A Comprehensive Guide to Puerto Rican Income and U.S. Taxes for Expats and Residents
Ever find yourself daydreaming about sipping piña coladas in sunny Puerto Rico, only to be jolted back to reality by the thought of U.S. taxes? Fear not, we’re here to help you navigate the tax maze with a splash of humor and a dose of simplicity.
The Scoop on Puerto Rican Income and U.S. Taxes
If you’re living the island life as a bona fide resident of Puerto Rico, you can generally exclude your Puerto Rican source income from your U.S. tax return. But wait, there’s a catch! If you work for Uncle Sam or any of its agencies, this exclusion doesn’t apply. Ouch!
Now, here’s the good news. If you need to file a U.S. return, you can still claim deductions and credits that relate to your reportable income. But remember, you can’t claim deductions and credits linked to the excluded Puerto Rican source income.
Divvying Up Deductions and Credits
Some deductions and credits aren’t tied to a specific source of income. In that case, you’ll need to split them between your Puerto Rican source income and your worldwide income to figure out what you can claim on your U.S. return. Think of it like sharing a pizza—everyone gets their fair slice!
Examples of these split-able deductions and credits include standard deductions and certain itemized deductions like medical expenses, charitable donations, real estate taxes, and mortgage interest on your cozy island abode.
A Tropical Treat: Expanded Child Tax Credit
Starting in tax year 2021, the Child Tax Credit has been extended to residents of Puerto Rico with one or more qualifying kiddos. You could get up to $3,600 per child in 2021 and up to $1,500 per child in 2022!
To claim this credit, you must file a federal tax return with the IRS, even if you don’t have a filing requirement or only have a few bucks rolling in. Choose from Forms 1040-PR, 1040-SS, 1040, or 1040-SR to claim the credit. Good news: Forms 1040-PR and 1040-SR come in Spanish!
Pro tip: You can still file your 2021 tax return and claim the Child Tax Credit until April 15, 2025, without penalty—even if you don’t owe the IRS any taxes.
Foreign Tax Credit: A Silver Lining
If you need to report Puerto Rican source income on your U.S. tax return, don’t despair! You can claim a foreign tax credit for income taxes paid to Puerto Rico on the same income. Just remember to reduce your Puerto Rican income taxes by any amount tied to excluded income. Fill out Form 1116 to claim your foreign tax credit, and check out Topic No. 856 for more info.
For more details on allocating deductions, credits, and bona fide residency, refer to Topic No. 901, Publication 570, and Publication 1321.
And there you have it! We’ve untangled the complex world of Puerto Rican income and U.S. taxes, so you can kick back and enjoy that piña colada with peace of mind. Happy tax-filing, amigos!
***Disclaimer: This communication is not intended as tax advice, and no tax accountant -client relationship results**