Puerto Rican residents are taxed in Puerto Rico on their worldwide income, no matter where the income is sourced. Puerto Rican non-residents are only taxed in Puerto Rico on their PuertoRico-source income. Income for services performed is sourced to Puerto Rico based on where the services are performed. Such income is typically prorated to Puerto Rico based on workdays.
Puerto Rico has a de minimis rule to avoid sourcing to Puerto Rico very small amounts of income from personal services. Income from personal services performed within Puerto Rico will not be considered from Puerto Rican sources if it is 3,000 United States dollars (USD) or less and the individual was present in Puerto Rico for 90 days or less during the calendar year (such personal services must have been provided to an employer who is not engaged in a trade or business in PuertoRico).
Personal income tax rates
The following regular tax rates remain in effect for 2018 and future years:
| Net taxable income (USD) | Tax |
| Not over 9,000 | 0% |
| Over 9,000, but not over 25,000 | 7% of the excess over USD 9,000 |
| Over 25,000, but not over 41,500 | USD 1,120 plus 14% of the excess over USD 25,000 |
| Over 41,500, but not over 61,500 | USD 3,430 plus 25% of the excess over USD 41,500 |
| Over 61,500 | USD 8,430 plus 33% of the excess over USD 61,500 |
Gradual adjustment tax
If the individual's net taxable income exceeds USD 500,000, they will have to pay an additional tax (i.e. gradual adjustment tax). This tax is 5% of the excess of the total net taxable income over USD 500,000, limited to 33% of their personal and dependents' exemption plus USD 8,895.
Alternate basic tax (ABT)
In addition to the regular income tax, individuals are required to compute an ABT assessed in accordance to the below tax table. The ABT taxable income is computed by adding back certain income items exempt from regular income tax.
ABT rates:
| Net income subject to ABT (USD) | Tax (%) |
| In excess of 25,000 but not more than 50,000 | 1 |
| In excess of 50,000 but not more than 75,000 | 3 |
| In excess of 75,000 but not more than 150,000 | 5 |
| In excess of 150,000 but not more than 250,000 | 10 |
| In excess of 250,000 | 24 |
The credit for prior years’ ABT liability may not be sold, transferred, or refunded. When determining the net income subject to ABT, this credit will be reduced by the portion of the ABT attributable to non-deductible expenses.
The ABT will not be applicable to individuals whose only source of income is from salaries informed in a Withholding Statement.
For tax years after 31 December 2019, an individual's total tax will be 95% ofone's total tax determined (regular tax plus gradual adjustment) if gross income exceeds USD 100,000. If gross income is USD 100,000 or less, then the individuals total tax will be 92% of one's total tax determined.
New optional tax for self-employed individuals rendering services
Self-employed individuals whose income is derived substantially from the business of rendering services may elect to pay an optional tax on gross income instead of the income tax otherwise imposed by the Code on net income, as follows:
| Gross income (USD) | Tax (%) |
| Not greater than 100,000 | 6 |
| In excess of 100,000 but not more than 200,000 | 10 |
| In excess of 200,000 but not more than 300,000 | 13 |
| In excess of 300,000 but not more than 400,000 | 15 |
| In excess of 400,000 but not more than 500,000 | 17 |
| In excess of 500,000 | 20 |
The income received must be substantially from the provision of services. For these purposes, accrued income will be considered to come substantially from services rendered when said income category represents at least 80% of the total gross income received during the taxable year.
In addition, to use the optional computation of tax, the total gross self-employment income must be subject to withholding at source or to estimated tax payments and must be reported in an Informative Return.
The new optional tax is applicable for taxable years that commence after 31 December 2018.
The taxation system in Puerto Rico is unique, isn't it? Let's break down the concepts embedded in the article:
Taxation for Puerto Rican Residents:
- Worldwide Income Taxation: Puerto Rican residents are taxed in Puerto Rico on their worldwide income, irrespective of where the income originates.
- Source of Income: Income for services performed is sourced to Puerto Rico based on where the services are executed. It's prorated to Puerto Rico depending on workdays.
De Minimis Rule:
- Threshold for Income: Puerto Rico has a de minimis rule exempting very small amounts of income from personal services sourced in Puerto Rico. If income from personal services performed within Puerto Rico is $3,000 USD or less and the individual was present in Puerto Rico for 90 days or less, it's not considered income from Puerto Rican sources.
Personal Income Tax Rates:
- Tax Brackets: The tax rates are structured based on net taxable income in the following ranges:
- 0% for income up to $9,000 USD
- 7% for income between $9,000 and $25,000 USD
- Progressively increasing rates for higher income brackets up to 33% for income over $61,500 USD.
Gradual Adjustment Tax:
- Additional Tax for High Earners: Individuals with net taxable income exceeding $500,000 USD are subject to a 5% gradual adjustment tax on the excess, capped at 33% of their personal and dependents' exemption plus $8,895 USD.
Alternate Basic Tax (ABT):
- Additional Tax Computation: Individuals must compute an ABT based on certain income items exempt from regular income tax. ABT rates vary from 1% to 24% based on income ranges.
Tax Credits and Adjustments:
- Limitations: Credits for prior years’ ABT liability have restrictions on sale, transfer, or refund.
- Exemptions: The ABT won't apply if an individual's only income source is salaries reported in a Withholding Statement.
Total Tax Computation:
- Thresholds: For tax years after December 31, 2019, total tax varies based on gross income thresholds: 95% for gross income exceeding $100,000 USD, and 92% for gross income at $100,000 USD or less.
Optional Tax for Self-Employed Individuals:
- Alternative Tax for Self-Employed: Self-employed individuals whose income primarily arises from rendering services can opt to pay tax on gross income instead of net income.
- Tax Rates: The optional tax rates for self-employed individuals range from 6% to 20% based on gross income thresholds.
Criteria for Optional Tax:
- Qualification: To use the optional tax, a substantial portion (at least 80%) of the total gross income must come from services rendered. Accrued income should meet this criterion.
- Reporting Requirements: The income must be subject to withholding or estimated tax payments and reported in an Informative Return.
The system's complexity highlights the need for careful consideration of income sources and thresholds to optimize tax liabilities for individuals in Puerto Rico.
