IRS Form 8689 - USVI Tax Allocation Guide & Filing Steps

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A U.S. citizen with Virgin Islands rental income came to us convinced the federal return covered everything. The income numbers were right, but the filing was incomplete: with USVI-source income and no bona fide USVI residency, part of that tax belonged to the Virgin Islands, allocated on Form 8689. We sorted it out before the deadline, and the logistics, not the math, were the hard part.

Form 8689 sits between your federal return and the USVI. Line 35 sets the allocation ratio, USVI AGI divided by total U.S. AGI, rounded to at least three decimals and capped at 1.000, and Line 36 is the tax allocated to the territory. You attach the form to the Form 1040 you file with the IRS and send an identical signed copy to the Virgin Islands Bureau of Internal Revenue. Short work trips can stay off the form under de minimis relief: 90 days or less and 3,000 or less of pay.

Key Takeaways

You file Form 8689 if you are a U.S. citizen or resident alien, you are not a bona fide USVI resident, and you have USVI‑source income or income effectively connected with a USVI trade or business.
The allocation is simple, compute your USVI AGI share, then apply it to your U.S. tax, that result is the tax payable to the USVI.
You must submit identical signed returns, attach Form 8689 to the one you file with the IRS, and send a signed copy to the Virgin Islands Bureau of Internal Revenue.
De minimis relief can keep short USVI work trips off the form, 90 days or less and 3,000 or less of pay, and not working for a USVI trade or business.
2025 Form 8689 uses Line 35 for the percentage and Line 36 for the USVI tax, with payments and credits reconciled on Lines 37 through 46.

What Is IRS Form 8689

Form 8689, Allocation of Individual Income Tax to the U.S. Virgin Islands, figures how much of your U.S. tax belongs to the USVI. In practice, you will:

List USVI‑source income in Part I.
Prorate above‑the‑line adjustments in Part II to arrive at USVI AGI.
Compute the allocation percentage on Line 35, USVI AGI divided by total AGI.
Apply that percentage to your U.S. tax base on Line 36.
Reconcile USVI withholding, estimates, and extension payments in Part IV to determine refund or balance due with the Virgin Islands.

You attach Form 8689 to your U.S. return and file a signed copy of the same return with the Virgin Islands. Publication 570 reiterates the same requirement and gives the current mailing details.

Why Accounting Firms Struggle Here

If you manage returns that cross U.S. and territory rules, you know the pain points. The mechanics are not hard, the workflow is. Deadlines slip when sourcing rules are unclear, when reviewers see unstructured workpapers, or when addresses and line references are out of date. That is why we confirm 2025 lines, addresses, and Schedule 3 entries before filing. The latest IRS guidance still requires identical filings and directs non‑residents with USVI income to mail the U.S. return to Austin if there is no payment and to Charlotte if there is a payment, plus a signed copy to the USVI.

Bottom line, Form 8689 is a split, not a second tax. You share your U.S. tax with the USVI based on your USVI share of AGI, then you true‑up payments on Part IV.

Who Must File Form 8689

You must file Form 8689 if all three are true:

You are a U.S. citizen or resident alien.
You are not a bona fide resident of the USVI for the year.
You have USVI‑source income or income effectively connected with a USVI trade or business.

This rule comes right from the IRS page for the form and Publication 570.

Common triggers include wages for days you physically worked in the USVI, interest paid by a USVI bank, dividends from a USVI corporation, net business income attributable to work performed in the USVI, rental income from USVI property, and gains from selling USVI real estate.

Bona fide USVI residents generally do not file Form 8689. They file with the Virgin Islands and report worldwide income there. If you qualify as a bona fide resident, Publication 570 explains presence, tax home, and closer connection tests that prove it.

Bona Fide Residency, The Quick Lens

To be a bona fide USVI resident, you must meet a presence test, have no tax home outside the USVI, and have a closer connection to the USVI than to the United States or another country. The presence test can be met in several ways, for example, at least 183 days in the USVI during the year, or alternative multi‑year thresholds. Publication 570 details all tests and examples.

If you do not meet those tests, you are a non‑resident for Form 8689 purposes, so the allocation rules apply. You will file with both jurisdictions and include Form 8689 with each identical return.

The Core Math, How The Allocation Works

Form 8689 uses a single, transparent formula. You compute your USVI share of AGI in Part II, then divide USVI AGI by total AGI on Line 35. That percentage, rounded to at least three decimals and capped at 1.000, multiplies your adjusted U.S. tax base on Line 33. The result on Line 36 is the dollar amount of U.S. tax that belongs to the USVI.

Once you have Line 36, you compare it to what you already paid to the Virgin Islands. Lines 37 to 39 cover USVI withholding, estimates, and any extension payment. Line 40 totals those payments. If payments exceed the allocation, you have an overpayment that can be refunded or applied to next year. If the allocation exceeds payments, you owe the difference to the Virgin Islands. The 2025 form tells you where to carry the refundable amount on Schedule 3 of Form 1040.

Think of it as a fair split. Your USVI‑source share of AGI drives your USVI share of tax. Then you settle up with the Virgin Islands, not the IRS, on Part IV.

Determining USVI‑Source Income

Your sourcing must be defensible. Here is how the rules apply in practical terms, drawn from the Form 8689 instructions and Publication 570.

Wages You Earned In The USVI

Wages are sourced to where you physically perform the services. If you split time between the mainland and St. Thomas, you apportion by days or hours. Keep time sheets, calendars, and travel records. If you were in the USVI for short stints, the de minimis exception can apply when all conditions are met, you are a U.S. person, not a bona fide resident, not working for a USVI trade or business, you worked there 90 days or less during the year, and you earned 3,000 or less for that work. If the exception applies, you do not treat those wages as USVI‑source.

Military families have special protection under MSRRA. If you are a civilian spouse in the USVI only to accompany an active‑duty servicemember and you keep a residence in a state, D.C., or another territory, your wages and self‑employment income are not USVI‑source. Form 8689 and Publication 570 spell this out. Keep orders and residency evidence in your file.

Interest And Dividends

Interest is sourced to the payer’s location. Interest from a USVI bank, or a USVI branch of a U.S. bank, is USVI‑source. Dividends are generally sourced to where the paying corporation is organized (not where your brokerage account is held or where you reside as the shareholder). Documentation matters, hold bank statements showing payer address, branch details, or corporate documents that prove the company is USVI‑based.

Real Property And Other Gains

Gains from selling real property are sourced to where the property sits. USVI real estate equals USVI‑source gain. If you sold a mixed business that included USVI and non‑USVI real property, separate the components and compute the USVI share. Use your normal basis and holding period rules.

Business Income And Rentals

For Schedule C work, allocate on a reasonable basis that fits your facts, most often a time basis tied to where services were performed. Apply the same method to both income and deductions. For rental real estate, include rents and expenses for USVI property only, including depreciation, repairs, and insurance. Keep clear workpapers so reviewers can follow your apportionment without guesswork.

What You Put In Each Part Of The Form

Part I lists USVI‑source income types, wages on Line 1, interest on Line 2, dividends on Line 3, business, capital gains, rentals, and other income through Line 15. Line 16 totals your USVI income.
Part II prorates above‑the‑line adjustments that belong with USVI income and arrives at Line 30, USVI AGI.
Part III computes the percentage on Line 35 and the USVI tax on Line 36.
Part IV reconciles USVI payments on Lines 37 to 40, shows the refundable portion on Lines 41 to 44, and any balance due on Lines 45 and 46.

Pro tip, build a short sourcing memo. A one‑page note that cites the time‑basis apportionment, the de minimis test if used, and the documents you relied on makes review and any later questions much easier.

Step‑By‑Step Completion

Part I, Income From The U.S. Virgin Islands

Line 1, enter wages for services performed while physically in the USVI, apportion mixed work by days or hours, and do not include amounts covered by the de minimis exception.
Lines 2 and 3, include only interest and dividends that meet USVI sourcing tests.
Lines 4 through 15, include other USVI‑source items, then total on Line 16.

Part II, Adjusted Gross Income From The USVI

Prorate educator expenses, HSA deduction, self‑employment deductions, IRA deduction, and similar adjustments based on the USVI share that relates to the underlying income. Sum Lines 17 through 28, then subtract from Line 16 to reach USVI AGI on Line 30.

Part III, Allocation Of Tax To The USVI

Line 31, start with the total tax from your Form 1040.
Line 32, enter the specified amounts per instructions, which nets you to Line 33.
Line 35, divide USVI AGI by total AGI, round to at least three decimals, cap at 1.000.
Line 36, multiply Line 33 by Line 35, this is the tax allocated to the USVI.

Part IV, Payments And True‑Up

Enter USVI withholding on Line 37, estimated payments and prior‑year credit on Line 38, and extension payment on Line 39. Do not also list the USVI withholding on the federal income tax withheld lines of Form 1040, or you will double‑count it. Total on Line 40. The 2025 form instructs you to carry the refundable amount from Line 41 and any amount paid with the return on Line 46 to the “Other refundable credits” line on Schedule 3 of Form 1040. This is how the IRS tracks the cross‑jurisdiction payment on your U.S. return.

Part IV, Quick Reference Table

Line	What you enter	What it means
37	USVI income tax withheld	Creditable payments to the Virgin Islands
38	Estimated payments and prior‑year credit	More creditable payments
39	Amount paid with extension	Add to payments
40	Total payments	Compare to Line 36
41	Smaller of Line 36 or Line 40	Refundable credit to Schedule 3
42–44	Overpayment, refund, carryforward	Choose refund or apply forward
45–46	Balance due and amount you will pay	Pay the Virgin Islands and reflect on Schedule 3

Source lines and carryovers are from the 2025 Form 8689 and related IRS guidance.

Keep a worksheet that ties Line 41 to your Schedule 3 entry, reviewers appreciate the trace.

Filing Methods And 2025 Addresses

You can e‑file your U.S. return with Form 8689 attached. Even when you e‑file, you must still send an identical signed copy of your U.S. return, including Form 8689, to the Virgin Islands Bureau of Internal Revenue. Publication 570 states this directly.

If you mail your U.S. return as a non‑resident with USVI‑source income, use the addresses Publication 570 lists for this fact pattern:

If you are not enclosing a payment, mail the original U.S. return to, Department of the Treasury, Internal Revenue Service, Austin, TX 73301‑0215.
If you are enclosing a payment, mail the original U.S. return to, Internal Revenue Service, P.O. Box 1303, Charlotte, NC 28201‑1303.

Mail the signed copy for the Virgin Islands to, Virgin Islands Bureau of Internal Revenue, 6115 Estate Smith Bay, Suite 225, St. Thomas, VI 00802. This matches the Bureau’s own site listing.

Note that the IRS “Where to file” pages for Form 1040 and 1040‑V also show Charlotte for payments and Austin for international or territory situations without payment, which aligns with Publication 570. Always check for yearly updates before mailing. Page last reviews in July 2025 confirm the current details.

Bona Fide Residency, A Closer Look

Presence test, for example, 183 days in the USVI during the year, or 549 days over three years with at least 60 days each year.
No tax home outside the USVI.
Closer connection to the USVI than to the United States or any foreign country.

Publication 570 gives examples and special rules, and it is what auditors and reviewers use to check your position.

Special Rules You Should Not Skip

De Minimis Rule

You generally do not have territory‑source wage income if you are a U.S. person, not a bona fide resident, not employed by a trade or business in the territory, you worked there 90 days or less, and earned 3,000 or less for those services. Meet all conditions or the exception fails.

Joint Returns

On a joint return, the spouse with the higher AGI controls residency treatment for Form 8689, and community property laws are disregarded when you make that determination. If that spouse is not a bona fide USVI resident, you use Form 8689 and the allocation rules on the combined AGI. The 2025 form instructions outline this clearly.

Military Spouse Protections

Under MSRRA, the civilian spouse who is in the USVI solely to accompany the servicemember and keeps domicile in a state, D.C., or another territory does not treat wages or self‑employment income as USVI‑source. Keep orders, domicile proof, and pay records.

Using Tax Software Without Headaches

TaxAct, Online And Desktop

Enter all income and adjustments on the main return first so the form pulls correct totals.
Open Form 8689 from Forms Assistant or Forms Explorer to review sourcing and percentages.
Save and attach for printing with Form 1040 and the copy for the Virgin Islands. The e‑file copy will include the form automatically when supported. (Follow your software prompts for dual filing packets.)

UltraTax, CCH Axcess, ProConnect, Drake

UltraTax and CCH Axcess, enter USVI sourcing at the activity level, then enable Form 8689 in the return configuration. Confirm Schedule 3 carryover of the refundable amount.
ProConnect and Lacerte, mark USVI‑source amounts on the income screens, then open Form 8689 to confirm Line 35 and Line 36. Check the Schedule 3 mapping for Line 41 and Line 46.
Drake, use the territory income screens to tag USVI items, then review Form 8689 and the “Other refundable credits” line on Schedule 3.

No matter the platform, the control steps are identical, get the sourcing right, prove the proration for adjustments, confirm the Line 35 math, and trace the Schedule 3 entry. Cross‑check against the 2025 form lines.

Common Mistakes And How To Avoid Them

The same handful of errors shows up every season, and almost all of them sit in Part III or Part IV. Here are the ones my team catches most often, with the fix we write into the SOP, drawn from the 2025 Form 8689 instructions and IRS Publication 570.

1. Allocating total tax instead of adjusted tax. The Line 35 ratio applies to Line 33, which is total tax on Line 31 minus the Line 32 backout of credits, self-employment tax, and the listed Schedule 2 and Schedule 3 items. Skip the Line 32 subtraction and your Line 36 USVI allocation comes out too high. Fix: Build Line 32 from the instruction list before you compute Line 33, then multiply Line 33 by Line 35.

2. Double-counting USVI withholding. USVI income tax withheld from box 2 of Form W-2VI belongs on Line 37 of Form 8689 only. Filers often also drop it on the federal income tax withheld line of Form 1040, which credits the same dollars twice. Fix: Map W-2VI box 2 straight to Line 37 and confirm it never reaches the federal withholding line on the 1040.

3. Claiming the full Line 36 as a credit. The credit on Schedule 3 is not the tax allocated on Line 36; it is what you actually paid to the Virgin Islands. That is Line 41, the smaller of Line 36 or your payments on Line 40, plus any Line 46 balance paid with the return. Fix: Carry only Lines 41 and 46 to the “Other refundable credits” line on Schedule 3, and tie the figure back to proof of payment.

4. Filing with only one jurisdiction. Form 8689 requires identical signed returns with both the IRS and the Virgin Islands Bureau of Internal Revenue. Sending the U.S. package to the IRS and forgetting the St. Thomas copy, or the reverse, leaves the filing incomplete. Fix: Treat the signed VIBIR copy to 6115 Estate Smith Bay, Suite 225, St. Thomas, VI 00802 as a required filing step, even when you e-file the U.S. return.

5. Rounding Line 35 too coarsely. The allocation ratio must be carried to at least three decimal places and capped at 1.000. Rounding to two places shifts the USVI tax, and a computed ratio above 1.000, which happens when USVI AGI exceeds total AGI, has to be entered as 1.000. Fix: Compute Line 30 divided by Line 34 to three or more decimals in the workpaper, then apply the 1.000 cap before it flows to Line 36.

6. Misreading the de minimis exception. Short USVI work only drops off the form when all five conditions hold: U.S. citizen or resident, not a bona fide USVI resident, not working for a USVI trade or business, 90 days or less in the USVI, and $3,000 or less earned there. Meeting the day test or the dollar test alone does not qualify. Fix: Run all five conditions as a single gate in the sourcing memo before excluding any wages from Line 1.

Addresses And Contacts You Will Actually Use

IRS, no payment enclosed, Department of the Treasury, Internal Revenue Service, Austin, TX 73301‑0215.
IRS, payment enclosed, Internal Revenue Service, P.O. Box 1303, Charlotte, NC 28201‑1303.
Virgin Islands Bureau of Internal Revenue, 6115 Estate Smith Bay, Suite 225, St. Thomas, VI 00802. The Bureau confirms this office address on its site.

Note, the IRS “Where to file” pages were last reviewed in July 2025, and Publication 570 for 2024 remains the controlling narrative for territory filings, so check those pages each filing season for updates.

When To Get Help, And How We Fit In

If you run a CPA or EA firm, the hard part is not learning the form, it is getting consistent, reviewer‑ready workpapers, disciplined sourcing memos, and on‑time filings to two jurisdictions. That is where a controlled delivery model helps. At Accountably, we integrate trained offshore accountants into your workflow so your team can hand off clean sourcing workbooks, verified Line 35 math, and ready‑to‑file copies for the Virgin Islands. We build this inside your systems, QuickBooks, UltraTax, CCH Axcess, ProConnect, Drake, Karbon, TaxDome, and more, so you keep process control while you scale production during peak season. Use us only where it adds value, and keep the focus on your client relationships.

Final Checklist Before You File

Confirm sourcing for wages, interest, dividends, rentals, and gains.
Prorate above‑the‑line adjustments that relate to USVI income.
Recalculate Line 35 and Line 36, save the worksheet.
Tie Line 41 and Line 46 to Schedule 3, “Other refundable credits,” then print the crosswalk.
E‑file the U.S. return or mail it to the correct IRS address, then send an identical signed copy to VIBIR.

Sources You Can Trust

Publication 570, Tax Guide for Individuals With Income From U.S. Territories, 2024 edition, for residency rules, de minimis standards, and dual filing logistics.
Form 8689, 2025 revision, for current line numbers, computations, and Schedule 3 placement.
IRS Where‑To‑File pages, updated in July 2025, for mailing addresses.
Virgin Islands Bureau of Internal Revenue site, for the St. Thomas mailing address.

Conclusion

You can make Form 8689 routine. Source income carefully, document your proration, confirm the allocation math, and file identical signed returns with both the IRS and the Virgin Islands. If you handle the logistics with the same care as the numbers, your review time drops, your deadlines stick, and your clients keep their peace of mind. If you want production stability during peak season, we can help you build the delivery discipline that keeps this clean, without sacrificing quality or security.

Reusable Checklists

Drop these into your firm SOPs as is. Each list is copy-paste ready, and the boxes save state in your browser so a preparer can work the form top to bottom without losing their place.

USVI Source-Income Workpaper

Split wages by days or hours physically worked in the USVI and document the calendar for Line 1.
Confirm interest payer location and dividend issuer organization before sourcing to the USVI on Lines 2 and 3.
Source real property gains to where the property sits, and separate mixed-use sales on Lines 7 and 8.
Run the five-part de minimis gate, 90 days and $3,000, before excluding any short-trip wages.
Check MSRRA and SCRA facts for military families before sourcing wages or self-employment income.
Total USVI income on Line 16 and attach the supporting records.

Line 35 Allocation and Tax Calculation

Prorate above-the-line adjustments tied to USVI income and total them on Line 29.
Subtract Line 29 from Line 16 to reach USVI AGI on Line 30.
Pull total tax to Line 31, then build the Line 32 backout from the instruction list.
Compute Line 33 as Line 31 minus Line 32.
Divide Line 30 by Line 34, carry to at least three decimals, and cap at 1.000 on Line 35.
Multiply Line 33 by Line 35 to set the tax allocated to the USVI on Line 36.

Dual-Jurisdiction Filing Packet

Enter USVI withholding from W-2VI box 2 on Line 37 and keep it off the federal withholding line.
Add estimates and prior-year credit on Line 38 and any extension payment on Line 39, then total on Line 40.
Carry Lines 41 and 46 to the “Other refundable credits” line on Schedule 3 with a payment trace.
Assemble identical signed returns for the IRS and the Virgin Islands Bureau of Internal Revenue.
Mail the U.S. return to the IRS address shown for your payment status in the 2025 instructions, or e-file it.
Send the signed VIBIR copy to 6115 Estate Smith Bay, Suite 225, St. Thomas, VI 00802.

Keep 8689 Season From Stalling

Form 8689 lands in the busiest stretch of the individual season, because it rides along with the Form 1040 due in April. The form itself is only 46 numbered lines across four parts, according to the 2025 Form 8689 instructions, but the work that stalls a return is the sourcing evidence behind Part I and the two-jurisdiction filing behind Part IV, not the arithmetic.

The fix is to treat sourcing and the dual-jurisdiction handoff as a documented workflow rather than a last-week scramble. When the proration logic, the Line 35 math, and the Virgin Islands copy are all standardized, review time drops and the April deadline holds without heroics.

Lock a one-page sourcing memo for Part I that shows the day-count split on Line 1 and the de minimis gate before any wages are excluded.
Pre-build the Line 32 backout list so Line 33 is correct before the Line 35 ratio is ever computed.
Standardize the Line 35 calculation to three decimals with the 1.000 cap baked into the workpaper.
Tie Lines 41 and 46 to the Schedule 3 “Other refundable credits” entry with a payment trace reviewers can follow.
Keep the identical signed Virgin Islands copy on the filing checklist so it never gets dropped at e-file.

That is the discipline we build into client workflows. Accountably integrates trained offshore preparers into your systems to produce reviewer-ready sourcing workbooks, verified Line 35 math, and ready-to-file Virgin Islands copies, so production stays stable through the April peak. See how we structure tax delivery when territory returns are part of the load.

FAQs

Do bona fide USVI residents use Form 8689

No. Bona fide residents generally file with the Virgin Islands and report worldwide income there, so Form 8689 is not used. Publication 570 covers the residency tests and filing patterns.

Where do I report the refundable amount on my U.S. return

For 2025, carry the amount from Form 8689 per the instructions to the “Other refundable credits” line on Schedule 3 of Form 1040. The form itself tells you to do this on Lines 41 and 46.

Can I net an overpayment with one jurisdiction against a balance with the other

No. You settle with each jurisdiction separately. Publication 570 and the IRS internal manuals explain that Form 8689 is not part of a cover‑over for direct netting on your return.

What if I am a nonresident alien with USVI income

You generally file a USVI return for USVI‑source income and a U.S. Form 1040‑NR for U.S.‑source income. Publication 570 lists the rules.