Do U.S. citizens living in Puerto Rico pay taxes? This is a common question that many people have, especially those considering moving to or visiting the island. Puerto Rico, an unincorporated territory of the United States, has a unique tax status that sets it apart from the rest of the nation. In this article, we will explore the tax obligations of U.S. citizens living in Puerto Rico, including income taxes, sales taxes, and other relevant fees.
Puerto Rico’s tax system is based on the Internal Revenue Code (IRC), which means that U.S. citizens living on the island are required to file U.S. federal income tax returns. However, the island’s tax status offers certain benefits and exemptions that are not available to mainland U.S. residents. Here’s a closer look at the tax obligations of U.S. citizens living in Puerto Rico.
Income Taxes
As U.S. citizens, residents of Puerto Rico are required to file federal income tax returns and pay federal income taxes. However, Puerto Rico has its own income tax system, which provides significant tax advantages. Under the current law, Puerto Rico residents are exempt from paying federal income tax on their earnings from Puerto Rican sources. This means that income earned in Puerto Rico is not subject to federal income tax, although it is subject to Puerto Rican income tax.
Puerto Rican income tax rates vary depending on the amount of income earned. The rates range from 1% to 33%, with a maximum rate of 33% for income over $1 million. Additionally, residents of Puerto Rico may be eligible for a federal income tax credit to offset the Puerto Rican income tax paid.
Sales Taxes
In Puerto Rico, sales tax is called the Sales and Use Tax, and it is applicable to the sale, lease, or rental of tangible personal property and certain services. The current sales tax rate is 11.5%, which is composed of a 7% state sales tax and a 4.5% municipal sales tax. This rate is lower than the sales tax rates in many U.S. states.
However, it’s important to note that not all items and services are subject to sales tax in Puerto Rico. For example, food and clothing are exempt from sales tax, as are prescription medications. Additionally, residents of Puerto Rico may be eligible for a sales tax exemption on certain items and services.
Other Taxes
In addition to income and sales taxes, U.S. citizens living in Puerto Rico may also be subject to other taxes, such as property tax, estate tax, and inheritance tax. Property tax in Puerto Rico is calculated based on the assessed value of the property and is used to fund local government services. The estate tax and inheritance tax were eliminated in 2017, making Puerto Rico one of the few U.S. territories without these taxes.
Conclusion
In summary, U.S. citizens living in Puerto Rico do pay taxes, but the tax system is unique due to the island’s status as an unincorporated territory. While residents are required to file federal income tax returns, they may benefit from certain tax advantages, such as the exemption from federal income tax on Puerto Rican earnings and lower sales tax rates. It’s important for U.S. citizens considering moving to or living in Puerto Rico to understand their tax obligations and seek professional advice to ensure compliance with both federal and local tax laws.
