How to help taxpayers displaced by Hurricane Maria

Many Puerto Ricans were temporarily or permanently displaced by the natural disaster. Here are the tax implications.

By: Russell Schneidewind  /  March 13, 2018

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Hurricane Maria uprooted hundreds of thousands Puerto Ricans. Many have moved stateside, and some will need to file a U.S. federal return and a Puerto Rican return for the first time.

Many people may also need to file a state income tax return with the state where they live depending on that state’s residency rules.

To best serve these taxpayers, tax professionals will need to make the following determinations.

1. Is the taxpayer a U.S. resident under the bona fide resident test?

Determining where a taxpayer is a U.S. resident alien requires looking at the tax home, connections, and time the taxpayer spent in the U.S. and in Puerto Rico.

Usually, taxpayers are residents of Puerto Rico if:

  • Their main place of employment is in Puerto Rico, and
  • Their permanent home or family and other personal connections are in Puerto Rico, and
  • They were:
    • In Puerto Rico for at least 183 days during the year, or
    • In Puerto Rico for at least 549 days total during the year and the prior two years, or
    • In the U.S. for 90 days or less during the tax year, or
    • In Puerto Rico longer than in the U.S., and earn $3,000 or less in the U.S.

If the taxpayer doesn’t meet this test, the person will generally not be considered a bona fide resident of Puerto Rico. Special rules apply to military taxpayers and noresident aliens.

This determination includes a special rule for people affected by Hurricane Maria and Hurricane Irma

To determine these taxpayers’ presence in the U.S., don’t include any day during a 14-day period in which a major disaster occurs in Puerto Rico and the Federal Emergency Management Agency (FEMA) declares a major disaster.

The IRS extended the normal 14-day period to 268 days (Sept. 6, 2017, to May 31, 2018), meaning that people affected by Hurricanes Maria and Irma are still considered bona fide residents of Puerto Rico even if they spent up to 268 days in the mainland U.S.

2. Do the “year of move” rules affect the taxpayer?

People who permanently moved from Puerto Rico to the U.S. are considered part-year residents of Puerto Rico for 2017. Under the “year of move” rules, if a taxpayer isn’t a bona fide resident of Puerto Rico under the tests described above, then he or she will be considered a resident of Puerto Rico before the move to the U.S., if the taxpayer is:

  • A U.S. citizen,
  • A resident of Puerto Rico for the two years before moving to the U.S. mainland, and
  • Now a resident of the U.S.

3. What is the source of the taxpayer’s income?

Generally, the source of income for wages is the location where the taxpayer performs services, regardless of the employer’s location. Different rules apply for income other than wages. Check Publication 570, Chapter 2, for more information.

4. What forms are required?

In most cases, people affected by Hurricane Maria must file a tax return with the U.S. and Puerto Rico. The income they should report on each return will be determined by their residency under the above rules.

Full-year Puerto Rico residents need to file U.S. and Puerto Rico returns, but report all income on their Puerto Rico return.

If taxpayers are residents of Puerto Rico for the entire year, they should file a Puerto Rico tax return with the Hacienda on Form 482, and they must follow Puerto Rico filing procedures. This return reports taxpayers’ worldwide income, and they can claim a tax credit for taxes they paid to the U.S.

If these taxpayers have income from anywhere that is not Puerto Rico, they will also file a U.S. Form 1040 reporting all their worldwide income, except for Puerto Rico income and any directly associated deductions (including self-employment tax) and credits.

Some taxpayers can claim the additional child tax credit with Form 1040-SS or Form 1040-PR.

Part-year Puerto Rico residents file U.S. and Puerto Rico returns, but don’t report Puerto Rico income before the move on the U.S. return.

Part-year residents must report Puerto Rico income after the date of the move on Form 1040, and they can claim the foreign tax credit on Form 1116 for the taxes they paid to Puerto Rico for the remainder of the year. Some part-year residents also must file Form 8898 with the IRS if they have worldwide income and meet other criteria.

If taxpayers paid moving expenses in 2017 and can claim moving expenses under the normal rules, they should also file Form 3903.

If taxpayers are self-employed in Puerto Rico, even if they don’t have to file Form 1040, they must file Form 1040-SS or 1040-PR.

Taxpayers who aren’t residents of Puerto Rico but have Puerto Rico-sourced income should file both returns, but report Puerto Rico income only on their Hacienda return.

These taxpayers will also need to file a U.S. Form 1040 reporting all their worldwide income, including Puerto Rico income, and they can claim the foreign tax credit on Form 1116 for any taxes they paid to Puerto Rico.

5. Do special rules apply to the returns?

Taxpayers who meet the general filing threshold will need to file Form 1040. Some taxpayers, such as Puerto Rico residents or part-year residents who are excluding Puerto Rico income from taxable income on Form 1040, use a modified filing threshold. The modified filing threshold is determined by looking at the amount of income subject to U.S. tax, total income from all sources, and the taxpayer’s standard deduction and personal exemption(s).

The Form 1040 (for tax year 2017) is due on the same date as applies to other U.S. taxpayers (April 17 for 2017 returns). Taxpayers can request an automatic six-month extension by filing Form 4868.

Send Forms 1040 without tax payments to:

Department of the Treasury

Internal Revenue Service

Austin, TX 73301-0215

Send Forms 1040 with tax payments to:

Internal Revenue Service

PO Box 1303

Charlotte, NC 28201-1303

Note these special rules for Puerto Rico residents and disaster relief

  • The Earned Income Credit (EIC) The EIC isn’t available for an individual and qualifying child whose main home is in Puerto Rico, because this isn’t considered “in the U.S.” for EIC purposes.
  • Deductible IRA contributions – Excluded Puerto Rico income isn’t included when calculating deductible IRA contributions.
  • Casualty and theft deductions – There are special rules for deducting casualties and theft due to disaster on Form 4684.
  • Retirement plan distributions Up to $100,000 in retirement plan distributions can be excluded from income. Any amounts over $100,000 will be taxed over the next three years, instead of in the year of distribution. Form 8915B is designated for this purpose.
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Author Name

Russell Schneidewind

Russell Schneidewind is a senior tax research analyst at The Tax Institute. Russell leads a research team focused on international taxpayer issues, such as foreign inbound and outbound business transactions, foreign investment rules, foreign real estate transactions, and foreign employment.

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