Who in Puerto Rico Should File A U.S. Tax Return?
We are all aware that every American citizen is required to pay taxes to the United States government on all money earned wherever in the globe. One would imagine that the same thing would happen to all Puerto Rican citizens. Here’s where you’ll need to pay close attention.
U.S. residents who spend the entire year on the island are excused from reporting taxes with the federal government of the United States if their entire income comes from Puerto Rican sources. You must, however, file a form with the federal government if you get money from anywhere else in the globe, including the United States, and/or if you work for any US government agency in Puerto Rico.
Puerto Rico Tax Return For US Citizens
If you match either of the following criteria, you should not submit a tax return for the United States:
1) During the whole tax year, you are a bona fide resident of Puerto Rico, and
2) your exclusive source of income is from Puerto Rico.
Employees of the United States government, including members of the armed forces, are subject to separate rules. For more information, please see the section below.
If you have income from sources outside of Puerto Rico, including from the United States, you must file a federal income tax return in the United States if the amount exceeds the U.S. filing threshold for your filing status.
If you’re a U.S. citizen who relocates from Puerto Rico to the United States and was a bona fide resident of Puerto Rico for at least two years prior to relocating, you can deduct any Puerto Rican source income from your U.S. income tax return for the time you were still residing in Puerto Rico during the year.
If you are a bona fide resident of Puerto Rico and are qualified to exclude income from Puerto Rico from your U.S. tax return, you must figure out the filing threshold provided in the U.S. tax return instructions. IRS Publication 1321 will assist you in determining how much income you have that requires you to submit a tax return in the United States.
In addition, IRS Publication 570 explains what it means to be a bona fide resident of a United States possession or territory. Certain tax benefits may be available to bona fide residents of American Samoa, Guam, the Northern Mariana Islands (CNMI), Puerto Rico, and the Virgin Islands.
Although bona fide inhabitants of Puerto Rico are exempt from paying federal income taxes on income earned in the territory, if you are self-employed, the situation is different. Even though you will not be required to file in the United States, you should utilize Form 1040-SS or Form 1040-PR because your income will be effectively connected with a trade or operation in Puerto Rico.
Citizens of The United States Serving In The Military
You must file a federal tax return if you are a U.S. citizen who is also a bona fide resident of Puerto Rico during the fiscal year and receive income as a U.S. government employee in Puerto Rico.
Your military service pay will be sourced to Puerto Rico if you are a bona fide resident of Puerto Rico and a member of the US armed forces, even if you work for the military in the US or another US possession. You will determine your residency as a member of the US armed forces by looking at your home of record. Even if you are stationed in the United States, if your home of record is in Puerto Rico, you are still a bona fide resident of the island. In this case, you’ll file a Puerto Rico return to report your worldwide income and a United States return to report your military pay. For taxes paid to Puerto Rico, a foreign tax credit is available on the US tax return.
Even if you are stationed in Puerto Rico, if your primary residence is in one of the fifty states, your income is sourced there. You must file a Puerto Rico tax return for income earned in Puerto Rico, as well as a United States tax return for income earned anywhere in the world. Taxes paid to Puerto Rico on income that is not exempt on the US tax return are eligible for a foreign tax credit.
The Military Spouse Residency Relief Act imposes some restrictions on spouses of active duty military personnel (MSRRA). Civilian spouses may be able to choose the same domicile (tax residence) as their military spouse.
1) Any wages, salaries, tips, or self-employment income obtained by the civilian spouse is considered Puerto Rico source income if the civilian spouse continues to be a bona fide resident of Puerto Rico under the MSRRA while in any of the 50 United States or the District of Columbia. The civilian spouse reports and files taxes according to the above-mentioned rules for bona fide residents.
2) If the civilian spouse continues to live in one of the 50 United States or the District of Columbia, and the civilian spouse’s only source of income is wages, salaries, tips, or self-employment, the civilian spouse will be taxed on worldwide income and will file only a federal and state tax return. If the civilian spouse has additional sources of income in Puerto Rico, the money may be required to be reported.
The MSRRA’s tax benefits for military spouses can save them hundreds of dollars in taxes and make the tax return filing process easier.
Residents and citizens of the United States must pay federal taxes for their job on the Island of Enchantment, so speak with a tax specialist about your individual circumstances to obtain the assistance you require.