The first "opportunity for solution" that you have in preparing a U.S. Virgin Islands Individual Income Tax return is that your tax preparation software doesn’t have a state module for the U.S. Virgin Islands. This is not a problem. A U.S. Virgin Islands income tax return is prepared using the same Form 1040 U.S. Individual Income Tax Return that is used throughout the United States. The major difference is the tax is paid to the U.S. Virgin Islands Treasury rather than the United States Treasury. This entry will cover some minor differences and practical tips which you may want to pass on to your tax preparer.
Gather your information.
You need the same information for your U.S. Virgin Islands return that you would need for a United States return. If you use a paid preparer such as a C.P.A., Enrolled Agent or other licensed individual, which is highly recommended, they will give you a list of items to bring to your tax interview. Also get a copy of IRS Form 8689, Allocation of Individual Income Tax to the U.S. Virgin Islands. This is available on the IRS website at http://www.irs.gov/pub/irs-pdf/f8689.pdf. This Form provides a list in Parts I and II of items that you may need to identify as U.S. Virgin Islands sourced and in the instructions on page two how to tell if a particular item is sourced in the Territory.
Prepare Form 1040
Enter the information into your Federal tax software the same as you would for a United States return. Don’t try to prepare the return by hand with the low cost of available computer software. The first place you can go wrong is if you received a W-2 for working for someone in the U.S. Virgin Islands. There are four differences between a United States W-2 and a Virgin Islands W-2VI beside the title. The first is on the bottom of the form where the United States W-2 says “Form W-2 Wage and Tax Statement” the Virgin Islands W-2VI says “Form W-2VI U.S. Virgin Islands Wage and Tax Statement.” If the place where you worked was in the Territory of the U.S. Virgin Islands and your employer gave you a United States W-2, your employer gave you the wrong form. The second difference is the Virgin Islands W-2VI does not have an IRS e-file logo at the top. (You will not be able to file your U.S. Virgin Islands return electronically. You will be able to file your Federal return electronically.) The third and fourth differences are box two instead of Federal income tax withheld is VI income tax withheld, and the whole area where the United States W-2 has state information in boxes 15-18 is screened out .
Very important! Do not put the VI income tax withheld shown in Box 2 in the computer tax return program input for Box 17 which is for state income tax withheld. (And if you have income tax withholding on a 1099 or K-1 that was paid to the Virgin Islands, made estimated tax payments, applied an amount from last year, or paid an amount with an extension to file to the Virgin Islands don’t put it in the state income tax withheld input, put it in the Federal income tax withheld input.) Won’t this combine the United States and U.S. Virgin Islands tax payments? Yes. This is another not-a-problem. You will later in this process either have to lump the United States and Virgin Islands payments or manually separate them, depending on your residency status. Taxes paid to the U.S. Virgin Islands are not deductible on either a Federal or U.S. Virgin Islands return. Taxes paid to the U.S. Virgin Islands are a refundable credit on the Federal or U.S. Virgin Islands return which is way better.
Continue entering all the information into the tax preparation program input and print out a copy.
Were you a “bona fide resident” of the U.S. Virgin Islands for the taxable year?
Next you must determine if you were a “bona fide resident” of the U.S. Virgin Islands for the taxable year. Residency has two requirements, presence and intention. If before January 1st you were on island and intended to be a U.S. Virgin Islands resident, and on December 31st you were still on island or off island but intended to come back as soon as possible get IRS Publication 570, Tax Guide for Individuals with Income From U.S. Possessions to determine if you qualify. If you are fling a joint return, the spouse with the higher Adjusted Gross Income must qualify.
If you qualify as a “bona fide resident” of the U.S. Virgin Islands
If you had earnings subject to self-employment tax, which includes tips received but not reported to your employer, manually override the self-employment tax output on page 2 of Form 1040 to zero (-$0-). (Don’t eliminate self-employment tax calculations entirely. You want the credit for one-half of self-employment tax on page 1.) Print out a copy of your return. Pull Form 1040-SE out of the stack and get a copy of Form 1040SS from the IRS website, http://www.irs.gov/pub/irs-pdf/f1040ss.pdf. Fill out the top of the first page to Part I, line 1. Ignore Part II. If your return has a Schedule F, write “see attached” in Part III and attach a copy of all Schedules F. If your return has a Schedule C, write “see attached” in Part IV and attach a copy of all Schedules C. Put the Schedule SE that printed out next to Part V and copy the printed figures to the same line number on Form 1040SS. Flip back to Part I, put the self-employment tax on line 3 and fill out the rest of page 1. Mail Form 1040SS to Where to File in the instructions http://www.irs.gov/pub/irs-pdf/i1040ss.pdf.
If you had income from other than the United States or the U.S. Virgin Islands, or you made estimated tax payments to the United States Internal Revenue Service, get 1040 VI Info Form – CY20XX, Virgin Islands Form 1040INFO from the V.I. BIR website, http://www.viirb.com. Fill out and attach to your return.
Print out two filing copies of your income tax return, and go to Filing income tax returns with the V.I. Bureau of Internal Revenue below. If you had withholding and estimated tax payments including previous year overpayments applied made to the IRS instead of the BIR, the BIR will get the payments for you from the IRS directly.
If you do not qualify as a “bona fide resident” of the U.S. Virgin Islands
You will need to split your tax due between the United States and the U.S. Virgin Islands. Get a copy of Form 8689 Allocation of Individual Income Tax to the U.S. Virgin Islands from the IRS website. http://www.irs.gov/pub/irs-pdf/f8689.pdf. Fill out Parts I and II with the amounts from the Virgin Islands only that you identified when collecting your information. Do the calculation in Part III. This is the portion of your total tax that is paid to the U.S. Virgin Islands. Finish Form 8689 Part IV using amounts paid to the U.S. Virgin Islands. Ignore line 40. You now need two “identical” tax returns.
On the Form 1040 that will go to the IRS, put the amount from Form 8689 line 35 on Form 1040 line 53 c “8689”. Calculate your total payments to the IRS, Federal income tax withheld from Forms W-2, etc., and fill out Form 1040 lines 61 through 76 using Federal amounts. Place Form 8689 in the return in attachment sequence order (85). Sign and date Form 1040 on page 2 and mail to the IRS Service Center Austin, TX 73301-0215.
On the Form 1040 that will be filed with the Virgin Islands Bureau of Internal Revenue, put Form 8689 as the first page of the return (on top of Form 1040 page 1). Ignore Form 8689 instructions to put amounts from lines 40 (which should be blank) and 44 on Form 1040 line 71. (We are giving you the official V.I. Bureau of Internal Revenue instructions.) Sign and date the return.
How to file an tax return with the V.I. Bureau of Internal Revenue
In addition to the tax return copies that you usually prepare, prepare an additional Virgin Islands filing copy to be file stamped as your proof of filing. The best way to file is to have someone you trust go to the BIR, have the receptionist stamp both copies, and get your copy back to you. If you mail your return to the BIR, enclose the filing copy (with the W-2s, etc., attached), a copy for you, a SASE, and a cover letter asking the BIR to file-stamp your copy and mail it back to you in the enclosed envelope. The mailing address is 9601 Estate Thomas, St. Thomas, VI 00802.
Harris R. Angell, Jr. is a corporate and tax attorney with the Tax and Estate Planning Practice Group at BoltNagi PC, a full service business law firm in St. Thomas, U.S. Virgin Islands with a practice concentration in banking, real estate, corporate and commercial law and litigation, estate planning, family law and tax and estate planning. Attorney Angell would like to thank Ms. Paula Lambert of St. John, U.S. Virgin Islands for her assistance.
Note: This article is solely intended for general information and is not intended to apply to, and should not be relied on to apply to, any specific individual tax situation. Any U.S. federal or territorial tax advice contained in this article is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Individual situations vary and tax laws are continually changing. We recommend you consult an experienced tax advisor.