Excluding Puerto Rican Source Income from U.S. Taxation
Bona fide residents of Puerto Rico can exclude Puerto Rican source income from their U.S. income tax return. However, this exclusion does not apply to income earned from services performed as an employee of the United States government or any of its agencies.
If you are a bona fide resident and still required to file a U.S. tax return, you can claim deductions and credits against the income reported on your U.S. return. However, you cannot claim deductions or credits related to Puerto Rican source income that is excluded from U.S. taxation.
Allocating Deductions and Credits
You are allowed to claim deductions and credits that are not specifically tied to either Puerto Rican or non-Puerto Rican source income. However, you must allocate these deductions and credits between:
Puerto Rican source income (excluded from U.S. tax).
Worldwide income (reported on your U.S. tax return).
✅ Examples of allocable deductions and credits:
Standard deduction.
Itemized deductions such as:
Medical expenses.
Charitable contributions.
Real estate taxes.
Mortgage interest on your personal residence.
Child Tax Credit (CTC) for Puerto Rico Residents
Starting with tax year 2021, the Child Tax Credit (CTC) expanded to include Puerto Rican residents with at least one qualifying child.
For 2024, the CTC amount is:
$2,000 per qualifying child.
The refundable portion, known as the Additional Child Tax Credit (ACTC), increased to $1,700 per qualifying child.
✅ Filing Requirements:
To claim the CTC, Puerto Rican residents must file a federal tax return with the IRS, even if they:
Have no filing requirement.
Earn little or no income from a job, business, or other source.
You can file any of the following tax returns to claim the CTC:
Formulario 1040-SS (SP) – Spanish version of the U.S. Self-Employment Tax Return.
Form 1040-SS – U.S. Self-Employment Tax Return.
Form 1040 – U.S. Individual Income Tax Return.
Form 1040-SR – U.S. Tax Return for Seniors.
✅ Important:
Even if you miss the regular filing deadline, you can still file a 2021 tax return and claim the CTC until April 15, 2025, without any penalties, provided you do not owe taxes to the IRS.
Foreign Tax Credit for Puerto Rican Source Income
If you must report Puerto Rican source income on your U.S. tax return, you may be eligible to claim a foreign tax credit for income taxes paid to Puerto Rico on the same income.
✅ Foreign Tax Credit Calculation:
When calculating the foreign tax credit, you must reduce the amount of taxes paid to Puerto Rico by the portion allocated to excluded Puerto Rican source income.
To claim the credit, you must complete Form 1116 (Foreign Tax Credit).
For more details on the foreign tax credit, refer to Topic No. 856.
✅ Key Takeaways:
Puerto Rican Source Income Exclusion:
Bona fide residents can exclude Puerto Rican source income from U.S. taxes.
Exclusion does not apply to U.S. government employees.
Deductions and Credits:
You cannot claim deductions/credits against excluded Puerto Rican income.
Deductions not specifically allocable must be divided between Puerto Rican and worldwide income.
Child Tax Credit (CTC):
Expanded to Puerto Rican residents in 2021.
$2,000 per child in 2024, with $1,700 refundable.
Must file a federal tax return to claim it.
Foreign Tax Credit:
For income taxes paid to Puerto Rico on reportable U.S. income.
File Form 1116 to claim the credit.