House Bill 1544 was signed by Puerto Rico’s governor last month and enacted as Act 257-2018.  The Act introduces various amendments to the 2011 Puerto Rico Internal Revenue Code, as amended, with several of the amendments related to individuals: i.e., tax rates, loans, indemnity payments, distributions from retirement accounts, and interest.¹    

Several of the measures aim to put more money back in people’s pockets, especially for lower-to-middle-income earners and business owners, with the overall effect of potentially increasing their disposable income.  However, the impact for each individual needs to be determined in light of his or her particular situation.

In cases of assignments to Puerto Rico where assignees are subject to Puerto Rico’s tax rules, and for assignees working outside Puerto Rico but still subject to Puerto Rico’s tax rules, international assignment cost projections and budgeting should reflect the changes described in this newsletter.  Where appropriate, adjustments to gross-up packages and withholding taxes need to be considered.

Effective for taxable years after December 31, 2018, the following will be excluded from an individual’s taxable gross income:

• Earned Income Tax Credit (EITC).
• Loans to employees or independent contractors and qualified payments to help with managing disasters declared by the governor of Puerto Rico.
• Payments as compensation for injury or disease (this includes mental suffering). Payments for mental suffering were previously included in gross income.
• Distributions from an employees’ trust or individual retirement account in connection with a declared disaster. 

There are changes to the rules regarding exemptions from gross income:

• The exemption allowable for interest earned on deposits held at cooperatives, savings associations, commercial banks, and mutual funds is reduced to $100 from $2,000.  The exemption for interest on certain securities and mortgages was eliminated.

• A New Earned Income Tax Credit has been introduced that ranges from $300 to $2,000, which will be granted to qualifying Puerto Rico resident taxpayers with earned income.  Generally, the credit varies depending on marital status, number of dependents, and adjusted gross income.
• Adjustment to regular tax rates for tax year 2019 and going forward: the tax is 95 percent of the total tax at current rates; thus a 5-percent relief is granted.  The tax tables remain the same as in 2018, and one’s tax liability is calculated as it would normally be, but in effect a credit of 5 percent is allowed, reducing the 100-percent liability to an actual 95-percent liability that is owed.  (For additional information on Adjusted Alternative Basic Income Tax (ABT) rates and self-employed income rates, see Table 1 at the end of this newsletter.)
• Certain Individual Retirement Accounts (“IRA”) distributions after December 31, 2018, will be subject to a 10-percent withholding at source, a reduction from the current rate of 17 percent.
• The filing requirement for the income tax return will be triggered when gross income exceeds the exemptions allowed under the Code (gross income after exemptions more than $0) or if the net income subject to alternative basic tax is $25,000 or more.
• A foreign tax credit for income taxes paid to states of the United States is allowed.
• Individuals with a net loss in a trade or business for three consecutive taxable years will be allowed 100-percent net operating loss carryover instead of the current 50-percent limitation.
• The automatic extension of time to file income tax returns was extended from a three-month period to six months.
• Contributions to Health Savings Account will not be allowed as deductions.   

Adjusted Alternative Basic Income Tax (ABT) rates are adjusted as shown below. 

Net income subject to ABT Tax

In excess of $25,000 but not more than $50,000: 1%

In excess of $50,000 but not more than $75,000: 3%

In excess of $75,000 but not more than $150,000: 5%

In excess of $150,000 but not more than $250,000: 10%

In excess of $250,000: 24%

Self-employed individuals whose income is derived substantially from rendering services may elect to pay an optional tax on gross income instead of the income tax otherwise imposed by the Code on net income, as follows:

Not greater than $100,000: 6%

In excess of $100,000 but not more than $200,000: 10%

In excess of $200,000 but not more than $300,000: 13%

In excess of $300,000 but not more than $400,000: 15%

In excess of $400,000 but not more than $500,000: 17%

In excess of $500,000: 20%

* The Secretary of Treasury has discretion to postpone its effective date for taxable years after December 31, 2019.

1  Find Ley Núm. 257 10 de diciembre de 2018 (P. de la C. 1544) on the website of the Oficina de Servicios Legislativos by clicking here.

Or search under “2018” at this link.  

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The information contained in this newsletter was submitted by the KPMG International member firm in Puerto Rico.