While all Puerto Rico residents pay federal taxes, many are not required to pay federal income tax to the IRS on income earned within the territory.
Puerto Rico's unique status as an unincorporated territory of the United States means its residents, who are U.S. citizens, have a distinct relationship with the U.S. federal tax system. Although it is not a U.S. state, it is a U.S. insular area, which shapes its tax obligations.
Understanding Puerto Rico's Federal Tax Obligations
Residents of Puerto Rico contribute to the U.S. federal government through various taxes, even though their federal income tax obligations differ from those in the U.S. states.
Federal Taxes Paid by Puerto Rico Residents
All residents of Puerto Rico are subject to several types of federal taxes. These contributions support federal programs and services. Key federal taxes paid include:
- Social Security and Medicare Taxes (FICA): These payroll taxes are deducted from wages and self-employment income, just as they are in the U.S. states. They fund Social Security and Medicare benefits.
- Federal Excise Taxes: Taxes on certain goods and services, such as gasoline, tobacco, alcohol, and airline tickets, apply in Puerto Rico.
- Federal Unemployment Taxes (FUTA): Employers in Puerto Rico generally pay FUTA taxes to help fund unemployment compensation programs.
- Customs Duties: Taxes on imported goods apply to items brought into Puerto Rico.
- Estate and Gift Taxes: Federal estate and gift taxes may apply to residents of Puerto Rico.
Federal Income Tax Exemption
A significant distinction for most Puerto Rico residents is their exemption from federal income tax on income sourced within the territory. This means that:
- Income earned by individuals from employment or business operations within Puerto Rico is generally not subject to U.S. federal income tax.
- However, if a Puerto Rico resident earns income from sources outside Puerto Rico (e.g., from a U.S. state, or through federal employment), that specific income is typically subject to U.S. federal income tax and must be reported to the IRS.
This unique arrangement means that while Puerto Rico residents are not entirely exempt from federal taxation, their primary income from island sources is not subject to the federal income tax administered by the IRS. Instead, Puerto Rico has its own local tax system that collects income taxes from its residents.
Summary of Federal Tax Payment Status
| Tax Type | Application for Most Puerto Rico Residents (Island-Sourced Income) |
|---|---|
| Federal Income Tax | Generally Exempt |
| Social Security & Medicare Taxes (FICA) | Yes |
| Federal Excise Taxes | Yes |
| Federal Unemployment Taxes (FUTA) | Yes |
| Customs Duties | Yes |
| Federal Estate & Gift Taxes | Yes |
