Today TaxMama® hears from Pat in the TaxQuips Forum with a quickie question. “Are income taxes paid to the Virgin Islands deductible as state taxes? VI taxes are governed by the Internal Revenue Code so it doesn’t seem logical they’d be deductible, as federal taxes generally aren’t. In addition, the U.S. Virgin Islands aren’t a state. They’re a territory.”
You’re talking about the U.S. Virgin Islands? Not the British Virgin Islands? Look, there are two versions of those islands! (Actually three, if you include the Spanish Virgin Islands…or Puerto Rico.)
Taxes paid to the US Virgin Islands should hold up as state taxes. If they were paid to the British Virgin Islands, they would be foreign taxes.
However, when it comes to foreign taxes, you DO have two options – either the foreign tax credit, or the Schedule A tax deduction.
IRS specifically addresses this issue in Publication 17, talking about Foreign Taxes, it says: Generally, you can take either a deduction or a credit for income taxes imposed on you by a foreign country or a U.S. possession.
In fact, the State of California specifically recognizes the U.S.V.I. for the state tax credit on Schedule S – see page 1 item C. So it’s likely that other states do, too.
And remember, you can find answers to all kinds of questions about taxes paid to U.S. Territories and other tax issues, free. Where? Where else? At www.TaxMama.com.[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]
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