EFTA01128897.pdf

Publication 1321 (Rev. July 2011) Special Instructions For Bona Fide Residents Of Puerto Rico Who Must File A U.S. Individual Income Tax Return (Form 1040 or 1040A) 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. Caution: The rules for determining if an individual qualifies as a bona fide resident of Puerto Rico and other U.S. possessions for U.S. income tax purposes were changed by the American Jobs Creation Act of 2004. For additional information, see Publication 570, Tax Guide for Individuals with Income From U.S. Possessions. Publication 570 discusses the new requirements for being considered a bona fide resident of Puerto Rico and provides information on the special rules that applies in the year you are moving to or from Puerto Rico. American Opportunity Tax Credit Bona fide residents of Puerto Rico will receive the refundable part of this credit from the Puerto Rico Treasury Department. 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 andfor 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, in part, on the standard deduction for your particular filing status. Use the following worksheet to determine if you have to file a U.S. income tax return: Who Mu8t File Worksheet for Bona Fide Residents of P.R. with exempt income (under section 933) 1. Enter STANDARD DEDUCTION If your filing status is (see caution below) Single under 65 enter $5,800 65 or older enter $7,250 . . . Married filing jointly both under 65 enter $11,600 one 65 or older enter $12,750 both 65 or older enter $13,900 . Head of household under 65 enter $8,500 65 or older enter $9,950 Qualifying widow(er) with dependent child under 65 enter $11,600 . . . . 65 or older enter $12,750 CAUTION: If someone can claim you as a dependent, enter amount from the Standard Deduction Worksheet in the instructions for Form 1040 or Form 1040A, as applicable. 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. Multiply STANDARD DEDUCTION (line 1) by line 2c 3. Enter: IRS married filing jointly $7,400 if someone can claim you as a dependent enter "0- all others enter $3,700 Department of he Treasury Internal Revenue Service 4. Add lines 2d and 3 www.irs.gov You must file a return if your gross income subject to U.S. tax (line 2a) is equal to or more than line 4. If you Puticalaq 1321 ill. 7,011i are married filing a separate return, you must file a return if your gross income subject to U.S. tax is equal CatalogNum:ad 63770: to or more than $3,700. EFTA01128897 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 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) 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. You are subject to these special rules if you meet both of the following conditions: • For the tax year for which the source of gain must be determined, you are a bona fide resident of Puerto Rico. • For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of Puerto Rico). • If you meet these conditions, gains from the disposition of this property will not be treated as income from sources within the relevant possession for purposes of the Internal Revenue Code. Accordingly, bona fide residents of American Samoa and Puerto Rico. for example, may not exclude the gain on their U.S. tax return. However, there is a special election that you can make to allocate gain/losses between the U.S. and Puerto Rico from disposition of certain property. 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, if you incurred employee business expenses of $1.250 on wages of $18.500 that are exempt from tax on your Federal return, the employee business expenses are not deductible on the Federal return. Deductions for personal exemptions are allowed in full and need not be allocated. 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 deductions that do not definitely apply to a particular type of income are alimony payments and certain itemized deductions (such as medical expenses, charitable contributions, and 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. During 2011 you earned $15,000 from Puerto Rican sources and your spouse earned $25,000 from the U.S. Government. You have $16.000 of itemized deductions that do not apply to any specific type of income. These are medical expenses (doctor's fees) $4,000. real estate taxes $5,000. home mortgage interest from a financial institution of $6,000, and charitable deductions of 51,000 (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). r gross income subject to Federal tax Formula: x deduction = allowable portion of deduction gross income from all sources Page 2 EFTA01128898 SCHEDULE A—Itemized Deductions should be modified as shown in the sample below: Medical Expenses (doctors fees) $25.000 x $4,000 = $2,500 (Enter on line 1 of Schedule A.) $40.000 Real Estate Taxes $25,000 x $5,000 = $3,125 (Enter on line 6 of Schedule A.) $40,000 Home Mortgage Interest $25,000 x $6,000 = $3,750 (Enter on line 10 of Schedule A.) $40,000 Charitable deduction (cash contributions) $25,000 x $1,000 = $625 (Enter on line 16 of Schedule A.) $40.000 NOTE: Enter on Schedule A only the allowable portion of each deduction. Deductions directly allocable to the income subject to Federal tax (such as employee business expenses and other miscellaneous deductions) need not be allocated. 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 40 of Form 1040 or line 24 of Form 1040A. 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 you checked Form 1040, Filing Status box 1, enter $5.800 2 or 5, enter $11.600 Jly 3, enter $5.800 4, enter $8,500 CAUTION: If you are 65 or over and/or blind, enter amount from the Standard Deduction Worksheet in the instructions for Form 1040 or Form 1040A. as applicable; or If someone can claim you as a dependent, enter amount from the Standard Deduction Worksheet in the instructions for Form 1040 or Form 1040A. as applicable. 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 40 or Form 1040A, line 24 (allowable portion of STANDARD DEDUCTION) Write the following above line 40, Form 1040 or line 24 of Form 1040A: -Standard Deduction modified due to exempt income under section 933." Page 3 EFTA01128899 Example: John and Mary are U.S. citizens, under 65, and bona fide residents of Puerto Rico for all of 2011. They file a joint income tax return. During 2011 they received $15,000 of income from Puerto Rican sources and $6.000 interest income from a bank account in the U.S. They do not itemize deductions. Line 37 of their Federal tax return, Form 1040, shows $6.000. 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: If you checked Form 1040. Filing Status box 1, enter $5.800 2 or 5, enter $11.600 11,600 3, enter $5.800 4, enter $8.500 CAUTION: If you are 65 or over and/or blind, enter amount from the Standard Deduction Worksheet in the instructions for Form 1040 or Form 1040A. as applicable; or If someone can claim you as a dependent, enter amount from the Standard Deduction Worksheet in the instructions for Form 1040 or Form 1040A, as applicable. 2. Allowable portion of STANDARD DEDUCTION: a. Gross income subject to U.S. tax 6,000 b. Total gross income from all sources (including exempt P.R. income) 21,000 c. Divide line 2a by line 2b .2857 d. Multiply Standard Deduction (line 1) by line 2c and enter this amount on Form 1040, line 40 or Form 1040A, line 24 (allowable portion of STANDARD DEDUCTION) 3.314 Write the following above line 40, Form 1040 or line 24 of Form 1040A: "Standard Deduction modified due to exempt income under section 933." Credits If 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. r Income from P.R. sources not subject to Federal tax less deductible expenses allocable to that income Formula. x Tax paid or accrued to Puerto Rico = Total income subject to Puerto Rico tax less Reduction in foreign taxes deductible expenses allocable to that income Example: John and Mary are bona tide residents of Puerto Rico filing jointly. John works for the Federal Government and received salary of $25,000 during 2011. Mary works for private industry and received salary of $15.000. Total taxes paid to Puerto Rico: $2,500. $15.000 x $2,500 = $938 = taxes allocable to excluded income. (Enter on Form 1116, Part III, line 12 "Reduction in foreign taxes".) $40,000 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. Taxpayers from Puerto Rico who are liable for filing Form 1040, U.S. Individual Income Tax Return, should call 1-800-829-1040. To call Taxpayer Service from Puerto Rico, dial 1.800.829.1040. For automated refund information, dial 1-800.829.1954. For recorded tax information (Teletax). dial 1-800-829-4477. To request forms and publications, dial 1.800.8293676. Page 4 EFTA01128900