What Is Form 8689 and Who Needs to File It?

Tax obligations extend beyond the 50 states, and U.S. territories have specific tax rules. If you earn income in the U.S. Virgin Islands, you may need to file additional forms with your federal tax return to ensure compliance.

One such document is Form 8689. Knowing when to use it and how to complete it correctly helps avoid mistakes and penalties.

Purpose of the Form

Form 8689 reports income earned in the U.S. Virgin Islands (USVI) and allocates tax liability between the IRS and the Virgin Islands Bureau of Internal Revenue (VIBIR). Unlike income earned in the 50 states, USVI income follows a split reporting system to meet both federal and territorial tax obligations while preventing double taxation.

The U.S. tax system applies a mirror code structure to the USVI, meaning the territory generally follows IRS tax rules. However, because the USVI administers its own system, individuals with income from the territory must determine how much tax is owed to the VIBIR. Form 8689 calculates the portion of tax payments, refundable credits, and withholdings allocated to the USVI.

Who Must File

Individuals who earn income in the USVI but are not bona fide residents of the territory must file Form 8689. This applies to U.S. citizens and resident aliens who receive wages, self-employment income, or other taxable earnings from USVI sources while maintaining tax residency in the 50 states or another jurisdiction.

Bona fide USVI residents for the entire tax year generally report their income only to the VIBIR and do not file Form 8689. However, individuals who work in the USVI part-time or earn income from businesses, rental properties, or investments in the territory must allocate their tax responsibility between the IRS and the VIBIR.

Employers in the USVI withhold taxes on wages, but these withholdings must be reported correctly to avoid discrepancies. Self-employed individuals must ensure estimated tax payments reflect the portion of income earned in the territory to prevent underpayment penalties or unnecessary tax burdens.

Types of Income That May Apply

Income subject to Form 8689 includes wages, business earnings, rental income, and certain investment income.

Wages from a USVI employer are among the most common types of reportable income. Even if a taxpayer works remotely for a USVI-based company while living elsewhere, those earnings may still be considered USVI-sourced. This is especially relevant for consultants, contractors, and remote employees providing services to USVI businesses.

Business income from activities in the USVI must also be reported. This applies to sole proprietors, partners in partnerships, and shareholders in S corporations with USVI-based revenue. For example, a freelance graphic designer working with USVI clients must report that income on Form 8689.

Rental income from USVI properties is reportable. A taxpayer who owns a vacation rental in St. Thomas and collects rent from short-term visitors must allocate that income appropriately.

Investment income tied to the USVI, such as interest, dividends, and capital gains from USVI-based financial accounts, may also require reporting. If a taxpayer owns stock in a USVI corporation and receives dividends, those distributions may be considered USVI-sourced. Similarly, gains from selling USVI real estate, such as a condominium in St. Croix, must be reported.

Deductions and Credits

Taxpayers allocating income to the USVI through Form 8689 may claim deductions and credits to reduce tax liability.

Deductions apply to expenses directly related to USVI income. Self-employed individuals can deduct business expenses like equipment costs, travel expenses, and professional fees. Rental property owners can deduct mortgage interest, property management fees, and maintenance costs.

Tax credits help prevent double taxation. The foreign tax credit allows individuals to offset U.S. tax liability by the amount paid to the USVI. Since the USVI follows a mirror tax code, this credit ensures taxpayers are not taxed twice on the same income. However, it is limited to the proportion of U.S. tax attributable to USVI-sourced income. Refundable credits, such as the Earned Income Tax Credit (EITC), may also be allocated to the USVI, depending on residency status and income sources.

Required Documents

Completing Form 8689 requires specific documents for accurate reporting.

Individuals with USVI-sourced wages need a Form W-2 from their USVI employer, detailing total earnings and taxes withheld by the VIBIR. Unlike standard W-2s from U.S. employers, these may reflect withholdings that must be allocated between federal and territorial tax obligations.

Self-employed individuals or those earning rental or investment income from the USVI need additional documentation. Form 1099-NEC or 1099-MISC may be issued for contract work performed in the territory. Rental property owners should maintain records of rental income statements, mortgage interest statements (Form 1098), and expense receipts. Those claiming deductions must keep records of business expenses, depreciation schedules, and financial statements. Taxpayers applying for foreign tax credits should retain proof of tax payments made to the USVI, such as payment confirmations or official tax transcripts from the VIBIR.

Filing Steps

Submitting Form 8689 correctly ensures compliance with IRS and USVI tax regulations.

The form requires reporting total USVI income and determining the portion of tax liability allocated to the territory. Taxpayers must enter wages, self-employment earnings, and other applicable income sources, along with any taxes withheld by USVI employers. They must also calculate the percentage of total tax payments and refundable credits assigned to the USVI.

Once completed, Form 8689 must be attached to the taxpayer’s federal income tax return (Form 1040) and submitted to the IRS by the standard filing deadline, typically April 15. Taxpayers must also file a separate return with the VIBIR, reporting the same income and tax allocations. Failing to file with both entities may result in penalties or delays in processing returns.