If I am a Maryland resident with earned income in the Virgin Islands, do I need to file a separate tax return for the Virgin Islands, or is it included on my Maryland state tax return?

Maryland Residents and Taxes on Income Earned in the U.S. Virgin Islands

Taxation of Income Earned in the U.S. Virgin Islands

Maryland state tax laws generally require residents to pay taxes on all income earned, including income earned outside the state. However, the U.S. Virgin Islands (USVI) has a unique tax relationship with the United States, as outlined in the Internal Revenue Code and other federal provisions.

Coordination of U.S. and Virgin Islands Taxes

According to [26 U.S. Code § 932], there is a coordination of income taxes between the United States and the Virgin Islands. This section of the code provides rules for individuals who are bona fide residents of the USVI and those who are not. It addresses how income should be reported and how taxes are assessed between the two jurisdictions.

Tax Credits to Prevent Double Taxation

The U.S. tax code has provisions to prevent double taxation for individuals who pay taxes to both the U.S. and the USVI. Specifically, [26 U.S. Code § 934] limits the reduction in income tax liability incurred to the Virgin Islands and allows for certain credits and exclusions, particularly for income derived from sources within the USVI or connected with a trade or business there.

Maryland Specific Provisions

The Maryland Code, Tax-General § 10-817, does not provide specific guidance on the treatment of income earned in the USVI. However, Maryland residents are typically subject to state income tax on their worldwide income, which would include income from the USVI unless specific provisions or tax treaties apply.

Conclusion

Maryland residents must generally pay state taxes on income earned in the USVI. However, they may be eligible for tax credits to prevent double taxation due to the unique tax relationship between the USVI and the United States. The specific application of these credits would depend on the individual's circumstances, including whether they are considered a bona fide resident of the USVI and the nature of the income earned.

For detailed guidance on how these rules apply to specific situations, individuals should refer to the relevant sections of the U.S. tax code and Maryland state tax laws. It is also advisable to review the latest updates and bulletins from the IRS, such as those found in the [Internal Revenue Bulletin: 2008-20], for any recent changes or developments that may affect tax liability and credits.

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Sources:

Instructions for Form 941 (03/2024) | Internal Revenue Service 2024-03-12

Publication 54 (2023), Tax Guide for U.S. Citizens and Resident Aliens ... 2024-03-11

Bona fide residents of the U.S. Virgin Islands - Tax credits 2024-06-30

Publication 519 (2023), U.S. Tax Guide for Aliens | Internal Revenue ... 2024-03-11

U.S. Government Civilian Employees Stationed Abroad 2024-03-15

26 U.S. Code § 932 - Coordination of United States and Virgin Islands income taxes 26 U.S. Code Chapter 1 - NORMAL TAXES AND SURTAXES 26 U.S. Code Subchapter N - Tax Based on Income From Sources Within or Without the United States 26 U.S. Code Part III - INCOME FROM SOURCES WITHOUT THE UNITED STATES 2023-12-11

26 U.S. Code § 934 - Limitation on reduction in income tax liability incurred to the Virgin Islands 26 U.S. Code Chapter 1 - NORMAL TAXES AND SURTAXES 26 U.S. Code Subchapter N - Tax Based on Income From Sources Within or Without the United States 26 U.S. Code Part III - INCOME FROM SOURCES WITHOUT THE UNITED STATES 2023-12-11

Maryland Code, Tax-General § 10-817 2021-12-31

Internal Revenue Bulletin: 2008-20 2008-05-18