Do I Qualify as a USVI Bona-Fide Resident or File Form 8969?

USVI Bona-Fide Resident Rules and Form 8969

The United States Virgin Islands (USVI) is a territory of the United States. And, since it is a territory, the USVI and IRS tax rules are entwined (and the USVI rules are considered to ‘mirror’ the United States Tax system). For some US Persons who reside overseas in the Virgin Islands and qualify as a Bona-Fide Resident, they may only be required to file tax returns in USVI only, if they do not have U.S. sourced income. In general, and based on the USVI tax rules (similar in concept to other possessions and territories), a Taxpayer may obtain a significant tax benefit if they can prove that they are considered a Bona-Fide Resident of USVI. Of course, the IRS does not always agree with a person’s categorization of being a BFR of a territory or possession, which can then lead to headaches for Taxpayers (although in the case of Sanders, the Taxpayer was victorious over the IRS at Tax Court). Let’s look at the basics of Bona-Fide Residency in USVI and how to allocate income for non-Bona-Fide Residents.

USVI Bona-Fide Resident (Pub 570)

The Bona-Fide Residence Test for USVI works as follows (as provided under Publication 570)

• • • Generally, you are a bona fide resident of one of these territories (the relevant territory) if, during the tax year, you:

      • Meet the presence test,

      • Do not have a tax home outside the relevant territory, and

      • Do not have a closer connection to the United States or to a foreign country than to the relevant territory.

Meet The Presence Test

• • • If you are a U.S. citizen or resident alien, you will satisfy the presence test for the tax year if you meet one of the following conditions.

      • You were present in the relevant territory for at least 183 days during the tax year.

      • You were present in the relevant territory for at least 549 days during the 3-year period that includes the current tax year and the 2 immediately preceding tax years. During each year of the 3-year period, you TIP must be present in the relevant territory for at least 60 days.

      • You were present in the United States for no more than 90 days during the tax year.

      • You had earned income in the United States of no more than a total of $3,000 and were present for more days in the relevant territory than in the United States during the tax year. Earned income is pay for personal services performed, such as wages, salaries, or professional fees.

      • You had no significant connection to the United States during the tax year.

Special rule for nonresident aliens.

• • • Conditions (1) through (5) above do not apply to nonresident aliens of the United States. Instead, nonresident aliens must meet the substantial presence test discussed in chapter 1 of Pub. 519. In that discussion, substitute the name of the territory for “United States” and “U.S.” wherever they appear. Disregard the discussion in that chapter about a Closer Connection to a Foreign Country.

Do not have a tax home outside the relevant territory

• • You will have met the tax home test if you did not have a tax home outside the relevant possession during any part of the tax year. Your tax home is generally determined under the principles of section 911(d)(3) and section 162(a)(2) (relating to traveling expenses while away from home). Your tax home is your regular or main place of business, employment, or post of duty regardless of where you maintain your family home. If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work.

Do not have a closer connection to the United States or to a foreign country than to the relevant territory

• • • You will have met the closer connection test if, during any part of the tax year, you do not have a closer connection to the United States or a foreign country than to the relevant U.S. territory. You will be considered to have a closer connection to a territory than to the United States or to a foreign country if you have maintained more significant contacts with the territories than with the United States or foreign country. In determining if you have maintained more significant contacts with the relevant territory, the facts and circumstances to be considered include, but are not limited to, the following.

      • The location of your permanent home.

      • The location of your family.

      • The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by you and your family.

      • The location of social, political, cultural, professional, or religious organizations with which you have a current relationship.

      • The location where you conduct your routine personal banking activities.

      • The location where you conduct business activities (other than those that go into determining your tax home).

      • The location of the jurisdiction in which you hold a driver’s license.

      • The location of the jurisdiction in which you vote.

      • The location of charitable organizations to which you contribute.

      • The country of residence you designate on forms and documents.

      • The types of official forms and documents you file, such as Form W-8BEN or Form W-9. Your connections to the relevant territory will be compared to the total of your connections with the United States and foreign countries. Your answers to the questions on Form 8898, Part III, will help establish the jurisdiction to which you have a closer connection.

As further provided by the IRS in Publication 570

• • • Bona Fide Resident of the U.S. Virgin Islands File your tax return with the USVI if you are a U.S. citizen, resident alien, or nonresident alien and a bona fide resident of the USVI during the tax year.

      • Include your worldwide income on your USVI return. In determining your total tax payments, take into account all income tax withheld and paid to either the USVI or the United States, any credit for an overpayment of income tax to either the USVI or the United States, and any payments of estimated tax to either the USVI or the United States. Pay any balance of tax due with your tax return. Filing this return with the USVI generally also starts the statute of limitations on assessment of your U.S. income tax.

      • You generally do not have to file with the United States for any tax year in which you are a bona fide resident of the USVI during the tax year, provided you report and pay tax on your income from all sources to the USVI and identify the source(s) of the income on the return.

      • If you have self-employment income, you may be required to file Form 1040-SS with the United States. For more information, see Self-employment tax under Special Rules for the U.S. Virgin Islands, later.

Form 8969 to Allocation USVI Income

For Taxpayers who do not qualify as Bona-Fide Residents of USVI, they file Form 8969 to allocate their income between the US and USVI.

As provided by Form 8969:

• • • U.S. tax allocable to the U.S. Virgin Islands (USVI).

      • Who must file. If you were a U.S. citizen or resident alien (other than a bona fide resident of the USVI) and had income from sources in the USVI or income effectively connected with the conduct of a trade or business in the USVI, you may owe tax to the USVI. Your USVI tax liability is a percentage of your U.S. tax liability.

      • Do not use this form if you were a bona fide resident of the USVI during the entire tax year, or were considered a bona fide resident of the USVI for the entire tax year under the special rules for the year of a move (see chapter 1 of Pub. 570, Tax Guide for Individuals With Income From U.S. Possessions).

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