The Commonwealth
of Puerto Rico(p12)

The Commonwealth of Puerto Rico has its own separate and independent tax system. Although it is modeled after the U.S. system, there are differences in law and tax rates.

To obtain Puerto Rico tax forms, contact the Forms and Publications Division Office at the above address or call (787) 722-0216, option #7.

Generally, you will file returns with both Puerto Rico and the United States. The income reported on each return depends on your residency status in Puerto Rico. To determine if you are a bona fide resident of Puerto Rico, see the information in chapter 1.

Bona fide residents of Puerto Rico will generally pay tax to Puerto Rico on their worldwide income.

If you are a U.S. citizen or resident alien and also a bona fide resident of Puerto Rico during the entire tax year, you generally must file the following returns.

• A Puerto Rico tax return reporting income from worldwide sources. If you report U.S. source income on your Puerto Rico tax return, you can claim a credit against your Puerto Rico tax, up to the amount allowable, for income taxes paid to the United States.
• A U.S. tax return reporting income from worldwide sources, but excluding Puerto Rico source income. However, see U.S. Government employees under Special Rules for Puerto Rico, later, for an exception.  If you are excluding Puerto Rico income on your U.S. tax return, you will not be allowed any deductions or credits that are directly or indirectly allocable to exempt income. For more information, see Special Rules for Completing Your U.S. Tax Return in chapter 4.
   If all of your income is from Puerto Rico sources, you are not required to file a U.S. tax return. However, if you have self-employment income, see Self-employment tax, later.
  

If you are a U.S. citizen, you may also qualify under these rules if you have been a bona fide resident of Puerto Rico for at least 2 years before moving from Puerto Rico. In this case, you can exclude your income derived from sources within Puerto Rico (but not wages and salaries received as an employee of the U.S. Government or its agencies) that you earned before the date you changed your residence. For more information, see Puerto Rico under Year of Moving From a Possession in chapter 1.

If you are a bona fide resident of Puerto Rico during the entire tax year, but a nonresident alien of the United States, you generally must file the following returns.

• A Puerto Rico tax return reporting income from worldwide sources. If you report U.S. source income on your Puerto Rico tax return, you can claim a credit against your Puerto Rico tax, up to the amount allowable, for income taxes paid to the United States.
• A U.S. tax return (Form 1040) reporting income from worldwide sources, but excluding Puerto Rico source income (other than amounts for services performed as an employee of the United States or any of its agencies). For tax purposes other than reporting income, however, you will be treated as a nonresident alien individual. For example, you are not allowed the standard deduction, you cannot file a joint return, and you are not allowed a deduction for a dependent unless that person is a citizen or national of the United States. There are also limitations on what deductions and credits are allowed. See Publication 519 for more information.

If you have no U.S. filing requirement but have income that is effectively connected with a trade or business in Puerto Rico, you must file Form 1040-SS or Form 1040-PR with the United States to report your self-employment income and, if necessary, pay self-employment tax.

To see if you are required to make payments of estimated income tax and/or self-employment tax to the IRS, get Form 1040-ES (or Form 1040-ES(PR)).

To pay by check or money order, send your payment with the Form 1040-ES (or Form 1040-ES(PR)) payment voucher to:

Internal Revenue Service
P.O. Box 1300
Charlotte, NC 28201-1300
USA

To get information on paying electronically (by credit or debit card, or through the Electronic Federal Tax Payment System (EFTPS)), go to www.irs.gov/e-pay.

For information on making estimated income tax payments to Hacienda, see Where To Get Forms and Information, earlier.

An individual who is not a bona fide resident of Puerto Rico for the tax year generally files tax returns with both Puerto Rico and the United States.

If you are a U.S. citizen or resident alien but not a bona fide resident of Puerto Rico during the entire tax year, you generally must file the following returns.

• A Puerto Rico tax return reporting only your income from Puerto Rico sources. Wages for services performed in Puerto Rico, whether for a private employer, the U.S. Government, or otherwise, is income from Puerto Rico sources.
• A U.S. tax return reporting income from worldwide sources. Generally, you can claim a foreign tax credit for income taxes paid to Puerto Rico on the Puerto Rico income that is not exempt from U.S. taxes (see chapter 4 for more information).

If you are a nonresident alien of the United States who does not qualify as a bona fide resident of Puerto Rico for the entire tax year, you generally must file the following returns.

• A Puerto Rico tax return reporting only your income from Puerto Rico sources. Wages for services performed in Puerto Rico, whether for a private employer, the U.S. Government, or otherwise, is income from Puerto Rico sources.
• A U.S. tax return (Form 1040NR) according to the rules for a nonresident alien. See the instructions for Form 1040NR.

In certain situations you will not have income from a possession. See De minimis exception under Compensation for Labor or Personal Services in chapter 2.

Use the addresses listed below to file your U.S. and Puerto Rico income tax returns.

If you are not including a check or a money order, send your U.S. tax return and all attachments to:

Department of the Treasury
Internal Revenue Service
Austin, TX 73301-0215
USA

If you are including a check or a money order, send your U.S. tax return and all attachments to:

Internal Revenue Service
P.O. Box 1303
Charlotte, NC 28201-1303
USA

If you request a refund on your Puerto Rico return, send your Puerto Rico tax return and all attachments to:

Departamento de Hacienda
P.O. Box 50072
San Juan, PR 00902-6272

Send all other Puerto Rico tax returns, with all attachments, to:

Departamento de Hacienda
P.O. Box 9022501
San Juan, PR 00902-2501

In addition to the general rules given earlier for filing U.S. and Puerto Rico tax returns, there are some special rules that apply to certain individuals and types of income.

Wages and cost-of-living allowances paid by the U.S. Government (or one of its agencies) for working in Puerto Rico are subject to Puerto Rico tax. However, the cost-of-living allowances are excluded from Puerto Rico gross income up to the amount exempt from U.S. tax. In order to claim this exclusion, you must:

• Include with your Puerto Rico tax return evidence to show the amount received during the year, and
• Be in full compliance with your Puerto Rico tax responsibilities.

These wages are also subject to U.S. tax, but the cost-of-living allowances are excludable. A foreign tax credit is available in order to avoid double taxation.

Bona fide residents of Puerto Rico include military personnel whose official home of record is Puerto Rico.

If, under the rule discussed at the beginning of chapter 1 (see Special rule for civilian spouse of active duty member of the U.S. Armed Forces), your tax residence is Puerto Rico, follow the guidance in the section for bona fide residents under Which Returns To File, earlier. However, if your tax residence is one of the 50 states or the District of Columbia and your only income from Puerto Rico is from wages, salaries, tips, or self-employment, you will be taxed on your worldwide income and file only a U.S. tax return (Form 1040) and a state and/or local tax return, if required. If you have income from Puerto Rico other than wages, salaries, tips, or self-employment that is considered to be sourced in that possession (see Table 2-1), contact the Hacienda for guidance.

If you are a U.S. citizen and bona fide resident of Puerto Rico and you have income from sources outside both Puerto Rico and the United States, that income is treated as foreign source income under both tax systems. In addition to your Puerto Rico and U.S. tax returns, you may also have to file a return with the country or possession from which your outside income was derived. To avoid double taxation, a foreign tax credit is generally available for either the U.S. or Puerto Rico return.

Thomas Red is a bona fide resident of Puerto Rico and a U.S. citizen. He traveled to the Dominican Republic and worked in the construction industry for 1 month. His wages were $20,000. Because the wages were earned outside Puerto Rico and outside the United States, Thomas must file a tax return with Puerto Rico and the United States. He may also have to file a tax return with the Dominican Republic.

Generally, expenses of a move to Puerto Rico are directly attributable to wages, salaries, and other earned income from Puerto Rico. Likewise, the expenses of a move back to the United States are generally attributable to U.S. earned income.

If your move was to Puerto Rico, report your deduction for moving expenses as follows.

• If you are a bona fide resident in the tax year of your move, enter your deductible expenses on your Puerto Rico tax return.
• If you are not a bona fide resident, enter your deductible expenses on both your Puerto Rico and U.S. tax returns. Also, for purposes of a tax credit against your U.S. tax liability, reduce your Puerto Rico "general category income" on Form 1116, line 1a, by entering the deductible moving expenses on line 2.

If your move was to the United States, complete Form 3903 and enter the deductible amount on Form 1040, line 26.

If you are not required to file a U.S. income tax return, this credit is available only if you meet all three of the following conditions.

• You were a bona fide resident of Puerto Rico during the entire tax year.
• Social security and Medicare taxes were withheld from your wages or you paid self-employment tax.
• You had three or more qualifying children. (For the definition of a qualifying child, see the instructions for Form 1040-PR or Form 1040-SS.)

If your income exceeds certain levels, you may be disqualified from receiving this credit. Use Form 1040-PR or Form 1040-SS to claim the additional child tax credit.

A mutual agreement procedure exists to settle cases of double taxation between the United States and the Commonwealth of Puerto Rico. See Double Taxation in chapter 4.