A Guide to Deductions and Credits for Puerto Rican Income
Source: IRM 126.96.36.199.2 (10-01-2019)
Q1. Can I claim deductions or credits applicable to exempt Puerto Rico income on my U.S. income tax return?
No, taxpayers required to file both a U.S. income tax return and a Puerto Rico income tax return may not claim deductions or credits applicable to exempt PR income on their U.S. income tax return.
Q2. How are non-specific deductions allocated on my U.S. tax return?
Deductions that do not specifically apply to any particular type of income are allocated between the PR sources and income from other sources to determine the amount of deductions claimed on the U.S. tax return.
Q3. Can you provide examples of deductions which do not definitely apply to a particular type of income?
Yes, examples of such deductions include alimony payments, standard deductions, and certain itemized deductions like medical expenses, charitable contributions, real estate taxes, and mortgage interest.
Q4. How do I calculate the allowable portion of the deductions?
To determine the allowable portion of the deductions, use this formula:
(Gross income subject to U.S. tax / Gross income from all sources) x Deductions = Allowable portion of deductions
Q5. Can I claim personal exemptions in full?
Yes, personal exemptions are allowed in full. However, note that the personal exemption deduction is suspended for all taxpayers for tax years 2018 through 2025.
Q6. Can a U.S. citizen who must report Puerto Rico source income claim a Foreign Tax Credit on the U.S. return?
Yes, any U.S. citizen who must report Puerto Rico source income on his U.S. tax return may claim a Foreign Tax Credit on the U.S. return, to the extent computed on Form 1116 for income taxes paid to Puerto Rico on Puerto Rico source income. Form 1116 is attached to the U.S. tax return, Form 1040.
Q7. How do taxpayers compute the Foreign Tax Credit if they have both excludable and non-excludable income from Puerto Rican sources?
To compute the Foreign Tax Credit, taxpayers with both excludable and non-excludable income from Puerto Rican sources must reduce the foreign tax paid or accrued by the taxes allocable to the exempt income. This is calculated using the following formula:
(Income from PR sources not subject to U.S. tax – deductible expenses allocable to that income / Total income subject to PR tax – deductible expenses allocable to that income) x Tax paid or accrued to Puerto Rico = Reduction in Foreign Taxes
Q8. Can I claim a withholding tax credit on my U.S. income tax return if I am a bona fide resident of Puerto Rico?
The only withholding tax credit that is allowed on a U.S. income tax return filed by a bona fide resident of Puerto Rico is that paid to the United States. However, taxpayers may also be allowed a Foreign Tax Credit on their U.S. income tax return for income tax paid to a U.S. territory.
Q9. Will the IRS consider the social security tax paid on a Puerto Rico W-2 when verifying excess social security tax claimed on Form 1040?
Yes, the IRS will consider the social security tax paid on a Puerto Rico W-2 when verifying excess social security tax claimed on Form 1040.
Please note, these are broad general guidelines, and each individual’s tax situation may vary. It is always recommended to consult with a local tax professional to ensure that your unique circumstances are properly considered and to avoid any potential tax penalties.
Q10. If the employer’s address is not in one of the 50 states or the District of Columbia, what happens to the withholding credit?
If the address of the employer is not in one of the 50 states or the District of Columbia, the IRS will disallow the credit.
Q11. Can the withholding tax credit from an employer located outside of the 50 U.S states or the District of Columbia be claimed on a U.S. income tax return?
No, the IRS only allows withholding tax credits from W-2s with an address in one of the 50 U.S states or the District of Columbia. If the employer’s address is not in one of these locations, the IRS will disallow the credit.
Q12. What happens if a taxpayer is a U.S. government employee and a resident of Puerto Rico?
For U.S. government employees who are residents of Puerto Rico, withholding taxes are paid directly to Puerto Rico, according to the terms of an agreement with the United States (5 U.S.C. Section 5517). For more information, refer to Pub 80, (Circular SS), Federal Tax Guide for Employers in US Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands.
Q13. Are there any other specific guidelines or resources for employers and taxpayers dealing with tax matters related to U.S. territories?
Yes, for further information on tax matters related to U.S. territories, including Puerto Rico, employers and taxpayers can refer to Publication 80 (Circular SS), Federal Tax Guide for Employers in US Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands.
Remember, taxes can be complex and navigating the tax laws for Puerto Rico residents filing U.S. income tax returns can be particularly challenging. Always consult a tax professional to ensure your taxes are filed accurately and in accordance with U.S. and Puerto Rico tax laws.
***Disclaimer: This communication is not intended as tax advice, and no tax accountant -client relationship results**