One of the most frequently asked questions by U.S. citizens when considering a move to Puerto Rico is about their tax obligations. Understanding the nuances of tax responsibilities is crucial for financial planning and compliance.

Federal Taxes

Residents of Puerto Rico are required to pay several types of federal taxes. Specifically, they are liable for customs taxes, federal commodity taxes, and payroll taxes, which include Social Security, Medicare, and unemployment taxes (FICA taxes). However, income tax responsibilities vary depending on the source of income and the resident’s status.

Income Tax Exclusions

According to the Internal Revenue Service (IRS), bona fide residents of Puerto Rico can exclude income derived from Puerto Rican sources from their U.S. income tax return. This provision does not apply to income earned from U.S. government employment or other sources outside Puerto Rico. Bona fide residency is determined by physical presence, tax home, and closer connection tests​ (IRS)​​ (IRS)​.

Filing Requirements

Puerto Rican residents must file a U.S. tax return if they have income from outside Puerto Rico or if the U.S. government employs them. They can claim deductions and credits on their U.S. tax return for income that is not excluded. Additionally, Puerto Rican residents must file a Puerto Rican tax return and comply with local tax laws, which often have significant differences from U.S. federal tax regulations.

Key Points for Consideration

• Customs and Commodity Taxes: These taxes apply to goods imported into Puerto Rico and specific commodities.
• Payroll Taxes: Residents must pay Social Security, Medicare, and unemployment taxes, contributing to their future benefits.
• Income Source Exclusion: Income from Puerto Rican sources is generally excluded from U.S. income tax, provided residency requirements are met.

Resources for Further Information

For more detailed guidance and specific cases, refer to the following IRS publications:

• IRS Publication 1321: General Rules and Procedures for Filing Federal Tax Returns in Puerto Rico
• IRS Topic No. 902: Credits and Deductions for Taxpayers with Puerto Rican Source Income Exempt from U.S. Tax

Understanding these tax rules is essential for U.S. citizens living in Puerto Rico to ensure compliance and optimize their financial situation. Proper planning and consulting with tax professionals can help navigate the complexities of tax obligations between Puerto Rico and the United States.