A Comprehensive FAQ Guide Filing Requirements and Foreign Tax Credits for Puerto Rico

A Comprehensive FAQ Guide Filing Requirements and Foreign Tax Credits for Puerto Rico

Filing Requirements and Foreign Tax Credits for Puerto Rico

Source: IRM 21.8.1.6.1 (10-01-2020)

1. What tax filing requirements apply if I am a bona fide resident of Puerto Rico (PR) for the entire tax year and have both U.S. or other foreign-source income and PR source income?

As a bona fide resident of Puerto Rico with global income, you are required to file a PR tax return that reports income from worldwide sources. This includes wages for services performed in PR, whether for a private employer, the U.S. government, or otherwise. You can claim a Foreign Tax Credit on the PR return for income taxes paid to the U.S. on U.S. source income, and U.S. government wages earned in PR.

You must also file a U.S. tax return reporting income from worldwide sources, excluding PR source income. However, wages earned in PR from U.S. government or its agencies cannot be excluded. A Foreign Tax Credit can be claimed on the US return for income taxes paid to PR.

2. What if I am a bona fide resident of PR for the entire tax year, only have PR source income, and do not have wages earned in PR from the U.S. government or its agencies, and have no U.S. or other foreign source income?

In this scenario, you are required to file a PR tax return reporting income from worldwide sources. However, you do not have a U.S. income tax return filing obligation.

3. What happens if I am a U.S. citizen or resident alien, but not a bona fide resident of PR for the entire tax year and I have U.S. and PR source income?

You must file a PR tax return that only reports PR source income, including wages earned in PR from the U.S. government or its agencies. Also, a U.S. tax return reporting income from worldwide sources must be filed. The Form 1116 can be used to claim a credit for income taxes paid to PR on PR source income.

4. What if I am a U.S. citizen or resident alien, not a bona fide resident of PR for the entire tax year, and only have PR source income, including wages earned in PR from the U.S. government or its agencies, and no U.S. source income?

Similar to the scenario above, you need to file a PR tax return reporting only PR source income. Additionally, a U.S. tax return reporting income from worldwide sources is mandatory. The Form 1116 can be used to claim a credit for income taxes paid to PR on PR source income.

5. What is the case for a nonresident alien, who is not a bona fide resident of PR for the entire tax year and has U.S. and PR source income?

Nonresident aliens in this scenario must file a PR tax return that reports PR source income, as well as a U.S. tax return (Form 1040-NR) that reports U.S. source income and adheres to the rules for a U.S. nonresident alien.

6. What are the tax filing requirements for married couples filing a joint return but living apart, with one residing in the U.S. and the other a bona fide resident of PR?

Married couples in this situation need to abide by the general rules as described above. Each spouse should report their respective incomes according to the source of their income and their residency status.

7. What are the tax rules for members of the U.S. Armed Forces stationed in PR and who have a “state of legal residence” in the U.S., or whose civilian spouse is eligible for MSRRA benefits?

The military member or the civilian spouse are not considered bona fide residents of PR and must file income tax returns based on the rules for U.S. citizens not considered bona fide residents of PR.

8. What are the tax filing requirements if I am a bona fide resident of PR and U.S. citizen or resident, and I have income from a trade or business, regardless of whether I am required to file Form 1040 (U.S.)?

If you have income from a trade or business, you must file a Form 1040, or a Form 1040-SS, U.S. Self-Employment Tax Return, to report self-employment income and pay self-employment tax, in addition to the income tax return filed with PR.

Example1 : Suppose you’re a U.S. citizen, but not a bona fide resident of PR, and you worked part-time for a U.S. company while living in PR and also had a PR job. In this case, you will file a PR tax return reporting only the income earned from your PR job. Also, you will file a U.S. tax return reporting income from both the U.S. job and the PR job. You can claim a Foreign Tax Credit for the taxes you paid to PR on your PR source income.

Example 2: Let’s say you’re a U.S. citizen but not a bona fide resident of PR and running your online business. In this scenario, you need to file a Form 1040 or a Form 1040-SS to report your self-employment income and pay self-employment tax, in addition to your PR income tax return.

This FAQ guide aims to simplify complex tax concepts and help taxpayers understand the tax laws, especially related to international transactions and U.S taxation policies. Always consult a tax advisor or tax professional for personalized advice.




***Disclaimer: This communication is not intended as tax advice, and no tax accountant -client relationship results**

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