Taxation in Puerto Rico
The Commonwealth of Puerto Rico is a territory of the United States and Puerto Ricans are US citizens. However, Puerto Rico is not a US state. Because of this, only Puerto Rican residents who are government employees, and those with income sources outside of the territory, pay federal income tax. All other employers and employees pay no federal income taxes. However, residents of Puerto Rico and businesses operating in Puerto Rico do pay some federal taxes, and the commonwealth's government has its own taxes as well.
In July 2018, approximately 21% of the labor force on Puerto Rico were employed by the government.
The Commonwealth government has its own tax laws and Puerto Ricans are also required to pay some US federal taxes, although most residents do not have to pay the federal personal income tax. In 2016, Puerto Rico paid $3.5 billion into the US Treasury. Residents of Puerto Rico pay into Social Security, and are thus eligible for Social Security benefits upon retirement. However, they are excluded from the Supplemental Security Income.
The federal taxes paid by Puerto Rico residents include import/export taxes, federal commodity taxes, and others. Residents also pay federal payroll taxes, such as Social Security and Medicare taxes.
In general, United States citizens and resident aliens who are bona fide residents of Puerto Rico during the entire tax year, which for most individuals is January 1 to December 31, are only required to file a U.S. federal income tax return if they have income sources outside of Puerto Rico or if they are employees of the U.S. government. Bona fide residents of Puerto Rico generally do not report income received from sources within Puerto Rico on their U.S. income tax return. However, they should report all income received from sources outside Puerto Rico on their U.S. income tax return. Residents of Puerto Rico who are employed by the government of the United States or who are members of the armed forces of the United States also should report all income received for their services to the government of the United States on their U. S. income tax return.
United States citizens or resident aliens who are not bona fide residents of Puerto Rico during the entire tax year are required to report all income from whatever source derived on their U.S. income tax return. However, a U.S. citizen who changes residence from Puerto Rico to the United States and who was a bona fide resident of Puerto Rico at least two years before changing residence can exclude from U.S. taxable income the Puerto Rican source income received while residing in Puerto Rico during the taxable year of such change of residence. 
Bona fide residents of Puerto Rico cannot claim deductions and/or credits allocable to or chargeable against Puerto Rican source income that is excluded from a U.S. tax return. The deductions and credits not attributable to specific income must be divided between excluded income from sources in Puerto Rico and income from all other sources to find the part that can be deducted or credited on a U.S. tax return. Examples of deductions not attributable to specific income include alimony, the standard deduction, and certain itemized deductions such as medical expenses, charitable contributions, and real estate taxes and mortgage interest on your personal residence. Personal exemptions are generally allowed in full.
If you have taxable Puerto Rican source income on your U.S. income tax return, then you can claim a credit for foreign taxes paid to Puerto Rico. However, you are not allowed to claim a credit for foreign taxes paid with respect to Puerto Rican source income that is excluded from a U.S. tax return. Therefore, to properly calculate your foreign tax credit, you must reduce your foreign taxes paid by the amount of taxes allocable to excluded Puerto Rican source income.
Employers in Puerto Rico are subject to both Federal Insurance Contributions Act (FICA) tax (a payroll withholding tax, which funds Social Security and Medicare) and the Federal Unemployment Tax Act (FUTA). Employers in Puerto Rico must withhold the employee portion of FICA taxes from their employees' wages and contribute the employer portion of FICA.
Puerto Rico imposes a separate income tax in lieu of federal income tax.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 the per-capita income in Puerto Rico is much lower than the average per-capita income on the 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 responsibilities than do U.S. State and local governments." As residents of Puerto Rico pay into Social Security, Puerto Ricans are eligible for Social Security benefits upon retirement but are excluded from the Supplemental Security Income (SSI) (Commonwealth of Puerto Rico residents, unlike residents of the Commonwealth of the Northern Mariana Islands and residents of the 50 States, do not receive the SSI), and the island actually receives less than 15% of the Medicaid funding it would normally receive if it were a state. However, 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 In general, "many federal social welfare programs have been extended to Puerto Rican (sic) residents, although usually with caps inferior to those allocated to the states." A common misconception is that the import/export taxes collected by the U.S. on products manufactured in Puerto Rico are all returned to the Puerto Rico Treasury. That is not the case, as such import/export taxes are returned only for rum products, and even then, the US Treasury keeps a portion of the taxes.
The main body of domestic statutory tax law in Puerto Rico is the Internal Revenue Code of Puerto Rico (Spanish: Código de Rentas Internas de Puerto Rico). The code organizes commonwealth laws covering commonwealth income tax, payroll taxes, gift taxes, estate taxes and statutory excise taxes.
On July 4, 2006, the government approved Law Number 117, The 2006 Contributive Justice Law, establishing 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 subarticle BB. On July 29, 2007, the government approved Law Number 80, making the tax mandatory for all municipalities of the island. Also, the tax rates changed to 6% at the state level and 1% at the municipal level.
The tax originated in some municipalities (Caguas, Yauco and Villalba) in 2005. Seeing the economic success of these municipalities, many other municipalities enacted sales tax ordinances, usually by copying the ordinance of Caguas. By the middle of 2006, more than 30 municipalities had enacted sales and uses taxes on the island. During the second and third quarters of 2006, the Commonwealth of Puerto Rico suffered several political struggles in its Legislative Assembly. They were largely caused of the budget deficit of the government and the refusal of the Legislative Assembly to approve the taxes proposed by the Governor of the Island. Government offices were shut down until the Assembly approved Law 117, which included the first sales tax of that possession of the United States.
On July 1, 2006, the first Commonwealth-wide sales tax was approved with a 5.5% rate at state level and an optional 1.5% rate at municipal level. The adoption of the municipal tax was mixed. The tax went into effect on November 15, 2006. Since the tax reform of July 2007, the tax is applied in all 78 municipalities of the island and at Commonwealth level. On February 6, 2008, the governor of the island proposed to remove the state part of the IVU. Also, with the February 6, 2008 changes, the tax rates are now 6% at the state level and 1% at the municipal level.
On July 1, 2015, the sales tax rate was increased to 11.5%, in response to the island's suffering economy. The new tax contributes 1% to the municipality and 10.5% to the state.
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 has decided to continue the existing Sales and Use Taxation (SUT) system. 
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- "Joint Committee on Taxation. An Overview of the Special Tax Rules Related to Puerto Rico and an Analysis of the Tax and Economic Policy Implications of Recent Legislative Options" (PDF). Retrieved August 14, 2010.
- Members of the military must pay federal income tax
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- "Table 5. Internal Revenue Gross Collections, by Type of Tax and State, Fiscal year 2016" (XLS). irs.gov. External link in
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- For a comprehensive coverage of Federal programs made extensive to Puerto Rico see Richard Cappalli's Federal Aid to Puerto Rico (1970)).
- See the "House Report 110-597 – Puerto Rico Democracy Act of 2007" mentioned above.