Taxation Keys
Gross
Income – As Puerto Rico Bona Fide Residents – Before 2002
Federal Tax Exempt
Grounds
Tax Guide for Individuals With Income from
Possession source income. Generally, income earned after
Filing Requirements for Individuals in Certain
Table of Contents
Where To Get Forms and Information
Which Returns To File
Special Rules
Double Taxation
The
Where To Get Forms and Information
Which Returns To File
Special Rules
Double Taxation
The Commonwealth of the
Where To Get Forms and Information
Which Return To File
Special Rules
Double Taxation
Where To Get Forms and Information
Which Return To File
Special Rules
Double Taxation
The U.S.
Where To Get Forms and Information
Which Return To File
Special Rules
Double Taxation
If you have income from American Samoa, the CNMI, Guam,
Puerto Rico, or the USVI, you may have to file a tax return with the tax
department of that possession. Or, you may have to file two annual tax returns,
one with the possession's tax department and the other with the U.S. Internal
Revenue Service. This chapter covers the general rules for filing returns in
the five possessions.
You must first determine if you are a bona fide resident of
the relevant possession. See chapter 1 for a discussion of the requirements you
must meet.
You should ask for forms and advice about the filing of
possession tax returns from that possession's tax department, not the Internal
Revenue Service. Contact information is listed in this chapter under the
heading for each possession.
The Commonwealth of
Puerto Rico
The Commonwealth of Puerto Rico has its own separate and
independent tax system. Although it is modeled after the U.S. system, there are
differences in law and tax rates.
Where To Get Forms and Information
Requests for information about the filing of Puerto Rican
tax returns should be addressed to:
Departamento
de Hacienda
Negociado de
Asistencia
Contributiva
y Consultas Especializadas
P.O.
Box 9024140
San Juan, Puerto Rico 00902-4140
The phone number is 787-721-2020, extension 3611.
To obtain Puerto Rican tax forms, contact the Forms and
Publications Division Office at the above address or call 787-721-2020,
extensions 2645 or 2646.
You can access the Puerto Rican website at www.hacienda.gobierno.pr or email your questions about
Puerto Rican taxes to InfoServ@hacienda.gobierno.pr.
Caution: The addresses and phone numbers listed above are
subject to change.
Which Returns To File
Generally, you will file returns with both Puerto Rico and
the United States. The income reported on each return depends on your residency
status in Puerto Rico. To determine if you are a bona fide resident of Puerto
Rico, see the information in chapter 1.
Bona Fide Resident of Puerto Rico
Bona fide residents of Puerto Rico will generally pay tax to
Puerto Rico on their worldwide income.
U.S. citizen or
resident alien.
If you are a U.S. citizen or resident alien and also a bona fide
resident of Puerto Rico during the entire tax year, you generally must file the
following returns.
A Puerto Rican tax return reporting income from worldwide
sources. If you report U.S. source income on your Puerto Rican tax return, you
can claim a credit against your Puerto Rican tax, up to the amount allowable,
for income taxes paid to the United States.
A U.S. tax return reporting income from worldwide
sources, but excluding Puerto Rican
source income. However, see U.S. Government employees, on this page, for an
exception.
If you are excluding Puerto Rican income on your U.S.
tax return, you will not be allowed any deductions or credits that are directly
or indirectly allocable to exempt income. For more information, see Special
Rules for Completing Your U.S. Tax Return in chapter 4.
If all of your income is from Puerto Rican sources, you are not required to file a U.S. tax
return. However, if you have self-employment income, see Self-employment
tax on page 12.
Before moving to USA on 2002, on 2000, we
filed the local returns, and, the IRS 1040PRs for the Fiscal Years 1998, 1999
and 2000; then, 5 years later, on Oct 2007, as requested by the IRS, we filed
the 1040s and 1041s for the FY’s 2000, 2001 and 2002 reporting the updated PRPB
GDP’s only, always claiming refunds (excess payments of Social Security and
Medicare 941PR&1040PR), excluding the administration the exempt income,
earned before 2002 as bona fide residents of Puerto Rico.
U.S. citizen
only.
If you are a U.S. citizen, you may also qualify under
these rules if you have been a bona fide resident of Puerto Rico for at least 2
years before moving from Puerto Rico. In this case, you can exclude your income
derived from sources within Puerto Rico that you earned before the date you changed
your residence. For more information, see Puerto Rico under Special Rules in
the Year of a Move in chapter 1.
Nonresident alien.
If you are a bona fide resident of Puerto Rico during the
entire tax year, but a nonresident alien of the United States, you generally
must file the following returns.
A Puerto Rican tax return reporting income from worldwide
sources. If you report U.S. source income on your Puerto Rican tax return, you
can claim a credit against your Puerto Rican tax, up to the amount allowable,
for income taxes paid to the United States.
A U.S. tax return (Form 1040) reporting income from
worldwide sources, but excluding Puerto Rican source income (other than amounts
for services performed as an employee of the United States or any of its
agencies). For tax purposes other than reporting income, however, you will be
treated as a nonresident alien individual. For example, you are not allowed the
standard deduction, you cannot file a joint return, and you are not allowed a
deduction for a dependent unless that person is a citizen or national of the
United States. There are also limitations on what deductions and credits are
allowed. See Publication 519 for more information.
Not a Bona Fide
Resident of Puerto Rico
An individual who is not a bona fide resident of Puerto Rico
for the tax year generally files tax returns with both Puerto Rico and the
United States.
U.S. citizen or resident alien. If you are a U.S. citizen or
resident alien but not a bona fide resident of Puerto Rico during the entire
tax year, you generally must file the following returns.
A Puerto Rican tax return reporting only your income from
Puerto Rican sources. Wages for services performed in Puerto Rico for the U.S.
Government or for private employers is income from Puerto Rican sources.
A U.S. tax return reporting income from worldwide
sources. Generally, you can claim a foreign tax credit for income taxes paid to
Puerto Rico on the Puerto Rican income that is not exempt from U.S. taxes (see
chapter 4 for more information).
Nonresident alien.
If you are a nonresident alien of the United States who does not qualify
as a bona fide resident of Puerto Rico for the entire tax year, you generally
must file the following returns.
A Puerto Rican tax return reporting only your income from
Puerto Rican sources. Wages for services performed in Puerto Rico for the U.S.
Government or for private employers is income from Puerto Rican sources.
A U.S. tax return (Form 1040NR) according to the rules for a
nonresident alien. See the instructions for Form 1040NR.
Special Rules
In addition to the above general rules for filing U.S. and
Puerto Rican tax returns, there are some special rules that apply to certain
individuals and types of income.
U.S. Government employees.
Wages and cost-of-living allowances paid by the U.S. Government (or one
of its agencies) for working in Puerto Rico are subject to Puerto Rican tax.
However, the cost-of-living allowances are excluded from Puerto Rican gross
income up to the amount exempt from U.S. tax. In order to claim this exclusion,
you must:
Include with your Puerto Rican tax return evidence to show
the amount received during the year, and
Be in full compliance with your Puerto Rican tax
responsibilities.
These wages are also subject to U.S. tax, but the
cost-of-living allowances are excludable. A foreign tax credit is available in
order to avoid double taxation.
Income from sources outside Puerto Rico and the United
States. If you are a U.S. citizen and
bona fide resident of Puerto Rico and you have income from sources outside both
Puerto Rico and the United States, that income is treated as foreign source
income under both tax systems. In addition to your Puerto Rican and U.S. tax
returns, you may also have to file a return with the country or possession from
which your outside income was derived. To avoid double taxation, a foreign tax
credit is generally available for either the U.S. or Puerto Rican return.
Example.
Thomas Red is a bona fide resident of Puerto Rico and a U.S.
citizen. He traveled to the Dominican Republic and worked in the construction
industry for 1 month. His wages were $20,000. Because the wages were earned
outside Puerto Rico and outside the United States, Thomas must file a tax
return with Puerto Rico and the United States. He may also have to file a tax
return with the Dominican Republic.
Moving expense deduction.
Generally, expenses of a move to Puerto Rico are directly attributable
to wages, salaries, and other earned income from Puerto Rico. Likewise, the
expenses of a move back to the United States are generally attributable to U.S.
earned income.
If your move was to Puerto Rico, report your deduction for
moving expenses as follows.
If you are a bona fide resident in the tax year of your
move, enter your deductible expenses on your Puerto Rican tax return.
If you are not a bona fide resident, enter your deductible
expenses on both your Puerto Rican and U.S. tax returns. Also, for purposes of
a tax credit against your U.S. tax liability, reduce your Puerto Rican “general
limitation income” on Form 1116, line 1a, by entering the deductible moving
expenses on line 2.
If your move was to the United States, complete Form 3903
and enter the deductible amount on Form 1040, line 26.
Additional child tax credit. If you are not required to file a U.S.
income tax return, this credit is available only if you meet all three of the
following conditions.
You were a bona fide resident of Puerto Rico during the
entire tax year.
Social security and Medicare taxes were withheld from your
wages or you paid self-employment tax.
You had three or more qualifying children. (For the
definition of a qualifying child, see the instructions for Form 1040-PR or Form
1040-SS.)
If your income exceeds certain levels, you may be
disqualified from receiving this credit. Use Form 1040-PR or Form 1040-SS to
claim the additional child tax credit.
Advice about possible tax benefits under the Puerto Rican investment
incentive programs is available from the Puerto Rican tax authorities.
Self-employment tax. If you have no U.S. filing requirement
but have income that is effectively connected with a trade or business in
Puerto Rico, you must file Form 1040-SS or Form 1040-PR with the United States
to report your self-employment income and, if necessary, pay self-employment
tax.
Double Taxation
A mutual agreement procedure exists to settle cases of
double taxation between the United States and the Commonwealth of Puerto Rico.
See Double Taxation in chapter 4.
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Estate
Income
If the administrators and heirs live in USA, the Gross
Income IS NOT exempt, and, cannot be excluded.
Even, during the examination process, the losses related or
connected with it cannot be excluded.
Grounds
About the particular, the IRS Publication 525 (for the year 2006) Taxable and Nontaxable Income states on
the page 29:
·
Estate and trust income. An estate or trust, unlike a
partnership, may have to pay federal income tax. If you are a beneficiary of an
estate or trust, you may be taxed on your share of its income distributed or
required to be distributed to you. However, there is never a double tax.
Estates and trusts file their returns on Form 1041, U.S. Income Tax Return for
Estates and Trusts, and your share of the income is reported to you on Schedule
K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc.
·
Current income required to be
distributed. If you
are the beneficiary of an estate or trust that must distribute all of its
current income, you must report your share of the distributable net income,
whether or not you actually received it.
·
Current income not required to be
distributed. If you
are the beneficiary of an estate or trust and the fiduciary has the choice of
whether to distribute all or part of the current income, you must report:
·
All
income that is required to be distributed to you, whether or not it is actually
distributed, plus
·
All
other amounts actually paid or credited to you, up to the amount of your share
of distributable net income.
And, during the examination process, the Part 4 (Examining Process), Chapter 10 (Examinations
of Returns), Section 12 (Frivolous Return Program), Article 4.1 [4.10.12.4.1]
of the Internal
Revenue Manual indicates:
4.10.12.4.1 (
Compliance Checks
Consider for Campus examination cases above tolerance with
the following taxable sources of income:
Medical payments — Compensation paid to doctors, dentists,
and others in the medical profession. Subject to self-employment tax unless
clear indication taxpayer is not in a medical profession
Wages, Tips and Other Compensation — Form W2 (Include wages
paid during the year (prior to payroll deductions), non-cash payments
(including fringe benefits), total tips reported, and certain employee business
expense reimbursements. Sick pay is considered taxable wages unless it is
clearly identified as employee paid sick leave. Wages may be fully or partially
reported on tax return wage lines, as other income on Form 1040, on Schedule C
or F, or as income on attachments. See current tax law for allocated tip income
Dividends, Interest, and Original Issue Discount — Ordinary
dividend distributions, capital gain distributions, and nontaxable
distributions (not included as income). (Consider OID only when reported by a
financial institution)
Capital Gain Distributions — See current tax law for taxable
portion
State or Local Income Tax Refunds (SITR) —If taxpayer
itemized in prior year
Agricultural Subsidies (AGSUB) — Government payments to
farmers or businesses to assist in a policy deemed advantageous to the public.
Subject to self-employment tax
Patronage Dividends — Paid by cooperatives. Considered
income unless attributable to family items, capital assets or depreciable
assets used in taxpayers business. May be subject to self-employment tax
Rents/Royalties —Not usually subject to self-employment tax
unless taxpayer is in business of rental property and has reported rental
income on Schedule C or F. May be subject to self-employment tax
Pensions and Annuities — See current tax law for taxable
portion
IRA Distributions -See current tax law for taxable portion
Lump-Sum Distributions — Income received within one tax year
from an employer's qualified pension, stock bonus, or profit-sharing plan,
including employee savings plans. The case minor may reflect both ordinary
income (ORINC) and capital gains (CG)
Conduit Income —Taxpayer portion from a partnership,
estate, trust, or small business corporation. Do not include negative amounts.
May be subject to self-employment tax
Non-employee Compensation (NEC) — Fees, commissions, or any
other compensation paid by a business to an individual that is not an employee.
Subject to self-employment tax
Unemployment Compensation
Social Security/Railroad Benefits — See current tax law for
taxable portion
Fishing Income —Income earned by fishing boat crew members.
Subject to self-employment tax
Prizes and Awards — The fair market value of the prize or
award
Gambling Income — Gross winnings from a gambling activity
Forgiveness of Federal Indebtedness (FOFI) — Considered
income if a debt owed to the Federal government was declared uncollectable
Debt Out/Debt Satisfied/Fair Market Value (FMV) —
Acquisition or abandonment of property that is security for a debt for which
the payer is the lender. Do not include negative amounts
Taxable Grants — A grant determined to be taxable by the
payer and is considered income to the taxpayer
Stocks/Bonds — Proceeds from security sales involving
stocks, bonds, other debt obligations, commodities, or forward contracts
Rollover — Income withdrawn from one IRA account and
transferred to another IRA account
Bartering — An exchange of one taxpayer's property or
services for another taxpayer's property or services. The fair market value of
property or services received through bartering is taxable
Crop Insurance — Amounts received by farmers for destruction
or damage to crops. Subject to self-employment tax
Other Portfolio Income — Income derived in the ordinary
course of the business and is not subject to the passive activity rules. May be
only subject to capital gains tax
Forfeitures — An early withdrawal penalty is a forfeiture of
interest income due to premature withdrawal of capital on a time savings
account. Penalty can exceed amount of interest paid to the taxpayer for the
year
IRA/SEP — See current tax law for taxable portion
Realized 89 (or other tax year) — Income received from the sale
of an item
Real Estate (Real es sl) — The sale or exchange of one to four family real
estate transactions
Golden Parachute Payment ( IRC 280G & IRC 4999 ) —
Payments in the nature of compensation to a disqualified individual.
Disqualified individual means an officer, shareholder, or independent
contractor whose employment has been discontinued due to a change in ownership
or control of the corporation. They are severance pay and should be reported as
income
ORINC/ORD Income (Ordinary Income) — Income received within
one tax year from an employer's qualified pension, stock bonus, or
profit-sharing plan, including employee savings plans
Permanent Dividend Fund (State of Alaska) — Dividend income
from the State of Alaska paid to eligible Alaska residents. Not subject to
self-employment tax
Non-employee Comp (State of Alaska longevity bonus) — Paid
to qualified Alaska residents at least 65 years of age and living in Alaska 20
years. Not subject to self-employment tax
Dependent Care (Depend Care) — Dependent care benefits paid
by the taxpayer's employer
Amt of Contract — Taken from Form 8596, Contract with the
Federal Government ( IRC 6050(m) )
Non-IRP Income Sources - Self-assessed income reported by taxpayer,
erroneous refund income received as a result of a frivolous filing
_______________________
Appeals
& Litigation
Owing Taxes & Penalties
-
To
challenge them in court, a Notice of Deficiency is needed, plus they have to be
paid in advance.
Denied Refunds
-
To
get them, go to the US District Court via Jury Trial.
Appeals
-
Never
go to the IRS Small Claim Division (for $50K or less). The decisions are final
and cannot be appealed.
More About (MSN Press Article)
Yes, you can sue the IRS. But it can be as
complicated a process as the U.S. Tax Code. This quick guide can help you find
your way around the court system and choose the best forum for winning your
case.
Sometimes, IRS agents just don't listen, and
when they do listen they just don't understand. In those cases, we have to take
the government to court. But how? To which court? And how much will it cost?
If you and the Internal Revenue Service can't
agree, they will send you a "Notice of Deficiency," sometimes
referred to as a 90-Day Letter. This is because once the notice has been issued,
you have 90 days from the date on that notice to file a petition with the Tax
Court.
If you miss the 90-day cutoff, you lose! No
ifs, ands or buts. The statute of limitations has run out and you must pay the
tax. You may be able to sue for a refund, but you have to pay the tax first.
So, first and foremost, if you disagree with the IRS, don't just sit on the
notice. Respond, saying that you disagree with their findings. Now, let's see
what to do once we've decided to go to court.
Most taxpayers choose the U.S. Tax Court as their forum to litigate tax
issues. Established in 1923, it's made up of 19 judges who travel around the
country and hear cases on a regular basis. It handles only tax litigation, and
the judges are tax experts.
|
Which court to
choose? |
|
|
|
|
Court |
Fee |
Contact |
When to use |
|
U.S. Tax Court |
$60 |
Clerk, U.S. Tax Court |
Case is based on law interpretation. |
|
|
|
400 2nd Street N.W. Washington, D.C., 20217 |
|
|
|
|
202-521-0700 |
|
|
U.S. District Court |
$150 |
Clerk of Court's office in district where
you reside. |
Case is based on fairness issues. |
|
U.S. Court of Federal Claims |
$250 |
Clerk of the Court of Claims |
Your attorney is "forum shopping"
for a federal circuit court with laws sympathetic to your case. |
|
|
|
17 Madison Place N.W. Washington, D.C.,
20005 |
|
|
|
|
202-357-6400 |
|
The major advantage of electing this forum is
that it is the only court that will decide your case before you pay the tax.
All other options require you to pay the disputed amount upfront. If you can't
pay, you won't be able to get into any of the other courts, as those are
intended as refund disputes. If your argument is based on technical analysis,
this is the courtroom for you. You want a judge who understands the minutiae of
the law.
If your argument is based on fairness or
equity, you don't want to be in the Tax Court. You should file your petition in
U.S. District Court, discussed below. In district court, a jury of your peers
decides the verdict. Remember, Tax Court cases are decided exclusively by
judges; there are no Tax Court juries.
Although you may represent yourself at the Tax
Court, it is best to have an attorney specializing in taxation to handle the
case.
A simplified process is available if the
disputed amount is $50,000 or less for any taxable year. Here, you may want to
represent yourself.
Cases under the Small Claims division are
heard by special trial judges in informal settings, and the formal rules of
evidence don't apply. But if you lose, you can't appeal. Their decision is
final and binding. Regular Tax Court decisions can be appealed to the U.S.
Courts of Appeal, and then to the U.S. Supreme Court.
The fee for all cases is $60. You send it,
with an original and two copies of your petition, a copy of the Notice of
Deficiency, and your pick of the city where you want.
If you missed the 90-day time limit, or want a
jury to hear your case, you may choose to go to U.S. District Court. It's the
only forum where a jury is available. That's great if your argument is more
about fairness than technical compliance. Juries are more receptive and
sympathetic to the equities of a case than to the letter of the tax law.
To get into a District Court, you must first
pay your tax deficiency and then file a claim for a refund with the IRS. The
IRS then has six months to act on your claim. When it is rejected, you can then
file suit for a refund in U.S. District Court. (I should note that, rarely,
does the IRS say, "Oops, we goofed!" and give you a refund.)
The District Court hears all kinds of
litigation involving federal laws and any kind of law, state or federal, if the
litigants are citizens of different states. The District Court judges are
rarely tax experts. If your position is technical, go to Tax Court. You can
represent yourself in the U.S. District Court, but judges frown on it.
District Court decisions can be appealed to
the U.S. Courts of Appeals, and then to the U.S. Supreme Court.
This is your third choice of forums, and, in
my opinion, the least desirable, unless you have a lawyer who successfully
"shops" for the right venue. (I'll explain that in a moment.)
The U.S. Claims Court
is a special court that hears all sorts of claims against the
However, before the arguments, there is a
fact-finding hearing before a trial judge in a city near where you live. The
trial judge will file the findings and the recommended decision. If either you,
or the IRS, disagrees, the case will come up for arguments before the full
court in Washington.
Decisions can be appealed to the federal
Circuit Court of Appeals, and then to the U.S. Supreme Court.
But why go here if you don't get a jury, don't
get a tax expert as a judge, and still have to pay the tax first? In addition,
the litigation is complex and you most certainly will need an attorney.
The answer lies in the quirky nature of our
legal system. Our federal judiciary divides the country geographically into
different circuits. Unless the Supreme Court has ruled on the specific issue,
judges in different circuits are free to decide a case based on the legal
precedent in that specific circuit's Court of Appeals. So one circuit's
decision could be completely opposed to what another circuit's Court of Appeals
has ruled in the past.
In the legal world, this is called “forum
shopping.” A sharp lawyer will pick the circuit in which the past rulings have
been most sympathetic to your cause. The U.S. Claims Court may be able to
follow a legal precedent in your favor that the other courts have ruled
against.
______________