Tax Time for Puerto Rico?

As the deadline for filing federal income taxes nears, residents of Puerto Rico have a different situation from that of people living in the states. The following information comes from the IRS.

Residents of Puerto Rico don’t usually have to file income tax returns as long as these things are true:

  • You are a resident of Puerto Rico for the entire tax year.
  • All your income comes from Puerto Rico.

Residents of Puerto Rico usually must file federal income tax returns if these things are true:

  • You are an employee of the U.S. government.
  • You are self-employed.
  • You have income from outside of Puerto Rico, including any state.

People who moved from Puerto Rico to a state in 2017 can generally exclude the income they earned in Puerto Rico when they file their taxes this year, even if they didn’t live in Puerto Rico all year in 2017. People who live in or own a business in Puerto Rico may also be eligible for federal income tax relief when they file this year.

Filing a federal income tax return is not the same as paying federal income tax.

The Tax Policy Center estimates that nearly half of all Americans do not pay income tax. Like residents of Puerto Rico, these people may pay Social Security and other taxes, but they do not pay federal income tax. When they file their income taxes, they receive a refund of all the money that has been withheld from their paychecks all year.

Most of these people don’t earn enough money to pay income taxes. The average income in Puerto Rico was lower than in any state even before Hurricane Maria. Chances are, most residents of Puerto Rico would not owe any federal income taxes. That means that they would not pay federal income tax.

What’s more, people living in the states often receive tax credits, such as the Earned Income Tax Credit, which people living in Puerto Rico do not get. People who receive these credits get back all the money that was withheld from their paychecks, plus the tax credit.

When Puerto Rico becomes a state, most residents will not owe federal income tax.

While roughly half of U.S. citizens living in the states don’t pay any income taxes, some states pay in more in federal taxes and some receive more in federal funds.

WalletHub has calculated which states pay in more than they receive and which receive more than they pay in. New Mexico, which became a state in the 20th century, is #1 in receiving more than they send to Washington. Kentucky, Mississippi, Alabama, and West Virginia are next on the list. These are relatively poor states. Some have been states for a long time and some have not.

At first, Puerto Rico would surely be in this group. As a state, Puerto Rico would have the rights of a state and would get federal funding according to the same calculations as other states. that’s not true for the territory of Puerto Rico.

The state that gives the most to Washington and receives the least in comparison is Delaware, followed by Kansas, and then come Illinois, New Jersey, and Massachusetts, all three states with large proportions of residents of Puerto Rican heritage.

The most recent territories to become states were Alaska and Hawaii, both impoverished territories. Alaska is now #8 — a state that receives more than it pays in. Hawaii is #38 — a state that gives more funds to the federal government than it receives. Neither is now a poor state.

So it is hard to predict where Puerto Rico will end up after statehood. All 32 territories which have already become states are richer as states than they were as territories. But some pay in more to the federal government than they receive, and some receive more than they pay in.

We can say for certain that most individuals living in Puerto Rico right now will not pay federal income taxes, and many will receive credits.

Fear of federal income tax is not a reason to oppose statehood. Most residents of Puerto Rico will not pay federal income tax, just like half the residents of the states. Click To Tweet

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