Who in Puerto Rico should file a U.S. tax return?

Ed note: H&R Block provides tax services to a wide variety of clients, including residents of Puerto Rico. We even have office locations on the island. These folks have a few complexities though – starting with whether or not they are even required to file. Leer en español.

We know that every American citizen is subject to paying taxes to the government of the United States on their income anywhere in the world. One would also think the same thing would happen with all citizens living in Puerto Rico. Well, here is where you must pay close attention.

According to Section 933 of the U.S. Internal Revenue Code, citizens who have lived all year on the island are exempt from filing taxes to the federal government of the United States as long as the income was from Puerto Rican sources. However, if you receive income from anywhere else in the world, including the United States and/or if you are an employee of any agency of the United States in Puerto Rico, you must submit a form to the federal government.

So you shouldn’t file a tax return for the U.S. if you meet the following requirements:

1. You have been a bona fide resident of Puerto Rico in the taxable year: all your income is from sources on the island, except for amounts received for services to the United States or any U.S. government agency. However, the rules are different for members of the U.S. armed forces, please see the section below. If you are a member of the U.S. military and a bona fide resident of Puerto Rico, then you do not have to file a U.S. return if your only income from the U.S. is military pay.
2. You are a U.S. citizen who changed your residence from Puerto Rico to the United States and were a bona fide resident of Puerto Rico for a period of at least two years before changing residence. You may exclude from your payroll any revenue sources from Puerto Rico as long as you’ve been on the island for at least two years.

If you are a bona fide resident of Puerto Rico and are eligible to exclude income from Puerto Rico on your U.S. tax return, you must determine the setting based on the limits established for filing, indicated in the instructions for the tax return. The IRS has a guide to determine the amount of income that would lead you to file the return.

Also, you can find out what it means to be a bona fide resident in IRS Publication 570, where bona fide residents of American Samoa, Guam, the Northern Mariana Islands (CNMI), Puerto Rico and the Virgin Islands may qualify for certain tax benefits.

Even though bona fide residents of Puerto Rico do not have to pay federal taxes on income sourced from Puerto Rico, the situation is different if you are self-employed. In that case, even though you won’t have a U.S. filing requirement, because you will have income effectively connected with a trade or business in Puerto Rico, you should use Form 1040-SS or Form 1040.

U.S. Citizens in military service

If you are a U.S. citizen who is also a bona fide resident of Puerto Rico during the fiscal year but receive income as a U.S. government employee in Puerto Rico, you must file a federal tax return.

However, if you are a bona fide resident of Puerto Rico and a member of the U.S. armed forces, your military service pay will be sourced to Puerto Rico even if you work for the military in the U.S. or another U.S. possession. As a member of the U.S. armed forces, you will determine your residency by looking at your home of record. If that home of record is in Puerto Rico, then you are still a bona fide resident of Puerto Rico, even if you are stationed in the U.S. In such a case, you will file a U.S. return only if you have other U.S. sourced income or worldwide income from sources outside of Puerto Rico.

If your home of record is one of the fifty states, then even if you are stationed in Puerto Rico, the income is sourced to the U.S. and you must file a U.S. federal return.

There are some rules that apply for spouses of active duty members of the military who retain their residence for tax purposes in any of the 50 U.S. states. If any of these spouses were to receive a salary for their own account while residing in Puerto Rico, they would also have to file a federal tax return and file it on their income in the United States. Note that both spouses must have the same tax residence in one of the 50 states before they move to Puerto Rico for this benefit to come into effect.

These tax benefits for military spouses are part of the law known as the Military Spouse Residency Relief Act (MSRRA). It can mean saving hundreds of dollars in taxes if the spouse maintains residency in the United States for tax purposes.

It is important for residents or U.S. citizens to pay federal taxes for their work on the Island of Enchantment, so make sure to talk to a tax professional about your specific situation to get the help you need.