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Do Puerto Rico Residents Owe US Tax?

Do Puerto Rico Residents Owe US Tax?
Ines Zemelman, EA
30 January 2018

Puerto Rico is considered an unincorporated United States territory, so the rules for residents of Puerto Rico are a little different than for residents of the 50 states. The determination of whether you owe US income taxes depends on your residency status and your income source.

Residents

In general, if you made your principal residence in Puerto Rico for a minimum of 183 days in the tax year, you are a bona fide resident of Puerto Rico and are exempt from submitting a United States federal income tax return. However, if you earn income from places not in Puerto Rico, are an employee of the federal government, or a military member, you do need to submit a tax return and pay tax on that portion of income. Even then, income from a source in Puerto Rico is still excluded.

Non-Residents

If you do not meet the PR residency requirements, you must submit a tax return to report your income from any source. Therefore Puerto Ricans who move abroad or to the mainland must file US tax return.

There is one exception. This exception applies to those taxpayers who were residents of Puerto Rico for a minimum of two years prior to their move to the mainland. Income received from sources in Puerto Rico during the year the move occurred can be excluded from income reporting.

Credits, Deductions, and Exemptions

The credits and deductions that can be taken on federal tax returns cause a little more confusion. If you have a mix of reportable income and excludable income, many credits and deductions cannot be allocated to the income that is excluded. As an example, if half your income is from sources in Puerto Rico (so it does not need to be reported), then you are only allowed half of the standard deduction. The same concept is also applicable to itemized deductions (e.g., medical expenses and mortgage interest), as well as alimony.

You are allowed to take the full personal exemption, and you are also allowed to take credit for taxes paid to the Puerto Rican government.

Payroll Taxes

Regardless of whether your wages were earned in Puerto Rico or on the mainland, you are still required to pay the full amount of FICA tax (which pays for Medicare and Social Security). Employers must pay their portion of the tax as well. Of course, any local taxes levied by the Puerto Rican government must also be paid.

Ines Zemelman, EA
founder of Taxes for Expats