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Publication 570

Special Rules for Completing Your U.S. Tax Return(p22)

If you are not excluding possession income from your U.S. tax return, follow the instructions for the specific forms you file. However, you may not qualify to claim the earned income credit (EIC).

Earned income credit.(p22)

Even if you maintain a household in one of the possessions discussed in this publication that is your main home and the home of your qualifying child, you cannot claim the earned income credit on your U.S. tax return. This credit is available only if you maintain the household in the United States or you are serving on extended active duty in the U.S. Armed Forces.
U.S. Armed Forces.(p22)
U.S. military personnel stationed outside the United States on extended active duty are considered to live in the United States during that duty period for purposes of the EIC. Extended active duty means you are called or ordered to duty for an indefinite period or for a period of more than 90 days. Once you begin serving your extended active duty, you are still considered to have been on extended active duty even if you do not serve more than 90 days.

Income from American Samoa or Puerto Rico excluded.(p22)

You will not be allowed to take deductions and credits that apply to the excluded income. The additional information you need follows.

Deductions if Possession Income Is Excluded(p22)

Deductions that specifically apply to your excluded possession income, such as employee business expenses, are not allowable on your U.S. income tax return.
Deductions that do not specifically apply to any particular type of income must be divided between your excluded income from sources in the relevant possession and income from all other sources to find the part that you can deduct on your U.S. tax return. Examples of such deductions are alimony payments, the standard deduction, and certain itemized deductions (such as medical expenses, charitable contributions, real estate taxes, and mortgage interest on your home).

Figuring the deduction.(p22)

To find the part of a deduction that is allowable, multiply the deduction by the following fraction.
 Gross income subject to U.S. income tax 
 Gross income from all sources
(including excluded possession income)

Adjustments to Income(p22)

Your adjusted gross income equals your gross income minus certain deductions (adjustments).

Moving expense deduction.(p22)

Generally, expenses of a move to a possession are directly attributable to wages, salaries, and other earned income from that possession. Likewise, the expenses of a move back to the United States are generally attributable to U.S. earned income.
If you are claiming expenses for a move to a relevant possession, how and where you will deduct the expenses depends on your status as a bona fide resident and if any of your possession income is excluded on your U.S. tax return. For more information, see Moving expense deduction in chapter 3 under the name of the relevant possession.
If you are claiming expenses for a move from a U.S. possession to the United States, use Form 3903 to figure your deductible expenses and enter the amount on Form 1040, line 26. For purposes of deducting moving expenses, the possessions are considered part of the United States. See Publication 521, Moving Expenses, for information about what expenses are deductible.

Self-employment tax deduction.(p22)

Generally, if you are reporting self-employment income on your U.S. return, you can include the deductible part of your self-employment tax on Form 1040, line 27. This is an income tax deduction only; it is not a deduction in figuring net earnings from self-employment (for self-employment tax).
However, if you are a bona fide resident of American Samoa or Puerto Rico and you exclude all of your self-employment income from gross income, you cannot take the deduction on Form 1040, line 27, because the deduction is related to excluded income.
If only part of your self-employment income is excluded, the part of the deduction that is based on the nonexcluded income is allowed. This would happen if, for instance, you have two businesses and only the income from one of them is excludable.
For purposes of the deduction only, figure the self-employment tax on the nonexcluded income by multiplying your total self-employment tax (from Schedule SE (Form 1040)), Self-Employment Tax) by the following fraction.
 Self-employment income
subject to U.S. income tax
 Total self-employment income
(including excluded possession income)
The result is your self-employment tax on nonexcluded income. Include the deductible part of this amount on Form 1040, line 27.

Individual retirement arrangement (IRA) deduction.(p22)

Do not take excluded income into account when figuring your deductible IRA contribution.

Standard Deduction(p22)

The standard deduction is composed of the regular standard deduction amount and the additional standard deduction for taxpayers who are blind or age 65 or over.
To find the amount you can claim on Form 1040, line 40, first figure your full standard deduction according to the Instructions for Form 1040. Then multiply your full standard deduction by the following fraction.
 Gross income subject to U.S. income tax 
 Gross income from all sources
(including excluded possession income)
In the space above line 40, enter "Standard deduction modified due to income excluded under section 931 (if American Samoa) or section 933 (if Puerto Rico)."
This calculation may not be the same as the one you used to determine if you need to file a U.S. tax return.

Itemized Deductions(p22)

Most itemized deductions do not apply to a particular type of income. However, itemized deductions can be divided into three categories. The example given later shows how to figure the deductible part of each type of expense that is not related to specific income.


In 2014, you and your spouse are both under 65 and U.S. citizens who are bona fide residents of Puerto Rico during the entire tax year. You file a joint income tax return. During 2014, you earned $20,000 from Puerto Rican sources (excluded from U.S. gross income) and your spouse earned $60,000 from the U.S. Government. You have $16,000 of itemized deductions that do not apply to any specific type of income. These are medical expenses of $4,000, real estate taxes of $5,000, home mortgage interest of $6,000, and charitable contributions of $1,000 (cash contributions). You determine the amount of each deduction that you can claim on your Schedule A (Form 1040), Itemized Deductions, by multiplying the deduction by the fraction shown under Figuring the deduction, earlier under Deductions if Possession Income is Excluded.
 Medical Expenses
(enter on line 1
of Schedule A)
 Real Estate Taxes
(enter on line 6
of Schedule A)
 Home Mortgage Interest
(enter on line 10 or 11 of
Schedule A)
 Charitable Contributions (cash contributions)
(enter on line 16
of Schedule A)
Enter on Schedule A (Form 1040) only the allowable portion of each deduction.
Overall limitation on itemized deductions.(p23)
If your adjusted gross income (discussed earlier) is over $305,050 if married filing jointly or qualifying widow(er); $279,650 if head of household; $254,200 if single; or $152,525 if married filing separately; see the Itemized Deductions Worksheet in the Instructions for Schedule A (Form 1040), to figure your itemized deductions.

Personal Exemptions(p23)

Personal exemptions are allowed in full even if excluding possession income. However, depending upon your adjusted gross income and filing status, the amount you can deduct may be reduced. See the Deduction for Exemptions Worksheet—Line 42 in the instructions for Form 1040.

Foreign Tax Credit if Possession Income Is Excluded(p23)

If you must report American Samoa or Puerto Rico source income on your U.S. tax return, you can claim a foreign tax credit for income taxes paid to the possession on that income. However, you cannot claim a foreign tax credit for taxes paid on possession income that is excluded on your U.S. tax return. 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 also have possession source income 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 make this reduction for each separate income category. To find the amount of this reduction, use the following formula for each income category.
Excluded income from possession sources less deductible expenses based on that incomexTax paid or accrued to the possession=Reduction in foreign taxes
Total income subject to possession tax less deductible expenses based on that income
Enter the amount of the reduction on Form 1116, line 12.
For more information on the foreign tax credit, see Publication 514.


Jason and Lynn Reddy are U.S. citizens who were bona fide residents of Puerto Rico during all of 2014. They file a joint tax return. The following table shows their excludable and taxable income for U.S. federal income tax purposes.
 Taxable  Excludable
Jason's wages from
U.S. Government
Lynn's wages from Puerto Rico
Dividend from Puerto Rico corp. doing business in Puerto Rico  200
Dividend from U.S.
corp. doing business
in U.S.*
Totals$26,000  $15,200
* Income from sources outside Puerto Rico is taxable.

Jason and Lynn must file 2014 income tax returns with both Puerto Rico and the United States. They have gross income of $26,000 for U.S. tax purposes. They paid taxes to Puerto Rico of $4,000 ($3,980 on their wages and $20 on the dividend from the Puerto Rico corporation). They figure their foreign tax credit on two Forms 1116, which they must attach to their U.S. return. They fill out one Form 1116 for wages and one Form 1116 for the dividend. Jason and Lynn figure the Puerto Rico taxes on excluded income as follows.
 Wages: ($15,000 ÷ $40,000) × $3,980 = $1,493
 Dividend: ($200 ÷ $200) × $20 = $20
They enter $1,493 on Form 1116, line 12, for wages and $20 on the second Form 1116, line 12, for the dividend.

Self-Employment Tax(p23)

Self-employment tax includes both social security and Medicare taxes for individuals who are self-employed.
A U.S. citizen or resident alien who is self-employed must pay self-employment tax on net self-employment earnings of $400 or more. This rule applies whether or not the earnings are excludable from gross income (or whether or not a U.S. income tax return must otherwise be filed). Bona fide residents of the possessions discussed in this publication are considered U.S. residents for this purpose and are subject to the self-employment tax.

Forms to file.(p23)

If you have net self-employment income and are subject to self-employment tax, file one of the following with the United States.

Chapter 11 Bankruptcy cases.(p23)

While you are a debtor in a chapter 11 bankruptcy case, your net profit or loss from self-employment will be included on the income tax return (Form 1041, U.S. Income Tax Return for Estates and Trusts) of the bankruptcy estate. However, you—not the bankruptcy estate—are responsible for paying self-employment tax on your net earnings from self-employment.
Use Schedule SE (Form 1040), Form 1040-SS, or Form 1040-PR, as determined above, to figure your correct amount of self-employment tax.
For other reporting requirements, see Chapter 11 Bankruptcy Cases in the Instructions for Form 1040.

Additional Medicare Tax(p23)

A 0.9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 if single, head of household, or qualifying widow(er).
Medicare wages and self-employment income are combined to determine if income exceeds the threshold. A self-employment loss should not be considered for purposes of this tax. RRTA compensation should be separately compared to the threshold.
Your employer is responsible for withholding the 0.9% Additional Medicare Tax on Medicare wages or RRTA compensation it pays to you in excess of $200,000. You should consider this withholding, if applicable, in determining whether you need to make estimated tax payments.
There are no special rules for U.S. citizens and nonresident aliens living abroad for purposes of this provision. Wages, RRTA compensation, and self-employment income that are subject to Medicare tax will also be subject to Additional Medicare Tax if in excess of the applicable threshold.
For more information, see Form 8959, Additional Medicare Tax, and its instructions or visit and enter the following words in the search box: Additional Medicare Tax.
You cannot include the Additional Medicare Tax as a deductible part of your self-employment tax.

Net Investment Income Tax(p24)

The Net Investment Income Tax (NIIT) imposes a 3.8% tax on the lesser of an individual’s net investment income or the excess of the individual’s modified adjusted gross income over a specified threshold amount. Bona fide residents of Puerto Rico and American Samoa who may have a federal income tax return filing obligation may be liable for the NIIT if the taxpayer’s modified adjusted gross income from non-territory sources exceeds a specified threshold amount. The NIIT does not apply to any individual who is a nonresident alien with respect to the United States. Bona fide residents must take into account any additional tax liability associated with the NIIT when calculating your estimated tax payments.

Forms to file.(p24)

If you are a bona fide resident of American Samoa and Puerto Rico and you are required to pay the NIIT, you must file Form 1040 with the United States and attach Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts. For more information, see Form 8960 and its instructions.