Possession Exclusion

For 2001, the possession exclusion applies only to individuals who are bona fide residents of American Samoa. However, there are also similar provisions discussed later, applicable to income derived from sources in, or income earned by residents of, Guam, Commonwealth of Northern Mariana Islands (CNMI), Puerto Rico, and the U.S. Virgin Islands.

Individuals in the following U.S. possessions or territories are not eligible for the possession exclusion discussed here.

• Baker Island
• Commonwealth of Northern Mariana Islands (CNMI)
• Guam
• Howland Islands
• Jarvis Island
• Johnston Island
• Kingman Reef
• Midway Islands
• Palmyra
• Puerto Rico
• Virgin Islands
• Wake Island

Special filing requirements apply to individuals in the CNMI, Guam, Puerto Rico, and the Virgin Islands. See Filing Requirements for Individuals in U.S. Possessions, later. Individuals in the other possessions listed above should see If You Do Not Qualify, later.

Qualifications

To qualify for the possession exclusion, you must be a bona fide resident of American Samoa for the entire tax year. For example, if your tax year is the calendar year, you must be a bona fide resident from January 1 through December 31. In addition to this time requirement, the following factors may be considered in determining bona fide residence.

• Your intent to be a resident of American Samoa, as shown by the circumstances.
• The establishment of a permanent home for you and members of your family in American Samoa for an indefinite period of time.
• Your social, cultural, and economic ties to American Samoa.
• Your physical presence for the year.

Other factors that may be considered are the nature, extent, and reasons for temporary absences; assumption of economic burdens and payment of taxes to American Samoa; existence of other homes outside of American Samoa; and place of employment.

If you were not a bona fide resident of American Samoa for all of 2001, you cannot claim the possession exclusion. See If You Do Not Qualify, later.

What Income Can Be Excluded

If you qualify as a bona fide resident of American Samoa for 2001, you can exclude income from sources in American Samoa, Guam, or the CNMI and income effectively connected with your trade or business in these possessions.

Possession source income. Excludable income from sources within the possessions includes the following.

1. Wages, salaries, and other kinds of pay for personal services performed in the possessions. (But see U.S. Government wages, later, for an exception.)
2. Dividends received from possession sources, including those paid by:
1. U.S. corporations that do business in the possessions and elect the Puerto Rico and possession tax credit, and
2. Possession and foreign corporations that do business mainly in the possessions.
3. Interest on deposits paid by banks that do business mainly in the possessions, including interest paid on deposits with the possession branches of:
1. Domestic banks with commercial banking business in the possessions, and
2. Savings and loan associations chartered under federal or state laws.
4. Gains from the sale of securities, such as stock certificates, are from sources in the possessions if the seller's residence is in a possession and the sale is not attributable to an office or other fixed place of business maintained by the seller in the United States.

U.S. Government wages. For purposes of the possession exclusion, possession source income does not include wages, salaries, etc., paid by the U.S. Government or any of its agencies to civilian or military employees.

Scholarships and fellowships. The source of a scholarship or fellowship grant is generally the residence of the payer. The result is the same if payments are made by an agency acting on behalf of the payer.

Examples. The following examples illustrate the sources of income. Assume that corporations chartered in American Samoa (American Samoan corporations) do business only in American Samoa, and that the U.S. and foreign corporations do not carry on business in the possessions.

Example 1. Frank Harris, who is single, is an engineer who went to work in American Samoa for a private construction company on August 3, 2000, and lived there for all of 2001. He is a bona fide resident of American Samoa for 2001.

During 2001, he received the following amounts of income.

Frank's possession source income eligible for the exclusion is $23,300. Frank's remaining income ($1,800) is not possession source income and is not eligible for the exclusion.

Example 2. Oliver Hunter was employed by a private employer in American Samoa from June 16, 2000, through December 31, 2001. He is a bona fide resident of American Samoa for 2001.

During 2001, he received the following amounts of income.

Oliver's possession source income of $16,500 is eligible for the exclusion. Oliver's remaining income ($6,000) is not possession source income and is not eligible for the exclusion.

Deductions and Credits

You can neither deduct nor claim a credit for items connected to your possession income that you exclude from gross income on your U.S. income tax return. See Filing Tax Returns, later, to find out if you have to file a U.S. income tax return.

Items that do not apply to a particular type of income must be divided between your excluded income from possession sources and income from all other sources to find the amount you can deduct on your U.S. tax return. Examples of these items are medical expenses, real estate taxes, mortgage interest on your home, and charitable contributions.

Figuring the deduction. To figure the amount of an item you can deduct on your U.S. income tax return, multiply the amount by the following fraction.

Standard deduction. The standard deduction does not apply to a particular type of income. It must be divided between your excluded income and income from other sources. This division must be made before you can determine if you must file a U.S. tax return, because the minimum income level at which you must file a return is based, in part, on the standard deduction for your filing status.

Example. Barbara Jones, a U.S. citizen, is single, under 65, and a bona fide resident of American Samoa. During 2001, she received $20,000 of income from Samoan sources and $5,000 of income from sources outside the possessions. She does not itemize her deductions. Her allowable standard deduction for 2001 is figured as follows:

Foreign tax credit. If you must report possession source income on your U.S. tax return, you can claim a foreign tax credit for income taxes paid in the possessions on that income. You cannot claim a foreign tax credit for taxes paid on excluded possession income. The foreign tax credit is generally figured on Form 1116.

If you have income, such as U.S. Government wages, that is not excludable, and you have income from possession sources that is excludable, you must figure the credit by reducing your foreign taxes paid or accrued by the taxes based on the excluded income. You must make this reduction for each separate income category. To find the amount of this reduction, use the following formula for each income category.

For more information on foreign tax credit, get Publication 514.

Personal exemptions. Personal exemptions are allowed in full. They are not divided. However, they may be phased out depending upon your adjusted gross income and filing status.

Moving expenses. If you are claiming expenses for a move to a U.S. possession from the United States, or from a U.S. possession to the United States, use Form 3903, Moving Expenses. These are not considered foreign moves. Get Publication 521, Moving Expenses, for more information.

If You Do Not Qualify

If you do not qualify for the possession exclusion because you are not a bona fide resident of American Samoa (as explained earlier), or not a bona fide resident of American Samoa for the entire year, figure your tax liability in the usual manner. Report all your taxable income, including income from foreign and possession sources, and claim all allowable exemptions, deductions, and credits, following the instructions for Form 1040.

You can take a credit against your U.S. tax liability if you paid income taxes to a foreign country or a possession and reported income from sources outside the United States on your U.S. tax return. Get Form 1116 to determine your credit and whether you must attach Form 1116 to your Form 1040. For more information, see Publication 514.

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