When You Have To File A Puerto Rico Tax Return

February 17, 2016 : Sasha Drakulovic – The Tax Institute

Did you know that in addition to the 50 states and D.C., the U.S. also has multiple possessions?

Possessions are governments that are essentially equivalent to states, though they sometimes have their own tax laws. Puerto Rico is one of those possessions, and it has separate tax laws.

Anyone born in Puerto Rico on or after January 13, 1941, is a citizen of the U.S. at birth. This group living in Puerto Rico may need to not only file a U.S. federal tax return, but also a Puerto Rico tax return. If you are a U.S. citizen or resident alien who has income from Puerto Rico, the following information describes which returns you will need to file.

There are special rules for members of the U.S. armed forces, people with self-employment income, U.S. government employees and people who move in or out of Puerto Rico during the year. For these special rules, see IRS Publication 570Tax Guide for Individuals with Income from U.S. Possessions, or consult with a tax professional about your unique situation.

Whether you should be paying taxes to Puerto Rico

Typically, if you have income from Puerto Rico, you will need to pay taxes in Puerto Rico. How you are taxed is dependent upon whether you are a bona fide resident of Puerto Rico or not.

Bona fide residency is determined through a variety of factors. Generally, you are a bona fide resident of Puerto Rico if, during the tax year, you fulfill all three of the following:

  1. Meet the presence test
  2. Do not have a tax home outside Puerto Rico
  3. Do not have a closer connection to the U.S. or to a foreign country than to Puerto Rico (Form 8898 has questions that discuss the presence and closer connection requirements)

Presence test

Usually, if you are a U.S. citizen or resident alien, you will satisfy the presence test for the entire tax year if you meet one of the following conditions:

  1. You were present in Puerto Rico for at least 183 days during the tax year.
  2. You were present in Puerto Rico for at least 549 days during the three-year period that includes the current tax year and the two immediately preceding tax years. During each year of the three-year period, you must be present in Puerto Rico for at least 60 days.
  3. You were present in the U.S. for no more than 90 days during the tax year.
  4. You had earned income in the U.S. of no more than a total of $3,000 and were present for more days in Puerto Rico than in the U.S. during the tax year.

There are many exceptions and details to the presence test, all are listed in pages 3-4 of IRS Publication 570.

Tax home

In order to be a bona fide resident of Puerto Rico, you cannot have a tax home outside of Puerto Rico.

Your tax home is your regular or main place of business, employment or post of duty. The tax home is not necessarily where you maintain your family home. If you don’t have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live.

If you do not fit either of these categories, your tax home is wherever you work.

Closer Connection

You will be considered to have a closer connection to Puerto Rico than to the U.S. if you maintained more significant contacts with Puerto Rico than with the U.S. In determining if you have maintained more significant contacts with Puerto Rico, the following will be considered:

  • The location of your permanent home.
  • The location of your family.
  • The location of personal belongings, such as automobiles, furniture, clothing and jewelry owned by you and your family.
  • The location of social, political, cultural, professional or religious organizations with which you have a current relationship.
  • The location where you conduct routine personal banking activities.
  • The location where you conduct business activities (other than those that go into determining the tax home).
  • The location of the jurisdiction in which you hold a driver’s license.
  • The location of the jurisdiction in which you vote.
  • The location of charitable organizations to which you contribute.
  • The country of residence you designate on forms and documents.
  • The types of official forms and documents you file, such as Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for U.S. Tax Withholding and Reporting (Individuals), or Form W-9, Request for Taxpayer Identification Number and Certification.

Filing the Correct Forms

Now that you’ve figured out whether you are a bona fide resident of Puerto Rico, let’s look at your filing obligations.

You are a bona fide resident of Puerto Rico

If you are a bona fide resident of Puerto Rico during the entire tax year, you’ll file the following returns:

  1. A Puerto Rico tax return (Form 482) reporting your worldwide income.
  2. A U.S. tax return (Form 1040) reporting your worldwide income. However, this 1040 will exclude your Puerto Rico income.

If you report U.S. 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 U.S.

You are not a bona fide resident of Puerto Rico

If you are not a bona fide resident of Puerto Rico during the entire tax year, you will instead file the following returns:

  1. A Puerto Rico tax return (Form 482) reporting only your income from Puerto Rico. Wages for services performed in Puerto Rico, whether for a private employer, the U.S. Government, or otherwise, is income from Puerto Rico.
  2. A U.S. tax return (Form 1040) reporting all worldwide income. If you are double taxed by both the U.S. and Puerto Rico, you can claim a foreign tax credit on Form 1116 for the income taxes paid to Puerto Rico.

Since these rules can easily become complicated very quickly, you may want to speak to a tax prep professional at H&R Block. (We even have offices in Puerto Rico: https://www.hrblock.com/puerto-rico/)

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Sasha Drakulovic – The Tax Institute

Sasha is a tax research analyst specializing in international tax issues and real property. She received her J.D. and LLM from the University of Missouri-Kansas City School of Law.