Publication 1321: Special Instructions For Bona Fide Residents Of Puerto Rico Who Must File A U.S. Individual Income Tax Return
Publication 1321 provides special instructions for bona fide residents of Puerto Rico who are required to file a U.S. Individual Income Tax Return (Form 1040 or Form 1040-SR). These instructions are crucial for understanding the adjustments necessary on your return when claiming an exclusion for income earned in Puerto Rico.
Understanding Bona Fide Residents of Puerto Rico:
To qualify as a bona fide resident of Puerto Rico for tax purposes, you must:
- Meet the presence test.
- Not have a tax home outside Puerto Rico.
- Not have a closer connection to the United States or a foreign country than to Puerto Rico.
Publication 570 outlines these requirements and special rules applicable during the transition to or from Puerto Rico.
Who Must File Publication 1321?
Section 933 of the U.S. Internal Revenue Code mandates that U.S. citizens residing in Puerto Rico for the entire taxable year, who earn income from sources outside Puerto Rico, and/or work as civilian or military employees of the U.S. Government in Puerto Rico, must file a U.S. Federal income tax return.
While income earned in Puerto Rico is exempt from U.S. income tax under Section 933, adjustments must be made to itemized deductions or standard deduction amounts to allocate for the exempt income. These adjustments determine if you need to file a U.S. tax return based on the minimum income level required for your filing status.
Source of Income:
The source of income plays a crucial role in determining its tax treatment under Section 933. Various factors, such as where services are performed or where the property is located, determine the source of different types of income, including salaries, pensions, investment earnings, interest, dividends, rents, royalties, and capital gains.
Deductions:
Deductions applicable to exempt Puerto Rico income are not deductible on your Federal income tax return. This includes the personal exemption deduction, which is suspended for tax years 2018 through 2025.
The standard deduction and additional standard deduction for taxpayers who are blind or age 65 or over must be apportioned based on the ratio of gross income subject to Federal tax to gross income from all sources, including exempt Puerto Rico income.
Who qualifies as a bona fide resident of Puerto Rico for tax purposes?
To be considered a bona fide resident, you must meet the presence test, have your tax home in Puerto Rico, and have a closer connection to Puerto Rico than to any other place.
Do I need to file a U.S. Federal income tax return if I'm a bona fide resident of Puerto Rico?
Yes, if you receive income from sources outside Puerto Rico or work as a civilian or military employee of the U.S. Government in Puerto Rico, you must file a U.S. income tax return.
How do I determine if I need to file a U.S. tax return if some of my income is exempt under Section 933?
You must allocate part of your itemized deductions or standard deduction amount to the exempt income. This allocation helps determine if your gross income subject to U.S. tax exceeds the filing threshold.
Can I claim certain tax credits if I'm a bona fide resident of Puerto Rico?
While some credits may have special rules or limitations, others may not be available to Puerto Rico residents. It's important to review the specific guidelines for each credit.
What should I do if I begin or end bona fide residence in a U.S. possession during the tax year?
You may need to file IRS Form 8898 to report the change in residence. Failure to file this form may result in penalties.