U.S. Citizens or resident aliens who are bona fide residents of Puerto Rico, i.e., meet the presence test, don't have a tax home outside Puerto Rico, and don't have a closer connection to the U.S. or another foreign country than to Puerto Rico, will file a tax return with Puerto Rico. They do not have to file a U.S. federal income tax return if all of their income was from sources within Puerto Rico, with the exception that if they have income that is effectively connected with a trade or business in Puerto Rico, they must file either U.S. Form 1040-SS or Form 1040-PR to report their self-employment income and pay self-employment tax.
On the other hand, if a bona fide resident of Puerto Rico receives income from sources outside of Puerto Rico and/or income as a civilian or military employee of the U.S. Government in 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.
For Social Security benefits, refer to IRS Publication 915 to determine how much may be taxable. IRS 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.
In TaxSlayer Pro, 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:
- 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.