Form 8689: Allocation of individual income tax to the US Virgin Islands explained
IRS Form 8689 is not the regular return for every USVI resident. A full-year bona fide USVI resident generally follows the separate Section 932 filing rules and does not use Form 8689.
For 2025 returns filed in 2026, the form matters mainly when a taxpayer is not a full-year USVI bona fide resident but has USVI-source income or income connected with a USVI trade or business.
That makes residency and income sourcing the starting points for US territories taxation. They determine whether Form 8689 applies and how much tax is allocated to the Virgin Islands Bureau of Internal Revenue (VIBIR).
What is Form 8689 and who needs to file it?
For the 2025 tax year, Form 8689 generally applies to a US citizen or resident alien who is not a full-year bona fide USVI resident and has USVI-source or effectively connected income. The form allocates part of the taxpayer’s US income tax to VIBIR.
Form 8689, Allocation of Individual Income Tax to the U.S. Virgin Islands, calculates the portion of US income tax allocated to the USVI for certain US citizens and resident aliens who are not bona fide USVI residents for the entire tax year.
Form 8689 is the mechanism that determines how much of a qualifying taxpayer’s US federal tax liability is allocated to the USVI rather than retained entirely by the IRS.
The following 3 conditions describe the main group required to file the 8689 tax form for 2025:
- You were a US citizen or resident alien during the tax year.
- You were not a bona fide USVI resident for the entire tax year.
- You had USVI-source income or income effectively connected with a USVI trade or business.
A full-year USVI bona fide resident follows a different rule. The 2025 Form 8689 instructions specifically state that such a taxpayer should not use the form.
For context on other federal forms that can apply outside the 50 states, TFX explains the main filing documents in its US tax forms for expats guide.
Form 8689 Virgin Islands reporting is therefore narrower than ordinary Form 1040 filing. It deals with territory-source income and the Section 932 allocation rules.
The form is also different from a possession income exclusion. Form 8689 allocates tax. It does not exclude otherwise taxable US Virgin Islands income from a federal tax calculation.
The USVI mirror tax system explained
For the 2025 tax year, the USVI applies an income tax system that mirrors much of the Internal Revenue Code. IRC Section 932 coordinates US and USVI taxation, including which government receives an individual taxpayer’s income tax.
Under the USVI tax mirror system, a full-year bona fide resident generally reports worldwide income to VIBIR, while certain non-bona-fide residents use Form 8689 to calculate a territory tax allocation.
A qualifying bona fide USVI resident generally files the territorial version of Form 1040 with VIBIR rather than a regular Form 1040 with the IRS.
A separate federal requirement can still apply for items such as self-employment tax. The exact filing package depends on the taxpayer’s income and status for the year.
A taxpayer who is not a full-year bona fide resident but has Section 932 income follows a different route. Form 8689 calculates the portion of tax attributable to the USVI.
For federal income reporting context, see TFX’s explanation of where foreign income is reported on Form 1040.
Bona fide residence test for USVI residents
For the 2025 tax year, bona fide USVI residence depends on 3 core requirements under IRC Section 937: a qualifying presence test, a tax home that is not outside the USVI, and no closer connection to the United States or a foreign country.
The bona fide residence test determines which USVI filing rules apply, but failing that test can make Form 8689 relevant rather than disqualifying you from the form.
The following 3 criteria must be considered together:
- Presence test: You must meet one of the statutory territory-presence alternatives.
- Tax-home test: Your tax home cannot be outside the USVI during the applicable period.
- Closer-connection test: You cannot have a closer connection to the United States or a foreign country than to the USVI.
One statutory route is presence in the USVI for at least 183 days during the tax year.
Another route can use at least 549 days over a 3-year period, including at least 60 days in each of those years. Other alternatives also exist under the territory rules.
Residence therefore depends on more than one day count. Housing, employment, family location, banking, registrations, personal belongings, and similar ties can matter.
TFX explains the broader concepts behind these tests in its bona fide residence test guide.
Bona fide residence vs. physical presence: which test applies to USVI filers?
For USVI residence in 2025, the territory rules under IRC Section 937 apply. Form 2555’s 330-full-day physical presence test is a separate test for qualifying foreign-country income and does not replace the USVI residence rules.
The Form 2555 physical presence test cannot be substituted for the Section 937 tests that determine bona fide USVI residence.
Form 2555 applies under IRC Section 911. Its physical presence route generally requires at least 330 full days in one or more foreign countries during a qualifying 12-month period.
The USVI is a US territory, not a foreign country for Section 911. Time spent there therefore does not become foreign-country time merely because the islands are outside the mainland.
TFX compares the 2 foreign-income tests in its guide to the bona fide residence test vs. physical presence test.
USVI-source income vs. US-source income: what counts?
For the 2025 tax year, Form 8689 uses federal sourcing rules to separate USVI income from other income. Wages generally follow where services are performed, while income from real property generally follows the property’s location.
The source of your income – USVI or US mainland – directly affects the territory tax allocation calculated on Form 8689.
The following 6 examples show how common items are generally classified:
- Wages for services performed in the USVI are generally USVI-source income.
- Wages for services performed on the mainland are generally US-source income.
- Rent from USVI real property is generally USVI-source income.
- Rent from mainland US real property is generally US-source income.
- Interest generally follows the applicable payer-based sourcing rules.
- Dividends generally follow the place where the paying corporation was created or organized.
A taxpayer who works in more than one jurisdiction may need to allocate compensation according to where the services were performed.
Certain temporary services can qualify for a limited de minimis rule. The 2025 Form 8689 instructions include conditions involving no more than 90 days and compensation of no more than $3,000.
For real estate income, TFX explains the separate federal rules in its guide to US expat taxes on rental income.
Form 8689 line-by-line instructions
The 2025 Form 8689 contains 4 main parts covering USVI income, USVI adjusted gross income, allocation of tax to the USVI, and payments to VIBIR. The core allocation percentage is calculated by comparing USVI AGI with worldwide AGI.
The allocation ratio on Form 8689 is the central calculation because it determines the portion of adjusted US income tax allocated to the USVI.
The following 5 steps cover the main Form 8689 instructions:
- Identify USVI income. Part I reports USVI wages, interest, dividends, business income, gains, rents, pensions, and other qualifying income.
- Calculate USVI adjusted gross income. Part II applies the relevant adjustments and produces USVI AGI.
- Calculate the allocation ratio. Line 35 divides USVI AGI on line 30 by worldwide AGI on line 34.
- Calculate allocated tax. The resulting ratio is applied to the adjusted tax amount in Part III.
- Reconcile VIBIR payments. Part IV accounts for withholding, estimated payments, extension payments, refunds, and balances due.
The line 35 percentage is rounded to at least 3 decimal places and cannot exceed 1.000.
The official 2025 Form 8689 PDF and instructions should be used for a 2025 return filed in 2026, not the 2024 revision.
Form 8689 is attached to Form 1040 or Form 1040-SR when the taxpayer meets the filing conditions.
For a separate explanation of returns used by nonresident aliens, see TFX’s guide to filing US taxes as a nonresident.
Dual filing requirement: IRS and VIBIR
A qualifying Form 8689 filer generally has a 2-part filing requirement for the 2025 tax year. The taxpayer sends the original federal return package to the IRS and an identical signed copy, including Form 8689, to VIBIR.
The dual filing requirement applies to the Form 8689 filing package, not automatically to every bona fide USVI resident.
The following 2 return packages are generally required when Form 8689 applies:
- The original Form 1040 or Form 1040-SR, Form 8689, and required attachments go to the IRS.
- An identical signed copy of the return, forms, schedules, and attachments goes to VIBIR.
A full-year bona fide USVI resident normally follows the separate Section 932 resident filing rule instead.
Possession income reporting must therefore begin with residence status. Using the wrong filing path can send the return to the wrong tax authority.
Get help with your USVI tax filing
USVI tax filing can require 2 matching return packages plus a documented income allocation.
Where to file Form 8689: mailing addresses and deadlines
For most calendar-year 2025 Form 8689 filers, the regular return deadline was April 15, 2026. A valid filing extension can move the federal filing deadline to October 15, 2026, but it does not extend the original time to pay tax.
Form 8689 preview
For tax year 2025, the key regular filing date is April 15, 2026, with an extended filing date of October 15, 2026 when a valid extension applies.
The IRS and VIBIR packages have separate filing destinations, so verify the address before mailing a paper return.
| Filing destination | Address or deadline |
|---|---|
| IRS – no payment enclosed | Department of the Treasury, Internal Revenue Service, Austin, TX 73301-0215, USA |
| IRS – payment enclosed | Internal Revenue Service, P.O. Box 1303, Charlotte, NC 28201-1303, USA |
| VIBIR | Bureau of Internal Revenue, 6115 Estate Smith Bay, Suite 225, St. Thomas, VI 00802 |
| Regular tax year 2025 deadline | April 15, 2026 |
| Extended filing deadline | October 15, 2026, when a valid extension applies |
An extension gives additional time to file the return. It does not postpone the tax payment deadline.
As of September, 2026, the April 15 deadline has passed. A taxpayer who obtained a valid extension should confirm the October 15, 2026 filing requirement for the applicable return.
Penalties for non-compliance: what USVI residents risk
Federal penalties can apply when a required 2025 return is filed late, or tax remains unpaid. The failure-to-file penalty generally starts at 5% of unpaid tax per month, while failure to pay generally starts at 0.5% per month.
Tax, interest, and more than 1 penalty can apply to the same filing problem, depending on what was filed, how late it was, and whether the reported USVI position was accurate.
The following 4 consequences can apply depending on the facts:
- Failure to file: Generally 5% of unpaid tax for each month or part of a month a return is late, subject to the statutory cap.
- Failure to pay: Generally 0.5% of unpaid tax per month or part of a month, subject to applicable limits.
- Accuracy-related penalty: A 20% penalty can apply to certain negligent or materially understated tax positions.
- Willful conduct: Intentional tax evasion can create civil or criminal exposure beyond routine late-filing penalties.
A separate reporting penalty can apply when Form 8898 is required after a territory residency change and is not properly filed.
Form 8898 generally uses a $75,000 worldwide gross income threshold when its other statutory filing conditions are met.
A residency dispute should be reviewed against the facts for the specific year. Residence, income source, prior filings, and the reason for an incorrect position can all affect the result.
How Form 8689 interacts with the Foreign Earned Income Exclusion and Foreign Tax Credit
USVI-source wages are not foreign earned income for Form 2555 because the USVI is a US territory. For 2025, Form 1116 also directs taxpayers away from the Foreign Tax Credit mechanism for USVI tax and toward Form 8689.
Form 8689 allocates qualifying USVI tax. It does not turn USVI-source income into foreign-country income for Form 2555 or Form 1116.
The Foreign Earned Income Exclusion applies to qualifying earned income from a foreign country.
The USVI is not treated as a foreign country for that purpose. Work performed there therefore does not qualify for FEIE merely because it was performed outside the mainland United States.
The Foreign Tax Credit also has a specific USVI rule. Tax allocated to the USVI is handled through Form 8689 rather than claimed as ordinary foreign tax on Form 1116.
A taxpayer who separately earns true foreign-country income can still need a Form 2555 or Form 1116 analysis for that other income.
TFX explains the difference in its guide to the Foreign Tax Credit vs. Foreign Earned Income Exclusion.
Form 2555 vs. Form 8689: key differences for Americans in US territories
For the 2025 tax year, Form 2555 can exclude up to $130,000 of qualifying foreign earned income. Form 8689 does not exclude USVI income. It allocates tax under IRC Section 932 between the US and the USVI.
The key distinction is that Form 2555 can exclude qualifying foreign earned income, while Form 8689 reallocates tax associated with qualifying USVI income.
Form 2555 operates under IRC Section 911 and requires a foreign tax home plus a qualifying residence or physical presence test.
Form 8689 operates under the USVI rules and applies to qualifying US citizens or resident aliens who are not full-year bona fide USVI residents.
The Foreign Earned Income Exclusion is capped at $130,000 per qualifying person for the 2025 tax year.
For the separate Section 911 rules, read TFX’s Form 2555 guide.
A possession income exclusion is different again. For example, Form 4563 is a possession exclusion form associated with qualifying American Samoa income, not ordinary USVI Form 8689 income.
Practical example: allocating tax with Form 8689
A Form 8689 allocation uses a percentage, not a flat USVI tax rate. If USVI AGI is $70,000 and worldwide AGI is $100,000, the basic allocation ratio is 0.700 before it is applied to the adjusted tax amount.
Even $30,000 of non-USVI income can reduce a taxpayer’s USVI allocation ratio from 1.000 to 0.700 in this simplified example.
Based on our client scenario at TFX: a US citizen is not a bona fide USVI resident for all of 2025 and reports $70,000 of USVI AGI plus $30,000 of other income.
The following 5 steps show the simplified territory tax allocation:
- Worldwide AGI: $100,000 is used for the federal AGI amount and Form 8689 line 34.
- USVI AGI: $70,000 is reported on Form 8689 line 30 after applicable adjustments.
- Allocation ratio: $70,000 ÷ $100,000 = 0.700.
- Allocated tax: If the adjusted tax amount is $20,000, multiplying by 0.700 gives $14,000.
- VIBIR payments: Withholding and payments are then reconciled in Part IV of Form 8689.
The remaining federal result depends on the actual return, including credits, other taxes, and amounts already paid to VIBIR.
Investment income can also create a separate federal issue. TFX explains this in its Net Investment Income Tax guide.
Changing USVI residency during the tax year: dual-status considerations
A move to or from the USVI during 2025 does not create an automatic month-by-month Form 8689 proration rule. IRC Section 937 includes special year-of-move provisions, so residence status must be determined before the income allocation is prepared.
The exact date of a move matters, but the tax result depends on the Section 937 residence rules rather than a simple count of months spent in each jurisdiction.
The following 3 issues should be documented for a 2025 move:
- The date your home, tax home, and closer connection changed.
- Whether a special year-of-move rule treats you as a bona fide resident for the full tax year.
- Which income items are USVI-source under the normal sourcing rules.
Form 8898 can also apply when a taxpayer begins or ends bona fide residence in a US territory and the statutory filing conditions are met.
The $75,000 worldwide gross income threshold for Form 8898 is tested separately for each spouse.
This territory residence issue is not the same as immigration-law dual-status alien filing. TFX explains that separate concept in its dual-status alien return guide.
Other US territories: how their tax rules compare to the USVI
The 5 inhabited US territories do not use one identical income tax filing system. The USVI is coordinated through IRC Section 932, Puerto Rico through Section 933, Guam and the CNMI through Section 935, and American Samoa through Section 931.
Several territories use tax systems based on the Internal Revenue Code, but Form 8689 is specific to the USVI and should not be applied to the other 4 territories.
The applicable code section and return mechanism change by territory, so US territories taxation must be checked jurisdiction by jurisdiction.
| Territory | Main federal provision | Key form or mechanism | Territorial return |
|---|---|---|---|
| US Virgin Islands | IRC Section 932 | Form 8689 for qualifying filers | Depends on bona fide residence and income |
| Puerto Rico | IRC Section 933 | Federal Form 1040 rules where applicable | Depends on residence and income |
| Guam | 26 CFR § 1.935-1 / Guam Organic Act | Form 5074 can apply | Guam filing rules apply to qualifying residents |
| CNMI | 26 CFR § 1.935-1 / CNMI Covenant | Form 5074 can apply | CNMI filing rules apply to qualifying residents |
| American Samoa | IRC Section 931 | Form 4563 can apply | Separate American Samoa rules apply |
Guam tax obligations cannot be determined from Form 8689. Guam has its own coordinated filing rules — the coordination mechanism operates through the Guam Organic Act and 26 CFR § 1.935-1, not a currently operative IRC section.
American Samoa tax filing is also separate. Qualifying taxpayers can encounter the Section 931 possession income exclusion and Form 4563.
The tax treatment of expat territory income therefore depends on the specific possession. Possession income reporting should not be generalized from the USVI rules.
There is no general US possession tax treaty that replaces these Internal Revenue Code provisions. The applicable statutory territory rule controls the federal coordination.
Required attachments and supporting documentation for Form 8689
A 2025 Form 8689 filing requires the form to be attached to the applicable Form 1040 or Form 1040-SR. A qualifying dual filer also sends VIBIR an identical signed return package with the forms and schedules included in the federal package.
The filing package should contain the return documents needed to support the USVI income allocation, while residency evidence should be retained in case the IRS or VIBIR requests substantiation.
The following 5 categories should be assembled:
- Form 1040 or Form 1040-SR with Form 8689 attached.
- The identical signed return package required for VIBIR.
- W-2, W-2VI, 1099, and other relevant income statements.
- Schedules supporting USVI-source business, rental, or investment income.
- Residence records supporting a Section 937 position when residence status is relevant.
A lease, utility bill, travel log, voter registration, or banking record is not automatically attached to every return.
Those records should still be kept when they support a bona fide residence position.
As a practical recordkeeping measure, keeping key residency evidence for at least 6 years can provide a longer file if the return is later examined. This is not a special 6-year statutory Form 8689 retention rule.
Electronic filing options and limitations for Form 8689
For the 2026 filing season, a federal return containing Form 8689 can be e-filed when the chosen software and IRS e-file system support the form. The VIBIR submission is separate and can have different electronic filing procedures.
Federal e-file availability does not mean the required VIBIR copy is automatically transmitted to the USVI tax authority.
VIBIR operates an online income-tax portal and has previously allowed qualifying taxpayers to upload completed federal-style returns.
Portal functionality can change by filing season. A taxpayer filing the 2025 return should confirm which forms and PDF uploads VIBIR currently accepts.
If electronic filing is not available for the required VIBIR package, follow the current VIBIR paper-filing instructions.
Professional preparation can also help coordinate the 2 submission channels, but the taxpayer should still retain confirmation showing where each return was filed.
Common mistakes to avoid when filing Form 8689
Five filing errors account for much of the risk around Form 8689: using it for the wrong residency status, omitting one return package, misclassifying income, calculating the allocation incorrectly, and applying foreign-country tax rules to USVI income.
The first check should be whether Form 8689 applies at all because a full-year bona fide USVI resident generally follows a different Section 932 filing rule.
The following 5 mistakes should be checked before filing:
- Failing to file the required IRS and VIBIR packages. A qualifying Form 8689 filer generally has a dual filing requirement.
- Calculating the USVI ratio incorrectly. USVI AGI and worldwide AGI must be identified before the allocation percentage is calculated.
- Using the wrong residency position. Bona fide residence depends on the Section 937 presence, tax-home, and closer-connection rules.
- Applying FEIE or FTC to USVI-source income. Form 2555 and Form 1116 use foreign-country rules that do not replace Form 8689.
- Missing the applicable filing deadline. A late return or payment can create interest and federal penalties.
TFX’s Foreign Earned Income Exclusion denial case study covers a different residence test, but it shows why the facts supporting any residence-based tax position matter.
FBAR and FATCA obligations for USVI residents
USVI residence does not remove federal foreign-account reporting rules. For 2025, a US person generally files an FBAR when the combined maximum value of reportable foreign accounts exceeds $10,000 at any point during the calendar year.
For FBAR purposes, an account maintained in the USVI is not treated as a foreign account merely because the territory is outside the 50 states.
FBAR is filed on FinCEN Form 114, separately from Form 1040.
The 2025 FBAR had an April 15, 2026 due date and an automatic extension to October 15, 2026.
FATCA reporting on Form 8938 uses different definitions and thresholds from FBAR.
A full-year bona fide USVI resident who does not have a federal Form 1040 filing requirement can have a different Form 8938 analysis from a taxpayer who files Form 1040 with Form 8689.
TFX compares the broader reporting systems in its FATCA and CRS reporting guide.
Catch up on missed federal filings
Missing prior federal returns or FBARs can require a separate compliance review. The IRS Streamlined Filing Compliance Procedures apply only when their eligibility rules are met and do not replace any separate VIBIR filing obligation.
Review my Streamlined filing options
Frequently asked questions
A US citizen or resident alien who was not a full-year bona fide USVI resident can need Form 8689 if they had USVI-source income or income effectively connected with a USVI trade or business during 2025. The 2025 Form 8689 PDF gives the official filing conditions.
A qualifying full-year bona fide USVI resident generally reports worldwide income to VIBIR under IRC Section 932 rather than filing a regular federal Form 1040 for that income.
Separate federal obligations, such as self-employment tax, can still apply.
A qualifying Form 8689 filer generally sends the original Form 1040 package to the IRS and an identical signed copy to VIBIR.
A full-year bona fide USVI resident normally follows the separate Section 932 resident filing rule.
No. The USVI is not a foreign country for IRC Section 911, so USVI wages do not become qualifying foreign earned income merely because the work occurred in the territory.
TFX explains the separate Section 911 rules in its Foreign Earned Income Exclusion guide.
The correct return treatment can change if a claimed USVI residence position is not sustained.
Depending on the year and filing history, the taxpayer may need to review Form 8689, Form 8898, amended returns, tax, interest, and applicable penalties.
It can be. A US citizen or resident alien who is not a full-year bona fide USVI resident can still need Form 8689 even when all reportable income is USVI-source.
If USVI AGI equals worldwide AGI, the allocation ratio can reach 1.000 under the form’s instructions.
For most calendar-year taxpayers using Form 8689, the regular filing deadline was April 15, 2026.
A valid extension can move the filing deadline to October 15, 2026, but does not extend the original time for payment.
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