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Puerto Rico holds a unique position as an unincorporated U.S. territory. Under Internal Revenue Code (IRC) 933, Puerto Rico source income is excluded from U.S. federal tax.
Who must file an income tax return in Puerto Rico? Every individual who during the taxable year has net income subject to alternate basic tax of $150,000 or more.
If youre a bona fide resident of Puerto Rico during the entire tax year, you generally arent required to file U.S. federal income tax returns if your only income is from sources within Puerto Rico.
If you are a bona fide resident of Puerto Rico during the entire tax year, youll file the following returns: A Puerto Rico tax return (Form 482) reporting your worldwide income. A U.S. tax return (Form 1040) reporting your worldwide income. However, this 1040 will exclude your Puerto Rico income.
You must file a Puerto Rico tax return for income earned in Puerto Rico, as well as a United States tax return for income earned anywhere in the world. Taxes paid to Puerto Rico on income that is not exempt on the US tax return are eligible for a foreign tax credit.
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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 Puerto Rico. You must file a Puerto Rico tax return reporting income from Puerto Rico sources, and a U.S. tax return reporting income from worldwide sources.
Consequently, while all Puerto Rico residents pay federal taxes, many residents are not required to pay federal income taxes. Aside from income tax, U.S. federal taxes include customs taxes, federal commodity taxes, and federal payroll taxes (Social Security, Medicare, and Unemployment taxes).
Note: If you are a resident of Puerto Rico, you can file Form 1040 (PR) instead of Form 1040-SS. Form 1040 (PR) is the Spanish-language equivalent of Form 1040-SS. These forms must be filed with the U.S. Internal Revenue Service at the address shown in the instructions for Form 1040 (PR) and Form 1040-SS.
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. Other income. Section 933 Excluded Income from Puerto Rico.
If you move to the island, you can legally pay none. Theres also no capital gains tax. You just have to give 4 percent of your income to Puerto Rico. The tax break was started by a Puerto Rican politician whod watched years of high taxes fail to improve life on the island.

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