The latest COVID-19 relief bill continues to make its way through Congress. The proposal is expected to be signed into law by President Biden by mid-March. Among the many provisions in the bill is a change in tax credits for Puerto Rico. If the bill passes, Island residents will be eligible for the Earned Income Tax Credit and for full coverage under the Child Tax Credit.
Most residents of Puerto Rico are not required to pay income tax on wages earned in Puerto Rico. While this is a benefit for some high-income residents, the average household in Puerto Rico, like half of the households in the States, would not have to pay any income tax if otherwise required under Federal law because their income would be low enough to avoid tax liability.
In fact, most families in Puerto Rico would be better off if they filed income taxes, because they would be able to receive U.S. tax credits intended to help low income workers.
The Child Tax Credit
The current Child Tax Credit pays families up to $2,000 for each dependent child age 16 and under. Up to $1,400 of that can be received as a refund even if the parents don’t owe taxes. That is, a family that owes no income tax can still receive a “refund” of as much as $1,400 for each child under 17 living in the family.
President Biden wants to extend this credit in several ways. For one thing, he wants to increase it to $3,600 for children under six years old and $3,000 for older kids. He also wants to make the credit available to parents who earn less than $2,000 per year, a group who are currently not eligible.
In Puerto Rico, families are not eligible for the Child Tax Credit if they have just one or two children, which most families in Puerto Rico do. A third child makes the household eligible for the credit for that child and subsequent children. Families with three children or more can file federal income taxes to receive this credit.
The relief bill would change that, giving full eligibility to residents of Puerto Rico on January 1st, 2022.
In a press release, Gov. Pedro Pierluisi described the extension of the Child Tax Credit to Puerto Rico as a “historic breakthrough in our fight for equal treatment as American citizens” that will “encourage economic growth, support Puerto Rican families, and strengthen our communities.”
The Earned Income Tax Credit
The Earned Income Tax Credit is a refundable credit for families earning up to $56,844 (the income cut off depends on the number of children in the household). For the current tax year, the total tax credit ranges from $543 to $6,728.
Residents of Puerto Rico are not currently eligible for the federal EITC. A local EITC was created in 2019. The territory had a previous EITC from 2006 to 2014, but had to repeal it because of a lack of funds. The Center on Budget and Policy Priorities says that Puerto Rico is not in a position to provide an EITC robust enough to encourage work.
The COVID-19 relief bill plans for the U.S. Treasury to provide a match of the cost of Puerto Rico’s local EITC. In fact, it would cover up to three times the current amount, allowing Puerto Rico to expand its current EITC. The Congressional Budget Office (CBO) estimates that the new policy will result in $600 million/year from the U.S. government, to be paid as wage supplements to Puerto Rico workers.
The EITC has been found, in the states, to help families move out of poverty. Research shows that recipients of this tax credit spend it on things like car repairs, training, and other expenses that help them get and maintain jobs.
Tax credits have been proposed before
Resident Commissioner Jenniffer González has been among the many leaders encouraging the extension of these two tax credits to Puerto Rico in the past. “These proposals are vital for the economic development of Puerto Rico,” she said.
Governor Pierluisi said that the tax changes will bring Puerto Rico “one step closer to achieving equality for our people.”
The Congressional Task Force on Economic Growth in Puerto Rico made both these proposals in 2016, and bills to achieve these changes have been introduced repeatedly.