IRS Form 8689 – Allocation of Individual Income Tax to the U.S. Virgin Islands

IRS Form 8689 – If you’re a U.S. citizen or resident alien with income tied to the U.S. Virgin Islands (USVI), navigating your tax obligations can feel complex. IRS Form 8689 plays a key role in allocating your individual income tax between the United States and the USVI, ensuring you avoid double taxation while complying with both jurisdictions. This comprehensive guide covers everything you need to know about Form 8689, including its purpose, who must file it, step-by-step filing instructions, and recent updates for the 2025 tax year. Whether you’re dealing with USVI wages, business income, or investments, understanding this form can help streamline your tax preparation.

What Is IRS Form 8689?

IRS Form 8689, titled “Allocation of Individual Income Tax to the U.S. Virgin Islands,” is a specialized tax document used to calculate the portion of your U.S. federal income tax that should be allocated to the USVI. It’s designed for taxpayers who have income from USVI sources but are not considered bona fide residents of the territory. The USVI operates under a “mirror code” system, where its tax laws largely reflect the U.S. Internal Revenue Code, but with the territory treated as the taxing authority for local income.

The form helps determine how much of your total tax liability is payable to the USVI based on the ratio of your USVI-sourced adjusted gross income (AGI) to your worldwide AGI. This allocation prevents overpayment and allows you to claim a credit on your U.S. tax return for taxes paid to the USVI. The latest revision of Form 8689 was posted on November 3, 2025, for use in the 2025 tax year.

Key features of the form include:

  • Part I: Reporting income from USVI sources, such as wages, interest, dividends, and business profits.
  • Part II: Adjustments to gross income, like educator expenses or health savings account deductions attributable to USVI.
  • Part III: Tax computation, including the allocation formula and credits.
  • Part IV: Overpayments and amounts due.

By using Form 8689, taxpayers ensure compliance with Section 932 of the Internal Revenue Code, which addresses taxation for individuals with USVI connections.

Who Needs to File IRS Form 8689?

Not every taxpayer with USVI ties must file Form 8689. The requirement depends on your residency status and income sources.

Eligibility Criteria

  • U.S. Citizens or Resident Aliens (Not Bona Fide USVI Residents): If you have income from USVI sources (e.g., wages for work performed there) or income effectively connected with a USVI trade or business, you must file Form 8689. This includes nonresidents who earned USVI rental income, royalties, or partnership distributions.
  • Bona Fide USVI Residents: These individuals typically file their tax return (Form 1040) solely with the Virgin Islands Bureau of Internal Revenue (VIBIR), reporting worldwide income. They do not file Form 8689 unless they have specific U.S. filing obligations, such as self-employment tax. To qualify as a bona fide resident, you must meet presence, tax home, and closer connection tests under IRC Section 937.
  • Nonresident Aliens: If you have USVI source income but are not a U.S. citizen or resident, file a USVI return for that income and a U.S. Form 1040-NR for U.S. source income. Form 8689 is not typically required.

Special Situations

  • Married Couples: If filing jointly, determine the filing jurisdiction based on the spouse with the higher adjusted gross income (AGI). If that spouse is not a bona fide USVI resident, file Form 8689 with your U.S. return. Report the entire joint income on the return filed with the primary jurisdiction. File Form 8689 only if the higher-AGI spouse is not a bona fide USVI resident for the entire tax year.
  • Puerto Rico Residents: U.S. citizens residing in Puerto Rico with USVI or U.S. source income must file Forms 1040 and 8689 with both the VIBIR and IRS, reporting only USVI and U.S. income. Deductions are prorated based on AGI ratios.
  • Change in Residency: If you move to or from the USVI, notify the IRS using Form 8898 by the due date of your income tax return.

If you’re unsure about your status, consult IRS Publication 570, “Tax Guide for Individuals With Income From U.S. Possessions,” for detailed examples.

How to File IRS Form 8689: Step-by-Step Guide?

Filing Form 8689 requires attaching it to your U.S. Form 1040 or 1040-SR and submitting identical copies to both the IRS and VIBIR. Here’s a breakdown of the process.

Step 1: Gather Required Documents

  • Your U.S. Form 1040 or 1040-SR.
  • Records of all USVI source income (e.g., W-2VI, 1099 forms).
  • Worldwide income details for AGI calculation.
  • Any prior USVI tax payments or withholdings.

Step 2: Complete Part I – Income From the USVI

Enter amounts from USVI sources only:

  • Line 1: Wages, salaries, tips.
  • Line 2: Taxable interest.
  • Line 3: Ordinary dividends.
  • Continue through Line 15 for other income types (e.g., IRA distributions, pensions).
  • Line 16: Total USVI income (sum of Lines 1–15).

Step 3: Complete Part II – Adjusted Gross Income From the USVI

Report adjustments attributable to USVI income:

  • Line 17: Educator expenses.
  • Line 18: Certain business expenses.
  • Line 19: Health savings account deduction.
  • Line 20: Moving expenses (if applicable).
  • Continue through Line 36 for other adjustments.
  • Line 37: Total USVI adjustments (sum).
  • Line 38: USVI AGI (Line 16 minus Line 37).

Step 4: Complete Part III – Tax Computation

  • Line 39: Enter your total tax from Form 1040 (after certain credits but before others).
  • Line 40: Multiply Line 39 by the ratio of USVI AGI (Line 38) to worldwide AGI (from Form 1040).
  • Lines 41–43: Adjust for alternative minimum tax or other specifics if applicable.
  • Line 44: Total allocated tax to USVI.

Step 5: Complete Part IV – Payments and Tax Due

  • Line 45: Enter USVI withholdings and payments.
  • Line 46: Overpayment or amount due.
  • If an overpayment, it may be credited; if due, pay with your USVI return.

Step 6: Where and When to File

  • Attach to U.S. Return: Include Form 8689 with your original Form 1040 filed with the IRS.
  • Copy to USVI: Send a signed identical copy (including Form 8689) to VIBIR at 6115 Estate Smith Bay, Suite 225, St. Thomas, USVI 00802.
  • IRS Addresses:
    • No payment: Department of the Treasury, Internal Revenue Service, Austin, TX 73301-0215.
    • With payment: Internal Revenue Service, P.O. Box 1303, Charlotte, NC 28201-1303.
  • Deadline: April 15, 2026, for the 2025 tax year. Extensions via Form 4868 provide 6 months; file separately with IRS and USVI if needed.

For electronic filing, check if your software supports Form 8689; otherwise, paper file.

Recent Updates for the 2025 Tax Year

The 2025 revision of Form 8689 includes minor adjustments to reporting thresholds and submission methods, potentially affecting electronic filing options. No major structural changes were noted, but taxpayers should review for any inflation-adjusted figures. The Health Coverage Tax Credit, mentioned in prior contexts, expired in 2021 and does not impact current filings.

Common Mistakes to Avoid When Filing Form 8689

  • Misclassifying Residency: Double-check bona fide status using the three tests (presence, tax home, closer connection).
  • Incorrect AGI Ratio: Ensure worldwide AGI includes all global income, not just U.S. and USVI.
  • Forgetting Copies: Always send an identical signed copy to VIBIR to claim credits properly.
  • Overlooking Credits: Enter the USVI tax allocation as a credit on Form 1040, Line 33, with “Form 8689” noted.
  • Self-Employment Oversight: Bona fide residents may still need Form 1040-SS for U.S. self-employment taxes.

FAQs About IRS Form 8689

Do I need to file if all my income is from the USVI?

No, if you’re a bona fide resident, file only with VIBIR. Non-bona fide residents with exclusively USVI income still file with both but use Form 8689 for allocation.

Can I claim a foreign tax credit for USVI taxes?

Yes, the allocation on Form 8689 acts as a credit against your U.S. liability.

What if I have income from multiple U.S. possessions?

Consult Publication 570 for combined rules; you may need additional forms like 8689 for each.

Is there a penalty for not filing Form 8689?

Yes, failure to file can result in penalties for underpayment or late filing, plus interest on unpaid taxes.

For personalized advice, consult a tax professional or the IRS. Download the latest Form 8689 from the official IRS website to ensure accuracy. By properly allocating your taxes, you can fulfill your obligations efficiently and potentially reduce your overall tax burden.