IRS Publication 570 is the federal tax guide for individuals who live in or earn income from one of five U.S. territories: Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands.1Internal Revenue Service. Publication 570 – Tax Guide for Individuals With Income From U.S. Territories Its central question is whether your territory income gets excluded from your federal return, and the answer turns almost entirely on whether you qualify as a bona fide resident of that territory. Getting the answer wrong can mean paying tax to both the territory and the IRS on the same dollar, or claiming an exclusion you don’t actually qualify for.
Which Territories the Guide Covers
Publication 570 applies to Puerto Rico, the U.S. Virgin Islands (USVI), Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands (CNMI). Each has its own local tax system, and your filing obligations differ depending on which one you live in. The territories split into two camps: those using a “mirror code” that borrows the U.S. Internal Revenue Code as local law, and those with separate tax systems. That distinction controls where you file, what forms you use, and how you avoid being taxed twice.
The Bona Fide Residency Test
Almost every benefit in Publication 570 requires you to be a bona fide resident of the territory for the entire tax year. Congress defined the term in Section 937 of the Internal Revenue Code using a two-pronged test built around physical presence, your tax home, and your personal ties.2Office of the Law Revision Counsel. 26 USC 937 – Residence and Source Rules Involving Possessions
The first prong is presence. You must be physically in the territory for at least 183 days during the tax year, with days counted under the same principles used for the substantial presence test.3Internal Revenue Service. Moving to or From a United States (U.S.) Territory or Possession
The second prong has two linked parts. Your tax home, meaning your main place of business or employment, must be inside the territory, and you cannot have a closer connection to the mainland United States or a foreign country than you do to the territory. The IRS evaluates “closer connection” by looking at where you keep your permanent home, where your family lives, where your bank accounts and driver’s license are, and where you vote or maintain community ties. This is where residency claims most often fall apart. Moving to a territory while keeping a fully furnished house in Florida, holding a Florida driver’s license, and flying back every other weekend will raise flags no matter how many days you spend on the island.
Fail any part of the test and the IRS treats you as a non-resident. Your worldwide income stays fully subject to U.S. federal tax, and the possession income exclusion is off the table.
Mirror Code Territories vs. Separate Tax Systems
The USVI, Guam, and CNMI use a mirror code. They adopt the entire U.S. Internal Revenue Code as their local tax law, substituting the territory’s name wherever “United States” appears.4Congressional Research Service. Tax Policy and U.S. Territories – Overview and Issues for Congress The local tax authority collects the revenue, but the underlying rules match federal law. For a bona fide resident, filing correctly with the territory’s tax office and paying the full liability there generally satisfies the entire income tax obligation, with no separate IRS return required.5eCFR. 26 CFR 1.935-1 – Coordination of Individual Income Taxes With Guam and the Northern Mariana Islands
Puerto Rico and American Samoa operate outside that framework. Puerto Rico has its own independent Internal Revenue Code, and American Samoa has voluntarily adopted much of the U.S. code without being a mirror jurisdiction. Bona fide residents of these two territories typically face dual filing: a local return reporting worldwide income, plus a U.S. federal return reporting income sourced outside the territory.
The Possession Income Exclusion
The core benefit for bona fide residents is being able to leave territory-source income off the U.S. federal return. The statute varies by territory, but the effect is similar.
For bona fide residents of Guam, American Samoa, or the CNMI, Section 931 excludes income from sources within those territories and income effectively connected with a trade or business there.6eCFR. 26 CFR 1.931-1 – Exclusion of Certain Income From Sources Within Guam, American Samoa, or the Northern Mariana Islands Wages paid by the U.S. government for services in the territory do not qualify, even though they are technically territory-source.
For bona fide residents of Puerto Rico, Section 933 provides a similar exclusion for Puerto Rico-source income, including wages, business income, and most investment income sourced there.7GovInfo. 26 USC 933 – Income From Sources Within Puerto Rico U.S. government wages are again carved out.
For bona fide residents of the USVI, the mechanics look different. Because of the mirror code, residents file with and pay tax to the USVI Bureau of Internal Revenue on worldwide income, and the federal filing obligation is generally eliminated rather than reduced through an exclusion on Form 1040.8GovInfo. 26 USC 932 – Coordination of United States and Virgin Islands Income Taxes
For the exclusion to apply, income has to originate inside the territory. Wages qualify when the work is physically performed there. Business income qualifies when it is effectively connected with a territory trade or business. Rent from territory property, interest from territory banks, and dividends from territory-based businesses generally count too. Income sourced outside the territory, such as a mainland rental, a pension from a former U.S. employer, or interest from a New York bank, does not qualify and must be reported on your federal return.
You cannot claim deductions or credits on your federal return for expenses tied to income you excluded. Deductions that don’t map to any specific income stream, like the standard deduction, medical expenses, or charitable contributions, get split by a ratio: gross income subject to U.S. tax divided by total gross income from all sources.1Internal Revenue Service. Publication 570 – Tax Guide for Individuals With Income From U.S. Territories Only the portion attributable to taxable U.S. income is deductible on the federal return. Credits follow the same allocation rule.
Capital Gains and the 10-Year Sourcing Rule
Capital gains are the trickiest area in territory taxation and the one the IRS scrutinizes most closely. The general rule under Section 865 is that gains from a U.S. resident’s sale of personal property are U.S.-sourced.9Office of the Law Revision Counsel. 26 USC 865 – Source Rules for Personal Property Sales For bona fide residents of a territory, Section 865(g) and Treasury Regulation 1.937-2 allow gains to be treated as territory-source, but only for appreciation that accrues after you become a resident.
Here is where the 10-year lookback rule bites. If you owned an asset before moving to the territory, any gain attributable to pre-move appreciation stays U.S.-sourced. The IRS can reach back up to 10 years to recapture that gain. Selling a stock portfolio that tripled in value while you lived in New York does not become a Puerto Rico capital gain just because you were a territory resident on the sale date. The gain gets split: pre-move appreciation is U.S.-source and taxable on your federal return, and only post-move appreciation may qualify as territory-source. The IRS has said it actively scrutinizes these transactions, especially involving cryptocurrency and other digital assets that surged in value before a taxpayer relocated.
Which Federal Forms You File
Which federal forms you need depends on where you live and where your income comes from.
Puerto Rico Residents
If all of your income is from Puerto Rico sources, you are not required to file a U.S. federal return, though you still file a Puerto Rico return covering worldwide income. If any income is sourced outside Puerto Rico, you file Form 1040 reporting worldwide income but excluding Puerto Rico-source income.1Internal Revenue Service. Publication 570 – Tax Guide for Individuals With Income From U.S. Territories For income sourced outside both Puerto Rico and the United States, you may also owe tax where it originated and can use the foreign tax credit to avoid triple taxation.
American Samoa Residents
Bona fide residents of American Samoa with income to exclude must attach Form 4563 to Form 1040.10Internal Revenue Service. About Form 4563 – Exclusion of Income for Bona Fide Residents of American Samoa The form calculates the American Samoa-source income excluded from federal gross income. Without it, the IRS has no basis to honor the exclusion.
USVI, Guam, and CNMI Residents
Bona fide residents of the mirror code territories generally do not file with the IRS at all. They file with the territory tax authority, and that satisfies the income tax obligation. The exception is a non-resident with income from one of these territories. A mainland resident with USVI-source income, for example, files with both the IRS and the USVI, using Form 8689 to allocate the portion of tax owed to the USVI.11Internal Revenue Service. About Form 8689 – Allocation of Individual Income Tax to the U.S. Virgin Islands Form 5074 handles the same allocation for U.S. residents with income from Guam or the CNMI.12Internal Revenue Service. About Form 5074 – Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands (CNMI)
Reporting a Change in Residency
Anyone who becomes or stops being a bona fide resident of a U.S. territory must file Form 8898 with the IRS for the year of the change, if their worldwide gross income for that year exceeds $75,000. For married taxpayers, the $75,000 threshold applies to each spouse separately. Failing to file, or filing with incomplete or incorrect information, carries a $1,000 penalty unless you can show reasonable cause.13Internal Revenue Service. Residents of U.S. Territories or Possessions – Form 8898 Bona Fide Residence
Self-Employment Tax Still Applies
Excluding your territory income from federal income tax does not clear you of self-employment tax. Any bona fide resident of a U.S. territory with net self-employment earnings of $400 or more owes self-employment tax (Social Security and Medicare) to the IRS.1Internal Revenue Service. Publication 570 – Tax Guide for Individuals With Income From U.S. Territories This applies regardless of age and even if you are already collecting Social Security benefits.
If you already file Form 1040, self-employment tax goes on Schedule SE. If you are not otherwise required to file Form 1040, which is common for bona fide residents of mirror code territories, you file Form 1040-SS to report and pay it.14Internal Revenue Service. About Form 1040-SS – U.S. Self-Employment Tax Return A freelancer in Guam who correctly files only with the Guam tax authority for income tax purposes can still owe the IRS self-employment tax, and can be penalized for not filing Form 1040-SS.
Credits Available to Territory Residents
Foreign Tax Credit
The foreign tax credit under Section 901 applies to taxes paid to U.S. territories. The statute explicitly lists “any possession of the United States” alongside foreign countries.15Office of the Law Revision Counsel. 26 USC 901 – Taxes of Foreign Countries and of Possessions of United States If you are a bona fide resident of Puerto Rico or American Samoa and must report some income federally (because it wasn’t eligible for the exclusion or was U.S.-sourced), you can credit territory taxes paid on that same income.
You cannot, though, claim the credit for territory taxes attributable to income you already excluded from your federal return. The IRS applies a formula to reduce your allowable credit in proportion to the excluded portion.1Internal Revenue Service. Publication 570 – Tax Guide for Individuals With Income From U.S. Territories
Child Tax Credit
Starting with tax year 2021, Puerto Rico residents with qualifying children became eligible to claim the federal Child Tax Credit by filing Form 1040, even if they would not otherwise need a federal return.16Internal Revenue Service. Resources and Guidance for Puerto Rico Families That May Qualify for the Child Tax Credit For 2026, the maximum credit is $2,200 per qualifying child, with up to $1,700 refundable. Families with little or no income can still qualify.
Puerto Rico Act 60 and the 2026 Changes
Much of the interest in Publication 570 comes from people considering a move to Puerto Rico for Act 60, the island’s Incentives Code. Under the Resident Individual Investor program, qualifying new residents historically paid 0% Puerto Rico tax on interest, dividends, and capital gains earned after establishing residency. Paired with the Section 933 federal exclusion, certain investment income could effectively be tax-free at both levels.
That changed in 2026. Puerto Rico enacted Act 38-2026, amending the Incentives Code. Anyone applying for a Resident Investor decree after December 31, 2026, will pay 4% Puerto Rico tax on interest, dividends, and post-residency capital gains instead of 0%. Applicants after that date must also show they were not Puerto Rico residents during the six years before relocating. Existing decree holders keep their original terms. The program’s sunset date was extended from 2035 to 2055.
Even under the revised rate, 4% local tax combined with federal exclusion on territory-source income sits well below mainland rates for investment-heavy taxpayers. But the 10-year lookback still applies, so appreciation accrued before the move remains subject to U.S. federal tax. Timing of asset sales matters, and IRS scrutiny of the sourcing should be expected.
Filing Deadlines
The standard federal filing deadline is April 15. Bona fide residents of territories who are living outside the United States and Puerto Rico, meaning residents of Guam, the USVI, CNMI, and American Samoa, qualify for an automatic two-month extension to June 15 without filing paperwork.17Internal Revenue Service. Form 4868 – Application for Automatic Extension of Time To File U.S. Individual Income Tax Return Bona fide residents of Puerto Rico who file a federal return do not automatically qualify for this extension, because Puerto Rico is specifically excluded from the “out of the country” definition.
Any taxpayer who needs more time can file Form 4868 to push the filing deadline to October 15.18Internal Revenue Service. Get an Extension to File Your Tax Return The extension covers filing, not payment. Interest and possible penalties on unpaid tax start running from the original due date. Sending your payment to the wrong jurisdiction, whether to the IRS when it should go to the territory or the reverse, is another common source of penalties and delays.