Taxation in Puerto Rico consists of taxes paid to the

United States federal government The federal government of the United States (U.S. federal government or U.S. government) is the national government of the United States, a federal republic located primarily in North America, composed of 50 states, a city within a fe ...

and taxes paid to the Government of the Commonwealth of Puerto Rico. Payment of taxes to the federal government, both personal and corporate, is done through the federal Internal Revenue Service (IRS), while payment of taxes to the Commonwealth government is done through the

Puerto Rico Department of Treasury The Puerto Rico Department of Treasury (''Departamento de Hacienda'') is the executive department of the government of Puerto Rico responsible for the treasury of the U.S. Commonwealth of Puerto Rico. It is one of the constitutionally-created ex ...

().

Puerto Rico Puerto Rico (; abbreviated PR; tnq, Boriken, ''Borinquen''), officially the Commonwealth of Puerto Rico ( es, link=yes, Estado Libre Asociado de Puerto Rico, lit=Free Associated State of Puerto Rico), is a Caribbean island and unincorporated ...

is an

unincorporated territory of the United States Territories of the United States are sub-national administrative divisions overseen by the federal government of the United States. The various American territories differ from the U.S. states and tribal reservations as they are not sover ...

and Puerto Ricans are U.S. citizens; however, Puerto Rico is not a

U.S. state In the United States, a state is a constituent political entity, of which there are 50. Bound together in a political union, each state holds governmental jurisdiction over a separate and defined geographic territory where it shares its sove ...

, but a U.S. insular area. Consequently, while all Puerto Rico residents pay federal taxes, many residents are not required to pay federal

income taxes An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Ta ...

. Aside from income tax, U.S. federal taxes include customs taxes, federal commodity taxes, and federal

payroll tax Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their employees. By law, some payroll taxes are the responsibility of the employee and others fall on the em ...

es (

Social Security Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifical ...

, Medicare, and Unemployment taxes). Not all Puerto Rican employees and corporations pay federal income taxes. Federal law requires payment of federal income tax from the following residents and corporations only: federal government employees in Puerto Rico, residents who are members of the United States military, those with income sources outside of Puerto Rico, those individuals or corporations who do business with the federal government, and those Puerto Rico-based corporations that intend to send funds to the United States.

Federal taxes

Residents of Puerto Rico are required to pay most types of federal taxes. Specifically, residents of Puerto Rico pay customs taxes,''Puerto Rico.''
Stanford.wellsphere.com 7 September 2008
Archived
on 1 April 2010. Federal

commodity tax file:Lincoln Beer Stamp 1871.JPG, upright=1.2, 1871 U.S. Revenue stamp for 1/6 barrel of beer. Brewers would receive the stamp sheets, cut them into individual stamps, cancel them, and paste them over the Bunghole, bung of the beer barrel so when ...

es, and all

payroll taxes Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their employees. By law, some payroll taxes are the responsibility of the employee and others fall on the em ...

(also known as FICA taxes, which include (a)

, (b) Medicare, and Unemployment taxes).

Federal income taxes

Some Puerto Rico residents pay U.S.

federal income tax Income taxes in the United States are imposed by the federal government, and most states. The income taxes are determined by applying a tax rate, which may increase as income increases, to taxable income, which is the total income less allow ...

es. Residents falling within the following categories must pay tax on their income to the United States federal government, via the Internal Revenue Service: Puerto Rico residents who: * work for the federal government such as US Post Office employees, and federal agents of any of the federal executive and judicial branches located in Puerto Rico''D.C. Voting Rights: No Representation? No Taxation!''
Robert A. Book. WebMemo #2338. 11 March 2009
Archived
10 February 2010.''D.C. Voting Rights: No Representation? No Taxation!''
Robert A. Book. Heritage.com 11 March 2009. Accessed 28 October 2020. * do business with the federal government * are members of the U.S. military * earned income from sources outside Puerto Rico and * Puerto Rico-based corporations that intend to send funds to the U.S. However, notwithstanding these requirements, some residents of Puerto Rico are not required to file federal income tax returns because their income falls below the

poverty threshold The poverty threshold, poverty limit, poverty line or breadline is the minimum level of income deemed adequate in a particular country. The poverty line is usually calculated by estimating the total cost of one year's worth of necessities for t ...

. As of 2019, the median income of Puerto Rico was $20,166, which falls below the poverty threshold of $24,400. The IRS does not require individuals or households below the poverty threshold to pay federal income tax. Puerto Rico residents pay more in federal income taxes every year than do residents of six U.S. states: "From 1998 up until 2006, when Puerto Rico was hit by its present economic recession, Puerto Rico consistently contributed more than $4 billion annually in federal taxes and impositions into the national fisc." This was more that the IRS collected from taxpayers in six States of the Union:

Vermont Vermont () is a state in the northeast New England region of the United States. Vermont is bordered by the states of Massachusetts to the south, New Hampshire to the east, and New York to the west, and the Canadian province of Quebec to ...

Wyoming Wyoming () is a state in the Mountain West subregion of the Western United States. It is bordered by Montana to the north and northwest, South Dakota and Nebraska to the east, Idaho to the west, Utah to the southwest, and Colorado to the s ...

South Dakota South Dakota (; Sioux: , ) is a U.S. state in the North Central region of the United States. It is also part of the Great Plains. South Dakota is named after the Lakota and Dakota Sioux Native American tribes, who comprise a large porti ...

North Dakota North Dakota () is a U.S. state in the Upper Midwest, named after the indigenous Dakota Sioux. North Dakota is bordered by the Canadian provinces of Saskatchewan and Manitoba to the north and by the U.S. states of Minnesota to the east, So ...

Montana Montana () is a state in the Mountain West division of the Western United States. It is bordered by Idaho to the west, North Dakota and South Dakota to the east, Wyoming to the south, and the Canadian provinces of Alberta, British Columb ...

, and

Alaska Alaska ( ; russian: Аляска, Alyaska; ale, Alax̂sxax̂; ; ems, Alas'kaaq; Yup'ik: ''Alaskaq''; tli, Anáaski) is a state located in the Western United States on the northwest extremity of North America. A semi-exclave of the U.S. ...

, as well as the

Northern Mariana Islands The Northern Mariana Islands, officially the Commonwealth of the Northern Mariana Islands (CNMI; ch, Sankattan Siha Na Islas Mariånas; cal, Commonwealth Téél Falúw kka Efáng llól Marianas), is an unincorporated territory and commonw ...

. As the cutoff point for income taxation in Puerto Rico is lower than that imposed by the U.S. IRS code and because the per-capita income in Puerto Rico is much lower than the average per-capita income of the US states, more Puerto Rico residents pay income taxes to the local taxation authority than if the IRS code were applied to the island. This occurs because "the Commonwealth of Puerto Rico government has a wider set of iscalresponsibilities than do U.S. State and local governments."''Puerto Rico: Fiscal Relations with the Federal Government and Economic Trends during the Phaseout of the Possessions Tax Credit.''
US Government. General Accounting Office. Report Number GAO-06-541. 19 May 2006. Publicly Released: 23 June 2006. Accessed 28 October 2020. As a result, the Commonwealth government imposes a separate income tax to make up for revenue funds that would otherwise be available through state-like funding resulting from federal income tax. Only certain residents of Puerto Rico are required to file

returns. According to the Internal Revenue Service:

Other US Federal taxes

While the Commonwealth government has its own tax laws, Puerto Rico residents are also required to pay US federal taxes, but most residents do not have to pay the federal personal income tax. Employers in Puerto Rico are subject to both Federal Insurance Contributions Act (FICA) tax (a

payroll A payroll is the list of employees of some company that is entitled to receive payments as well as other work benefits and the amounts that each should receive. Along with the amounts that each employee should receive for time worked or tasks pe ...

withholding tax Tax withholding, also known as tax retention, Pay-as-You-Go, Pay-as-You-Earn, Tax deduction at source or a ''Prélèvement à la source'', is income tax paid to the government by the payer of the income rather than by the recipient of the income ...

, which funds

and Medicare) and the

Federal Unemployment Tax Act The Federal Unemployment Tax Act (or FUTA, ) is a United States federal law that imposes a federal employer tax used to help fund state workforce agencies. Employers report this tax by filing an annual Form 940 with the Internal Revenue Service. ...

(FUTA). Employers in Puerto Rico must withhold the employee portion of FICA taxes from their employees' wages and contribute the employer portion of FICA. In 2016, Puerto Rico paid close to into the

US Treasury The Department of the Treasury (USDT) is the national treasury and finance department of the federal government of the United States, where it serves as an executive department. The department oversees the Bureau of Engraving and Printing and ...

in the form of Business Income Taxes, Individual income tax withheld and FICA tax, Individual income tax payments and SECA tax, Unemployment insurance tax, Estate and trust income tax, Estate tax, Gift tax and Excise taxes.

Social Security and Supplemental Security Income (SSI) benefits

In general, "many federal social welfare programs have been extended to Puerto Ric residents, but usually with caps inferior to those allocated to the states." Residents of Puerto Rico who have paid into Social Security are eligible for benefits upon retirement. Residents of Puerto Rico who have paid into Social Security however are excluded from receiving Supplemental Security Income (SSI) benefits would they otherwise qualify. Commonwealth of Puerto Rico residents, unlike residents of the Commonwealth of the Northern Mariana Islands and residents of the 50 States, currently do not qualify for SSI. (SSI benefits are generally for low-income, disabled, as well as for elderly.) On 10 April 2020, the U.S. Court of Appeals for the First Circuit ruled that residents of Puerto Rico were eligible for SSI benefits, finding that residents of Puerto Rico make substantial contributions to the federal treasury in higher amounts than taxpayers in at least six states and the territory of the Northern Mariana Islands. In March 2021, the

US Supreme Court The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all U.S. federal court cases, and over state court cases that involve a point of ...

agreed to look at the constitutionality of the SSI issue.

Medicaid and Medicare benefits

Puerto Rico receives less than 15% of the

Medicaid Medicaid in the United States is a federal and state program that helps with healthcare costs for some people with limited income and resources. Medicaid also offers benefits not normally covered by Medicare, including nursing home care and per ...

funding it would receive were it a state and Medicare providers receive less-than-full state-like reimbursements for services rendered to beneficiaries in Puerto Rico even though the latter paid fully into the system.

Commonwealth taxes

The main body of domestic statutory tax law in Puerto Rico is the ''Código de Rentas Internas de Puerto Rico'' (Internal Revenue Code of Puerto Rico). The code organizes commonwealth laws covering commonwealth income tax,

es,

gift tax In economics, a gift tax is the tax on money or property that one living person or corporate entity gives to another. A gift tax is a type of transfer tax that is imposed when someone gives something of value to someone else. The transfer must ...

es,

estate tax An inheritance tax is a tax paid by a person who inherits money or property of a person who has died, whereas an estate tax is a levy on the estate (money and property) of a person who has died. International tax law distinguishes between an es ...

es and statutory excise taxes. All federal employees, those who do business with the federal government, Puerto Rico-based corporations that intend to send funds to the US, and some others also pay federal income taxes (for example, Puerto Rico residents who earned income from sources outside Puerto Rico. In addition, because the cutoff point for income taxation is lower than that of the US IRS code and because the per-capita income in Puerto Rico is much lower than the average per-capita income on the U.S. mainland, more Puerto Rico residents pay income taxes to the local taxation authority than if the IRS code were applied to the island. That occurs because "the Commonwealth of Puerto Rico government has a wider set of iscalresponsibilities than do U.S. State and local governments."

Property Tax

Property taxes are the main fund of the 78 municipalities of Puerto Rico.

Sales and Use Tax

The Puerto Rico Sales and Use Tax (SUT, es, Impuesto a las Ventas y Uso, IVU) is the combined

sales Sales are activities related to selling or the number of goods sold in a given targeted time period. The delivery of a service for a cost is also considered a sale. The seller, or the provider of the goods or services, completes a sale in ...

and

use tax A use tax is a type of tax levied in the United States by numerous state governments. It is essentially the same as a sales tax but is applied not where a product or service was sold but where a merchant bought a product or service and then conv ...

applied to most sales in

. As of 2020, the tax rate is 11.5%: 1.0% of the tax collected goes to the municipality where the sale was executed (there are 78 - municipalities), and 10.5% of the tax collected goes to

Government of Puerto Rico The government of Puerto Rico is a republican form of government with separation of powers, subject to the jurisdiction and sovereignty of the United States.Urgent Interest Fund Corporation (COFINA) to pay the

public debt of Puerto Rico The public debt of Puerto Rico is the money borrowed by the government of Puerto Rico through the issue of securities by the Government Development Bank and other government agencies. History In May 2007, local economists expressed serious con ...

, making it a three-tier tax. In July 2006, the government approved Law Number 117, The 2006 Contributive Justice Law, which established a tax with a 5.5% rate at state level and an optional 1.5% rate at municipal level. The tax went into effect on November 15, 2006. The tax is better known as the ''Sales and Use Tax (''Impuesto sobre Ventas y Uso''), often referred to by its Spanish acronym "IVU". The law amended Article B of the Code and created sub-article BB. On 29 July 2007, the government approved Law Number 80, making the tax mandatory for all municipalities of the commonwealth. Also, the tax rates were changed to 6% at the state level and 1% at the municipal level. On 1 July 2015, the sales tax rate was increased from 7% to 11.5%, in response to a suffering economy. The new tax contributes 1% to the municipality level and 10.5% to the "state" level. The IVU was scheduled to expire on 1 April 2016, to be replaced with a

value-added tax A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the en ...

(VAT) of 10.5% for the state level, with the 1% IVU continuing for the municipalities. On 2 May 2016 the House of Representatives voted to repeal the adoption of value added tax (VAT), followed shortly by the Senate on 5 May 2016. The Legislature decided to continue the existing Sales and Use Taxation (SUT) system.

Import / Export Taxes

A common misconception is that customs taxes (also called import/export taxes) collected by the U.S. government on products manufactured in Puerto Rico are all returned to the Puerto Rico Treasury. That is not the case, and such taxes are returned to the Puerto Rico Treasury only for rum products. Even then, the US Treasury keeps a portion of the taxes.''House Report 110-597 - Puerto Rico Democracy Act of 2007.''
U.S Congress. House of Representatives. 110th Congress (2007-2008). Second Session. Note: For this report, submit a query at "https://www.congress.gov/ ", the official U.S. Congress database website, for "House Report 110-597 - Puerto Rico Democracy Act of 2007".

Notes

References

External links

''IRS Topic No. 901.''''IRS pub. 1321.''

1996 Report by GAO, see pages 29-43, Appendix II Comparison of U.S. and Puerto Rico Individual Income Tax Rules

Departamento de Hacienda de Puerto Rico
{{North America topic, Taxation in Department of Treasury of Puerto Rico Economy of Puerto Rico Finance in Puerto Rico Government of Puerto Rico Puerto Rican law