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Mar 07, 2012

Living There


INDIVIDUAL TAXATION

Under Puerto Rican tax law, individuals are presumed to be resident if they are domiciled in Puerto Rico for a period of 183 or more days in a calendar year.

Residents are taxed on their worldwide income. Married couples may be taxed jointly or separately.

INCOME TAX

Income is categorized into the following categories: (1) interest, (2) dividends and profits, (3) personal services, (4) rentals and royalties, (5) sale of real property, (6) sale of personal property, (7) distributions in liquidation, and (8) other income.

Income is taxed at progressive rates. A resident taxpayer can qualify for personal deductions and additional deductions (itemized or standard).

INCOME TAX FOR SINGLE INDIVIDUALS AND
MARRIED COUPLES FILING SEPARATELY

TAXABLE INCOME, US$ TAX RATE
Up to US$8,500 7%
US$8,500 – US$15,000 14% on band over US$8,500
US$15,000 – US$25,000 25% on band over US$15,000
Over US$25,000 33% on all income over US$25,000
Source: Global Property Guide

INCOME TAX FOR MARRIED COUPLES FILING JOINTLY

TAXABLE INCOME US$ TAX RATE
Up to US$17,000 7%
US$17,000 – US$30,000 14% on band over US$17,000
US$30,000 – US$50,000 25% on band over US$30,000
Over US$50,000 33% on all income over US$50,000
Source: Global Property Guide

In addition, the law provides for a recapture of the lower tax brackets for taxpayers with net taxable income in excess of US$75,000 (US$37,500) if the taxpayer is married but filing separately). Taxpayers with adjusted gross incomes of US$75,000 or more are subject to the alternative basic tax.

ALTERNATE BASIC TAX FOR INDIVIDUALS

TAXABLE INCOME US$ TAX RATE
US$75,000 – US$125,000 10%
US$125,000 – US$175,000 15%
Over US$175,000 30%
Source: Global Property Guide

Also, for three taxable years (from 2009 to 2011), an additional 5% surcharge will be added to the total income tax in the case of taxpayers with adjusted gross income in excess of US$100,000 (US150,000 if the taxpayer is married and filing jointly).

Each taxpayer is entitled to the following deductions (called personal exemptions):

  • US$1,300 for a single taxpayer or a married person not living with their spouse
  • US$3,000 for a married couple

There are other deductions a resident taxpayer can avail of and these deductions can be deducted into two ways. The taxpayer can opt for (1) the standard deductions or (2) the itemized deductions.

Standard deductions may be claimed instead of itemized deductions. The standard deductions are:

  • US$3,000 for a married couple filing jointly, or
  • US$1,500 for couples living together and filing separately, or
  • US$2,000 for a single taxpayer (or a married person not living with their spouse)

In lieu of standard deductions, a taxpayer can opt for itemized deductions such as:

  • Child’s care expenses: up to US$600 for one child and US$1,200 for two or more children
  • Medical expenses (medical and dental expenses, including insurance premiums over 3% the adjusted gross income)
  • Taxes on the taxpayer’s principal residence and license fees on the taxpayer’s automobile
  • Interest expense on personal indebtedness
  • Rent: 10% of the annual rent on the taxpayer’s principal residence with a maximum of US$500
  • Charitable contributions: up to 15% to 30% of the adjusted gross income

RENTAL INCOME
Rental income earned by residents is taxed at standard income tax rates. Income-generating expenses are deductible when calculating taxable rental income.

CAPITAL GAINS
Capital gains earned by resident individuals are taxed as ordinary income. Long-term capital gains are gains earned from an asset which is held for more than 6 months. The taxable gain is computed by deducting the acquisition costs from the gross selling price.

However, individuals can opt for their net long-term (held for more than 6 months) capital gains to be taxed at a flat rate of 20%.


PROPERTY TAX


Property Tax

Real property is subject on an annual real property tax levied on the property’s market value. The Commonwealth imposes a flat rate of 1.03% with an additional 1% for personal property (effective rate of 2.03% for personal property) and 3% for real property or land (effective rate of 4.03% for real property or land).

CORPORATE TAXATION

Income earned by nonresident companies may be assessed and taxed in two ways: (1) not effectively connected with trade or business and (2) effectively connected with trade or business.

Income Tax Not Effectively Connected with Trade or Business
A nonresident company not engaged in a trade or business in Puerto Rico is generally taxed at a flat rate of 29% (withheld) on Puerto Rican-sourced profits and income including investment income, rental income and capital gains.

Income Tax Effectively Connected with Trade or Business
A nonresident company engaged in a trade or business sin Puerto Rico is taxed as a local company.

INCOME TAX

Income earned by companies is taxed on a graduated tax rate structure. A flat tax of 20% is levied on the “normal-tax net income”. A surtax on “normal-tax net income” less credit is levied at progressive rates, from 5% on the first US$75,000 and up to 19% on surtax income over US$275,000. A “recovery of tax for differences in tax rates” is levied at 5% on net taxable income in excess of US$500,000.

CAPITAL GAINS TAX

Capital gains earned by companies are taxed at a flat rate of 15%. Capital losses may be carried forward for five years.





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