Puerto Rico is a territory of the United States. Compared with the States, however, it is struggling economically. Forty-four percent of the overall population lives in poverty, and the proportion rises to 57% for children. For the States as a whole, the average poverty rate is 14.6%. The poorest State, Mississippi, has a poverty rate of 21.5%, still less than half that of Puerto Rico.
The reasons for the high poverty rate in Puerto Rico are complex, but one thing is clear: Even though Puerto Rico’s need is demonstrably greater than that of any State, federal funding for relief for the needy is lower in Puerto Rico than in the States.
One example is the Child Tax Credit (CTC). This is a refundable credit — that is, families receive it as a “refund” on their taxes even if they don’t earn enough to pay any income tax. The CTC is given to U.S. households with children. Except in Puerto Rico, where families have only been eligible beginning with their third child.
Puerto Rico has the lowest birth rate in the United States, so 89% of families on the Island have not been eligible for this credit – one they would have been able to receive if they lived in a State.
Puerto Rico is now eligible for the child tax credit
The American Rescue Plan corrected the inequality in the Child Tax Credit. It also expanded the Earned Income Tax Credit. According to the Center on Budget and Policy Priorities, these two changes could lift many families in Puerto Rico out of poverty.
A study by the Youth Development Institute found that 97% of families on the Island will now be eligible for the Child Tax Credit. For families currently living in poverty, the credit could increase their income for this year by 53%.
The elimination of the three-child rule is permanent. However, there is also a temporary change in the rulings for all recipients, including those living in States. Previously, the credit was restricted to people who earned $2,500 or more per year, and only part of the credit was refundable That meant that the poorest families could not receive the credit, and those with higher incomes got larger payments. This requirement has been removed for the 2021 tax year.
The Earned Income Credit
The EITC has been shown to reduce poverty in the States. It is a payment to working families provided as an income tax refund. Studies have shown that families that receive the EITC typically spend their refunds on things that improve their earning capacity, such as auto repairs or additional training for work.
Puerto Rico was specifically excluded from EITC, in spite of numerous efforts to extend this credit to the territory. A local version was created, but it was small in scope. The American Rescue Plan provided federal funding to increase the amount of the local EITC payments, though the federal EITC provides less funding to recipients in Puerto Rico than they would receive if Puerto Rico was treated as a State.
Espacios Abiertos found in a new study that the expansion will nearly double the number of recipients on the Island. 55,000 households, they found, will be above the poverty level for the year, thanks to the EITC.
How will families receive the payments?
Wages earned in Puerto Rico, apart from money earned from jobs with the federal government, are not subject to federal income tax. Most Puerto Ricans have not had to file federal income tax returns. However, the Child Tax Credit, as a federal program, will only be received by individuals who file federal income tax returns.
The EITC, on the other hand, will be available only by filing a Puerto Rico tax return. In order to receive both credits, taxpayers in Puerto Rico will have to file both federal and local tax returns. These are two different forms sent to two different offices, and for many families, this will be the first time they have had to file both.
The government is undertaking an educational program to make people aware of this opportunity.