Forms 1040-U.S. and 1040-PR are federal tax returns.
On Form 1040-U.S., you report the income of individuals subject to federal income tax. This return has several attachments depending on the type of income reported. Residents of Puerto Rico must make special adjustments when, in addition to receiving federally taxable income, they have Puerto Rico income that is not taxed on the federal tax return.
Form 1040-PR is used to report and pay federal self-employment tax and claim the "Child Tax Credit. This form is used when a 1040-U.S. return does not need to be filed and the individual receives self-employment income. The self-employment tax is a social security and Medicare tax primarily for self-employed individuals. An individual cannot file both forms. Instructions on how to complete this form can be found here.
If you are required to file Form 1040-U.S. because you received federally taxable income, the self-employment income is reported on Form 1040-U.S., where the "Child Tax Credit" is also claimed.
Visit our blog about the CTC to learn more.
Obligation to File Form 1040-U.S.
Income from sources outside Puerto Rico
U.S. citizens who are bona fide residents of Puerto Rico must report income received from sources outside of Puerto Rico on a federal tax return. This includes the fifty states of the Union and foreign countries. They must also report on federal return amounts received for services performed in Puerto Rico as an employee or retiree of the United States or any of its agencies. The rules that determine an individual's residency are explained in IRS Publication 570.
Income from sources within Puerto Rico
Section 933 of the federal Internal Revenue Code provides that income derived from Puerto Rico sources by bona fide residents of Puerto Rico for the entire taxable year is exempt from federal income tax (except amounts received for services performed by employees of the United States or any of its agencies).
This section also provides that when there is exempt income from Puerto Rico sources, the deductions and credits properly attributable to the exempt income cannot be claimed. Publication 1321 "Special Instructions for Bona Fide Residents of Puerto Rico" explains in detail the deductions that can be taken on the federal income tax return when you have income subject to federal tax and also have income from sources within Puerto Rico that is not taxed on the federal return.
Change of Residence
If a bona fide resident of Puerto Rico moves from Puerto Rico he is entitled to exclude income earned in Puerto Rico before the move (except amounts received for services performed by employees of the United States or any of its agencies), provided he meets the following: (1) is a citizen of the United States, (2) was a resident of Puerto Rico for two years before the move, (3) ceases to be a resident of Puerto Rico in the year of the move.
Rules for Determining Sources of Income
There are rules to determine the source of your income. In the case of bona fide residents of Puerto Rico, these rules are important because they determine what income to report on the federal income tax return and what income can be excluded by section 933. The following is a list of the most common rules:
Sources of Income:
- Wages and any other compensation - where the services are rendered
- Pension distribution
- Pension distributions attributable to the plan contribution. - The place of service is used to determine the source of income for pension distributions.
- Pension distributions attributable to investment growth - The location where the pension plan trust is established is used to determine the source of investment growth income.
- The source of income from U.S. Social Security Benefits.
- Interest - The residence of the payer determines the source of interest income. Residents of Puerto Rico, who receive interest from U.S. bank accounts, have a U.S. source of income.
- Dividends - Where the corporation is created or organized.
- Sale of Personal Property and Stock - Seller's Tax Domicile. Personal property includes Stocks and Bonds. If a bona fide resident of Puerto Rico sells personal property, the gain (or loss) from the sale is considered a Puerto Rico source. There are special rules for reporting these sales. Refer to Publication 570.
- Rental income - Location of the property.
- Sale of real estate - Location of the property.
Double Taxation Avoidance Credit
Bonafide residents of Puerto Rico required to file a federal return must also file a return with the Treasury Department to report all of their income. The Foreign Tax Credit, Form 1116, is used to avoid double taxation.