If you are a bona fide resident of Puerto Rico, you will be able to exclude income from Puerto Rico sources on your U.S. income tax return. If you are also a federal employee, the income you derive from that employment is deemed U.S. sourced for U.S. income tax purposes. If you are a bona fide resident and have to file a U.S. 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 U.S. income tax return.
In addition, you can claim deductions and credits that are not specifically attributable to income from either Puerto Rico or non-Puerto Rico sources, but you must allocate 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 U.S. income tax return. Examples of these types of allocable 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 U.S. income tax return, then you can claim a foreign tax credit for income taxes paid to Puerto Rico on the same income. To calculate your foreign tax credit, you must reduce the income taxes paid to Puerto Rico by any amount of income 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).
Page Last Reviewed or Updated: June 20, 2016