As an unincorporated territory of the United States, Puerto Rico operates under a tax system that incorporates elements of both federal and local tax laws. Despite Puerto Rican citizens being U.S. citizens, the island maintains its own government and fiscal autonomy.
Although the relationship between Puerto Rico and the United States remains a topic of ongoing discussion and potential changes to the tax system in the future, currently, Puerto Rico’s citizens are required to fulfill their tax obligations by the existing regulations.
Do I have to file a Puerto Rico tax return?
If you qualify as a bona fide resident of Puerto Rico for the entire tax year and your sole income is derived from Puerto Rico, it is generally optional to file U.S. federal income tax returns. This exemption means you are not required to report your Puerto Rican income to the U.S. government.
However, if you have additional income from sources outside of Puerto Rico, including income from the United States, you are obligated to file a U.S. federal income tax return if the total amount exceeds the filing threshold established by the U.S. government.
In such cases, you must report and pay taxes on the income earned outside of Puerto Rico while still being exempt from reporting your Puerto Rican income on your U.S. federal income tax return.
Do Puerto Rico citizens pay federal taxes?
If you were wondering who pays taxes in Puerto Rico, the reality is that certain individuals may have specific tax considerations and obligations that are influenced by factors such as their employment status, business activities, sources of income, or involvement with Puerto Rico-based companies that intend to transfer funds to the U.S. Puerto Rican citizens who must pay income taxes are as follows:
If the U.S. federal government employs you or you serve in the U.S. armed forces, specific tax considerations or obligations may be based on your employment status. Similarly, you may have tax obligations or reporting requirements related to your business activities if you do business with the U.S. federal government.
If you receive income from sources outside of Puerto Rico, you may be subject to specific tax regulations and must file and pay taxes. Also, if you are a member or shareholder of a Puerto Rico-based corporation planning to transfer funds to the United States, there may be specific regulations or tax implications associated with this transfer.
Tips to reduce federal taxes in Puerto Rico
While evading federal taxes in Puerto Rico is not legal, it is legal to reduce them. However, to do so, it is necessary to comply with one of the following requirements or take any of the actions listed below.
- Become a bona fide citizen of Puerto Rico: You must have spent a minimum of 183 days per year on the island and built strong economic, social, and family connections. Being a bona fide resident, your income earned in Puerto Rico will not be subjected to U.S. federal income taxes. However, you will still need to pay U.S. taxes on your U.S. income.
- Make use of tax incentives provided by Act 20 and Act 22: While Act 20 provides tax exemptions for companies that export services from Puerto Rico, Act 22 provides tax exemptions for individuals who become residents of Puerto Rico. Under these laws, specific Puerto Rico income may be exempt from local and federal taxes. However, it is crucial to consider particular requirements and limitations.
- Include a partnership: Income earned by a corporation in Puerto Rico from sources within the region is free from U.S. federal income tax.
- Invest in tax-exempt Puerto Rico bonds: Interest earned from certain Puerto Rico bonds is exempt from federal and local income tax. These bonds must be issued by the Puerto Rico government or one of its institutions.
- Purchase real estate in Puerto Rico: Capital gains from selling real estate in Puerto Rico are usually free from U.S. capital gains tax. Rental income may also be exempt from tax.
Personal Income Tax Rate Puerto Rico 2023
The personal income tax in Puerto Rico is based on a progressive rate system, which means that rates increase as income levels increase. The personal income tax system in Puerto Rico consists of five tax rate brackets ranging from 0% to 33%, the amount of which varies according to the individual’s marital status.
Taxpayers with lower incomes may be exempt from paying taxes or pay a lower tax rate, while those with higher incomes are subject to a higher tax rate.
Personal income tax rate for single and married filing separately
| Taxable Income | Tax rate |
| $9,000 | 0% |
| $9,000 - $25,000 | 7% |
| $25,001 - $41,500 | 14% |
| $41,501 - $61,500 | 25% |
| + $61,501 | 33% |
Personal tax rate for married filing jointly and eligible surviving spouses
| Taxable Income | Tax rate |
| $18,000 | 0% |
| $18,001 - $50,000 | 7% |
| $50,001 - $83,000 | 14% |
| $83,001 - $130,000 | 25% |
| + $130,001 | 33% |
ABT Taxes Puerto Rico 2023
| ABT (USD) | Tax (%) |
| $25,000 - $50,000 | 1% |
| $50,001 - $75,000 | 3% |
| $75,001 - $150,000 | 5% |
| $150,001 - $250,000 | 10% |
| + $250,001 | 24% |
In short, Puerto Rican citizens do not have to pay taxes if the income comes from this territory. However, it is essential to consider the exceptions to know whether or not you must pay taxes. Otherwise, you could have debts and not be aware of them.
References
- “Do Puerto Ricans Pay Federal Taxes and Contribute to the U.S. Economy? | Marca.” MARCA, Marca, 22 Apr. 2022, https://www.marca.com/en/lifestyle/us-news/2022/04/22/6262923b268e3e75308b4576.html.
- “Topic No. 901, Is a Person With Income From Puerto Rico Required to File a U.S. Federal Income Tax Return? | Internal Revenue Service.” Internal Revenue Service | An Official Website of the United States Government, https://www.irs.gov/taxtopics/tc901.