taxes in puerto rico

It’s that time of the year again; time to pay the taxman.  And for some of us here on the island, we get double the pleasure with TWO tax men to pay!

Before I go on, let me state for the record that I am NOT a CPA.  Please use what I share as a starting point for your own research which should probably include seeking professional advice.  With that, let’s talk taxes.

Income Tax

US citizens must include income derived worldwide on their tax return.   This is pretty clear.  Where things get interesting is if one meets the IRS requirements to become a bona fide resident of Puerto Rico.  Because of Section 933 of the US tax code, bona fide residents of Puerto Rico can exclude all of their income derived from Puerto Rican sources from their US tax return.  If a bona fide resident makes ALL (or even most) of their money from Puerto Rican sources, they don’t even need to file a US tax return!

Those that have enough Puerto Rico sourced income to owe taxes must file a Puerto Rico tax return.  At first glance, the income tax rates in Puerto Rico seem significantly higher than tax rates in the U.S.  For example, you hit a marginal tax rate of 33% at only $61,500 of taxable income here versus $191,650 in the states!  However, because the other rates are lower, you will actually end up with a lower tax bill for up to $96,000 of annual taxable income here in Puerto Rico.  Keep in mind that if you are coming from a state with an income tax (we didn’t), your tax savings will be even greater.

Below $96k and above $490k the advantage swings to Puerto Rico

I was able to continue using TurboTax to file my US tax return this year, but for the longest time I couldn’t figure out how to file my Puerto Rico tax return or planilla.  This year the Puerto Rico Treasury Department mandated that tax returns be filed electronically through one of their certified providers.  I glanced at all of their sites and they were all in Spanish except for PRSoft.  However, I wasn’t thrilled with the fact that you have to download and install a windows program that, frankly, looked quite dated and so PRSoft didn’t inspire a lot of confidence in me.

Finally a couple of weeks ago, I discovered that taxmania allows you to switch to English AFTER you create your account.  Once inside, just click on “Cuenta” in the top right to change the language.  I haven’t completed my return yet, but this site looks good and seems to work well.  It even includes Schedule F1 for those with an Act 22 grant.  Furthermore, unlike in the states, there are no fees when paying your taxes with a credit card, just points!

Sales Tax

Since I’m already talking about taxes, I thought I would go ahead and briefly touch on some of the other taxes we pay here.  The day after we arrived, the sales tax was raised from 7% to 11.5%; just in time for us to purchase several big ticket items like appliances and furniture for our condo!  The government had been planning to transition the sales tax to a value-added tax of the same rate, but it looks like that effort has been killed.

purchased days after the new sales tax rate went in effect…

Property Tax

Let’s end on a positive note.  Property taxes are very low here; significantly lower than they are in Texas.  Tax rates average around 10% which is ONLY applied to the assessed value for tax purposes (sujeto a contribucción) which may average around 5% of the appraised value!  For example, the sujeto a contribucción for a house down the street that sold for $365,000 is only $13,822!  All in all, I would estimate that on equivalent properties, here we would pay less than a fifth of what we would in Texas.

That is, if we had to pay at all.  In Puerto Rico, you receive a $15,000 tax deduction on your primary residence that can be applied directly to your sujeto a contribucción!  CRIM, the local taxing office, did make us pay for one year, but have assured us that we won’t have to pay going forward.  You can lookup the sale price (“venta“) and sujeto a contribucción for a property you are interested in using CRIM’s handy little GIS site.

Low (or no) property taxes are another reason, real estate is quite attractive here.