Fillable Publication 1321 Special Instructions For Residents Of Puerto Rico Form 1040

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Publication 1321 Special Instructions For Residents Of Puerto Rico Form 1040

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Publication 1321 (Rev. 8-2019) Catalog Number 63770L Department of the Treasury Internal Revenue Service www.irs.gov
Publication 1321 (August 2019)
Special Instructions For
Bona Fide Residents Of Puerto Rico Who Must File A
U.S. Individual Income Tax Return (Form 1040)
If you are a bona fide resident of Puerto Rico who will file a U.S. Federal Income Tax Return, Form 1040,
and claim an exclusion for income earned in Puerto Rico, you will have to make certain adjustments on your
return. These special instructions explain the adjustments, and how to make them on your return.
Bona Fide Residents of Puerto Rico: Generally, you are a bona fide resident of Puerto Rico if during the
tax year, you:
• Meet the presence test
• Do not have a tax home outside Puerto Rico, and
• Do not have a closer connection to the United States or to a foreign country than to Puerto Rico.
Publication 570 discusses these requirements and provides information on the special rules that apply in
the year you are moving to or from Puerto Rico.
Who Must File
In general, section 933 of the U.S. Internal Revenue Code requires that U.S. citizens who are bona fide
residents of Puerto Rico during the entire taxable year, but who receive income from sources outside Puerto
Rico and/or receive income as a civilian or military employee of the U.S. Government in Puerto Rico, must
file a U.S. Federal income tax return. The income you receive from Puerto Rican sources is not subject to
U.S. income tax. Because some of the income is exempt (under Code section 933) a part of the itemized
deductions or a part of the standard deduction amount on your U.S. return must be allocated to that exempt
income. This computation must be made before you can determine if you must file a U.S. tax return,
because the minimum income level at which you must file a return is based on the standard deduction for
your particular filing status. Use the following worksheet to modify standard deduction and to determine if
you have to file a U.S. income tax return:
1. Enter STANDARD DEDUCTION
If your filing status is (see caution below) . . . . . . . . . . . . . . . . . . . . . . . . . .
Single under 65 enter $12,200 . . . . . .
65 or older enter $13,850 . . . . .
Married filing jointly both under 65 enter $24,400 . . .
one 65 or older enter $25,700. . .
both 65 or older enter $27,000 . .
Head of household under 65 enter $18,350 . . . . . .
65 or older enter $20,000 . . . . .
Qualifying widow(er) with dependent
child
under 65 enter $24,400 . . . . . .
65 or older enter $25,700 . . . . .
CAUTION: If someone can claim you as a dependent, enter amount from the Standard Deduction Worksheet
in the instructions for Form 1040.
2. Allowable portion of STANDARD DEDUCTION
a. Gross income subject to U.S. tax (include taxable social security benefits);
use Worksheet 1 of Pub. 915 to compute your taxable social security
benefits) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b. Total gross income from all sources (including exempt P.R. Income) . . . .
c. Divide line 2a by line 2b . . . . . . . . . . . . . . . . . . . . . . . . . .
d. Adjusted filing requirement: Multiply STANDARD DEDUCTION (line 1) by
line 2c. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
You must file a return if your gross income subject to U.S. tax (line 2a) is equal to or more than your adjusted
filing requirement (line 2d). If you are married filing a separate return, you must file a return if your gross
income subject to U.S. tax is equal to or more than 0.
Page 2
Source Of Income
The source of income is important in determining if the income may be excluded under section 933 of the Internal Revenue Code. The
table below describes the general rules for determining the source of your income:
Example Of Source Of Income Rules
Item of Income Factor Determining Source
Salaries and other compensation . . . . . . . . . . . . . . Where the service is performed
Social Security Benefits . . . . . . . . . . . . . . . . . . . *U.S. Source income by definition (IRC Sec. 861)
Pensions:
Contributions . . . . . . . . . . . . . . . . . . . . . . . Where services were performed that earned the pension
Investment earnings . . . . . . . . . . . . . . . . . . . Where pension trust is located
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . Residence of the payer
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . Location of payer
Rents. . . . . . . . . . . . . . . . . . . . . . . . . . . . Location of property
Royalties:
Natural resources . . . . . . . . . . . . . . . . . . . . Location of property
Patents, copyrights, etc. . . . . . . . . . . . . . . . . . Where the property is used
Sale of real property . . . . . . . . . . . . . . . . . . . . Location of property
Sale of personal property . . . . . . . . . . . . . . . . . .
**Seller’s tax home (but see Special Rules for Gains From
Dispositions of Certain Property for exceptions)
* Special Rules
Caution: *Bona Fide Residents of Puerto Rico should use Publication 915 to determine how much of their Social Security Benefits may
be taxable.
Caution: **There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt
instruments, diamonds, and gold) owned by a U.S. citizen or resident alien prior to becoming a bona fide resident of a possession. For
additional details see Publication 570.
Deductions
It is important to remember that deductions which apply to your exempt Puerto Rican income are not deductible on your Federal income
tax return. For example, self employment tax deduction: If you are a bona fide resident of Puerto Rico and you exclude all of your
self-employment income from gross income, you cannot take the deduction for part of your self-employment tax on Schedule 1 (Form
1040), line 14, because the deduction is related to excluded income. You must pay self-employment tax on net self-employment
earnings of $400 or more. For more information see Publication 570 “Self Employment Tax Deduction” in chapter 4.
The personal exemption amount is $0 for tax years beginning 2018 through tax year 2025.
Itemized Deductions
Deductions that do not specifically apply to a particular income item must be allocated between your gross income subject to U.S. tax
and your total gross income from all other sources. Examples of such deductions that do not apply to a particular type of income are
medical expenses, charitable contributions, real estate taxes and mortgage interest on your personal residence. To find the part of the
deduction that is allowable, you must apportion those items that do not apply to any specific type of income based on the ratio that your
gross income subject to Federal tax bears to gross income from all sources.
EXAMPLE: You and your spouse, both under 65, are U.S. citizens and bona fide residents of Puerto Rico for the entire year. You file a
joint return. This year you earned $24,000 from Puerto Rican sources and your spouse earned $96,000 from the U.S. Government. You
have $42,250 of itemized deductions that do not apply to any specific type of income. These are medical expenses (doctor’s fees)
$11,000, real estate taxes $10,000, home mortgage interest of $16,250, and charitable deductions of $5,000 (cash contributions). You
apportion deductions for your Federal tax return as follows: multiply the deduction to be allocated by a fraction. The numerator of the
fraction is your gross income subject to Federal tax and the denominator is your total gross income from all sources (including exempt
Puerto Rican income).
Formula:
gross income subject to Federal tax
gross income from all sources
x deduction = allowable portion of deduction
Page 3
SCHEDULE A — Itemized Deductions should be modified as shown in the sample below:
Medical Expenses (doctor’s fees)
$96,000
$120,000
x $11,000 = $8,800 (Enter on line 1 of Schedule A.)
Real Estate Taxes
$96,000
$120,000
x $10,000 = $8,000 (Enter on line 5b of Schedule A.)
Home Mortgage Interest
$96,000
$120,000
x $16,250 = $13,000 (Enter on line 8 of Schedule A.)
Charitable deduction (cash contributions)
$96,000
$120,000
x $5,000 = $4,000 (Enter on line 11 of Schedule A.)
NOTE: Enter on Schedule A only the allowable portion of each deduction.
Taxpayers Who Do Not Itemize Deductions
Standard Deduction
The standard deduction and the additional standard deduction for taxpayers who are blind or age 65 or over are deductions that do not
apply to any particular type of income. If you do not itemize, they must be apportioned by the ratio that gross income subject to
Federal tax bears to gross income from all sources. This adjustment must be made before you enter your standard deduction on line 9
of Form 1040.
Use the following worksheet to apportion the standard deduction.
Worksheet For Puerto Rico Filers With Exempt Income Under Section 933 Who Do Not Itemize Deductions
1. Enter STANDARD DEDUCTION: If your filing status is
Single or Married filing separately enter $12,200. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Married filing jointly or Qualifying widow(er) enter $24,400 . . . . . . . . . . . . . . . . . . . . . . .
Head of Household enter $18,350. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
}
CAUTION: If you are 65 or over and/or blind, enter amount from the Standard Deduction Worksheet in the instructions for
Form 1040;
or
If someone can claim you as a dependent, enter amount from the Standard Deduction Worksheet in the instructions for Form 1040.
2. Allowable portion of STANDARD DEDUCTION:
a. Gross income subject to U.S. tax . . . . . . . . . . . . . . . . . . . . . . . . .
b. Total gross income from all sources (including exempt P.R. income) . . . . . . .
c. Divide line 2a by line 2b . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
d. Multiply Standard Deduction (line 1) by line 2c and enter this amount
on Form 1040, line 9 (allowable portion of STANDARD DEDUCTION). . . . . . .
Write the following above line 9, Form 1040 “Standard Deduction modified due to exempt income under section 933.”
Page 4
Example: John and Mary are U.S. citizens, under 65, and bona fide residents of Puerto Rico for all of 2019. They file a joint income tax
return. During 2019 they received $15,000 of income from Puerto Rican sources not subject to U.S. income tax; $20,000 of federal
wages subject to U.S. income tax and $6,000 interest income from a bank account in the U.S. They do not itemize deductions. Line 7 of
their Federal tax return, Form 1040, shows $26,000. They will apportion their standard deduction as follows:
Worksheet For Puerto Rico Filers With Exempt Income Under Section 933 Who Do Not Itemize Deductions
1. Enter STANDARD DEDUCTION for:
Single or Married filing separately enter $12,200 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Married filing jointly or Qualifying widow(er) enter $24,400 . . . . . . . . . . . . . . . . . . . . . .
Head of Household enter $18,350 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,400
}
CAUTION: If you are 65 or over and/or blind, enter amount from the Standard Deduction Worksheet in the instructions for Form
1040, as applicable;
or
If someone can claim you as a dependent, enter amount from the Standard Deduction Worksheet in the instructions for Form
1040, as applicable.
2. Allowable portion of STANDARD DEDUCTION:
a. Gross income subject to U.S. tax . . . . . . . . . . . . . . . . . . . . . . . . .
26,000
b. Total gross income from all sources (including exempt P.R. income) . . . . . . .
41,000
c. Divide line 2a by line 2b . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.6341
d. Multiply Standard Deduction (line 1) by line 2c and enter this amount
on Form 1040, line 9 (allowable portion of STANDARD DEDUCTION). . . . . . .
15,472
Write the following above line 9, Form 1040 “Standard Deduction modified due to exempt income under section 933.”
Credits
Foreign Tax Credit: If you are claiming a credit for taxes paid or accrued to Puerto Rico and you have income from P.R. sources not
taxable on the Federal tax return, you must reduce your foreign taxes paid or accrued by the taxes allocable to exempt income. To find
the amount allocable to the exempt income, multiply the taxes paid or accrued to Puerto Rico by a fraction. The numerator of the
fraction is the exempt income (under IRC 933) from P.R. sources less deductible expenses allocable to that income. The denominator
is the total amount of income subject to P.R. tax less deductible expenses allocable to that income.
Formula to calculate the Reduction in Foreign Taxes:
Formula:
Income from P.R. sources not subject to Federal tax
less deductible expenses allocable to that income
Total income subject to Puerto Rico tax less
deductible expenses allocable to that income
x Tax paid or accrued to Puerto Rico
Example: John and Mary are bona fide residents of Puerto Rico filing jointly. John works for the Federal Government and received
salary of $42,000 during 2019. Mary works for private industry and received salary of $18,000. Total taxes paid to Puerto Rico: $3,010.
$18,000
$60,000
x $3,010 = $903 = taxes allocable to excluded income. (Enter on Form 1116, Part III, line 12 “Reduction in foreign taxes”.)
Reporting a Change in Bona Fide Residence
Beginning in tax year 2001, taxpayers who become or ceased to be bona fide resident of a U.S. possession may need to file IRS Form
8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession. If you are required to file Form 8898 for
any tax year and you fail to file it, you may owe a penalty of $1,000.
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