Does Everyone in Puerto Rico Pay to the IRS?

Does Everyone in Puerto Rico Pay to the IRS?
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Although the Commonwealth of Puerto Rico is legally a part of the United States, its status as an unincorporated territory means that the Internal Revenue Service makes some exceptions on income taxes. Whether or not you pay federal income taxes in Puerto Rico depends on the source of your income and your status as a resident of the commonwealth.

Residents and Federal Taxes

As a general rule, the IRS does not require an income tax return from bona fide residents of Puerto Rico, those who lived in their principal residence on the island for at least 183 days out of the year. If a Puerto Rico resident earns income from sources outside of Puerto Rico or is a federal employee or a member of the US armed services, the IRS requires a return and the payment of taxes on that income. If you're a resident, however, income earned from a Puerto Rican source is excluded from reporting to the IRS, whether or not you have to file a return.

Non-Resident Reporting Puerto Rico Taxes

If you live in Puerto Rico less than 183 days out of the year and aren't a bona fide resident, you must file a return and report income from all sources. The IRS makes an exception if you were a bona fide resident for at least two years before moving to the US mainland. In this case, you can exclude any income you received from Puerto Rico in the year of the move.

Deductions, Credits and Exemptions

Deductions and credits allowed on a federal income tax return give rise to another issue. If you can exclude Puerto Rican income, but have other income that is reportable, you can’t allocate certain deductions and credits to the excluded income. You can’t take a full standard deduction, for example, if 50 percent of your income came from Puerto Rico and you don’t have to report it. You would only be entitled to half the standard deduction. This rule also applies to alimony you paid, and itemized deductions such as mortgage interest and medical expenses. The IRS allows you to take full personal exemptions, however, and if you report Puerto Rico income to the IRS, you can take a credit for any taxes you paid on that income to Puerto Rico.

Working in Puerto Rico for U.S. Citizens

If you earn wages or a salary in Puerto Rico, you must make the full FICA payroll tax contribution, just as in the mainland United States. This tax, which funds Social Security and Medicare, also applies to employers, who contribute half of the payroll tax, and who also pay federal unemployment tax. Puerto Rico residents are also liable for commonwealth taxes paid to the government of Puerto Rico for local public services.