U.S. Citizens who lived in Puerto Rico for the entire year (bona fide residents) do not have to file a U.S. federal income tax return if all of their income was from sources within Puerto Rico. If income was received from sources outside of Puerto Rico, a U.S. federal tax return must be filed if the amount of income earned outside of Puerto Rico is more than the taxpayer’s filing threshold. Use the worksheet found in IRS Publication 1321 to determine if a federal tax return must be filed.
Bona fide residents of Puerto Rico who are required to file a U.S. federal tax return may be eligible to exclude their Puerto Rico source income on their federal tax return. Generally, the following types of income can be excluded:
- Salaries, wages, and other compensation for labor or personal services if the labor and services are performed in Puerto Rico
- Pension Income for services performed in Puerto Rico and investment earnings from a pension trust that is located in Puerto Rico
- Interest earned while a bona fide resident of Puerto Rico
- Dividends from corporations created and organized in Puerto Rico
- Rental Income from property located in Puerto Rico
- Royalties located and used in Puerto Rico
- Income from the sale of purchased business inventory sold in Puerto Rico
- Income from the sale of produced business inventory sold in Puerto Rico
- Income from the sale of real property located in Puerto Rico
- Income from the sale of personal property if the seller’s tax home is in Puerto Rico
Publication 915 should be referenced to determine how much of a taxpayer’s Social Security Benefits may be taxable. Publication 570 should be referenced for special rules for gains from the disposition of certain investment property owned by a U.S. citizen or resident alien before becoming a bona fide resident of Puerto Rico.
Members of the U.S. Armed Forces and U.S. Government Employees
U.S. citizens who are also bona fide residents of Puerto Rico that receive income as a U.S. government employee in Puerto Rico must file a U.S. federal tax return and report all of the U.S. government income to include any portion earned in Puerto Rico.
To exclude Puerto Rico income from a return where the taxpayer is a bona fide resident of Puerto Rico, from the Main Menu of the tax return (Form 1040) select:
- Income menu
- Other income
- Section 933 Excluded Income from Puerto Rico
If any income is excluded, the standard deduction will be adjusted and “SECT 933” will print on Form 1040 next to the Standard Deduction amount to indicate that it has been adjusted.
Additional Information:
Publication 570: Tax Guide for Individuals with Income from U.S. Possessions