When preparing your Puerto Rico Individual Income Tax return for the 2023 tax year, it is important to understand the differences between deductions, exemptions, and exclusions. These concepts have a direct impact on the amount of your income tax.
Deductions are expenses that can be subtracted from gross income to determine adjusted gross income. Adjusted gross income is the amount on which income tax is calculated.
Some of the most common deductions in Puerto Rico include:
- Contributions to an individual retirement account (IRA)
- Medical expenses
- Mortgage interest
- Student loan interest
- Donations to charitable organizations, casualty losses, and contributions to educational accounts
Exemptions are amounts that are subtracted from adjusted gross income to determine net income. Net income is the amount on which basic income tax is calculated.
In Puerto Rico, there are two exemptions available for individuals:
- Personal exemption:
- Married: $7,000
- Single taxpayer: $3,500
- Married filing separately: $3,500
- Dependent exemption:
- $2,500 per dependent
- Shared custody or married filing separately: $1,250
- Additional Personal Exemption for Veterans:
- $1,500 per veteran
- If both spouses are veterans: $3,000
Exclusions are amounts that are not considered income for income tax purposes.
Some of the most common exclusions in Puerto Rico include:
- Federal old-age and survivor's social security benefits
- Child support
- Life insurance
- Compensation for injury or illness
- Compensation or indemnity paid to an employee for termination of employment
- Income derived from the cancellation of debts
How deductions, exemptions, and exclusions affect your return
Deductions, exemptions, and exclusions can significantly reduce the amount of your income tax. Therefore, it is important to take the time to understand how these concepts affect your return.
If you are not sure how to apply deductions, exemptions, and exclusions to your return, it is advisable to consult with a tax professional.
Here are some tips for taking advantage of deductions, exemptions, and exclusions:
- Keep records of all your expenses and income.
- Research the deductions, exemptions, and exclusions that are available to you.
- If you have any questions, consult with a tax professional.
Additional information on donations
Donations to charitable organizations are a deductible deduction in Puerto Rico. To be eligible for the deduction, charitable organizations must be registered with the Puerto Rico Department of Treasury.
The amount of the deduction is limited to 25% of the taxpayer's adjusted gross income. For example, if a taxpayer has an adjusted gross income of $100,000, the maximum deduction for donations would be $25,000.
Persons who wish to claim a deduction for donations to non-profit organizations must retain the following documents:
(a) In the case of cash donations, the donation receipt.
(b) In the case of in-kind donations, or donations of goods, the following documents:
(1) A description of the donated good.
(2) The date of the donation.
(3) The fair market value of the donated good.
The fair market value is the price that would be paid for the good in a free transaction between a willing buyer and seller.
Donations to charitable organizations can help reduce your income tax and, at the same time, support causes that you care about.