territory, and discuss Puerto Rico Act 22.

Today’s webinar will focus on five U.S. territories, American Samoa, the Commonwealth of Northern Mariana Islands, Guam, Puerto Rico, and the U.S. Virgin Islands. American Samoa, the Commonwealth of Northern Mariana Islands, Guam, Puerto Rico, and the U.S. Virgin Islands each have their own independent tax agencies, but their tax systems are coordinated with the U.S. Internal Revenue Code. The IRS has entered into agreements called coordination or implementation agreements for coordinating tax issues between the IRS and the tax agencies in each of these five U.S. territories. Each coordination agreement contains exchange of information provisions and establishes mutual agreement procedures to settle issues, including residency, where there is inconsistent tax treatment between the IRS and the taxing authority of a U.S. territory.

The mutual agreement procedures generally permit taxpayers to request competent authority assistance when they consider that actions of the United States, a U.S. territory, or both result or will result in taxation that is contrary to the provisions of a coordination agreement. The income tax coordination rules do not apply to entities, just individuals. And for purposes of the Internal Revenue Code, territory source income is generally treated similar to foreign source income.

The Internal Revenue Code also treats U.S. subsidiaries, forms, and territories as foreign corporations. Internal Revenue Code Section 937(a) provides that an individual is a bona fide resident of a U.S. territory if the individual meets a presence test, a tax home test, and a closer connection test. The rules of Section 937 apply for tax years ending after January 31, 2006, which for most taxpayers would be the calendar year ended December 31, 2006. And Section 937(a) applies to the following U.S. territories, American Samoa, the Commonwealth of Northern Mariana Islands, Guam, Puerto Rico, and the U.S. Virgin Islands. And depending on the territory, bona fide residents either exclude territory sourced income from U.S. income tax or file a single income tax return with the territory to report income from all sources.

Members of the U.S. Armed Forces who qualify as bona fide residents of a territory in an earlier tax year will remain bona fide residents of that territory for tax purposes if they’re absent from that territory in compliance with military orders. Similarly, service members who do not qualify as bona fide residents of a territory in a prior taxable year are not considered to be bona fide residents of that territory if they’re present there solely in compliance with military orders. The service member is deemed to satisfy the presence test, the tax home test, and the closer connection test with respect to the territory if he was a bona fide resident of that territory in an earlier tax year.

And Armed Forces means all regular and reserve components of the uniformed services that are subject to the jurisdiction of the Secretary of War, the Secretary of the Army, the Secretary of the Navy, or the Secretary of the Air Force. It also includes the Coast Guard. The members of such forces include commissioned officers and personnel below the grade of commissioned officers in such forces. For example, a service member who before entering the U.S. Army was an Alabama resident and is now stationed in Guam on military orders continues to be treated as an Alabama resident for income tax purposes and so would not be considered a bona fide resident of Guam.

A service member from Puerto Rico who is now stationed in Maryland on military orders continues to be treated as a bona fide resident of Puerto Rico for income tax purposes. To be a bona fide resident of a U.S. territory for a particular year, an individual must meet all the following. Be present in the relevant territory for at least 183 days during the year or satisfy one of the other four alternative tests set forth in Treasury Regulation Section 1.937-1(c). Not have a tax home outside the relevant territory and not have a closer connection to the U.S. or to a foreign country than to the relevant territory.

David, is this a good time for our first polling question?

It sure is, Emma. Audience, here is our first polling question. In order to be a bona fide resident of a U.S. territory for a particular year, an individual must meet one of the following tests found in IRC Section 937. One, the presence test; two, the tax home test; or three, closer connection test. A for true and B for false. If you do not receive the polling question, please enter only the letters A or B that corresponds with your response in the Ask Question text box. Your response is timestamped. I’ll give you a few more seconds to make your selection.

Okay, we’re going to stop the polling now and we’ll share the correct answer on the next slide. And the correct answer is B, false. I see that in order to be a bona fide resident of a U.S. territory for a particular year, an individual must meet the three tests found in IRC Section 937, the presence test, the tax home test, and the closer connection test. And I see that the majority of you, 79%, responded correctly. Nice job.

Okay, back to you, Emma.

Thank you, David. The first requirement to be a bona fide resident of a U.S. territory is that the individual must satisfy a physical presence test. The requirements are not the same as for determining if a nonresident meets the substantial presence test under Section 7701, nor is it the same as the physical presence for purposes of the foreign earned income exclusion under Section 911. Generally, an individual will be treated as being present in the relevant territory on any day that they’re physically present in that territory at any time during the day. And there are some exceptions, which we will discuss shortly.

A U.S. citizen or resident alien will satisfy the presence test for the tax year if they’re present in the relevant territory for at least 183 days during the tax year or they meet one of the four alternative presence tests. They’re present in the relevant territory for at least 549 days during the three-year period that includes the current tax year and the two immediately preceding tax years. During each year of the three-year period, the individual must be present in the relevant territory for at least 60 days. They’re present in the United States for no more than 90 days during the tax year. The individual had earned income in the United States of no more than a total of $3,000 and was present for more days in the relevant territory than in the United States during the tax year.

Earned income is paid for personal services performed, such as wages, salaries, or professional fees. Do not forget, pension benefits, social security benefits are not considered earned income for purposes of this test or the individual had no significant connection to the United States during the tax year. And for purposes of this final alternative test, generally, a significant connection includes having a permanent home in the United States as defined in Treasury Regulation Section 301.7701(b)-2(d) with exceptions for certain rental property.

A current registration to vote in the United States or having a spouse or child under the age of 18 whose principal place of abode is in the United States, other than a spouse from whom the taxpayer is legally separated, or a child who is in the United States by reason of a custodial arrangement or as a student. The five ways of meeting the physical presence requirement only apply to U.S. citizens and residents. There is a special rule for determining if a non-resident alien meets this requirement. Non-resident aliens must apply the rules for the substantial presence test found in Section 7701, but substitute the name of the territory for United States and U.S. wherever they appear in that code section.

David, this looks like a good time for a second polling question for those who are taking this course for continuing education purposes.

I agree, Emma. Our second polling question is another true or false. Here we go. There are no alternatives to the 183-day requirement for purposes of satisfying the physical presence test. Select A for true or B for false. Take a moment and click the radio button that best answers the question. If you didn’t receive the polling question, please enter only the letter A or B that corresponds with your response in the Ask Question text box. Your response is timestamped. We’ll give you a few more seconds to make your selection or to submit your answer in the Ask Question feature.

Okay, we’re going to stop the polling now and let’s share the correct answer on the next slide. And the correct answer is B, false. Wow, I see that 74% of you answered correctly. So far, so good with the polling questions. Kathy, it looks like you’re up next to discuss days of presence.

That’s correct. Thanks, David. So as Emma mentioned previously, generally individuals are treated as being present in the territory on any day that they are physically present in that territory at any time during the day. So here’s an example. On October 15th, Willow was physically present in Puerto Rico from 12 a.m. to 6 p.m. and present in the United States for the remainder of the day. So on October 15th, that day would be counted as a day of presence in Puerto Rico for purposes of the physical presence test. If an individual is present in two territories on the same day, then that day is counted as a day of presence in the territory where the individual’s tax home is located. And I’ll talk about tax home a little bit later in the webinar.

So when it comes to tax law, whenever we say generally, it means that there are exceptions. And I’ll cover some of those exceptions on the next slide. So there are exceptions that provide that certain days that are spent outside the territory, they’re still counted as days of presence in the territory. So if an individual is outside the territory for purposes of receiving qualifying medical care or to accompany on a full-time basis a parent, a spouse, or a child who is receiving qualifying medical care, then they can still count those days as being present in the relevant territory.

So if the individual leaves the territory or is unable to return to the relevant territory during a 14-day period during which there’s a major disaster in the relevant territory and there is a FEMA notice or a presidential declaration of a major disaster issued in the federal register or a period during which there is a mandatory evacuation for the area within the relevant territory where the individual’s place of abode is located, then these days are still counted as days in the territory for the physical presence test. And you can find these declarations on the FEMA.gov website and there is a searchable list and you can search by date, type of declaration, or by location.

So in determining the number of days of presence, the following are not counted as days of presence in the United States. So days in the U.S. for less than 24 hours when traveling between two places outside the U.S., so maybe a layover at an airport, for example. Also days temporarily present in the U.S. as a professional athlete to compete in a charitable sports event where the individual does not receive any pay.

Days temporarily present in the U.S. as a full-time student with the appropriate visa, and this is not part-time or night school. They have to be a full-time student at a school or campus location and it does not include online school. Days in the U.S. serving as an elected representative of the territory or serving full-time as an elected or appointed official or employee of the territory government or its political subdivision. So if these situations apply, then these days would still be counted as days in the relevant territory.

So the second requirement to establish bona fide residence in a U.S. territory is the tax home test. So to meet this test, the individual cannot have a tax home outside the relevant territory during any part of the tax year. The tax home is generally determined under the principles of Section 911(d)(3) and Code Section 162(a)(2). So generally, an individual’s tax home is their regular or main place of business, employment, or their post of duty regardless of where they maintain their family home. So if the individual does not have a regular or a main place of business because of the nature of their work, then maybe they are some type of contractor that travels from job to job, then their tax home is the place where they regularly live. So if an individual does not fit either of these categories, then they are considered an itinerant and their tax home is wherever they work.

So there are some special rules regarding tax home that provide exceptions to the general rule. So for students, we’ll disregard days temporarily present in the United States as a student. For government officials, we will disregard days in the United States serving as an elected representative of the territory or serving full time as an elected or appointed official or employee of the government of the territory or any of its political subdivisions. And an individual is not considered to have a tax home outside the relevant territory solely because the individual is employed on ships or other seafaring vessels that are used predominantly in local waters. And when we say local waters, we mean within three miles of the relevant territory or if they’re in international waters. So this would normally be for fishing boats. And an exception to the tax home test may apply for the tax year a person moved to or from a territory.

Now, the third and final requirement is the closer connection test. In order to meet this test, the individual cannot have a closer connection to the U.S. or a foreign country than to the relevant territory. And that’s in Internal Revenue Code Section 937(a)(2). This test involves comparing the individual’s connections to the relevant territory to their connections with the United States and foreign countries. So the facts and circumstances to be considered include but are not limited to the location of permanent home, family, and personal belongings such as their cars, their furniture, clothing, and jewelry, the location of social, political, cultural, professional, or religious organizations that you might participate in. So where do you vote? Where do you go to church? Where you conduct routine personal banking activities and business activities other than those that go into determining tax home.

The jurisdiction where you hold a driver’s license, the country or state of residence that’s listed on the tax forms, the documents, and other official forms that you might file with the Internal Revenue Service. This test involves comparing the individual’s connections to the relevant territory to their connections with the United States and foreign countries. So an individual must satisfy the closer connection test for the entire taxable year. So let’s go through a couple of examples.

So T is a U.S. citizen and moves to the U.S. Virgin Islands in a prior taxable year to start an investment consulting and venture capital business. His wife and his children remain in Florida so the children can finish high school. T travels back regularly to Florida to visit his family, to engage in business activities, and to take vacations. He has an apartment in the U.S. Virgin Islands that is available full time and he is a member of the U.S. Virgin Islands Chamber of Commerce.

He remains a joint owner on the residence in Florida where his wife and children reside. He has cars and personal belongings in both Florida and the U.S. Virgin Islands. He receives mail in Florida, conducts his banking in Florida, holds a driver’s license in Florida, and is registered to vote in Florida and has current relationships with social, political, cultural, and religious organizations in Florida. So based on the totality of the facts and circumstances of this situation, T is not a bona fide resident of the U.S. Virgin Islands because he has a closer connection to the United States than to the U.S. Virgin Islands.

In another example here, this one is for a seasonal worker, so P is a U.S. citizen and is a permanent employee of a hotel in the Commonwealth of the Northern Mariana Islands, but works only during the tourist season. So for the remainder of each year, P lives with her husband and children in Guam, where she has no outside employment. So most of P’s personal belongings, including her automobile, are located in Guam. So P is registered to vote in and has a driver’s license issued by Guam and she does her personal banking in Guam and routinely lists her address in Guam as her permanent address on forms and documents.

So P satisfies the Presence Test with respect to both Guam and CNMI because, among other reasons, she does not spend more than 90 days in the United States during the taxable year. So P satisfies the tax home test only with respect to the Commonwealth of the Northern Mariana Islands because her regular place of business is in the Mariana Islands. So P satisfies the closer connection test with respect to both Guam and the Commonwealth of the Northern Mariana Islands because she does not have a closer connection to the United States or to any foreign country. So looking at all these facts, P is a bona fide resident of the Commonwealth of the Northern Mariana Islands for purposes of the Internal Revenue Code.

So there are special rules regarding the tax home and the closer connection test for the year that an individual moves to a U.S. territory. So individuals will be deemed to satisfy the tax home and the closer connection test in the year of move to a U.S. territory if they meet all of the following. So they were not a bona fide resident of the territory in any of the three tax years immediately preceding the year of the move. They did not have a tax home outside the territory or a closer connection to the United States or a foreign country than to the territory for any of the last 183 days of the year of move. And they are a bona fide resident of the territory for the three tax years immediately following the year of the move.

Another example. So you, a U.S. citizen, file returns on a calendar year basis. You lived in the United States from January 2018 through May 2024. In June 2024, you moved to the U.S. Virgin Islands, purchased a house, and accepted a permanent job with a local employer. So from July 1st through December 31st, 2024, which is more than 183 days, your principal place of business was in the U.S. Virgin Islands. And during this time, you did not have a closer connection to the United States or a foreign country than to the U.S. Virgin Islands. If you are a bona fide resident of the USVI during all of 2025 through 2027, then you will satisfy the tax home and closer connection test for 2024.

So if you also satisfy the presence test in 2024, you will be considered a bona fide resident of the U.S. Virgin Islands for the 2024 tax year. Individuals who have income from these U.S. territories may have to file a U.S. income tax return only, a territory income tax return only, or both returns. So this determination generally depends on whether the individual is a bona fide resident of a U.S. territory and the source of income received by that individual. So in some cases, an individual may have to file a U.S. return but may be able to exclude income earned in a territory from U.S. income tax. So since the topic of this webinar is residency in a U.S. territory, we will just briefly touch on taxation and filing requirements.

So to help you better understand the different income tax systems that apply to territory taxation, it is helpful to understand the difference between mirror code and non-mirror code territories. So the term mirror code is used to describe territories whose income tax laws mirror a version of the Internal Revenue Code, meaning that the territory’s tax law is generally identical to those in force in the United States, except for the substitution of the name of the relevant territory for the term United States where appropriate. So the term non-mirror code is used to describe territories who do not fully base their territory tax law on a version of the Internal Revenue Code. However, even though a non-mirror code territory does not fully adopt the Internal Revenue Code, often the many territory tax laws are similar to those of the United States.

So the mirror code territories are the Commonwealth of the Northern Mariana Islands, Guam, and the U.S. Virgin Islands. In non-mirror code territories are American Samoa and Puerto Rico. So American Samoa, they adopted the Internal Revenue Code income tax laws as of December 31, 2000, but they don’t incorporate the changes or updates which we know there are many. So that’s why they are a non-mirror code territory. And then Puerto Rico, they have their own tax system.

And, David, if it’s all right with you, let’s stop here for our third polling question.

That’s fine with me, Kathy. Okay, our third polling question is, which territory is a non-mirror code territory? Please take a moment and click the radio button you believe answers this question. Do you think the correct answer is A, U.S. Virgin Islands; B, Puerto Rico; or C, Guam? If you did not receive the polling question, please enter only the letter A, B, or C that corresponds with your response in the Ask Question text box. Your response is timestamped. I’ll give you a few more seconds to make your selection or to submit your answer in the Ask Question feature.

Okay, we’re going to stop the polling now. And let’s share the correct answer on the next slide. And the correct answer is B, Puerto Rico is a non-mirror code territory. And I see that 82% of you answered question three correctly. Terrific response rate. It seems like you’re all paying attention.

So Emma, you’re up next. Can you tell us about taxation of bona fide residents in American Samoa and Puerto Rico?

Absolutely, David. All bona fide residents, including U.S. citizens, resident aliens, and non-resident aliens of American Samoa and Puerto Rico, non-mirror code territories, have an income tax filing requirement with the relevant territory and may have one with the IRS. A bona fide resident of American Samoa or Puerto Rico with income from sources outside the territory must file a U.S. Form 1040 reporting worldwide income and excluding income from sources in that territory. Wages received for services as an employee of the U.S. government are not excluded.

Bona fide residents generally receive credit on their territory tax return for taxes paid to other tax jurisdictions on the same income. If excluding any income from American Samoa, the taxpayer completes Form 4563 and attaches it to the Form 1040. If all the bona fide resident’s income is from that territory, then the bona fide resident is generally not required to file a U.S. income tax return.

A U.S. non-resident alien who is a bona fide resident of American Samoa or Puerto Rico files Form 1040, not Form 1040-NR, to report income from worldwide sources but excluding income from that territory. However, for tax purposes other than reporting income, the taxpayer is treated as a non-resident alien individual. For example, the taxpayer is not allowed the standard deduction and cannot file a joint return and there are also limitations on what deductions and credits are allowed. In Publications 570 and 519, we’ll have more information concerning this topic.

A U.S. citizen or resident who is not a bona fide resident of a U.S. territory with income from Puerto Rico or American Samoa must report to Puerto Rico or American Samoa only the income from that respective territory, must file Form 1040 reporting worldwide income, and may claim a credit for taxes paid to Puerto Rico or American Samoa. A U.S. non-resident alien who is not a bona fide resident of American Samoa or Puerto Rico with income from either territory files a tax return with the territory reporting only income from sources within the territory. Wages for services performed in the territory, whether for a private employer, the U.S. government, or otherwise, is income from sources within that territory. And files a U.S. tax return, Form 1040-NR, reporting U.S. source income according to the rules for a non-resident alien.

Bona fide residents of the Commonwealth of the Northern Mariana Islands, Guam, or the United States Virgin Islands, so mirror code territories, have an income tax filing requirement only with the territory, which is known as the single filing rule. They must report income from all sources on a territory return, including any wages received for services as an employee of the U.S. government on a territory return, not with the IRS. And they will be allowed a tax credit on a territory return for withholding or estimated tax payments made to the IRS and may be allowed other tax credits by the territory. A territory bona fide resident may include an individual who is a U.S. non-resident subject to tax by the territory.

David, I think it’s time for another polling question.

Absolutely, Emma. Audience, our next polling question is, a U.S. citizen who is not a bona fide resident of Puerto Rico with income from Puerto Rico will file the following income tax returns. Is it A, report worldwide income to Puerto Rico and file Form 1040 reporting worldwide income excluding income from sources in Puerto Rico; or B, report to Puerto Rico only income from Puerto Rico and file U.S. Form 1040 reporting worldwide income. They may claim credit for taxes paid to Puerto Rico. So take a moment and click the radio button that best answers the question. If you did not receive the polling question, please enter either the letter A or B that corresponds with your response in the Ask Question text box. Your response, again, is timestamped. I’ll give you a few more question or seconds to make your selection or to submit your answer in the Ask Question feature.

Okay, we’re going to stop the polling now. And let’s share the correct answer on the next slide. And the correct answer is B, report to Puerto Rico only income from Puerto Rico, file U.S. Form 1040 reporting worldwide income, and you may claim a credit for taxes paid to Puerto Rico. I see that 78% of you responded correctly, which is another excellent correct response rate.

Kathy, I think you’re going to explain taxation of non-bona fide residents of the Northern Mariana Islands, Guam, and U.S. Virgin Islands.

That is correct. Thanks, David. So a U.S. citizen or resident who is not a bona fide resident of a U.S. territory but has income from U.S. Virgin Islands, then they must file a U.S. Form 1040 reporting worldwide income and file an identical copy with the U.S. Virgin Islands with Form 8689 to allocate U.S. VI income. For the Commonwealth of the Mariana Islands, they must file a U.S. Form 1040 reporting worldwide income with Form 5074 to allocate tax to CNMI. And for Guam, they must only file a U.S. Form 1040 reporting worldwide income and using the same Form 5074, to allocate tax to Guam. So an individual who is not a U.S. citizen or resident and is not a bona fide resident of a U.S. territory with income from a U.S. territory must report to the territory only income from that territory and file a U.S. Form 1040-NR to report any U.S. source income.

So someone who moves to or from a U.S. territory may have to file Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Territory, if they become or cease to be a bona fide resident of a U.S. territory. So an individual whose worldwide gross income is $75,000 or more must file Form 8898 for the tax year in which they become or cease to be a bona fide resident of the U.S. territory. So for married individuals, the $75,000 filing threshold applies to each spouse separately. So you must file Form 8898 if the following applies to you.

So if you take a position for U.S. tax purposes that you became a bona fide resident of a U.S. territory after a tax year for which you filed a U.S. income tax return as a citizen or resident alien of the United States but not as a bona fide resident of the territory. Or you are a citizen or resident alien of the United States who takes the position for U.S. tax purposes that you ceased to be a bona fide resident of a U.S. territory after a tax year for which you filed an income tax return with the IRS, the Territory Tax Authority, or both, as a bona fide resident of the territory. You take the position for U.S. tax purposes that you became a bona fide resident of Puerto Rico or American Samoa after a tax year for which you were required to file an income tax return as a bona fide resident of the CNMI, Guam, or the U.S. Virgin Islands.

And Form 8898 is filed with the Austin campus by the due date, including extensions for filing Form 1040 or Form 1040-NR. So if an individual is required to file Form 8898 for any tax year and fails to file it or does not include all the information required to be on the form or the form includes incorrect information, then they may be subject to a penalty of $1,000 unless it is shown that such failure is due to reasonable cause and not willful neglect. And this is in addition to any criminal penalties that may be imposed.

So on this slide and the next few slides is a screenshot of Form 8898. So unless otherwise specified, answers to questions seeking information for a tax year generally refer to the tax year in which you became or ceased to be a bona fide resident. So if you file a joint return, you’ll enter only the name and SSN for the spouse whose information is being reported on Form 8898. So if both you and your spouse are required to file Form 8898, you’ll file a separate form for each of you. So enter the address where you lived before your bona fide resident status changed and a different address for where you lived after your bona fide resident status changed.

So for example, Mr. Gray, a U.S. citizen, moved from New York to the U.S. Virgin Islands. So Mr. Gray must enter his New York address under address before your change in bona fide resident status and his U.S. Virgin Islands address under address after your change in bona fide resident status. So in Part 1, this is general information regarding when you became or ceased to be a bona fide resident of a U.S. territory. You’ll also enter your worldwide gross income for the current tax year as well as the three-year average for the period prior to the tax year on Line 3a.

So in Part 2, it asks questions about presence in the United States and the U.S. territory, and you’ll show the exact number of days that were spent in the U.S. versus the territory during the tax year to satisfy the presence test. Now, we covered how to count your days of presence, but there is more information in the instructions for Form 8898.

So Part 3 covers the closer connections to the United States, a foreign country, or a U.S. territory, whether you maintain closer, social, personal, or economic ties like a permanent home or immediate family to the U.S., a foreign country, or your new territory. So be as specific and detailed as you can.

And then Part 3 includes a lot of information. So Questions 9 through 28 all deal with specific questions for the closer connection test. So the tax home and closer connection questions indicating if your main ties were to the U.S., a foreign country, or a U.S. territory, locations of your principal permanent home and other available homes, location of your immediate family including spouse and minor children, locations where you registered your vehicles, your personal belongings, and routine personal banking, the jurisdiction of your driver’s license and voter registration, address and types of residences listed on official documents and forms, sources and general breakdown of your income and investments.

Now Part 4 details specific business activities, offices, services, or asset sales tied to the U.S. territory. You’ll answer questions about whether you maintained an office in the territory for a trade or business including its address and a description, whether you received compensation for personal services and where those services were performed, whether you manufactured anything in the territory for sale to customers, whether you sold or exchanged appreciated property after becoming a resident of the territory, yes/no indicators for specialized income sources such as rents, royalties from intangible properties, specific financial banking business income, or inventory sales outside the territory.

Now, I’ll turn it over to Emma for a discussion on Puerto Rico Act 22.

Thanks, Kathy. In 2012, Puerto Rico enacted resident investor tax incentives to encourage relocation to and investment in Puerto Rico. Puerto Rico Act 22, now part of Act 60, is a tax incentive law that offers major exemptions on passive income to individuals who relocate to Puerto Rico and establish residency in Puerto Rico. Act 22 provides an exemption from Puerto Rico income taxes on certain types of passive income attained or accrued after the individual established residency in Puerto Rico. And know that the exemption applies to those who apply prior to January 1, 2027.

Individuals who apply on or after January 1, 2027 will receive a reduced tax rate instead of the full exemption on interest, dividends, and post-residency capital gains. The resident investor incentive could be particularly appealing to high net worth individuals whose income is primarily based on investments such as interest, dividends, and capital gains.

As we discussed earlier, if all the bona fide resident’s income is from Puerto Rico, then the bona fide resident is generally not required to file a U.S. income tax return. However, if the bona fide resident has income from U.S. sources or non-Puerto Rico sources, he has to report such income on his U.S. income tax return. And generally speaking, sourcing rules for federal tax purposes are listed in Code Sections 861 through 865. However, Treasury Regulation Section 1.937-2 contains a number of special rules with respect to U.S. territory income sourcing. Generally, interest income is determined by the residents of the payor and generally dividend income is determined by the payor’s country of incorporation.

If Bob, who’s a United States citizen and a bona fide resident of Puerto Rico and a recipient of Puerto Rico Act 22 decree, receives $2 million in interest income on a personal loan made to Jane, who’s a resident of the United States, Bob will have to file a U.S. income tax return to report the interest income. Why? Because Jane, the payor, is a resident of the United States, hence the interest income is U.S. source income. An individual may be required to file a U.S. income tax return to report income from the sale of certain property that he owned before becoming a bona fide resident of Puerto Rico.

For example, Tom, a U.S. citizen, resides in Texas and acquires stock of Corporation X, a U.S. corporation, in 2020 for $100. Tom moves to Puerto Rico on March 1, 2021. So assume that Tom is a Puerto Rico bona fide resident from 2021 through 2026. On March 1, 2021, when Tom moved to Puerto Rico, the closing value of Tom’s stock in Corporation X, a marketable security, is $200. On January 3, 2026, Tom sells all his Corporation X stock for $700. All of Tom’s gain in the amount of $600, so $700 minus the basis of $100, will be treated as income from sources within the United States and not as income from sources in Puerto Rico. Note that individuals may elect to treat the portion of gain attributable to individuals’ Puerto Rico holding period as gain from sources within Puerto Rico.

So, for example, Tom moved to Puerto Rico on March 1, 2021, and his Puerto Rico holding period would begin on that day, the date his tax home changed to Puerto Rico. The portion of Tom’s gain attributable to the Puerto Rico holding period is $500, and that’s the excess of the sale price of the stock, $700, over its closing value, $200, on the first day of the Puerto Rico holding period, which is March 1, 2021. By reporting $500 of gain on his 2026 Puerto Rico tax return, Tom has elected to treat that amount as Puerto Rico source income.

And I’ll turn it over to Kathy to provide you with helpful resources.

Thanks, Emma. Here are some good resources that covers the information that we have discussed in today’s webinar. So we have Publication 570, Publication 1321, and a Practice Unit. Now Practice Units are a general source that provides foundational information about an issue or other topic. And this one is on U.S. territories determining bona fide residency status and it is located on IRS.gov.

So David, that concludes our presentation. I’ll turn it back over to you now for the Q&A and then we’ll bring everything together with the key points that we want the audience to remember from today’s webinar.

Well, thank you. Amazing job, Kathy and Emma. Before we start the Q&A, we have a final polling question, which is a simple attendance check. Attendees, please select the radio button on the screen. And if you didn’t receive the polling question, add the letter A as your response in the Ask Question text box to timestamp your response. Give me a few more seconds to select the radio button or submit in the Ask Question feature. Okay, we’re going to stop the polling now. Thank you for responding and participating with our polling questions.

Okay, now we’re ready for our live Q&A. I’ll be monitoring the session, but before we start, I want to thank everyone for attending and staying engaged during today’s presentation. If you haven’t input your questions, there’s still time. So go ahead and click the dropdown arrow next to the Ask Question field. Type in your question and click Send. Remember, do not enter any sensitive or taxpayer specific information. Kathy and Emma are going to stay on with us to answer your questions.

In addition, I would also like to introduce Sean Conaway from Counsel, International; and Senior Counsels, Alexander Martini and Ladd Brown, who have graciously joined our Q&A session. Alex Martini is a Senior Counsel with the IRS Office of Chief Counsel, Litigation and Advisory Division, focusing on international individual compliance matters, including residency, income sourcing, and international information reporting. Alex has a J.D. Magna Cum Laude and a Master’s Degree in taxation and is duly licensed as an Attorney and a CPA. Alex serves as Co-Lead for the Field Counsel team supporting the LB&I Puerto Rico Individual Investors Act campaign.

Ladd Brown is a Senior Counsel in the Office of Chief Counsel, Litigation and Advisory Division in Fort Lauderdale, Florida, and has been with Chief Counsel since 1991. He received his A.B. from Duke University in 1987, his J.D. with Honors from the University of Florida in 1990, and his LLM in Taxation from the University of Florida in 1991. Mr. Brown is currently one of the Co-Lead Counsels for the L&A Field Counsel team assisting with the Puerto Rico Act 22 campaign. He is also one of the Co-Lead Counsels for U.S. Possessions Residency and Sourcing Issue Management Team, the USVI project. Mr. Brown is active in tax court litigation and received six TC opinions and has tried over 30 cases from the U.S. tax court. He assists outside stakeholders with offshore compliance and international issues. Mr. Brown was admitted as an attorney and counselor of the Supreme Court of the United States of America before all nine justices of the Supreme Court in Washington, D.C.

Sean Conaway is an Attorney in the Office of Associate Chief Counsel, International. Sean works on projects involving foreign information gathering and the U.S. territories. He joined Counsel in 2020 as part of the honors program. Sean holds a B.A. in Economics from the University of Massachusetts Amherst and a J.D. from Michigan State University College of Law.

Let’s get started. So that our Q&A panel can answer as many of your questions as possible. All right. We’ve got some questions coming in here using that Q&A feature.

The first is, if I have a rental home in the U.S., does that count as having a U.S. residence?

I’ll take that one, David. No. So if you rent out a home that you own in the U.S., it generally does not count as your permanent home or residence unless you use the home or part of it as your residence during the tax year.

Okay. Thank you, Kathy. Got another one here. What if you’re separated and your spouse lives in the U.S. and you live in a U.S. territory? Does that mean that you automatically have a significant connection to the U.S.?

No. If an individual is legally separated for purposes of the significant connection analysis, you would disregard the individual’s spouse.

Okay. Thanks, Emma. Here’s another one. Are there any exceptions to the 183-day requirement for the physical presence test?

Yes. So those exceptions or other ways to pass the presence test would be to be present for 549 days or more in the U.S. territory during the tax year and to immediately preceding tax years with a minimum of 60 days presence for each of those three 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 a tax year than in the U.S. and your U.S. earned income is no greater than $3,000 or no significant connection to the U.S., so no permanent home, you don’t vote in the U.S., no spouse or minor child in the U.S.

Okay. Thanks, Kathy. Let’s see here. Can you give an example of factors that are used to evaluate closer connection?

David, I will answer that question. So as Kathy mentioned earlier, we look to Treasury Regulation Section 301.7701(b)-2(d) for factors and some of the factors that are evaluated are the location of the individual’s permanent home, the location of the individual’s family, the location of personal belongings such as cars, furniture, clothing, and jewelry, the location of social, political, cultural, or religious organizations with which the individual has a current relationship, the location where the individual conducts his or her routine personal banking activities, the location where the individual’s conduct business activities, location of the jurisdiction in which the individual holds a driver’s license, and this is non-exhaustive list. This is just a few factors that are analyzed.

Okay. Awesome. So the next one, what type of property is subject to the 10-year look-back rule?

Hi. Yeah, I can take this. This is Sean. I think that’s a good question because the 10-year look-back rule has a few conditions or requirements that need to be met before it can be applied, and for those who don’t know, this rule is located in Treasury Regulation 1.937-2(f). The first condition that needs to be met is that the property must be of a kind described in either Internal Revenue Code Section 731(c)(3)(C)(i) or Section 954(c)(1)(C). Section 731 provides a list of assets such as money, stock in a corporation, foreign currencies, and more. Section 954(c) provides a list of certain property transactions. So if it’s in one of those two code sections, you meet that first condition. Second, the property must have been owned by the individual prior to the individual becoming a bona fide resident of the relevant territory.

So if those two conditions are met, the property will be subject to the 10-year look-back rule if the individual satisfies the conditions set forth in Treasury Regulation 1.937-2(f)(iii). And those individuals are generally those who they have to have sold the property while they were bona fide residents of the relevant U.S. territory, and then you get that 10-year look-back requirement that we talked about, which is they haven’t been a U.S. citizen within the last 10 years or a resident of the United States.

Okay. Thanks, Sean. Appreciate it.

I would like to just clarify one more thing. When you do, if you do have property that’s subject to the 10-year look-back rule and you decide to make the election to apportion the gain, you would report that, you would report the non-PR source section on your U.S. return. So whatever income is subject to the U.S. taxation would be reported on U.S. return.

All right.

That’s it from me.

Got it. Thanks, Sean. Appreciate it. All right, here’s that one. Are there any special rules for self-employment tax and U.S. territories?

Yes. So a U.S. citizen who is self-employed in a U.S. territory, they must pay self-employment tax on net self-employment earnings of $400 or more. And 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. And if you are a resident of a U.S. territory who has net self-employment income and you do not have to file Form 1040 with the United States, you’ll use Form 1040-SS, the U.S. self-employment tax return, to report your self-employment taxes. And these forms must be filed with the U.S. Internal Revenue Service at the address that is shown on the instructions. And we did a webinar a couple of weeks ago, Bethany Krause and I on this topic, so you should be able to look that up on IRS.gov.

Thanks, Kathy. Appreciate that. Next question. What is qualifying medical treatment for purposes of the presence test?

I will respond to that question, David. So the term qualifying medical treatment is defined in Treasury Regulation Section 1.937-1(c)(4), and it generally means inpatient care in a hospital or hospice. So, for example, you have a cold and you decide to stay home and drink hot tea and eat soup, that would not be considered qualifying medical treatment for purposes of the presence test.

Okay. Thanks, Emma. Next question. Are there any special rules for dividends received from Puerto Rico Corporation?

Yeah, this is Alex. I’ll take that question. So, yes, there are special rules in Treasury Regulation Section 1.937-2(g)(1). For dividends paid by Puerto Rico Corporation to a Puerto Rico shareholder who owns directly or indirectly at least 10% of the total building stock, only the possessions source ratio is treated as income from sources within Puerto Rico. The possession source ratio is the gross income from sources within Puerto Rico of the Puerto Rico Corporation for the three-year period, ending with the taxable year of the dividend payment, divided by the total gross income of the Puerto Rico Corporation over that period.

Now, there is a safe harbor as well, provided in the regulation, in which the entire dividend will be treated as from sources within Puerto Rico if two conditions are both met. 80% or more of the gross income of the corporation was derived from sources within Puerto Rico or was effectively connected with the conduct of a trade or business in Puerto Rico, and 50% or more of the gross income of the corporation was derived from the active conduct of a trade or business within Puerto Rico.

Well, thanks, Alex. Does that cover it, counsel? Awesome. Our next question, for qualifying medical treatment, do you need a doctor’s note?

Yes, David. There are documentation requirements, including assigned certification by the providing or supervising physician, and the physician has to provide information in connection with the treatment. So just stating that the taxpayer received medical care will most likely not be sufficient for purposes of this.

All right. Well, thank you, Emma, for clarifying that. Another question here. Are bona fide residents of U.S. territories eligible for certain tax credits?

I’ll take that one. So generally, bona fide residents cannot claim the federal tax credits like the Earned Income Tax Credit, the Additional Child Tax Credit, the Credit for Other Dependents, or the American Opportunity Credit on a U.S. tax return. So bona fide residents might be able to claim similar credits on their territory tax returns. Bona fide residents of Puerto Rico may qualify for the Additional Child Tax Credit if the individual paid payroll taxes, had at least one qualifying child with a valid Social Security Number, and that number needs to be issued before the filing deadline of the return. And in such instances with the Additional Child Tax Credit, it would generally be claimed on a Form 1040-SS.

Okay. Thanks, Kathy. Here’s one. How do you claim credits for taxes paid in a U.S. territory?

So in order to claim a foreign tax credit for taxes paid in a U.S. territory on your U.S. tax return, you would file Form 1116.

Okay, Form 1116. Thanks, Emma. And what items might a taxpayer provide to show what days the taxpayer was present in the relevant territory?

Hey, good afternoon, everyone. This is Ladd Brown. First time getting to hear from you today. Before I answer that, we’ll lead into that analysis. There are a few other questions that have come in also that I’m going to sort of group together and maybe deal with as I get into this question. And one of them is actually a question that someone asked to explain poll question number one, which just to remind everybody, poll question one was, in order to be a bona fide resident of a U.S. territory for a particular year, an individual must meet one of the following tests found in IRC Section 937.

Number one was the presence test. Number two, tax home test. Or three, closer connection test. And it was A for true and B for false. And the correct answer was false. And so one of you all asked, and maybe some of you all thought, why is that statement false? And because the statement, as usual, you have to read all the fine print and follow everything the statement said, must meet just one of the following three tests. But the statute provides that you must meet all three. So the reason why that question was false was it wasn’t, you don’t become a resident of a territory by meeting one of the three, or even two of the three. You have to meet all three, the presence test, the tax home test, and the closer connection test.

So hopefully that answers that question for that person or for any of the others thought that. So segueing on that same thing as we get into a little more nuts and bolts here in a second, another question that came in was, if someone meets the 183-day presence test in Puerto Rico, and to be fair, this wasn’t the same person, meets the 183-day presence test in Puerto Rico, but their tax home and family, which I take that to mean and their closer connection, are still in the U.S. and they still qualify as a bona fide resident under 937.

Now, I think still qualify, I’m going to word parse here for a second, but they were before, so taking that aside that they may be the family and everything was there before, but for each of these tests, you apply on a year-by-year, calendar year basis. So for the answer to this question, in any given calendar year, as I just said, you have to meet all three tests. So as put by this question, this person met the 183 or presence test, but failed the tax home and closer connection test, so they would not be considered a bona fide resident of Puerto Rico for that particular year. So it’s a situation you must meet all three.

Let’s see, likewise, there’s a question, well, it’s sort of connected to it, is a form, if the Form 8898 was not filed when a person became a bona fide resident, and this question, they said of the USVI, but any of the five territories, should that be filed as soon as possible? And the answer to any type question like that is always yes. If for some reason you have just become aware because of this, attending this, or you have a friend that you’re going to go tell this to afterwards, or a client possibly, yes, it’s always better to file anything that’s delinquent before you get contacted by the IRS, but yes, so you should file as soon as possible, and usually they might include an explanation as to why you’re filing it now, and why you didn’t file when it was actually required, but it’s always better to file it and make up, and get it done, even if it’s tardy, then not file at all.

So I think that we may have some additional questions coming in, but I picked up the ones that had to do with this, I’m just skimming through again this related question. So, that said is, basically, it’s up to each taxpayer to, if questioned or called upon to show that they were a bona fide resident of a territory, it’s up to that person to show they met all three tests, presence, tax home, and close to connection. So, with regards to just the presence test now, that’s 183 days, let’s make it easier, as I discussed earlier, there’s alternative ways you can get there, but the simplest and most direct way is to be present in the territory for 183 days of the calendar year.

So, what that means is, if you’re on this as a taxpayer or a client, or you have a client who’s a taxpayer, who some of this may apply to, or is thinking or is in a territory, it’s incumbent upon the taxpayer to keep, the best thing would be as usual, like anything, mileage logs or business expenses, contemporaneous records. So, to keep records of, could be a logs, a work log they keep that shows where they are, a personal log, things are contemporaneous, obviously, you need to have evidence to bolster that. So what some people will have done in the past is, obviously, to get, if you’ve been to Puerto Rico or most of our territories, got to get there somehow, so it’s either going to be, you’re going to have taken a commercial plane, which means there’s going to be a flight record of when you enter and depart. If you flew on a private jet, there’s going to be records of that.

If you came by boat, there should be or could be obtained records to show that. So there’s three records obtainable and when you went to the island and when you left. Also, while on island or off island, it’s going to be, like, things like credit card. Most people nowadays who use their debit card, usually you have multiple debit cards for each member of your family, but usually have a unique debit card that, let’s say, a taxpayer actually use and if you’re like me, you probably have five or more charges a day and when you get your statements, those charge most time will show the location where that charge was made. So, that’s a handy way to keep track of a day-by-day basis to back up any sort of contemporaneous log you had. So, by either keeping those records either online of your checking account activity through your check card or printing out the statements, some taxpayers would print that out.

Other things is you can, especially if you do it sort of real time on a contemporaneous basis, most cell phone carriers, you can request or your clients can request basically the cell tower data. You can get the pings and usually it’s within one or two miles, so more than enough to establish where you’re at on multiple times in a given day and usually you have your own unique cell phone with your own number and that can be additional evidence that can be put together and put in a chart to bolster logs or to show things.

Other such things are credit card, credit card receipts will show, anything that shows charges that basically when they were made, where they were made, and that are unique to you. Things that come up, things that are shared, if you have a shared credit card, not so much common nowadays, but with the same exact number, then sometimes you’ll run a situation where you’ll see a charge in, say, San Juan, Puerto Rico, and in Miami Beach on the same day and the person doesn’t, the taxpayer doesn’t say they traveled on that day. Well, it may have been one of their relatives was in one of those two places and made a charge. So it needs to be the item that you’re using to establish where you, the individual, was during that day. It needs to be unique to you.

The same thing, it could be too is in some places, if you are a member of a country club on various islands or wherever it may be, usually they keep pretty strict records of your charges and where you’ve been and stuff like that. So, you can totally, like, get different things like that. Because, remember, at the end of the year, if called upon to establish your residency for a given year. It’s, you the taxpayer, or your clients’ responsibility to be able to do that and that’s the minimum initial threshold is getting to 183 days or one of the other tests.

So, that provides some, hopefully, guidance for you to think about practical things to meet that because one thing to say you’ve got 183 days, it’s another thing that you can actually establish it, especially if, let’s say, it turns out you’re asked to establish a residency three, four, possibly five years after the year in question, it would be better to keep those records contemporaneous and I’m sure some of you that are the power attorneys or the attorneys or CPAs are on this call, it’s better for your class to keep that stuff current for you so when you get called upon, you can get the records together quickly and easily rather than having to scramble and do a lot more. So, hopefully, that helps on that. We can always follow a bit more, but I wasn’t sure, but do we have some additional questions that have come in that maybe weren’t dealing with 183-day tests?

We do have other questions that have come in. Thanks, Ladd, for that thorough response and hopefully that helps folks figure out the residency in those situations. Here’s another one. How is the tax home test calculated for a U.S. captain of a yacht that docks at a U.S. territory and spends most of their work hours on shore?

Yeah, I’ll take that one. So, if they’re docked in the waters around a U.S. territory and they’re doing their work on the shore, then those days would be counted as presence in that territory. So that would also be that their home would be in the territory. So, and again, it’s within three miles of the shore, then that would be counted as in that U.S. territory. Hopefully, that answers that.

Okay. Got it. Here’s a question. How about a driver’s license? Will holding that qualify as a resident?

I will take that question. So, where the taxpayer has a driver’s license is one of the factors when we look at the closer connection. However, just because you have a driver’s license in a U.S. territory, it does not automatically make you a bona fide resident of that territory.

Okay. Thanks. So here’s a question regarding Form 8898. If a U.S. resident family moves to Guam and have been living there due to work for 15 years, then the kids go to college in the USA and the spouse and children move back to the USA, does she need to file Form 8898? Did not work in Guam.

So I will answer that question, David. If the spouse has rolled by gross income more than $75,000 for that year, then she would have a filing requirement.

So it goes right back to that $75,000. Thanks. Awesome. The next question I’m showing here is, what if T has a driver’s license and residences in both the U.S. and a territory and receives mail in a territory?

I’ll take that one, David. So just like the example that we talked about, you’re going to look at all of the facts and circumstances of all of the tests. So they may be able to satisfy both U.S. and one territory or even both territories for one of the tests or two of the tests, but you’re going to look at all three tests and then you’re going to look at all of those facts to see which one you’re leaning towards. So just having a driver’s license in both the U.S. and a territory wouldn’t necessarily mean that you’re a BFR of the territory. So you’re going to look at all of those facts and circumstances.

Okay. Got it.

This is Ladd. Just to add a short, believe it or not, shortly. Any of your clients or if you’re on this and you’re a taxpayer, you need to check with your various states and the territories. Some territories require you to surrender all their driver’s licenses and some states do also. So you just want to make sure you’re being, I know this is about your federal taxes here, but you want to be consistent and in compliance with the state that you’re moving from, let’s say, or wherever you’re moving from and where you’re moving to make sure you’re not necessarily in violation of any rules or regulations of the various states or territories.

So there are some combinations, but most places, including just if you’re moving from one state, from say Florida to Georgia, do require you to surrender and not to have two driver’s licenses active at the same time. So you should always check the rules of where you’re moving from and to, just to see what those rules are regardless. So I just want to add that little bonus part.

Okay. Thanks, Ladd. So I got one here that’s asking for just a little bit more clarity on the residency status. They’re asking if someone’s renting a home in the United States, what is the significance to their residency status?

I can maybe take that a little, take it short. Obviously, even these questions are hard. As you saw in those lectures and heard it, residency on the three tests are very difficult. With that alone, it’s just, as I think Emma mentioned earlier or Kathy, when you start looking at a closer connection, and in this case, possible tax home test, because we’re talking about potentially assuming they’re renting it out and making it possibly income or loss, but whatever, they’re having a tax effect by renting out that property, presumably, and it’s not just sitting vacant back in the States.

That would be one factor into looking at tax home, because you’re making most of your income from renting out that property. It’s a penthouse in New York, and you’re making $10 million, and it’s worth whatever you might be making in the territory that may go to a closer connection, a tax home being in New York in the U.S. versus the territory. Also, it could be the opposite. Same thing with a closer connection. If it turns out you rent it out part-time, but the rest of the time you’re living there, it might go to where your closer connections are.

So the fact that you have a rental property back in the States, if you alleged to move to, let’s say, USVI, United States Virgin Islands, in and of itself is not going to swing the weight one way or the other on the determination, but it will be one factor, and you have to look at the other parts of the overall picture to determine if that. It won’t disqualify you from becoming a resident of a territory because you left a rental property back in the United States, but it certainly will be a factor to consider amongst everything else to see the complete picture for tax home and closer connection.

Okay. Thanks. Next question is, if a Puerto Rican taxpayer works in Texas for a Puerto Rico-based company with a location in Texas and has a home, personal property, and family in both locations, do they file in both or just Puerto Rico?

This is Alex. I’ll take that one. And the facts are a little bit short, but we’ll assume that the taxpayer is working both in Texas and in Puerto Rico and has income from sources in both locations, in which case the taxpayer would be filing both in the US and with Puerto Rico. Obviously, we would have to determine whether the taxpayer is a bona fide resident of Puerto Rico, or if the taxpayer’s tax home is in Texas, then they would not qualify as a bona fide resident in Puerto Rico, in which case they would report their worldwide income with the U.S. and take a credit for any taxes paid to Puerto Rico on Puerto Rico-sourced income.

Got it. So the answer is it depends. Excellent, as in most of these. Thank you. Next question, can you briefly explain the itinerant status again? Thank you.

I’ll take that one. So since we do it for the tax home test, you’re going to look at where the permanent place of work is. If you’re an itinerant, you’re somebody that’s maybe a contractor that works all over. So with this category, you have to be careful, because as part of the tax home test, you cannot have a tax home outside the relevant territory or the territory you’re trying to be a bona fide resident of. And if you are an itinerant, your tax home would be considered wherever you work. So if you work outside the territory, then that would be your tax home. And you’re going to look at the average for the entire year. So maybe you work in the U.S. some days, you work in different territories, you work in foreign countries. So you’re really going to have to keep good records to show where your tax home actually is.

All right. Thank you. All right. And what is the form number that one files with Puerto Rico?

David, I will take this question. So obviously, we’re not experts on Puerto Rico taxation. And we highly recommend consulting an attorney or an accountant or a tax preparer in Puerto Rico. Also, Hacienda, which is the Puerto Rico Department of Taxation, has excellent resources. And this question is a bit ambiguous, because I don’t know whether they’re referring to individual tax returns. They may have to file Form 482 in Puerto Rico. However, we’re not experts on Puerto Rico taxation.

Well, thanks for answering that. Here’s another question here. If a U.S. citizen builds a home in Puerto Rico and then rents it out as an Airbnb rental, do they have to report the rental income on their 1040?

Sorry, I guess I can take that one. So if the question assumes that the taxpayer is not a bona fide resident of Puerto Rico, then the taxpayer will have to report their worldwide income on their 1040. So the answer in that situation would be yes.

Got it. Here’s another question. If a U.S. resident moves to a US territory, would they need to file a dual status return in addition to Form 8898?

Sort of like Alex just said, I think maybe that’s like, there is once again, can we just assumed some stuff there. It says moves, right? We’re assuming that the U.S. resident became a bona fide resident of the U.S. territory. So I think Alex has already covered this, and some of the others. Well, I think it’s not a dual status return. I think what he meant to say, do I have to file two returns? Do I have to file a return with the Hacienda or Puerto Rico and file a return with the IRS or the U.S. government? And the answer, as Alex said, it would depend on the sourcing. If you become a bona fide resident of a territory, well, second, feel like I restart it as I did earlier.

If we may be covered this about mirror and non-mirror earlier, if you’re part of a mirror jurisdiction like USVI, then you generally will only file one return with the mirror jurisdiction, the United States Virgin Islands, reporting your worldwide income and paying tax on that. If you go to a non-mirror like Puerto Rico, then you will file a return. If you only have Puerto Rico source income, you’ll only file a return with Puerto Rico. However, if you also have additional U.S. or non-Puerto Rican source, non-U.S., so like income from Germany, let’s say, then you would be required to also file a U.S. return with the IRS.

So you have to go back to the original part of these slides and you have to determine whether and I mentioned a consultant, I think a good accountant or a tax attorney, just to make sure. But depending on whether you’re in a mirror or non-mirror jurisdiction and whether you do or do not have non-territory source income will determine whether you have to file more than one return for a given tax year.

Just to be clear, Ladd, you’re talking about if the individual is a bona fide resident of a territory?

Yes, if they’re a bona fide resident of the territory. I was assuming that in the question, that if they’re a bona fide resident of the territory they moved to.

Yes, just want to clarify that.

Okay. Got it. Someone’s asking, can you explain the $3,000 earned income rule? Any takers?

I’ll take that one. So as part of the exceptions to the presence test, if you are not in the territory for 183 days, then you also can’t, as part of that, you can’t have earned more than $3,000 in U.S. source income.

All right. Well, thank you. All right. Well, audience, that’s all the time we have today for questions. I do want to thank our Q&A panel for answering your questions and sharing their knowledge and expertise.

Kathy, I want to pass the mic over to you to close out with some key points from today’s webinar.

Okay. Great. Thanks, David. So here are some of the key points that we hope that you remember. So to be a bona fide resident, an individual must meet a presence test, a tax home test, and a closer connection test. And you can find more information on that in Internal Revenue Code Section 937. And for the physical presence test, the individual must be present in the relevant territory for at least 183 days during the taxable year. And that’s in Internal Revenue Section 937(a)(1) and Treasury Regulation 1.937-1(c)(1)(i). And bona fide residents cannot have a tax home outside of a relevant territory during any part of the taxable year. And bona fide residents of a U.S. territory cannot have a closer connection to the U.S. or a foreign country than to the relevant territory. There are special rules regarding the tax home and closer connection tests for the year an individual moves to a U.S. territory.

In Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Territory is required to be filed by individuals who become or cease to be a bona fide resident of a U.S. territory. During the tax year, and whose worldwide gross income is more than $75,000 that year. You may be required to file a U.S. federal income tax return to report income from the sale of certain property that you owned before becoming a bona fide resident of Puerto Rico. For a detailed explanation of the U.S. territory residency and income sourcing rules, please refer to Publication 570, the Tax Guide for Individuals with Income from U.S. Territories. And recipients of Puerto Rico Act 22 decree may still have U.S. federal income tax return filing obligations.

And that’s the end of our presentation. Back to you, David.

Well, thank you, Kathy, for those key points and facts. Audience, please watch for announcements on future webinars. To register for any upcoming webinar, please visit IRS.gov, keyword search the word webinars, and select Webinars for Tax Practitioners or Webinars for Small Businesses. When appropriate, we will offer certificates and CE credit for upcoming webinars.

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