There are currently two Puerto Rico status bills under consideration in Congress, one in the House and one in the Senate. These two are the same bill, essentially the same Puerto Rico Status Act that was passed in the House last December. There was not enough time to move it through the Senate as well before the end of the term. This year, with the bill already in place in both houses, we are closer to our goal than ever before.

There will be hearings, discussions, and debates. There will probably be amendments offered and accepted or voted down. Since the bill is designed to be self-executing, as Rep. Gonzalez-Colon pointed out at the press conference for S 3231, it is essential that everything offered on the referendum ballot be something Congress is actually willing to grant.

So it’s important to be clear on all the provisions of the law. We offer a section-by-section breakdown of the bill, but we’ll also delve into the details in our articles in the coming weeks.

Today, we’ll consider what the bill has to say about taxes.

U.S. taxes under independence

Here is what the section on independence says about taxes:

“In general, United States citizens and United States businesses in the nation of Puerto Rico will be subject to United States Federal tax laws (as is the case with any other United States citizen or United States business abroad) and to Puerto Rican tax laws. Puerto Rico’s status as an independent, sovereign nation will be the controlling factor in the taxation of Puerto Rican taxpayers.”

U.S. citizens must file federal income tax returns no matter where they live. However, some foreign income is excluded, which is to say that a certain amount of the income earned in a foreign country is not taxed. There are also deductions for income taxes paid in a foreign country. These rules will apply to U.S. citizens living in a new Republic of Puerto Rico.

If Puerto Rico chooses independence and current U.S. citizens are able to keep their U.S. citizenship, they may have to pay income tax to Puerto Rico and to the United States. If Puerto Ricans lose their U.S. citizenship, they will not have to pay U.S. federal income taxes.

U.S. taxes under free association

The statement above for independence is repeated for free association, which makes sense, since free association is a form of independence.

The section on taxes under free association adds this sentence: “Puerto Rico will enter into an agreement with the United States to provide for ‘‘Sovereignty in Free Association’’ between the two nations. This agreement may modify the otherwise applicable tax rules, subject to negotiation and ratification by the two nations.”

Supporters of free association like to imagine that a relationship of free association will include a better deal than the federal government offers to its territories or its states. There is no evidence to support this claim. If Puerto Ricans keep their U.S. citizenship under free association, they should expect to be required to file federal income tax returns.

U.S. taxes under statehood

Puerto Rico will enter the Union on the same footing as all other states. It is not surprising, then, that S 3231 says this about taxes under statehood: “Individuals and businesses resident in the State of Puerto Rico will be subject to United States Federal tax laws as well as applicable State tax laws.”

This could be uncomfortable for wealthy individuals and companies using Puerto Rico as a tax shelter. For the average person, however, it will mean access to tax credits and benefits not always available to residents of Puerto Rico.

About Those Taxes…

The upshot is this: once Puerto Rico is no longer a territory, U.S. citizens living in Puerto Rico will have to file federal income tax returns. Whether they do so as citizens of the state of Puerto Rico or as residents of a foreign country is the question.

Puerto Rico is ready for the rights and the responsibilities of statehood. Tell your legislators that you want to see them on the right side of history. Ask them to cosponsor HR2757 and S3231.



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