When it comes to taxes, no one wants to pay more than they have to. This is why so many people are considering moving their business or personal income from Puerto Rico. However, a move may not be the best idea for everyone. This post will break down what you need to know about Puerto Rican tax rates and how they affect your financial situation if you live on the island or abroad.
What is the Puerto Rico Tax Rate?
In Puerto Rico, the standard Puerto Rico tax rate is 39%. However, there are some credits and deductions available to offset this.
The Pase-Paso system allows for a reduction of up to 20% on earnings from any individual activity that earns less than $20,000 per year with no family members working in the said business. So if you fall under this category, but your spouse does not work at all (or they earn more than $20k), then you can enjoy a reduction of 20% on your taxes for 2017 (2018 rates may change). In order to qualify for Pase-Paso benefits, one must meet certain conditions set by law:
• The taxpayer's base salary or wage cannot exceed twenty thousand dollars ($ 20,000)
• The taxpayer or their spouse has no other employment that exceeds twenty thousand dollars ($20,000), excluding the activity they are applying for.
• The PASE-PASO system is only available to taxpayers who file as individual income and cannot be combined with any other credit. It does not apply in cases of dissolution of marriage where both spouses earn incomes over $30,000 through separate activities. In addition, if a family earns more than $200,000 per year from all sources (individual earnings plus business income etc.), then it would not qualify for the Pase Paso benefits either.
Why does it matter if you're a US citizen living in Puerto Rico?
If you are a US citizen living in Puerto Rico, then your taxes will be the same as if you were living in any other part of the United States. You'll need to file for state and federal income tax along with property taxes. This is different from if you were only residing on American soil temporarily because there's no IRS requirement that dictates how long someone has to live somewhere before becoming subject to those taxes.
The one exception would be when it comes time to sell your home or business in order to return back stateside, where capital gains rates could apply depending on what type of item was sold (real estate versus stock).
What are some of the benefits for people who are not citizens of PR or US residents but are interested in doing business there, and what about those with investments on the island?
Some of the benefits that non-citizens and US residents who do business in Puerto Rico may enjoy are - access to a deeper talent pool, lower costs for manufacturing or services, opportunities for trade with Latin American countries. There is also an incentive package which includes no federal taxes on income earned there so long as it's from sources other than dividends (interests), rent, capital gains; reduced corporate tax rates for companies operating locally; accelerated depreciation allowances for corporations acquiring local assets like plants; and below-market interest rates offered by government agencies. If you have investments on the island, such as stocks or bonds issued by any public company headquartered in Puerto Rico, then these benefits could help your portfolio grow while still keeping money invested at home where it belongs.
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