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claim on line 37 of Form 1040, multiply your

Taxable Exempt

between the United States and the Common-

John’s wages from U.S.

wealth of Puerto Rico. See Double Taxation

standard deduction by the fraction given earlier.

Government . . . . . . . . . . $25,000

under Filing U.S. Tax Returns, earlier.

In the space above line 37, print “Standard de-

Mary’s wages from a Puerto

duction modified due to exempt income under

Rican corp. . . . . . . . . . . .

$15,000

section 933.”

Dividend from Puerto Rican

corp. doing business in

Illustrated Example

Make this computation before you de-

Puerto Rico . . . . . . . . . .

200

TIP

termine if you must file a U.S. tax re-

of Form 4563

Dividend from U.S. corp.

turn, because the minimum income

doing business in U.S.* . . .

1,000

level at which you must file a return is based, in

part, on the standard deduction for your filing

Totals . . . . . . . . . . . . . . $26,000 $15,200

John Black is a U.S. citizen and was a bona fide

status.

resident of American Samoa during all of 2003.

*Income from sources outside Puerto Rico is

He has to file Form 1040 because his gross

taxable.

income from sources outside the possessions

Example. James and Joan Brown, both

John and Mary must file 2003 income tax

($8,000 of dividends from U.S. corporations) is

under 65, are U.S. citizens and bona fide re-

returns with both Puerto Rico and the United

at least the total of his personal exemption and

sidents of Puerto Rico. They file a joint income

States. They have gross income of $26,000 for

allowable standard deduction for single filers.

tax return. During 2003, they received $15,000

U.S. tax purposes. They paid taxes to Puerto

(See Filing U.S.Tax Returns, earlier.) Because

of income from Puerto Rican sources and

Rico of $4,000. The tax on the wages is $3,980

he has to file Form 1040 (not illustrated), he fills

$8,000 of income from sources outside Puerto

and the tax on the dividend from the Puerto

out Form 4563 to determine the amount of pos-

Rico. They do not itemize their deductions. Their

Rican corporation is $20. They figure their for-

session income he can exclude.

allowable standard deduction for 2003 is figured

eign tax credit on two Forms 1116, which they

Line 1. John enters the date his bona fide

as follows:

must attach to their U.S. return. They fill out one

residence began in American Samoa, June 2,

Form 1116 for wages and one Form 1116 for the

2002. Because he is still a bona fide resident, he

$9,500

dividend. John and Mary figure the Puerto Rican

$8,000

(standard

$3,304

prints “not ended” in the second blank space.

taxes on exempt income as follows.

$23,000

deduction)

Line 2. He checks the box labeled “Rented

Wages: $15,000 ÷ $40,000 × $3,980 = $1,493

house or apartment” to describe his type of living

The Browns do not have to file a U.S. income tax

Dividend: $200 ÷ $200 × $20 = $20

quarters in American Samoa.

return because their gross income ($8,000) is

less than their allowable standard deduction

Lines 3a and 3b. He checks “No” on line 3a

They enter $1,493 on line 12 of the Form

plus their exemptions ($3,304 + $6,100 =

because no family members lived with him. He

1116 for wages and $20 on line 12 of the Form

$9,404).

leaves line 3b blank.

1116 for the dividend.

Foreign tax credit. If you are a U.S. citizen

Lines 4a and 4b. He checks “No” on line 4a

Earned income credit. Even if you main-

and your Puerto Rican income is not exempt,

because he did not maintain a home outside

tain a household in Puerto Rico that is your

you must report that income on your U.S. tax

American Samoa. He leaves line 4b blank.

principal home and the home of your qualifying

return along with income from sources outside

child, you cannot claim the earned income credit

Line 5. He enters the name and address of his

Puerto Rico. However, you can claim a foreign

on your U.S. tax return. This credit is available

employer, Samoa Products Co. It is a private

tax credit, figured on Form 1116, for income

only if you maintain the household in the United

Samoan corporation.

taxes paid to Puerto Rico on the Puerto Rican

States or you are serving on extended active

Line 6. He enters the dates of his 2-week

income that is not exempt.

duty in the Armed Forces of the United States.

vacation to New Zealand from November 11 to

You cannot claim a foreign tax credit for

Additional child credit. If you are not re-

November 25. That was his only trip outside

taxes paid on exempt income. If you have in-

quired to file a U.S. income tax return, this credit

American Samoa during the year.

come from Puerto Rican sources, such as U.S.

is available only if you meet all three of the

Line 7. He enters the $24,000 in wages he

Government wages, that is not exempt, and you

following conditions.

received from Samoa Products Co.

have income from Puerto Rican sources that is

1) You are a bona fide resident of Puerto

exempt, you must figure the credit by reducing

Line 9. He received dividends of $100 from a

Rico,

your foreign taxes paid or accrued by the taxes

CNMI corporation and $220 from a Samoan

based on the exempt income. You make this

corporation. He enters the total of those

2) Social security and Medicare taxes were

reduction for each separate income category.

amounts. He does not enter his dividends from

withheld from your wages or you paid

To find the amount of this reduction, use the

U.S. corporations because they do not qualify

self-employment tax, and

following formula for each income category.

for the possession exclusion.

3) You had three or more qualifying children.

Line 15. John totals the amounts on lines 7

(For the definition of a qualifying child, see

Exempt income

and 9 to get the amount he can exclude from his

the instructions for Form 1040 – PR or

from P.R. sources

gross income in 2003.

less deductible

Form 1040 – SS.)

expenses based on

Tax paid or

Reduction

If your income exceeds certain levels, you may

that income

accrued to

in foreign

be disqualified from receiving this credit. This

Total income subject

Puerto Rico

taxes

credit may be claimed using Form 1040 – PR or

Illustrated Example

to Puerto Rican tax

Form 1040 – SS.

less deductible

of Form 8689

expenses based on

Estimated tax. If your estimated income tax

that income

obligation is to the United States, use the work-

Gerald and Lily Smith live and work in the United

sheet in the Form 1040 – ES package to figure

States. In 2003, they received $14,400 in in-

your estimated tax, including self-employment

You enter the amount of the reduction on line 12

come from the rental of a condominium they own

tax. If you are paying by check or money order,

of Form 1116.

in the Virgin Islands. The rental income was

use the payment vouchers in the Form

deposited in a bank in the Virgin Islands and

1040 – ES package. Or, you can make your pay-

Example. John and Mary Reddy are U.S.

they received $500 of interest on this income.

ments electronically and not have to file any

citizens and were bona fide residents of Puerto

They were not bona fide residents of the Virgin

paper forms. See the Form 1040 – ES instruc-

Rico during all of 2003. They file a joint tax

Islands at the end of the year.

tions for information on making payments.

return. The following table shows their exempt

The Smiths complete Form 1040 (not illus-

and taxable income for U.S. federal income tax

Double taxation. A mutual agreement proce-

trated), reporting their income from all sources.

purposes.

dure exists to settle cases of double taxation

They report their wages, interest income, and

Page 9

Publication 570 - Tax Guide For Individuals With Income From U.s. Possessions - 2003 Page 9

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