New Puerto Rico Resident Income Tax Information

Massive disclaimer: I am not a tax expert, I am only trying to help. What's written here could be completely wrong, but hopefully will point you in the right direction.

The form links that used to be here are dead, but you can find the forms with a search engine these days pretty easily.

As a new Puerto Rican resident, you have a complicated tax status. The short answer for US citizens coming from the US is that you file 1040 claiming all your income for the year you moved, but with form(s) 1116 (credit for foreign tax paid) to reclaim the portion of your Federal tax attributable to income earned (and tax paid) in Puerto Rico.

Puerto Rico does count as "foreign" for the purposes of form 1116, but not for form 2555 (exclusion of foreign earned income). Your Puerto Rico tax will likely be larger than the federal tax on the Puerto Rico income, so you shouldn't end up paying any Federal tax on your Puerto Rico income, except perhaps interest (which is mostly tax-free in Puerto Rico).

If you are a "Bona Fide resident of Puerto Rico" for an entire tax year, the scheme is different. So the following is for your first year. After that, IRC Section 933 should apply. Though you could possibly choose not to be a Puerto Rican resident, if you prefer, and continue to follow these rules. That choice has advantages and disadvantages that are too involved to be addressed here.

There's a form 8898 on which you may have to declare that you have become, or ceased to be, a Bona Fide resident of Puerto Rico if your income is $75000 or more.

You will want Federal forms:

• Form 1040 and Instructions. Yes, you need the long form.
• Form 1116 and Instructions. Note that the instructions provided with the form are unintelligible.
• Publication 514 ``Foreign Tax Credit'', which contains the real instructions for form 1116.
• Publication 570, ``Tax Guide for Individuals With Income from U.S. Possessions'', which at least mentions how to deal with Puerto Rico tax. Publication 1321 has specific instructons for Puerto Rico, and is now available online (yay!).

You may also want:

• Publication 514 Foreign Tax Credit for Individuals
• Publication 521 Moving Expenses
• Form 3903 and instructions Moving Expenses (it's not considered a foreign move, rats).
• Publication 54 Tax Guide for U.S. Citizens and Resident Aliens Abroad
• Publication 570 Tax Guide for Individuals With Income from U.S. Possessions
• Publication 593 Tax Highlights for U.S. Citizens and Resident Aliens Going Abroad
• Publication 910 contains a list of all forms and publications.

You will also want the Puerto Rican forms, available from the government web site. There exist forms in English. I think you need the long form the first year. The English forms tend to appear on the web site well after the Spanish ones, and the English instructions later still. As I write this, it's April, and there are no English instructions yet.

IRA's

IRA's: Puerto Rico IRA's are an entirely separate beast from US ones, and I was unable to find any reason why one couldn't have both, if one wanted, your first year (since you have US earned income). Puerto Rican IRAs have some particular advantages if you plan to stay on the island for a long time: they can be withdrawn for certain expenses, like buying a house, without paying the tax until you sell it. It would be nice to collect a list of these advantages.

If, in later years, you exclude your Puerto Rico income as non-taxable (rather than claiming a foriegn tax credit), then you can't have a US IRA unless you have USA income. This stuff is complicated. Though you probably wouldn't want to deduct your Federal IRA, since you have to pay the PR tax on it anyway, and the way the credits work, you get no benifit. To not deduct a Federal IRA, you need Form 8606.

Excise (import) Tax

As of 2006 November 15, there is now a sales tax, and the excise tax is supposed to go away on most items.

Puerto Rico has in import excise tax on many (most) items. I consider it to be in lieu of sales tax, greatly simplifying the operation of small business and making "sales-tax" evasion almost impossible. It's awfully nice to actually pay the price on the sticker rather than have to add x%. The disadvantage is that all incoming packages are supposed to be taxed, and so need a commercial invoice if sent via delivery service, one of the reasons that many US companies won't ship to PR. Most express-delivery services will charge you the tax when you pick up your package. The US Postal Service doesn't collect the tax, though you are supposed to pay it, and may receive a bill.

The nominal amount is 6.6% for most items, though it seems to be much more for cars (I've seen up to 20%). There are a number of exceptions, but I don't have a list.

Recently, there seems to be taxes on hotels and car rentals, so that we have the worst of both worlds: you don't pay the advertised price and it's a pain to import things from the states.

Last modified: Wed Apr 03 15:29:52 AST 2013