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Filing State Income Taxes

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Filing State Income Taxes

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Fact Sheets 2014

IRS Offers Advice on How to Choose a Tax Preparer
FS-2014-5, February 2014 — Many people hire a professional when it’s time to file their tax return. If you pay someone to prepare your federal income tax return, the IRS urges you to choose that person wisely. Even if you don’t prepare your own return, you’re still legally responsible for what is on it.

Earned Income Tax Credit; Do I Qualify?
FS-2014-4, January 2014 — The Earned Income Tax Credit (EITC) is a financial boost for people working hard to make ends meet. Millions of workers may qualify for the first time this year due to changes in their marital, parental or financial status.

IRS Criminal Investigation Combats Identity Theft Refund Fraud
FS-2014-3, January 2014 — The IRS has seen a significant increase in refund fraud that involves identity thieves who file false claims for refunds by stealing and using someone's Social Security number. The investigative work done by Criminal Investigation is a major component of the IRS’s efforts to combat tax-related identity theft. 

Tips for Taxpayers, Victims about Identity Theft and Tax Returns
FS-2014-2, January 2014 — Identity theft is one of the fastest growing crimes nationwide, and refund fraud caused by identity theft is one of the biggest challenges facing the IRS. In 2014, the IRS continues to take new steps and strong actions to protect taxpayers and help victims of identity theft and refund fraud.

IRS Combats Identity Theft and Refund Fraud on Many Fronts
FS-2014-1, January 2014 — Stopping identity theft and refund fraud is a top priority for the IRS. The agency’s work on identity theft and refund fraud continues to grow, touching nearly every part of the organization. For the 2014 filing season, the IRS has expanded these efforts to better protect taxpayers and help victims.

News Release and Fact Sheet Archive
News releases and fact sheets from November 2002 forward and an archive of news releases and fact sheets in PDF format back to 1997.

Page Last Reviewed or Updated: 05-Mar-2014

The Filing State Income Taxes

Filing state income taxes 2. Filing state income taxes   Possession Source Income Table of Contents Types of IncomeCompensation for Labor or Personal Services Investment Income Sales or Other Dispositions of Property Scholarships, Fellowships, Grants, Prizes, and Awards Effectively Connected Income In order to determine where to file your return and which form(s) you need to complete, you must determine the source of each item of income you received during the tax year. Filing state income taxes Income you received from sources within, or that was effectively connected with the conduct of a trade or business within, the relevant possession must be identified separately from U. Filing state income taxes S. Filing state income taxes or foreign source income. Filing state income taxes This chapter discusses the rules for determining if the source of your income is from: American Samoa, The Commonwealth of the Northern Mariana Islands (CNMI), The Commonwealth of Puerto Rico (Puerto Rico), Guam, or The U. Filing state income taxes S. Filing state income taxes Virgin Islands (USVI). Filing state income taxes Generally, the same rules that apply for determining U. Filing state income taxes S. Filing state income taxes source income also apply for determining possession source income. Filing state income taxes However, there are some important exceptions to these rules. Filing state income taxes Both the general rules and the exceptions are discussed in this chapter. Filing state income taxes U. Filing state income taxes S. Filing state income taxes income rule. Filing state income taxes   This rule states that income is not possession source income if, under the rules of Internal Revenue Code sections 861–865, it is treated as income: From sources within the United States, or Effectively connected with the conduct of a trade or business within the United States. Filing state income taxes Table 2-1 shows the general rules for determining whether income is from sources within the United States. Filing state income taxes Table 2-1. Filing state income taxes General Rules for Determining U. Filing state income taxes S. Filing state income taxes Source of Income Item of Income Factor Determining Source Salaries, wages, and other compensation for labor or personal services Where labor or services performed Pensions Contributions: Where services were performed that earned the pension Investment earnings: Where pension trust is located Interest Residence of payer Dividends Where corporation created or organized Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. Filing state income taxes Where property is used Sale of business inventory—purchased Where sold Sale of business inventory—produced Allocation if produced and sold in different locations Sale of real property Location of property Sale of personal property Seller's tax home (but see Special Rules for Gains From Dispositions of Certain Property , later, for exceptions) Sale of natural resources Allocation based on fair market value of product at export terminal. Filing state income taxes For more information, see Regulations section 1. Filing state income taxes 863-1(b). Filing state income taxes Types of Income This section looks at the most common types of income received by individuals, and the rules for determining the source of the income. Filing state income taxes Generally, the same rules shown in Table 2-1 are used to determine if you have possession source income. Filing state income taxes Compensation for Labor or Personal Services Income from labor or personal services includes wages, salaries, commissions, fees, per diem allowances, employee allowances and bonuses, and fringe benefits. Filing state income taxes It also includes income earned by sole proprietors and general partners from providing personal services in the course of their trade or business. Filing state income taxes Services performed wholly within a relevant possession. Filing state income taxes   Generally, all pay you receive for services performed in a relevant possession is considered to be from sources within that possession. Filing state income taxes However, there is an exception for income earned as a member of the U. Filing state income taxes S. Filing state income taxes Armed Forces or a civilian spouse. Filing state income taxes U. Filing state income taxes S. Filing state income taxes Armed Forces. Filing state income taxes   If you are a bona fide resident of a relevant possession, your military service pay will be sourced in that possession even if you perform the services in the United States or another possession. Filing state income taxes However, if you are not a bona fide resident of a possession, your military service pay will be income from the  United States even if you perform services in a possession. Filing state income taxes Civilian spouse of active duty member of the U. Filing state income taxes S. Filing state income taxes Armed Forces. Filing state income taxes   If you are a bona fide resident of a U. Filing state income taxes S. Filing state income taxes possession and choose to keep that possession as your tax residence under MSRRA when relocating with your servicemember spouse under military orders, the source of income for your labor or personal services is considered to be that possession. Filing state income taxes Likewise, if your tax residence is in one of the 50 states or the District of Columbia before relocating and you choose to keep it as your tax residence, the source of income for services performed in any of the U. Filing state income taxes S. Filing state income taxes possessions is considered to be the United States and, specifically, your state of residence or the District of Columbia. Filing state income taxes Services performed partly inside and partly outside a relevant possession. Filing state income taxes   If you are an employee and receive compensation for labor or personal services performed both inside and outside the relevant possession, special rules apply in determining the source of the compensation. Filing state income taxes Compensation (other than certain fringe benefits) is sourced on a time basis. Filing state income taxes Certain fringe benefits (such as housing and education) are sourced on a geographical basis. Filing state income taxes   Or, you may be permitted to use an alternative basis to determine the source of compensation. Filing state income taxes See Alternative basis , later. Filing state income taxes   If you are self-employed, determine the source of your income for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. Filing state income taxes In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. Filing state income taxes Time basis. Filing state income taxes   Use a time basis to figure your compensation for labor or personal services from the relevant possession (other than the fringe benefits discussed later). Filing state income taxes Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed  services in the relevant  possession during the year     Total number of days you  performed services during the year           You can use a unit of time less than a day in the above fraction, if appropriate. Filing state income taxes The time period for which the income is made does not have to be a year. Filing state income taxes Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. Filing state income taxes Example. Filing state income taxes In 2013, you worked in your employer's office in the United States for 60 days and in the Puerto Rico office for 180 days, earning a total of $80,000 for the year. Filing state income taxes Your Puerto Rico source income is $60,000, figured as follows. Filing state income taxes       180 days 240 days × $80,000 = $60,000                 Multi-year compensation. Filing state income taxes   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. Filing state income taxes Multi-year compensation is compensation that is included in your income in 1 tax year but is attributable to a period that includes 2 or more tax years. Filing state income taxes You determine the period to which the income is attributable based on the facts and circumstances of your case. Filing state income taxes For more information on multi-year compensation, see Treasury Decision (T. Filing state income taxes D. Filing state income taxes ) 9212 and Regulations section 1. Filing state income taxes 861-4, 2005-35 I. Filing state income taxes R. Filing state income taxes B. Filing state income taxes 429, available at www. Filing state income taxes irs. Filing state income taxes gov/irb/2005-35_IRB/ar14. Filing state income taxes html. Filing state income taxes Certain fringe benefits sourced on a geographical basis. Filing state income taxes   If you received any of the following fringe benefits as compensation for labor or services performed as an employee partly inside and partly outside a relevant possession, you must source that income on a geographical basis. Filing state income taxes Housing. Filing state income taxes Education. Filing state income taxes Local transportation. Filing state income taxes Tax reimbursement. Filing state income taxes Hazardous or hardship duty pay. Filing state income taxes Moving expense reimbursement. Filing state income taxes For information on determining the source of the fringe benefits listed above, see Regulations section 1. Filing state income taxes 861-4. Filing state income taxes Alternative basis. Filing state income taxes   You can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your income than the time or geographical basis. Filing state income taxes If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your income. Filing state income taxes De minimis exception. Filing state income taxes   There is an exception to the rule for determining the source of income earned in a possession. Filing state income taxes Generally, you will not have income from a possession if during a tax year you: Are a U. Filing state income taxes S. Filing state income taxes citizen or resident, Are not a bona fide resident of that possession, Are not employed by or under contract with an individual, partnership, or corporation that is engaged in a trade or business in that possession, Temporarily perform services in that possession for 90 days or less, and Earned $3,000 or less from such services. Filing state income taxes This exception began with income earned during your 2008 tax year. Filing state income taxes Pensions. Filing state income taxes   Generally, pension income has two components: contributions to the pension plan and the earnings accrued from investing those contributions. Filing state income taxes The contribution portion is sourced according to where services were performed that earned the pension. Filing state income taxes The investment earnings portion is sourced according to the location of the pension trust. Filing state income taxes Example. Filing state income taxes You are a U. Filing state income taxes S. Filing state income taxes citizen who worked in Puerto Rico for a U. Filing state income taxes S. Filing state income taxes company. Filing state income taxes All services were performed in Puerto Rico. Filing state income taxes Upon retirement you remained in Puerto Rico and began receiving your pension from the U. Filing state income taxes S. Filing state income taxes pension trust of your employer. Filing state income taxes Distributions from the U. Filing state income taxes S. Filing state income taxes pension trust must be allocated between (1) contributions, which are Puerto Rico source income, and (2) investment earnings, which are U. Filing state income taxes S. Filing state income taxes source income. Filing state income taxes Investment Income This category includes such income as interest, dividends, rents, and royalties. Filing state income taxes Interest income. Filing state income taxes   The source of interest income is generally determined by the residence of the payer. Filing state income taxes Interest paid by corporations created or organized in a relevant possession (possession corporation) or by individuals who are bona fide residents of a relevant possession is considered income from sources within that possession. Filing state income taxes   However, there is an exception to this rule if you are a bona fide resident of a relevant possession, receive interest from a corporation created or organized in that possession, and are a shareholder of that corporation who owns, directly or indirectly, at least 10% of the total voting stock of the corporation. Filing state income taxes See Regulations section 1. Filing state income taxes 937-2(i) for more information. Filing state income taxes Dividends. Filing state income taxes   Generally, dividends paid by a corporation created or organized in a relevant possession will be considered income from sources within that possession. Filing state income taxes There are additional rules for bona fide residents of a relevant possession who receive dividend income from possession corporations, and who own, directly or indirectly, at least 10% of the voting stock of the corporation. Filing state income taxes For more information, see Regulations section 1. Filing state income taxes 937-2(g). Filing state income taxes Rental income. Filing state income taxes   Rents from property located in a relevant possession are treated as income from sources within that possession. Filing state income taxes Royalties. Filing state income taxes   Royalties from natural resources located in a relevant possession are considered income from sources within that possession. Filing state income taxes   Also considered possession source income are royalties received for the use of, or for the privilege of using, in a relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. Filing state income taxes Sales or Other Dispositions of Property The source rules for sales or other dispositions of property are varied. Filing state income taxes The most common situations are discussed below. Filing state income taxes Real property. Filing state income taxes   Real property includes land and buildings, and generally anything built on, growing on, or attached to land. Filing state income taxes The location of the property generally determines the source of income from the sale. Filing state income taxes For example, if you are a bona fide resident of Guam and sell your home that is located in Guam, the gain on the sale is sourced in Guam. Filing state income taxes If, however, the home you sold was located in the United States, the gain is U. Filing state income taxes S. Filing state income taxes source income. Filing state income taxes Personal property. Filing state income taxes   The term “personal property” refers to property (such as machinery, equipment, or furniture) that is not real property. Filing state income taxes Generally, gain (or loss) from the sale or other disposition is sourced according to the seller's tax home. Filing state income taxes If personal property is sold by a bona fide resident of a relevant possession, the gain (or loss) from the sale is treated as sourced within that possession. Filing state income taxes   This rule does not apply to the sale of inventory, intangible property, depreciable personal property, or property sold through a foreign office or fixed place of business. Filing state income taxes The rules applying to sales of inventory are discussed below. Filing state income taxes For information on sales of the other types of property mentioned, see Internal Revenue Code section 865. Filing state income taxes Inventory. Filing state income taxes   Your inventory is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. Filing state income taxes The source of income from the sale of inventory depends on whether the inventory was purchased or produced. Filing state income taxes Purchased. Filing state income taxes   Income from the sale of inventory that you purchased is sourced where you sell the property. Filing state income taxes Generally, this is where title to the property passes to the buyer. Filing state income taxes Produced. Filing state income taxes   Income from the sale of inventory that you produced in a relevant possession and sold outside that possession (or vice versa) is sourced based on an allocation. Filing state income taxes For information on making the allocation, see Regulations section 1. Filing state income taxes 863-3(f). Filing state income taxes Special Rules for Gains From Dispositions of Certain Property There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt instruments, diamonds, and gold) owned by a U. Filing state income taxes S. Filing state income taxes citizen or resident alien prior to becoming a bona fide resident of a possession. Filing state income taxes You are subject to these special rules if you meet both of the following conditions. Filing state income taxes For the tax year for which the source of the gain must be determined, you are a bona fide resident of the relevant possession. Filing state income taxes For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of the relevant possession). Filing state income taxes If you meet these conditions, gains from the disposition of this property will not be treated as income from sources within the relevant possession for purposes of the Internal Revenue Code. Filing state income taxes Accordingly, bona fide residents of American Samoa and Puerto Rico, for example, may not exclude the gain on their U. Filing state income taxes S. Filing state income taxes tax return. Filing state income taxes (See chapter 3 for additional filing information. Filing state income taxes ) With respect to the CNMI, Guam, and the USVI, the gain from the disposition of this property will not meet the requirements for certain tax rules that may allow bona fide residents of those possessions to reduce or obtain a rebate of taxes on income from sources within the relevant possessions. Filing state income taxes These rules apply to dispositions after April 11, 2005. Filing state income taxes For details, see Regulations section 1. Filing state income taxes 937-2(f)(1) and Examples 1 and 2 of section 1. Filing state income taxes 937-2(k). Filing state income taxes Example 1. Filing state income taxes In 2007, Cheryl Jones, a U. Filing state income taxes S. Filing state income taxes citizen, lived in the United States and paid $1,000 for 100 shares of stock in the Rose Corporation, a U. Filing state income taxes S. Filing state income taxes corporation listed on the New York Stock Exchange. Filing state income taxes On March 1, 2010, she moved to Puerto Rico and changed her tax home to Puerto Rico on the same date. Filing state income taxes Cheryl satisfied the presence test in 2010 and, under the year-of-move exception, she was considered a bona fide resident of Puerto Rico for the rest of 2010. Filing state income taxes On March 1, 2010, the closing value of Cheryl's stock in the Rose Corporation was $2,000. Filing state income taxes On January 5, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold all her Rose Corporation stock for $7,000. Filing state income taxes Under the earlier rules, none of Cheryl's $6,000 gain will be treated as income from sources within Puerto Rico. Filing state income taxes The source rules discussed in the preceding paragraphs supplement, and may apply in conjunction with, an existing special rule. Filing state income taxes This existing special rule applies if you are a U. Filing state income taxes S. Filing state income taxes citizen or resident alien who becomes a bona fide resident of American Samoa, the CNMI, or Guam, and who has gain from the disposition of certain U. Filing state income taxes S. Filing state income taxes assets during the 10-year period beginning when you became a bona fide resident. Filing state income taxes The gain is U. Filing state income taxes S. Filing state income taxes source income that generally is subject to U. Filing state income taxes S. Filing state income taxes tax if the property is either (1) located in the United States; (2) stock issued by a U. Filing state income taxes S. Filing state income taxes corporation or a debt obligation of a U. Filing state income taxes S. Filing state income taxes person or of the United States, a state (or political subdivision), or the District of Columbia; or (3) property that has a basis in whole or in part by reference to property described in (1) or (2). Filing state income taxes See chapter 3 for filing information. Filing state income taxes Special election. Filing state income taxes   For dispositions after April 11, 2005, you can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of the relevant possession (the possession holding period) as gain (or loss) from sources within that possession. Filing state income taxes Make the election by reporting the gain attributable to the possession holding period on your income tax return for the year of disposition. Filing state income taxes This election overrides both of the special rules discussed earlier. Filing state income taxes   There are two methods for figuring the gain for the possession holding period, one for marketable securities and another for other types of investment property. Filing state income taxes Marketable securities. Filing state income taxes   Marketable securities are those actively traded on an established financial market, such as stock in a publicly held corporation. Filing state income taxes Under the special election, allocate the gain (or loss) by figuring the appreciation separately for your possession and U. Filing state income taxes S. Filing state income taxes holding periods. Filing state income taxes   Your possession holding period begins on the first day you do not have a tax home outside the relevant possession. Filing state income taxes The gain (or loss) attributable to the possession holding period is the difference in fair market value of the security at the close of the market on the first and last days of this holding period. Filing state income taxes This is your gain (or loss) that is treated as being from sources within the relevant possession. Filing state income taxes If you were a bona fide resident of the relevant possession for more than one continuous period, combine the gains (or losses) from each possession holding period. Filing state income taxes Example 2. Filing state income taxes Assume the same facts as in Example 1, except that Cheryl makes the special election to allocate the gain between her U. Filing state income taxes S. Filing state income taxes and possession holding periods. Filing state income taxes Cheryl's possession holding period began March 1, 2010, the date her tax home changed to Puerto Rico. Filing state income taxes Therefore, the portion of gain attributable to her possession holding period is $5,000 ($7,000 sale price – $2,000 closing value on first day of the possession holding period). Filing state income taxes By reporting $5,000 of her $6,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Filing state income taxes Other personal property. Filing state income taxes   For personal property other than marketable securities, use a time-based allocation. Filing state income taxes Figure the gain (or loss) attributable to the possession holding period by multiplying your total gain (or loss) by the following fraction. Filing state income taxes      Number of days in the  possession holding period     Total number of days  in your holding period         The result is your gain (or loss) that is treated as being from sources within the relevant possession. Filing state income taxes Example 3. Filing state income taxes In addition to the stock in Rose Corporation, Cheryl acquired a 5% interest in the Alder Partnership on January 1, 2009. Filing state income taxes On March 1, 2010, when she established bona fide residency in Puerto Rico, her partnership interest was not considered a marketable security. Filing state income taxes On September 16, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold her interest in Alder Partnership for a $100,000 gain. Filing state income taxes She had owned the interest for a total of 1,720 days. Filing state income taxes Cheryl's possession holding period (from March 1, 2010, through September 16, 2013) is 1,296 days. Filing state income taxes The portion of her gain attributable to Puerto Rico is $75,349 ($100,000 x (1,296 Puerto Rico days ÷ 1,720 total days)). Filing state income taxes By reporting $75,349 of her $100,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Filing state income taxes Scholarships, Fellowships, Grants, Prizes, and Awards The source of these types of income is generally the residence of the payer, regardless of who actually disburses the funds. Filing state income taxes Therefore, in order to be possession source income, the payer must be a resident of the relevant possession, such as an individual who is a bona fide resident or a corporation created or organized in that possession. Filing state income taxes These rules do not apply to amounts paid as salary or other compensation for services. Filing state income taxes See Compensation for Labor or Personal Services, earlier in this chapter, for the source rules that apply. Filing state income taxes Effectively Connected Income In limited circumstances, some kinds of income from sources outside the relevant possession must be treated as effectively connected with a trade or business in that possession. Filing state income taxes These circumstances are listed below. Filing state income taxes You have an office or other fixed place of business in the relevant possession to which the income can be attributed. Filing state income taxes That office or place of business is a material factor in producing the income. Filing state income taxes The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. Filing state income taxes An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. Filing state income taxes The three kinds of income from sources outside the relevant possession to which these rules apply are the following. Filing state income taxes Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the relevant possession or from any interest in such property. Filing state income taxes Included are rents or royalties for the use of, or for the privilege of using, outside the relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the relevant possession. Filing state income taxes Dividends or interest from the active conduct of a banking, financing, or similar business in the relevant possession. Filing state income taxes Income, gain, or loss from the sale or exchange outside the relevant possession, through the office or other fixed place of business in the relevant possession, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. Filing state income taxes Item (3) will not apply if you sold the property for use, consumption, or disposition outside the relevant possession and an office or other fixed place of business in a foreign country was a material factor in the sale. Filing state income taxes Example. Filing state income taxes Marcy Jackson is a bona fide resident of American Samoa. Filing state income taxes Her business, which she conducts from an office in American Samoa, is developing and selling specialized computer software. Filing state income taxes A software purchaser will frequently pay Marcy an additional amount to install the software on the purchaser's operating system and to ensure that the software is functioning properly. Filing state income taxes Marcy installs the software at the purchaser's place of business, which may be in American Samoa, in the United States, or in another country. Filing state income taxes The income from selling the software is effectively connected with the conduct of Marcy's business in American Samoa, even though the product's destination may be outside the possession. Filing state income taxes However, the compensation she receives for installing the software (personal services) outside of American Samoa is not effectively connected with the conduct of her business in the possession—the income is sourced where she performs the services. Filing state income taxes Prev  Up  Next   Home   More Online Publications