The Federal Income Taxes Puerto Ricans Pay

Unequal treatment of Puerto Rico under federal law has frequently been justified on the grounds that Puerto Ricans do not pay federal income tax on Puerto Rican based income.  As we’ve stated in previous posts, this argument becomes unconvincing when half of all U.S. citizens have no federal income tax obligations.

But there is another reason to question the unfairness—and often total exclusion—of Puerto Rico’s treatment in federal laws: it turns out that Puerto Ricans are contributors to our nation’s bottom line.

In 2011, Puerto Ricans contributed $3.3 billion to the United States Treasury, approximately as much as Vermont.  In past years, Puerto Rico’s liability has exceeded Vermont’s.  In 2010, for example, Vermont’s tax liability was only $3.2 billion, while Puerto Rico’s was nearly $3.6 billion.

Puerto Ricans are required to pay federal income taxes on income from federal sources outside of Puerto Rico; otherwise they are exempt from federal income taxes.  The wages of Puerto Rican federal judges and other federal workers is fully taxable, for example, as is investment income from U.S. sources, such as dividends from investments of companies located in the fifty states.

All employers and employees in Puerto Rice are still subject to payroll taxes as imposed by the Federal Insurance Contribution Act (FICA), including Social Security, Medicare, and unemployment taxes.  The Social Security and Medicare taxes are withheld from Puerto Ricans’ paychecks just as they are for workers living within the rest of the United States.  The current Social Security tax rate is 6.2%, and the current Medicare tax rate is 1.45%.  Puerto Rican employers must also pay unemployment taxes, the current rate for which is 6.0%.  For low income workers, these taxes are more significant than income taxes because they pay a larger share of their income in payroll taxes than high income people do.  Finally, the federal government taxes Puerto Ricans on any of their investments made in the mainland United States.

Conversely, Puerto Ricans do not receive many of the same tax incentives as their fellow U.S. citizens living in the mainland.  For example, Puerto Rican families must have at least three children before they are eligible to receive the refundable portion of the Child Tax Credit, and no one in Puerto Rico can qualify for the Earned Income Tax Credit, both of which are proven work incentives.  In the states, the Earned Income Tax Credit and the Child Tax Credit were responsible for lifting 9 million working people out of poverty in 2010 and reducing child poverty by 7% in 2014.  Puerto Rico’s working poor cannot access these poverty-fighting measures even though Puerto Rico’s poverty level is higher than that of any state.   For a detailed analysis of Puerto Rico’s tax treatment, see the Joint Committee on Taxation’s “An Overview of the Special Rules Related to Puerto Rico and an Analysis of the Tax and Economic Policy Implications of Recent Legislative Options” (JCX-24-06, June 23, 2006).

Editor’s Update:  In Fiscal Year 2015, Puerto Ricans paid over $3.5 billion into the U.S. Treasury through federal taxes ($3,524,557).  Click here for the 2015 data, broken down by state.  Click here for a related link to the IRS website, listing annual tax collections by state/territory.  Also, we thank Marianne for her observation that military pay is considered Puerto Rico source income for Puerto Ricans and not federally taxed.  We have updated our article to reflect related information contained in IRS Pub 570.

16 Comments

DonRS

Such incredible logic in this report:

“Puerto Rico contributes more in Income Taxes
to the U.S. Treasury than does Vermont!”

Oh really, Puerto Rico has a population of 3.55 million, while Vermont’s population is 0.626 million! So, Vermont pays $5,112 per year per person. Puerto Rico pays $93 per year per person. So, Vermont citizens pay U.S. Income Taxes at a rate 55 times GREATER than that of Pureto Rico citizens.

Puerto Rico citizens receive U.S. Federal benefits which:

“lifted 9 million Puerto Ricans out of
poverty”.

That represents 14.4 times Vermont’s entire population!

How much more DISTORTION and MISREPRESENTATION of Puerto Rico’s U.S. tax burden is in the rest of this OUTRAGEOUS report?

Puerto Rico pays next to NOTHING and wants a BAILOUT from the U.S. Treasury for its PROFLIGATE SPENDING!

Marianne

Read IRS Pub 570. Active duty military pay is considered Puerto Rico source income for Bona Fide residents of PR. It is not federally taxed.

DLI

Reread the article Mr. DonRS The 9 million people referred to as being lifted out of poverty were “in the states”. The sentence you put in quotes is a misquote. Its impossible to have 9 M Puerto Ricans lifted out of poverty as PR currently has only 3.5M inhabitants. Total amount comparisons between VT and PR have to be clarified as most of the VT contribution is individual and corporate tax, while the PR contribution is FICA, SS, Federal pensions and excise taxes.

MSGT JOHN CORREA

I did noticed that “population” was left out of the equation when figuring out payable taxes?

So how could 9 million Puerto Ricans be lifted out of poverty when there are only 3.5 million subjects?

It appears that the real facts were left out? And if Puerto Rico is a “Common Wealth” recepient; why would they need a “bailout?”

MSGT JOHN CORREA
USAF (RET)

Tory

That’s not correct. Military (active duty or not), federal judges and any federal employees’ income are considered income outside of PR and are required to pay both PR tax and Fed tax; regardless if you’re a resident of PR.

tommy

if the people of puerto rico want help from the united states then vote to become a state. this is the only way i feel we should help. there are no more free hand outs

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