IRS Publication 570 Guide: Complete U.S. Territory Taxes

Introduction: What is Publication 570?

IRS Publication 570, officially titled Tax Guide for Individuals With Income From U.S. Possessions, is the federal government’s primary manual for taxpayers connected to United States territories. The United States exercises sovereignty over five major inhabited island territories: Puerto Rico, the U.S. Virgin Islands (USVI), Guam, the Commonwealth of the Northern Mariana Islands (CNMI), and American Samoa. While residents of these territories are U.S. citizens or U.S. nationals, the federal tax code applies to them under unique, specialized statutory rules.

The primary purpose of Publication 570 is to explain how individuals living in, working in, or earning income from U.S. possessions must file their taxes. It clarifies whether you must file your return with the Internal Revenue Service, the local territorial tax department, or both. The guide also establishes how to determine “bona fide residence,” how territory income exclusions function, and how to source earnings properly.

Because moving to or investing in a territory can dramatically change your tax obligations, understanding Publication 570 is vital. Following its guidelines ensures taxpayers take full advantage of legitimate territory tax incentives while avoiding dual-filing errors, underpayment penalties, and residency audit disputes.

Who Should Read This Publication?

Publication 570 is designed for anyone earning income in, moving to, or departing from a U.S. territory:

• Bona Fide Residents of U.S. Territories: Full-time residents of Puerto Rico, the USVI, Guam, the CNMI, or American Samoa managing local and federal tax obligations.
• Mainland Taxpayers Relocating to a Territory: Individuals and entrepreneurs establishing residency in territories with favorable local tax incentives, such as Puerto Rico’s Act 60.
• U.S. Citizens with Territory Investments: Mainland investors earning rental income, dividends, interest, or business profits from territory sources.
• Federal Civilian Employees and Military Personnel: Government workers and service members stationed in or deployed to a U.S. territory.
• Self-Employed Workers in U.S. Possessions: Freelancers and business owners who must calculate and pay federal self-employment taxes (Social Security and Medicare).
• CPAs and Cross-Border Tax Advisors: Accounting professionals preparing Form 1040, Form 1040-SS, and Form 8898 filings.

Key Topics Covered

Publication 570 organizes possession tax compliance into practical, jurisdiction-specific chapters. Its core topics include:

• The Bona Fide Residence Test: The three-part statutory legal test under Section 937 required to be treated as a territory resident.
• Sourcing of Income Rules: Determining whether specific wages, business profits, or investment gains are legally territory-sourced or U.S.-sourced.
• Territory-Specific Filing Frameworks: The differences between “mirror code” jurisdictions (Guam, CNMI, USVI) and exclusion jurisdictions (Puerto Rico, American Samoa).
• Reporting Changes in Residence (Form 8898): Mandatory reporting rules when moving to or from a U.S. possession.
• Self-Employment and FICA Tax Obligations: Why federal payroll taxes apply in territories even when local income is exempt from federal income tax.
• Coordination of Tax Payments and Credits: Preventing double taxation through foreign tax credits and territorial revenue sharing.

Detailed Breakdown of Main Concepts

1. The Bona Fide Residence Test (Section 937)

To qualify for special tax treatment or exclusions on possession income, you must prove that you are a “bona fide resident” of the territory. Under Internal Revenue Code Section 937, you must satisfy three separate tests for the entire tax year:

• The Presence Test: You must generally be physically present in the territory for at least 183 days during the tax year (alternative presence tests exist for individuals with limited mainland travel or foreign ties).
• The Tax Home Test: You must not have a tax home (your regular or principal place of business) outside the relevant territory during any part of the tax year.
• The Closer Connection Test: You must not have a closer connection to the United States or a foreign country than to the territory, evaluated by the physical location of your family, your permanent home, your personal belongings, and where you vote.

2. Sourcing of Income: Territory vs. Mainland

Determining where income is legally sourced is critical when applying Publication 570 rules. Sourcing rules depend on the type of income earned rather than where your bank account is located.

Compensation for personal services (wages and salaries) is sourced based on where the work is physically performed. If a resident of Puerto Rico works remotely for a New York company while sitting at a desk in San Juan, those wages are Puerto Rico-source income. However, if that same worker travels to New York for a two-week conference, the pay earned during those two weeks is U.S.-source income. Investment dividends and interest are sourced based on the residence of the issuing corporation or debtor.

3. Puerto Rico: The Section 933 Exclusion

Puerto Rico operates under a unique tax structure governed by Internal Revenue Code Section 933. Under this section, an individual who is a bona fide resident of Puerto Rico for the entire tax year excludes all Puerto Rico-source income from their federal Form 1040 return.

Instead, they report and pay taxes on that income directly to the Puerto Rico Department of the Treasury (Hacienda) on Form 482. A bona fide resident of Puerto Rico only files a federal Form 1040 if they have income from sources outside Puerto Rico (such as U.S. rental property, U.S. dividends, or mainland wages), or if they are a civilian employee of the U.S. federal government.

4. Mirror Code Jurisdictions: USVI, Guam, and the CNMI

The U.S. Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands utilize a “mirror tax code.” This means their local tax laws are identical to the Internal Revenue Code, with the territory’s name substituted wherever “United States” appears.

In the U.S. Virgin Islands, bona fide residents file a single tax return with the Virgin Islands Bureau of Internal Revenue (BIR). Under Section 932, reporting your worldwide income and paying your calculated tax to the USVI completely satisfies your federal filing obligation with the IRS. In Guam and the CNMI, bona fide residents similarly file a single tax return with their local territorial revenue department.

5. Reporting Changes in Residence on Form 8898

Because moving to a territory can significantly reduce a taxpayer’s effective tax rate, the IRS closely monitors relocations. Publication 570 outlines mandatory notification rules for individuals who change their residency status.

If your worldwide gross income exceeds $66,000 in the year you establish or terminate bona fide residency in a U.S. territory, you are legally required to file Form 8898 (Statement for Individuals Beginning or Ending Bona Fide Residence in a U.S. Possession). You must file this form separately with the IRS by the due date of your return. Failing to file Form 8898 without reasonable cause carries a mandatory $1,000 penalty.

6. Self-Employment Tax Applies Everywhere

A common pitfall highlighted in Publication 570 is the assumption that exempt income is exempt from all taxes. Even if your earnings are 100% exempt from federal income tax under Section 931 or Section 933, that exemption does not apply to federal self-employment taxes (Social Security and Medicare).

Self-employed individuals operating in Puerto Rico, the USVI, Guam, the CNMI, or American Samoa are subject to the standard 15.3% Self-Employment Contributions Act (SECA) tax. Titled residents who do not have to file a federal Form 1040 must instead file Form 1040-SS (or Spanish Form 1040-PR) to calculate and pay their federal self-employment taxes.

Practical Examples and Scenarios

The following examples demonstrate how individuals apply Publication 570 rules to real-world island living and business situations.

Scenario 1: Moving to Puerto Rico and Splitting Tax Filings

Carlos, a software architect, moves from Florida to San Juan, Puerto Rico, on January 2. During the year, Carlos spends 340 days in Puerto Rico, leases an apartment in San Juan, moves his family, and obtains a Puerto Rico driver’s license. He earns $120,000 consulting for local Puerto Rican businesses and receives $5,000 in dividends from shares in a California corporation.

Carlos satisfies the Presence, Tax Home, and Closer Connection tests under Section 937, making him a bona fide resident of Puerto Rico. Under Section 933, his $120,000 in local consulting earnings is excluded from his federal tax return and reported exclusively to Hacienda. However, because his $5,000 in dividends represents U.S.-source income, Carlos must also file a federal Form 1040 reporting the $5,000 to the IRS. Additionally, because his worldwide income exceeded $66,000, Carlos files Form 8898 to notify the IRS of his move.

Scenario 2: The Self-Employed Consultant in the U.S. Virgin Islands

Samantha is a freelance marketing consultant who has lived full-time on St. Thomas in the U.S. Virgin Islands for five years. During the tax year, she earns $80,000 from clients located in both the USVI and mainland Florida.

Because Samantha is a bona fide resident of the USVI under mirror code rules (Section 932), she has a single-filing requirement. She files a single Form 1040 directly with the Virgin Islands Bureau of Internal Revenue (BIR), reporting her worldwide income and paying her calculated tax to the USVI. She has no requirement to file an income tax return with the IRS in Washington, D.C.

U.S. Territories Tax Comparison Overview

Territory / Possession	Tax System Framework	Primary Tax Agency	Federal Form 1040 Required?
Puerto Rico	Section 933 Exclusion	Department of the Treasury (Hacienda)	Only if non-PR source income exceeds thresholds
U.S. Virgin Islands	Section 932 Mirror Code	Virgin Islands Bureau of Internal Revenue	No; single return filed with USVI BIR
Guam & CNMI	Section 935 Mirror Code	Department of Revenue and Taxation	No; single return filed with territory agency
American Samoa	Section 931 Exclusion	Tax Office, Government of American Samoa	Only if non-possession income exceeds thresholds

How This Publication Relates to Specific Forms

Publication 570 provides the operational instructions for several primary federal and territorial tax documents:

• Form 1040 (U.S. Individual Income Tax Return): The primary federal return where non-exempt or U.S.-source income is reported.
• Form 1040-SS & Form 1040-PR: The dedicated forms used by self-employed territory residents to pay federal Social Security and Medicare taxes.
• Form 8898 (Statement for Individuals Beginning or Ending Bona Fide Residence in a U.S. Possession): Filed to report establishing or terminating legal residence in a territory.
• Form 4563 (Exclusion of Income for Bona Fide Residents of American Samoa): Attached to Form 1040 to claim the Section 931 possession income exclusion.
• Form 5074 (Allocation of Individual Income Tax to Guam or the CNMI): Used by individuals with Guam or CNMI income who are required to file with the IRS.
• Form 8689 (Allocation of Individual Income Tax to the U.S. Virgin Islands): Used by U.S. citizens who have USVI income but are not bona fide residents of the USVI.

Common Misunderstandings Clarified

Misunderstanding 1: “Moving to a U.S. territory eliminates all federal taxes automatically.”

Relocating to a territory does not automatically wipe away U.S. tax liabilities. To exclude territory income, you must strictly satisfy the 183-day presence test, the tax home test, and the closer connection test. Furthermore, income earned from U.S. sources—such as mainland real estate, corporate pensions, or U.S. stocks—remains 100% taxable by the IRS.

Misunderstanding 2: “Living in Puerto Rico exempts you from Social Security and Medicare taxes.”

While Section 933 excludes Puerto Rico-source income from federal *income* tax, federal *payroll* taxes continue to apply. All self-employed workers in Puerto Rico owe the 15.3% SECA tax on their net earnings, which must be reported annually on Form 1040-SS or Form 1040-PR.

Misunderstanding 3: “Spending 183 days vacationing in a territory makes you a bona fide resident.”

The 183-day physical presence test is only the first of three mandatory hurdles. If you spend 183 days on an island but keep your principal office in Chicago (failing the Tax Home Test) or keep your primary home, family, and car on the mainland (failing the Closer Connection Test), the IRS will reject your residency claim.

Misunderstanding 4: “Federal civilian employees stationed in territories get tax-free salaries.”

Salaries paid to U.S. government civilian employees (such as postal workers, federal judges, or TSA agents) working in U.S. possessions are specifically excluded from tax-free territory treatment. Federal civilian salaries are treated as U.S.-source income and are fully taxable on a standard federal Form 1040.

Why This Publication Matters for Taxpayers

Taxation in U.S. territories represents one of the most heavily audited areas in federal international tax administration. Because programs like Puerto Rico’s Act 60 offer substantial tax benefits, the IRS operates dedicated audit campaigns targeting individuals who improperly claim territory residency without meeting the physical presence or closer connection standards.

Publication 570 protects compliant taxpayers by outlining the exact documentation required to substantiate residency. Following its rules ensures you file your returns with the correct revenue department, avoid $1,000 penalties on Form 8898, and structure your cross-border income without facing double taxation.

Frequently Asked Questions

What are the five main U.S. territories covered in Publication 570?

Publication 570 applies specifically to American Samoa, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), the Commonwealth of Puerto Rico, and the U.S. Virgin Islands (USVI).

What is the income threshold for filing Form 8898?

You must file Form 8898 if you begin or end bona fide residence in a U.S. possession and your worldwide gross income (from all sources) exceeds $66,000 for the tax year.

Are military service members stationed in a territory considered bona fide residents?

Generally, no. Under the Servicemembers Civil Relief Act, military personnel stationed in a territory retain their original legal home-state domicile and do not become bona fide residents of the territory merely by being stationed there under military orders.

Can a bona fide resident of a territory claim the Child Tax Credit?

Yes. Recent federal legislation permanently extended the Child Tax Credit to residents of Puerto Rico and other territories, allowing eligible families with qualifying children to claim the credit by filing Form 1040-SS or Form 1040-PR with the IRS.

How does the IRS verify the Closer Connection Test?

The IRS evaluates where you maintain your permanent home, where your spouse and minor children reside, where your personal belongings and vehicles are located, where you conduct everyday banking, where you are registered to vote, and which jurisdiction issued your driver’s license.

Conclusion

IRS Publication 570 is the definitive authority on federal tax compliance for individuals connected to U.S. possessions. By defining the three-part bona fide residence test, clarifying income sourcing rules, and detailing the differences between mirror code territories and Section 933 exclusions, it brings structure to a complex area of tax law.

Whether you are establishing a business under territorial incentive programs, relocating for a temporary island assignment, or managing investment income from the Caribbean or Pacific, consulting Publication 570 ensures you navigate residency rules accurately, file with the proper tax agencies, and maintain complete compliance with federal law.