Tax Guide for US Expats Living and Working in the U.S. Virgin Islands
Who Is Liable For Income Taxes in the U.S. Virgin Islands
The U.S. Virgin Islands income tax system mirrors the U.S. income tax system. The applicable law is the U.S. Internal Revenue Code, with “U.S. Virgin Islands” substituted for all references to the “United States.” For a description of the income taxation of individuals who are bona fide residents of the U.S. Virgin Islands, refer to the chapter in this book on the United States and substitute “U.S. Virgin Islands” for each reference to the “United States.”
Bona fide residents of the U.S. Virgin Islands are taxed on their worldwide income. The U.S. Virgin Islands tax liability of other U.S. citizens or residents with U.S. Virgin Islands-source in come is based on the ratio of their adjusted gross income derived from U.S. Virgin Islands sources to their adjusted gross income worldwide.
Under the American Jobs Creation Act of 2004 (AJCA), which was enacted on 22 October 2004, an individual is considered to be a bona fide resident of the U.S. Virgin Islands if he or she satisfies all of the following conditions:
- He or she is present for at least 183 days during the year in the U.S. Virgin Islands. This determination is made under the applicable rules under the substantial presence test.
- He or she does not have a tax home outside the U.S. Virgin Islands during the tax year.
- He or she does not have a closer connection to the United States or a foreign country than to the U.S. Virgin Islands.
The 183-day presence test applies for tax years beginning after 22 October 2004.
Individuals who are not U.S. citizens or bona fide residents of either the United States or the U.S. Virgin Islands must pay taxes on U.S. Virgin Islands-source income and on income effectively connected with a U.S. Virgin Islands trade or business. Under the AJCA, rules similar to the rules for determining whether income is income from sources within the United States or is effectively connected with the conduct of a trade or business within the United States apply for purposes of determining whether income is from sources within the U.S. Virgin Islands. However, any income treated as income from sources within the United States or as effectively connected with the conduct of a trade or business within the United States may not be treated as income from sources within the U.S. Virgin Islands or as effectively connected with the conduct of a trade or business within the U.S. Virgin Islands.
The above sourcing rules apply for income earned after 22 October 2004.
Under Internal Revenue Code Section 937, which was added by the AJCA, and Treasury Regulation Section 1.937-1(h), effective from 2001, an individual with worldwide gross income of more than US$75,000 must file Form 8898 for the tax year in which he or she becomes or ceases to be a bona fide resident of one of the U.S. Virgin Islands, among other U.S. possessions.
For married individuals, the US$75,000 filing threshold applies to each spouse separately.
Income subject to tax. Income tax provisions in the U.S. Virgin Islands governing the computation of taxable income, including employment and business income, directors’ fees, investment income and capital gains, as well as the availability of deductible expenses and personal deductions and allowances, are the same as those in the United States. The taxation of employer-provided stock options in the U.S. Virgin Islands is the same as in the United States.
The rules for the taxation of nonresidents are the same as the U.S. rules for nonresidents of the United States, except that the withholding tax rate is 10% instead of 30%.
Rates. The income tax rates are the same as those in the United States.
B. Estate and gift taxes
U.S. federal estate and gift taxes. The U.S. federal estate tax applies in the U.S. Virgin Islands and is administered by the U.S. Internal Revenue Service (IRS). Federal estate tax returns are filed with the IRS in the United States. Federal estate tax is payable by all U.S. Virgin Islands estates with a value that exceeds total exemptions granted by the U.S. Internal Revenue Code. Persons who are U.S. citizens because they are born or naturalized in the U.S. Virgin Islands and who are U.S. Virgin Islands residents at the time of their death are treated as nonresidents, not as citizens of the United States, for federal estate tax purposes. These U.S. Virgin Islands residents are subject to estate tax on the part of their gross estate that is situated in the United States at the time of their death.
U.S. citizens residing in the U.S. Virgin Islands who make gifts exceeding the annual exclusion (generally US$13,000 for each recipient in 2011) must file a federal gift tax return with the IRS.
A limited exemption may apply to gifts of U.S. Virgin Islands assets made by persons naturalized or born in the U.S. Virgin Islands.
U.S. Virgin Islands inheritance and gift tax. The rates of U.S. Virgin Islands inheritance and gift taxes vary, depending on the relationship of the beneficiary or donee to the deceased or donor. The rates range from 2.5% to 7.5%. The exemptions included in the law are so broad, however, that these taxes usually apply only to inheritances received in the U.S. Virgin Islands from persons who neither reside in the U.S. Virgin Islands nor own property in the U.S. Virgin Islands, and to gifts of U.S. Virgin Islands property made by persons who do not reside in the U.S. Virgin Islands.
C. Social security
U.S. social security (FICA) and self-employment taxes are imposed in the U.S. Virgin Islands. Payments are remitted to the U.S. mainland rather than to the Virgin Islands Bureau of Internal Revenue.
To learn more about the history, culture, economy and other information about the U.S. Virgin Islands
We have been preparing US income tax returns for US Citizens and permanent residents living in U.S. Virgin Islands for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in the U.S. Virgin Islands and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security).
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email