Puerto Rico is partially part of the United States, making the laws different from the other 50 states. The US determines your tax by checking where you earn your income and residency status.
Do Residents of Puerto Rico pay federal taxes?
It may be confusing if Puerto Rico residents pay federal taxes. Generally, a person earning from Puerto Rico for more than 183 days is considered a full resident of the country and not subject to the United States federal income tax. But if your income is not from Puerto Rico, you must send a report of your federal taxes to the US IRS, whether you are a federal government or military worker. However, you can keep your income from Puerto Rico to yourself.
The country has a residency requirement you must meet; if you do not, you must report your tax returns regardless of the source. Thus, bonafide Ricans living abroad or on the mainland must report taxes to the US.
However, taxpayers that were in Puerto Rico for more than two years before relocating to the mainland are exempted from filing tax returns in the US. They can also omit income earned on Puerto Rico grounds during the relocation.
RequirementsHowever, the exemption comes at a cost. You're expected to become a bona fide Puerto Rican to be exempted from filing US taxes. In addition, the law requires you to stay in the region for more than 183 days each year while reporting returns like form 8898 to the IRS and requesting exemption permits from the Secretary of Economic Development and Commerce of Puerto Rico.
The permit from the Secretary's office will explain how the tax will be treated and stands as a contract between you as a Resident Individual Investor and the Puerto Rican authorities. The permit will exempt you from filing taxes and expires by 2035. However, it would help if you were based permanently on the Island on the property and in person.
It is a bit confusing what credits and deductions a taxpayer can take. To clear the fog, if you earn reportable and excludable income, the excluded income has no credits or deductions. For example, receiving part of your income from Puerto Rico means you can't report it, so you can only take half of the standard deduction. The same law is used to itemize deductions like medical expenses, mortgage interest, and alimony. The law allows you to enjoy total personal exemption and cut some credits paid to the Puerto Rican government.
You don't have to worry about filing taxes to the US government if you're a bonafide Puerto Rican with a source of income from the region during the tax season. However, suppose you receive other income outside the region, including the US; in that case, you're expected to file a federal tax return to the US government if the amount exceeds the standard threshold. In other words, a Puerto Rican paying taxes to the Puerto Rican government with Puerto Rican income source cannot file taxes in the US tax system.
The government collects federal taxes from Puerto Ricans. Still, many of them do not contribute income taxes which are paid by Puerto Ricans who are:
Federal government workers.
In the US military.
Have a source of income outside the country.
In addition, moving to Puerto Rico is a great idea. You'll have access to various beautiful beaches, delicious cuisine, high mountains, and an average climate of 82.4° F. Plus, many Americans live in the region so you don't have to worry about the language barrier as they speak English fluently in Puerto Rico.
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