INDIVIDUAL TAXES
SIGNIFICANT DEVELOPMENTS
There have been no significant tax or regulatory developments in the last year.
TERRITORIALITY AND RESIDENCE
All bona fide residents of Puerto Rico (regardless of citizenship) are subject to Puerto Rico income tax on their worldwide income at graduated rates. Generally, a bona fide resident for income tax purposes is a person residing ina "bona fide" dwelling in Puerto Rico for a period of 183 days or more. Nonresident individuals are taxable only on their income from sources within Puerto Rico and gross incomeeffectivelyconnected with the operation of a trade or business within Puerto Rico.
GROSS INCOME
Employee gross income/In general, all compensation for personal services rendered within Puerto Rico, of whatever kind and in whatever form or place paid, is includable in gross income. If services are paid for with property other than money, the fair market value of the property is included in gross income. Other compensation, such as housing allowances, school allowances, cost-of-living allowances, and tax reimbursements, is also generally includable.
Capital gains and investment income/Resident individuals are subject to tax at the graduated rates on net income from capital gains, interest, dividends, rents, and distributions of partnership profits from sources within and without Puerto Rico's tax
laws accord favorable tax treatment to long-term capital gains versus ordinary income by allowing the excess
of net long-term capital gains over net short-term capital losses to be taxed at a fixed 20% rate. Otherwise, the taxpayer may opt to include this gain as part of gross income in the income tax return for the year in which the gain is recognized and pay a tax in accordance with normal tax rates.
Interest income received from banks and thrift institutions in Puerto Rico, to the extent it exceeds an annual exclusion amount of US$2,000, is eligible for a flat 17% tax in lieu of taxation at graduated rates, provided the payer is authorized in advance to withhold the 17% at source.
Dividends received from Puerto Rico corporations, as well as from foreign corporations that have derived 80% or more of their gross income during the preceding three-year period from Puerto Rican sources, other than dividends paid from certain tax-exempt income, are eligible for a flat 10% tax in lieu of taxation at graduated rated, provided the tax is withheld
at source, as generally required by law.
Nonresidents engaged in a trade or business in Puerto Rico(i.e., performing services within Puerto Rico) are taxed on their net income from Puerto Rico-source capital gains and investment income at same rates as resident individuals.
Nonresident U.S. citizens not engaged in a trade or business in Puerto Rico are subject to Puerto Rico taxes on net income form Puerto Rico-source capital gains, interest, dividends, rents, and distributions of partnership profits at the same rates as resident individuals. Nonresident aliens not engaged in a trade or business within Puerto Rico are subject to Puerto Rican taxes on the gross income from such sources at a flat rate of 29%, or at a higher graduated rate if that rate exceeds the
flat rate of 29%, except that the flat 10% tax rateisapplicable to certain dividends, as described above for resident individuals.
DEDUCTIONS
Business deductions/Resident individuals can deduct, to the extent not reimbursed, ordinary and necessary business expenses in connection with a trade or business, subject to a limitation of US$1,500 or 3% of adjusted gross income (AGI) from salaries, whichever is less. In the case of married persons living together who opt to file separate returns, the limitation would be US$750 or 3% of AGI from salaries, whichever is less, for each. Nonresident individuals can deduct such expenses to the extent they are connected with income that is effectively connected with the operation of a trade or business with Puerto Rico.
Nonbusiness expenses/The law provides an option to itemize deductions or to claim a standard deduction. The standard deduction for 1998 is US$3,000 for married individuals filing a joint return, US$2,000 for single individuals and married individuals living separately, US$2,600 for heads ofhouseholds, or US$1,500 for married individuals filing separate returns.
Resident individuals can deduct as itemized deductions property tax on residential property, fees paid on automobile license plates, casualty losses to the taxpayer's principal residence, and, subject to limitations, mortgage interest, rent paid on a house constituting the taxpayer's principal residence, certain costs for the education of dependents in elementary orsecondary schools (including interest paid on st
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