IRS Has Tax Refunds for Puerto Ricans

November 25, 2004
Copyright © 2004 THE PUERTO RICO HERALD. All Rights Reserved.

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IRS Has Tax Refunds for Puerto Ricans

The U.S. Internal Revenue Service recently disclosed here that tax refund checks for 2003 it tried to mail to over 700 Puerto Ricans have been returned.

The refunds demonstrate that residents of Puerto Rico are not exempt from federal income tax requirements as claimed by the territory’s "commonwealth" political party and is often reported.

The federal government has full power to tax Commonwealth residents and has exercised the power several times. It has not taxed residents on their Puerto Rican income but does tax them on their income from the States and the District of Columbia. Refunds can come from that taxation of income from the States (and DC).

Bequests are treated similarly: no taxation of estate assets in Puerto Rico but taxation of assets in the States.

Thresholds of amounts of income and estate assets that must be reached before tax is due mean that most residents of Puerto Rico with income from the States and most Puerto Rican estates with assets in the States do not have taxes to pay, however.

Puerto Rican income is, however, subject to the separate taxation to support the Social Security and Medicare programs. Hundreds of thousands of low and middle income Puerto Rican workers with three or more children are eligible for refunds of these payroll taxes.

To get the refunds, the workers have to file a federal income tax form. They do not have to pay income taxes, however, unless they have substantial income from the States. (Even if the federal government were to tax Puerto Rican income for income tax purposes, however, the low income workers who now have to pay Commonwealth income taxes would not owe federal income taxes because their incomes are too low.)

President Bush’s budget for fiscal year 2005, which began October 1st, proposed ending the payroll tax refunds in Puerto Rico but not the States. The proposal was contained in a package of measures that was not acted on by the Congress this year but it may be if Bush resubmits it in his fiscal year 2006 budget.

The 2006 budget is due to be transmitted to the 109th Congress in February. Supporters of the refunds to low-income workers in Puerto Rico are concerned that the proposal to end the refunds in the Commonwealth could be made again because it would give the federal government $2.1 billion over ten years by denying that amount to Puerto Ricans.

The refund to middle income workers in Puerto Rico is another reason that the proposal may be addressed. In the States, middle income workers get an income tax credit instead of payroll tax refunds. The dollar value of the credits in the States and the refunds in Puerto Rico is the same, however.

Puerto Rico’s newly elected resident commissioner in the U.S., Luis Fortuno (statehood/R), has pledged to fight Bush’s proposal if it is made again.

Bush’s proposal was also opposed this year by Senator John Kerry (MA), the Democratic presidential candidate. Kerry and retiring Senator Bob Graham (D-FL) additionally proposed extending the payroll tax refunds in Puerto Rico to low income workers in Puerto Rico with one child or two children. In the States, workers with any number of children can take income tax credits or receive payroll tax refunds.

Current Resident Commissioner Anibal Acevedo Vila ("commonwealth/D), who appears to have a very slight lead in the counting of ballots cast for governor November 2nd, and Governor Sila Calderon ("commonwealth"/no national party) have been cool to the proposal to extend the refunds to low-income workers in Puerto Rico with one child or two children. They were also slow to oppose Bush’s proposal to end the current refunds in the territory.

The requirement for Puerto Ricans to file federal income tax forms to obtain the refunds may be the reason for their opposition. It contradicts their claim regarding the Commonwealth’s "tax autonomy" that the federal government cannot impose income tax requirements on residents of Puerto Rico.

In fact, the Commonwealth’s tax autonomy is similar to that of the States and other territories. It is merely that the Commonwealth can impose local taxes. It provides no shield from federal taxation.

Acevedo’s opponent in the race for governor, Pedro Rossello (statehood/D), was an early and strong supporter of the payroll tax refunds being extended to low-income workers in the Commonwealth with any number of children.

Federal excise taxes are also imposed on certain products in the Commonwealth. Some are used to pay for services, such as environmental protection.

In the case of Puerto Rican rum, most -- but not all -- collections of the tax are granted to the territorial government to subsidize its operations. The federal government also grants the territorial government most excise taxes collected on foreign rum imported into the country.

The "Washington Update" appears weekly.

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