Yes, Puerto Rico is considered foreign for US tax purposes as it is an unincorporated territory of the United States. This means that residents of Puerto Rico are subject to a unique tax system separate from the federal tax code.
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Yes, Puerto Rico is considered foreign for US tax purposes as it is an unincorporated territory of the United States. This means that residents of Puerto Rico are subject to a unique tax system separate from the federal tax code.
According to the IRS, residents of Puerto Rico who do not qualify as bona fide residents or meet certain physical presence requirements are generally treated as nonresident aliens for federal tax purposes. As a result, they are exempt from paying federal income tax on income derived from sources within Puerto Rico. However, Puerto Rico operates its own tax system, known as the Puerto Rico Internal Revenue Code (IRC), under which residents are required to pay income tax.
The primary difference between the federal and Puerto Rico tax systems lies in the treatment of income sourced within Puerto Rico. While residents of the United States are subject to federal tax on their worldwide income, including income earned abroad, Puerto Rico residents are generally only taxed on their income sourced within Puerto Rico.
To better understand the tax implications for Puerto Rico residents, let’s delve into a quote by renowned tax expert Douglas L. Turover:
“Although Puerto Rico is a territory of the United States, for income tax purposes, it is treated as a foreign country.”
The unique tax treatment of Puerto Rico can be attributed to its historical and political relationship with the United States. Here are some interesting facts about Puerto Rico’s tax system:
- Puerto Rico residents are exempt from federal income tax on income earned within Puerto Rico.
- The Puerto Rico tax system operates independently from the federal tax code.
- While Puerto Rico residents are generally exempt from federal tax, they may still be subject to other federal taxes, such as Social Security and Medicare.
- Puerto Rico residents may claim certain tax credits and deductions specific to their territory.
- Corporations operating in Puerto Rico are subject to a different tax regime than those in the United States and may benefit from various tax incentives.
In summary, Puerto Rico is considered foreign for US tax purposes, as residents are subject to a distinct tax system. Understanding these tax implications is crucial for individuals and businesses residing or operating in Puerto Rico to ensure proper compliance with both federal and Puerto Rico tax obligations.
Here’s a table summarizing the key differences between US and Puerto Rico tax systems:
| Features | United States | Puerto Rico |
|---|---|---|
| Tax residency | Based on citizenship | Based on residence |
| Taxation on worldwide income | Yes | Only income sourced within Puerto Rico |
| Federal income tax | Applicable for residents | Exempt on income sourced within Puerto Rico |
| Tax credits and deductions | Based on federal code | Specific Puerto Rico tax credits and deductions |
| Tax treatment for corporations | US corporate tax system applies | Puerto Rico has its own corporate tax system with potential tax incentives |
Remember that tax laws can be complex, and seeking professional advice is always recommended when dealing with specific tax situations.
This video contains the answer to your query
In this YouTube video, Sean Golden explains the bonafide tax residency test for Puerto Rico residents. He outlines that Puerto Rico is taxed differently as it is a commonwealth, not a state. If a US person lives in Puerto Rico, their income earned there is normally exempt from US tax. However, their non-Puerto Rico income is still taxable in the US. Golden discusses the different ways to meet the bonafide residence test for US citizens, legal permanent residents, and non-residents. He also explains the FBAR filing requirement for US persons with income sourced in Puerto Rico, and provides information on rectifying US tax compliance for Puerto Rico residents.
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For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, the terms "foreign," "abroad," and "overseas" refer to areas outside the United States, American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Puerto Rico, the U.S. Virgin Islands, and
Not considered foreign
Two of the main form the taxpayer may have to file is the FBAR and Form 8938. It is important to note, that accounts located in Puerto Rico are not considered foreign.