Which Return Does a Bona Fide Resident of Puerto Rico File?

Which return does a bona fide resident of Puerto Rico file?

It depends on where your income comes from. A bona fide resident whose income is only from Puerto Rico sources generally has no U.S. federal income tax return to file. A bona fide resident with income from outside Puerto Rico files Form 1040 if that income is above the U.S. filing threshold, and leaves the Puerto Rico-source income off it. The IRS states this in Topic 901.

This guide is general education about how the pieces connect. It doesn't compute anything for you, and it can't tell you what your own situation requires. That's a question for a licensed advisor.

What does bona fide residency have to do with which return you file?

Bona fide residency is the status that makes the exclusion available. A bona fide resident is a person who meets the presence test, the tax home test and the closer connection test for the tax year. The regulation at 26 CFR 1.933-1 lets an individual who is a bona fide resident of Puerto Rico for the entire taxable year exclude income derived from sources within Puerto Rico. It sends the question of what residency means to 26 CFR 1.937-1, and the question of where income comes from to 1.937-2.

So the order of operations is: settle the status first, then ask what you have to file. If you want the three tests in overview, see the presence test, tax home and closer connection test. If you are wondering who has to prove your residency, that is a separate guide.

A person who is not a bona fide resident does not get this treatment. Topic 901 says U.S. citizens and resident aliens who are not bona fide residents of Puerto Rico report their worldwide income.

What if all your income comes from Puerto Rico?

If your income comes solely from Puerto Rico sources, the IRS says you generally are not required to file a U.S. federal income tax return. That sentence is about the U.S. income tax return only. Puerto Rico has its own tax system and its own return, which this guide does not cover. Ask your advisor about it.

The word "generally" matters here. The rule has exceptions, covered below, and Publication 570 treats pay for services performed in a territory as territory-source income in the ordinary case. Whether a given item is Puerto Rico source income is decided under the sourcing rules, not by where the money lands.

What if you also have income from outside Puerto Rico?

Then the answer changes. Topic 901 says a resident with income from outside Puerto Rico, including U.S.-source income, must file a U.S. federal income tax return if that income is above the U.S. filing threshold. The return is Form 1040. The IRS also says that a resident with a filing obligation does not report the Puerto Rico-source income on that return, because it is excluded.

In plain terms, the exclusion shapes what goes on the return, and the non-Puerto Rico income decides whether there is a return at all. The threshold itself is set by the IRS and changes, so this guide does not quote it. Publication 570 is the place to check the figure for the year you are filing.

Does the exclusion cover U.S. government pay?

No. The exclusion does not apply to amounts received for services performed as an employee of the United States or any agency of it. Topic 902 says the exclusion "doesn't apply to wages you receive for services performed as an employee of the United States Government." Topic 901 adds that residents who work for the U.S. government, including members of the Armed Forces, must file and report all pay for government services, including services performed in Puerto Rico.

The regulation draws one more line. An employee of the Puerto Rico government is not treated as an employee of the United States for this purpose. Publication 570 also has special residency and sourcing language for active duty members of the Armed Forces whose state of legal residence is Puerto Rico. If that describes you or your spouse, read that part of the publication with your advisor.

What is Form 1040-SS, and is it a substitute for Form 1040?

Form 1040-SS is the U.S. self-employment tax return. It is not a general substitute for Form 1040. Topic 901 says that residents who are not required to file a U.S. income tax return may still need to report self-employment income, and they do that on Form 1040-SS (Form 1040-SS (SP) in Spanish) to report the income and pay any self-employment tax owed.

Publication 570 states that bona fide residents of a U.S. territory with self-employment income must generally pay self-employment tax. So a resident can owe self-employment tax even with no income tax filing obligation. The publication also says not to file Form 1040-SS together with Form 1040. If you are required to file Form 1040, the Form 1040 instructions apply instead.

Form 1040-SS also carries the additional child tax credit for bona fide residents of Puerto Rico. Topic 902 says claiming that credit requires filing a federal return, on either Form 1040 or Form 1040-SS.

What happens to deductions and credits tied to excluded income?

You do not get them. Topic 902 says you cannot claim deductions and credits that apply to the Puerto Rican source income you excluded. The regulation says the same in its own terms: expenses, losses and credits allocable to excluded income generally cannot be claimed, with a narrow exception for the personal exemption under section 151, and the allocation follows 26 CFR 1.861-8.

A general guide has to stop here. How a particular expense is allocated depends on your facts. The foreign tax credit for Puerto Rico taxes on income you must report also has to be reduced by the part allocable to excluded income, according to Topic 902. Take those questions to your advisor.

Does Form 8898 change which return you file?

No. Form 8898 is a statement, not a return. Publication 570 says you may need to file it if you become, or cease to be, a bona fide resident of a U.S. territory, and it describes a penalty that may apply when it is required and not filed, unless the failure is due to reasonable cause and not willful neglect. The form turns on the year residence begins or ends, so the details sit with the year of the move.

One more timing point from the regulation: a U.S. citizen who was a bona fide resident for at least two years and then changes residence may exclude Puerto Rico-source income for the period before the change, still subject to the exception for U.S. government pay.

What should you keep in mind when you put this together?

The filing question follows from the residency question. If your status is solid and documented, the return question is mostly about where your income comes from. If your status is shaky, everything above is shaky with it. A day-by-day record, which is what One83 keeps automatically, is the kind of evidence that supports the status, and documenting your presence for an audit covers what to keep.

Three points to carry away:

• Only Puerto Rico-source income: generally no U.S. income tax return.
• Income from outside Puerto Rico above the filing threshold: Form 1040, without the excluded income.
• Self-employment income: Form 1040-SS when no Form 1040 is required.

Anything beyond that turns on your facts, and the answer belongs to a licensed professional.

Frequently Asked Questions

Does a bona fide resident of Puerto Rico have to file a U.S. federal return?

Generally not if all income is from Puerto Rico sources. IRS Topic 901 says income from outside Puerto Rico above the U.S. filing threshold creates a filing obligation. Confirm your own position with a licensed advisor.

Is Form 1040-SS a substitute for Form 1040?

No. Form 1040-SS reports self-employment tax for residents who are not required to file a U.S. income tax return. Publication 570 says not to file it together with Form 1040.

Are wages from the U.S. government excluded?

No. The exclusion does not cover pay for services performed as an employee of the United States or its agencies, including military members.

Does filing a Puerto Rico return replace the U.S. return?

No. They are separate obligations. This guide covers the U.S. side only, so ask your advisor about the Puerto Rico return.

One83 is a tracking tool, not tax advice. Consult a licensed tax professional about your situation.