Source: 21.8.1.5 (10-01-2019)

In the vast expanse of the United States, there are several territories that, while not states themselves, still come under the broad umbrella of the U.S administration. These territories have their own unique tax laws, which might seem confusing if you’re not well-versed in the nuances of tax legislation. This article aims to break down the complexities and provide a clear understanding of tax obligations for those residing or earning income in these U.S territories.

1. Which US territories have independent tax administrations?

The United States has five principal territories with their own tax administrations:

• Commonwealth of Puerto Rico (PR)
• U.S. Virgin Islands (USVI)
• Guam (GU)
• American Samoa (AS)Guam (GU)
• Commonwealth of the Northern Mariana Islands (CNMI)

2. Are individuals born in US territories considered US citizens?

If you are born in a U.S. territory, you are generally considered a U.S. citizen. There is one exception to this rule: individuals born in American Samoa are U.S. nationals, not citizens. However, for tax purposes, they are treated the same as U.S. citizens.

3. How are permanent residents in US territories treated for tax purposes?

Many individuals residing in the US territories are permanent residents of the United States because they possess a “green card.” For tax purposes, they are treated the same as US citizens.

4. Do individuals with income from US territories need to file income tax returns?

Individuals who derive income from one or more of the above US territories may be required to file a territory income tax return, a US income tax return, or both. This depends on their residency status and the source of their income.

For example, let’s say John is a US citizen living in Guam and earns income from a job in Guam. He may need to file a tax return with the Guam tax administration as well as the IRS, depending on his residency status and the specific source of his income.

5. Are federal employees in US territories eligible for the Recovery Rebate Credit (RRC) from the IRS?

Federal employees living in U.S. territories who need to file income tax returns with both the IRS and their territory treasury should note that they are not entitled to the Recovery Rebate Credit (RRC) from the IRS. The RRC is a tax credit against your 2020 income tax, and generally, it equals the amount of the Economic Impact Payments you received.

For example, if you’re a federal employee residing in the Northern Mariana Islands, you’re required to file income tax returns with both the IRS and the CNMI Department of Finance. However, you would not be eligible for the RRC from the IRS.

In conclusion, understanding the tax obligations for individuals residing or earning income in US territories can be complex. This guide aims to provide a clear overview of the crucial aspects related to the tax system in these regions. It is essential to consult with a tax professional or research the specific tax regulations applicable to your situation to ensure accurate tax filing and compliance.