It’s a common misconception that Puerto Ricans don’t pay federal taxes. People living on the Island do pay several types of federal taxes, although not all the same ones as U.S. residents on the mainland.
Federal taxes Puerto Ricans pay
- Federal Payroll Taxes: This includes Social Security, Medicare, and Federal Unemployment Tax (FUTA). These are the same payroll taxes that everyone in the US pays. However, residents of Puerto Rico do not receive the same benefits.
- Federal Excise Taxes: These are taxes on specific goods, like alcohol and tobacco.
- Customs Duties: These are taxes on goods imported into Puerto Rico.
- Federal Income Tax (in some cases): While many Puerto Ricans don’t pay federal income tax due to income levels and how Puerto Rican income is treated, some do:
- Federal government employees in Puerto Rico
- Those with income from outside Puerto Rico
- Members of the US military
Federal taxes Puerto Rico residents do not pay
Most Puerto Ricans do not pay federal income tax on income earned in Puerto Rico. This is the key difference. The reason for this is that the federal government wanted Puerto Rico to be able to charge local taxes as a territory, but was concerned that residents of Puerto Rico would not be able to afford to pay both nations and territorial income tax. They made wages earned in Puerto Rico exempt from U.S. income taxes.
Tax credits Puerto Ricans receive
Since 2021, the Child Tax Credit has been available in Puerto Rico for families with at least one child. Prior to 2021, families were not eligible for this credit if they had fewer than three children. Why? We have no idea. However, families with three children are rare in Puerto Rico, so that rule meant that very few people living in Puerto Rico received the Child Tax Credit.
Congress extended the Child Tax Credit to Puerto Rico in 2021, but the new Congress or a future Congress can take it away again. Even if they don’t have a filing requirement, Puerto Rico residents can file a federal tax return to claim the Child Tax Credit for tax year 2024.
Puerto Ricans do not receive the federal Earned Income Tax Credit, but the territory does sometimes have a local EITC which is partially refunded by the federal government. It is not equivalent to the EIC in the states.
How would statehood affect taxation?
In addition to federal taxes, Puerto Rico residents pay taxes to the territory government, including income tax, sales tax (the highest in the nation), and property taxes. These taxes could and should be reduced when Puerto Rico becomes a state.
However, even if that does not happen, most families in Puerto Rico would be better off paying federal taxes and receiving all the federal tax credits. Like just about half of the people living in the states, the average family in Puerto Rico doesn’t earn enough to pay anything into the federal tax system after the tax credits.
How would independence affect taxation?
It depends on citizenship. U.S. citizens must file federal income taxes if they are living in a foreign country, which is what Puerto Rico would be under independence. If citizens of Puerto Rico do not have U.S. citizenship, they generally would not be required to pay federal income tax.
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