Illustrated Example 
of Form 8689(p23)

Juan and Carla Moreno live and work in the United States. In 2010, they received $14,400 in income from the rental of a condominium they own in the U.S. Virgin Islands (USVI). The rental income was deposited in a bank in the USVI and they received $500 of interest on this income. They were not bona fide residents of the USVI during the entire tax year.

The Morenos complete Form 1040 (not illustrated), reporting their income from all sources, including their interest income and the income and expenses from their USVI rental property (reported on Schedule E (Form 1040)). The Morenos take the standard deduction for married filing jointly, both are under 65, and they have no dependents.

The Morenos also complete Form 8689 to determine how much of their U.S. tax shown on Form 1040, line 60 (with certain adjustments), must be paid to the U.S. Virgin Islands. See U.S. Citizen or Resident Alien (Other Than a Bona Fide Resident of the USVI) in chapter 3.

The Morenos file their Form 1040, attaching Form 8689 and all other schedules, with the Internal Revenue Service.

At the same time, they send a copy of their Form 1040 with all attachments, including Form 8689, to the Virgin Islands Bureau of Internal Revenue. This copy will be processed as their original Virgin Islands return.

Juan and Carla enter their names and Juan's social security number at the top of the form.

The Morenos enter their income from the USVI in Part I (see page 26). The interest income is entered on line 2 and the net rental income of $6,200 ($14,400 of rental income minus $8,200 of rental expenses) is entered on line 11. The Morenos' total USVI income of $6,700 is entered on line 16.

The Morenos have no adjustments to their USVI income, so they enter zero (-0-) on line 28, and $6,700 on line 29. Their USVI adjusted gross income (AGI) is $6,700.

On line 30, the Morenos enter the amount from Form 1040, line 60 ($4,596). Their Form 1040 does not show any entries required on line 31, so they leave that line blank and enter $4,596 on line 32.

The Morenos enter their worldwide AGI, $54,901 (Form 1040, line 38), on line 33. Next, they find what percentage of their AGI is from USVI sources ($6,700 ÷ $54,901 = 0.122) and enter that as a decimal on line 34. They then apply that percentage to the U.S. tax entered on line 32 to find the amount of U.S. tax allocated to USVI income ($4,596 x 0.122 = $561), and enter that amount on line 35.

Part IV is used to show payments of income tax to the USVI only. The Morenos had no tax withheld by the U.S. Virgin Islands, but made estimated tax payments to the USVI of $400, which they entered on lines 37 and 39. They include this amount ($400) in the total payments on Form 1040, line 72. On the dotted line next to the entry space for line 72, they enter "Form 8689" and show the amount. The Morenos do not complete Form 1116 because they receive credit on Form 1040, line 72, for the tax paid to the USVI. The income tax they owe to the USVI ($161) is shown on Form 8689, line 44. They also include this additional amount ($161) on the dotted line next to the entry space and in the total on Form 1040, line 72. The Morenos must pay their USVI tax at the same time they file the copy of their return with the U.S. Virgin Islands.