Topic 902 - Credits and Deductions for Taxpayers with Puerto Rican Source Income Exempt from U.S. Tax

If you are a bona fide resident of Puerto Rico and not a federal employee, you will be able to exclude income from Puerto Rico sources. If you are a bona fide resident and have to file a federal income tax return, then you cannot claim deductions and credits allocable to or chargeable against your excluded Puerto Rico source income. However, you can claim deductions and credits that are allocable to or chargeable against income required to be reported on your federal income tax return. In addition, you can claim deductions and credits that are not specifically attributable to income from either possession or non-possession sources, but you must divide such deductions and credits between income from Puerto Rico sources and income from all other sources (worldwide) to find the part that you can claim on your federal income tax return. Examples of these types of deductions and credits are alimony, the standard deduction and certain itemized deductions such as medical expenses, charitable contributions, real estate taxes, and mortgage interest on your personal residence. Generally, you can claim personal exemption deductions in full.

If you must report income from Puerto Rico sources on your federal income tax return, then you can claim a foreign tax credit for taxes paid to Puerto Rico. To calculate your foreign tax credit, you must reduce the taxes paid to Puerto Rico by any amount of taxes allocable to excluded Puerto Rico source income. When claiming a foreign tax credit, you must complete Form 1116 (PDF), Foreign Tax Credit. See Topic 856 for more information about the foreign tax credit.

For more information about how to allocate deductions and credits with respect to excluded income as well as how to determine if you are a bona fide resident, refer to Topic 901, Publication 570, Publication 4281 (PR) (PDF) and Publication 1321 (PDF).

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Page Last Reviewed or Updated: December 16, 2014