Special Income Tax Withholding Requirements for Commonwealth of Northern Mariana Islands and Puerto Rico
Jan. 31, 2018 —
This is a re-post from 2016. On 1 January 2017, there were systematic changes made to those members that were residents of the The Commonwealth of Northern Mariana Islands (CNMI) and Puerto Rico (PR) and Armed Forces members who are/were stationed in the CNMI or PR, unless their state of legal resident is the CNMI or PR. These are also the default W2 tax profiles for new personnel being accessed into the service that meet this criteria.
The U.S. Treasury Department has entered into agreements under 5 U.S.C Section 5517 ("5517 Agreements") with the Commonwealth of Northern Mariana Islands (CNMI) and Puerto Rico (PR) that require certain federal employers to withhold U.S. territorial income taxes (rather than U.S. federal income taxes) on certain employees. The 5517 Agreements apply to all military departments to include the U.S. Coast Guard.
Under the terms of these 5517 Agreements, the U.S. Coast Guard is required to withhold U.S. territory income taxes, rather than federal income taxes, from compensation paid to service members of the U.S. Armed Forces whose state of legal residence (SLR) is the CNMI or PR, regardless of duty station location. The 5517 Agreements apply to Armed Forces members who are on active duty status in the regular or reserve components or in the Ready Reserve and participating in scheduled drills or training periods or are serving on active duty for training under 10 U.S.C. Section 10147.
The 5517 Agreements do NOT apply to Federal retirees who are residents of the CNMI or PR and Armed Forces members who are stationed in the CNMI or PR, unless their state of legal residence is the CNMI or PR.
Effective 1 January 2017, Direct Access will systematically change all members with CNMI and PR as their state of legal residence to the following tax withholdings:
Federal: Special Tax Withholding set to "Do Not Maintain Taxable Gross and Do Not Withhold Tax" No federal tax will be deducted.
State: Special tax Withholding set to "None." State tax will be deducted based on the member's state of legal residence.
No other special tax withholdings will be permitted for residents of CNMI and PR.
This tax withholding setting will apply to all newly accessed members whose state of legal residence is CNMI or PR.