Puerto Rico Income Tax

A reader at Facebook asked us about personal income tax in Puerto Rico. “Can PR51 explain why PR individual local income taxes are excessively high as compared to other states and how is it that some states like Florida, Texas and Washington do not tax money on state individual income tax but they provide additional services to those states?

Residents of Puerto Rico whose income is earned in Puerto Rico don’t pay federal income tax on those earnings. If their income comes from a state, they must file a federal income tax return. If all their income is from Puerto Rico, though, they do not generally have to file a federal income tax return.

Anyone earning money in Puerto Rico will have to file a personal income tax return in the territory. Here are the current tax rates for Puerto Rico:

 
Net taxable income (USD) Tax
Not over 9,000 0%
Over 9,000, but not over 25,000 7% of the excess over USD 9,000
Over 25,000, but not over 41,500 USD 1,120 plus 14% of the excess over USD 25,000
Over 41,500, but not over 61,500 USD 3,430 plus 25% of the excess over USD 41,500
Over 61,500 USD 8,430 plus 33% of the excess over USD 61,500

The state of California has the highest personal income tax rate of any state, at 13.3% for the richest residents. Their lowest personal income tax rate is 1%.

As you can see from the chart above, Puerto Rico’s tax rate begins at 7% and goes as high as 33%. This is more than twice as high as any U.S. state.

You’ll have to be a millionaire to reach that 13.3% tax ate in California, but an annual income of $62,000 will see you paying 33% on at least some of your income in Puerto Rico.

There are seven states with no personal income tax at all:

  • Wyoming.
  • Washington.
  • Texas.
  • South Dakota.
  • Nevada.
  • Florida.
  • Alaska.

Whether a state collects income tax or not has no effect on the amount of financial support provided by the federal government. States that don’t collect income tax often have higher property taxes or sales taxes to make up for the revenue they don’t get from income tax. This is entirely up to the state.

Puerto Rico also has the highest sales tax in the nation: 11.5%. Compare that with California’s base sales tax of 7.25%. Local taxes are therefore higher in Puerto Rico than in any of the states.

Residents of Puerto Rico also pay federal payroll taxes for Social Security, Medicaid, and Medicare. Because Congress is allowed to treat territories differently from states, Puerto Rico receives less funding for Social Security, Medicaid, and Medicare than states do.

As a state, Puerto Rico will be able to adjust local taxes. In any case, it’s clear that being a territory really doesn’t give Puerto Rico a tax advantage.

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