4696 — 1025 Publ 4696 (PDF)

VITA/TCE Puerto Rico Resource Guide

2025 RETURNS Volunteer Income Tax Assistance (VITA) / Tax Counseling for the Elderly (TCE)

Take your VITA/TCE training online at apps.irs.gov/app/vita . Link to the Practice Lab to gain experience using tax software and take the certification test online, with immediate scoring and feedback.

Publication 4696 (Rev. 10-2025) Catalog Number 20279N Department of the Treasury Internal Revenue Service www.irs.gov

How to Get Technical Updates?

Updates to the volunteer training materials will be contained in Publication 4491-X, VITA/TCE Training Supplement. The most recent version can be downloaded at: www.irs.gov/pub/irs-pdf/p4491x.pdf

Volunteer Standards of Conduct

Volunteer Income Tax Assistance / Tax Counseling for the Elderly (VITA/TCE)

The mission of the VITA/TCE return preparation programs is to assist eligible taxpayers in satisfying their tax responsibilities by providing free tax return preparation. To establish the greatest degree of public trust, volunteers are required to maintain the highest standards of ethical conduct and provide quality service.

Annually all VITA/TCE volunteers must pass the Volunteer Standards of Conduct (VSC) certification test and agree that they will adhere to the VSC by signing and dating Form 13615, Volunteer Standards of Conduct Agreement – VITA/TCE Programs (www.irs.gov/pub/irs-pdf/f13615.pdf), prior to volunteering at a VITA/TCE site. In addition, return preparers, quality reviewers, coordinators, client facilitators, and tax law instructors must certify in Intake/Interview and Quality Review. Volunteers who answer tax law questions, instruct tax law classes, prepare or correct tax returns, or conduct quality reviews of completed returns must also certify in tax law prior to signing the form. Form 13615 is not valid until the sponsoring partner’s approving official (coordinator, instructor, administrator, etc.) or IRS contact confirms the volunteer’s identity, name, and address, using government-issued photo identification, and signs and dates the form. Volunteers’ names and addresses in Link & Learn taxes must match their government-issued photo identification. Advise volunteers to update their My Account page in Link & Learn Taxes with their valid name and address.

As a volunteer in the VITA/TCE programs, you must adhere to the following Volunteer Standards of Conduct:

VSC #1 - Follow all Quality Site Requirements (QSR).

VSC #2 - Do not accept payment, ask for donations, or accept refund payments for federal or state tax return preparation from customers.

VSC #3 - Do not solicit business from taxpayers you help or use the information you gained about them (taxpayer information) for any direct or indirect personal benefit for yourself, any other specific individual or organization.

VSC #4 - Do not knowingly prepare false returns.

VSC #5 - Do not engage in criminal, infamous, dishonest, notoriously disgraceful conduct, or any other conduct considered to have a negative effect on the VITA/TCE programs.

VSC #6 - Treat all taxpayers in a professional, courteous, and respectful manner.

Failure to comply with these standards could result in, but is not limited to, the following:

Removal from all VITA/TCE programs
Inclusion in the IRS Volunteer Registry to bar future VITA/TCE activity indefinitely
Deactivation of your sponsoring partner’s site VITA/TCE electronic filing identification number (EFIN)
Removal of all IRS products, supplies, loaned equipment, and taxpayer information from your site
Termination of your sponsoring organization’s partnership with the IRS
Termination of grant funds from the IRS to your sponsoring partner and
Referral of your conduct for potential TIGTA and criminal investigations

TaxSlayer® is a copyrighted software program owned by Rhodes Computer Services. All screen shots that appear throughout the official Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) training materials are used with the permission of Rhodes Computer Services.

Confidentiality Statement: All tax information you receive from taxpayers in your volunteer capacity is strictly confidential and should not, under any circumstances, be disclosed to unauthorized individuals.

4696 Table of Contents

How to Use this Guide �� 1

Are You Ready to Get Started? �� 1

Quality and Tax Alerts for IRS Volunteer Programs �� 2

The Five Step Interview Process �� 2

Determining Puerto Rico Residency Status for U.S. Tax Purposes �� 4

Level I

Who Must File �� 5

Source Rules for Income �� 7

Standard Deduction �� 8

Child Tax Credit and Additional Child Tax Credit �� 9

Level II

Bona Fide Residents of Puerto Rico �� 12

Adjustments to Income �� 15

Itemized Deductions �� 17

Social Security Benefits �� 19

Foreign Tax Credit �� 21

Other Taxes �� 26

TaxSlayer Software Hints

Starting – New Return Flow Chart �� 28

TaxSlayer – Additional Child Tax Credit (ACTC) �� 33

TaxSlayer – Adjustments to Income �� 41

TaxSlayer – Deductions �� 42

TaxSlayer – Foreign Tax Credit – Form 1116 �� 44

Page Intentionally Left Blank

How to Use this Guide

This publication is designed to assist you in preparing an accurate paper or software-prepared return using TaxSlayer. It is divided into three major sections—Level I, Level II, and Software Hints.

Level I section contains tax law in the form of decision trees, charts, and interview tips. Level II section has advanced tax law topics. The TaxSlayer section has step-by-step procedures for electronic tax return preparation using computer software.

The Link & Learn Taxes Puerto Rico course is divided into Level I and Level II . For volunteers assisting taxpayers in Puerto Rico, volunteers must first pass the regular Basic or Advanced VITA/TCE test . Next they should proceed to the Level I of the Puerto Rico test. Students can stop there or proceed to the Level I I of the Puerto Rico exam. Each course must be passed with a minimum score of 80% for certification.

TaxSlayer is a copyrighted software program developed by a family owned company with over 50 years in the tax preparation business. The screen shots in this publication should not be extracted, copied, or distributed without written approval of the IRS.

Some of the software screen shots in this guide may not be updated for current tax law. Generally, the screens depicted mirror the current year’s version. However, there are some instances where there are embedded references to earlier tax years.

Are You Ready to Get Started?

Complete this assessment by entering a check mark in the box for Yes . Resolve all No (unchecked boxes) responses with your site coordinator before assisting taxpayers.

1. Have you signed:

a. The Volunteer Agreement/Standards of Conduct?

b. The Property Loan Agreement (if applicable)?

2. Do you know the following:

a. Your duties at the site?

b. Site contacts (emergency, reporting delays, technical issues, etc.)?

c. When you are expected at the site?

d. Your site identification number (SIDN)?

3. Do you have your:

a. VITA/TCE Volunteer Resource Guide (Publication 4012)?

b. Your Federal Income Tax (Publication 17)?

c. Name badge (Form 14509, Volunteer ID Insert) depicting your certification level?

d. VITA/TCE Puerto Rico Resource Guide (Publication 4696)?

4. Are the following items at the site:

a. Intake/Interview & Quality Review Sheet (Form 13614-C)?

b. Overprinted return forms, schedules, worksheets, etc.?

Quality and Tax Alerts for IRS Volunteer Programs

For the latest volunteer tax law updates and other helpful tips throughout the filing season you can go to www.irs.gov —keyword: Volunteer Tax Alerts . Your site coordinator should share these messages with you. Also, for more information you can visit the Partner and Volunteer Resource Center.

The Five Step Interview Process

Interview Steps	Goal	Suggested Actions
1	Cultivate a comfortable environment and put the taxpayer at ease.	• Introduce yourself; engage in small talk (discuss the weather, difficulty in locating the site, apologize if long wait, etc.). • Explain the tax return preparation process–the interview, how the information they provide will assist you in determining whether they must file a return, their eligibility for tax credits, etc. • Allow the taxpayers to share any expectations, needs, and/or concerns by asking whether they have questions before beginning and encouraging them to ask questions throughout the process.
2	Use active listening skills	• Watch for nonverbal listening cues (tone of voice, body language, eye contact, etc.). • Listen, then respond by restating, paraphrasing, and/or encouraging further dialogue.
3	Review responses to the intake questions (Form 13614-C or equivalent).	• Confirm all the information completed by the taxpayer on the intake form responses to the (Form 13614-C or approved alternative) • Review all the information and documents presented by the taxpayer including W-2s, 1099s, 1098s, etc. • Scan the information for completeness.
4	Working with the taxpayer, complete the critical intake questions – page 2-3 of Form 13614-C	• Don’t assume anything use the interview tips and decision trees in Publication 4012 and Publication 4696 to confirm: ◦Marital status (filing status) ◦Eligibility for Child Tax Credit
5	Advise taxpayer of the next steps	• Restate the tax return preparation process, quality review procedures, signature and record keeping requirements, etc.

Determining Puerto Rico Residency Status for U.S. Tax Purposes

1 Your tax home is your regular or main place of business, employment, or post of duty regardless of where you maintain your family home. If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work.

2 You will be considered to have a closer connection to Puerto Rico than to the United States or to a foreign country if you maintained more significant contacts with Puerto Rico than with the United States or foreign country. In determining if you have maintained more significant contacts with Puerto Rico review the facts and circumstances to be considered in Publication 570, Tax Guide for Individuals With Income From U.S. Possessions.

Who Must File

Chart A: Who Must File?

Question	Answer
Were you a bona fide resident of Puerto Rico for at least part of the tax year?	• Yes: Continue • No: Consult Publication 4012 Tab A
Do you have any of the following income: • Income from sources outside of Puerto Rico? • Income as a civilian or military employee of the U.S. government? • Income from pensions as a civilian or military employee of the U.S. government? • Taxable Social Security benefits?	• Yes: Go to Chart B: Who Must File – Worksheet for Bona Fide Residents of Puerto Rico with Excluded Income to determine if a U.S. return must be filed. • No: Continue
Do you have any of the following income: • Net earnings from self-employment of at least $400? • Wages of $108.28 or more from a church or qualified church-controlled organization that is excluded from employer Social Security and Medicare taxes? • Tips you did not report to your employer or wages you received from an employer who did not withhold Social Security and Medicare taxes?	• Yes: File Form 1040 SS, U.S. Self-employment Tax Return. • No: You are not required to file a Federal Tax Return. However, Use Chart C to determine if you should file a tax return to claim a refund and/or any refundable credits.

Complete the worksheet (Chart B: Who Must File – Worksheet for Bona Fide Residents of Puerto Rico with Excluded Income) on the next page to determine if a U.S. return must be filed. After completing the worksheet, a return must be filed if the taxpayer’s gross income subject to U.S. tax, line 2a, is equal to or more than line 2d of the worksheet. If the taxpayer is married filing a separate return, a return must be filed if the taxpayer’s gross income subject to U.S. tax is equal to or more than $5.

Residents of Puerto Rico

If you are a resident of Puerto Rico for the entire year, gross income does not include income from sources within Puerto Rico, except for amounts received as an employee of the United States or a U.S. agency. Active duty members of the U.S. Armed Forces who claim Puerto Rico as their legal residence are employees of the U.S. Government. They are required to file a U.S. income tax return and declare the income they receive for their services rendered in Puerto Rico, the United States, or foreign countries in compliance with their military orders. If you receive income from Puerto Rico sources that is not subject to U.S. tax, you must reduce your standard deduction. As a result, the amount of income you must have before you are required to file a U.S. income tax return is lower that the applicable amount.

This computation (allowable portion of standard deduction), must be made before you can determine if you must file a U.S. tax return, because the minimum income level at which you must file a return is based, in part, on the standard deduction for your particular filing status.

Chart B: Who Must File – Worksheet for Bona Fide Residents of Puerto Rico with Excluded Income (under IRC Section 933)

1. Enter Standard Deduction ��

If your filing status is:

Single under 65 enter $15,750

65 or older enter $17,750

Married filing jointly both under 65 enter $31,500

one 65 or older enter $33,100

both 65 or older enter $34,700

Head of household under 65 enter $23,625

65 or older enter $25,625

Qualifying Surviving spouse with dependent child

under 65 enter $31,500

65 or older enter $33,100

Married filing separately See note after line 2d below

If someone can claim you as a dependent, enter amount from the Standard Deduction Worksheet for Dependents in Instructions for Form 1040 or Form 1040SR, as applicable.

2. Allowable portion of Standard Deduction

a. Gross Income subject to U.S. tax (include taxable social security benefits)��

b. Total gross income from all sources (including excluded P.R. Income)��

c. Divide line 2a by line 2b��

d. Multiply Standard Deduction (line 1) by line 2c��

You must file a return if your gross income subject to U.S. tax (line 2a) is equal to or more than line 2d. If you are married filing a separate return, you must file a return if your gross income subject to U.S. tax is equal to or more than $5.

Chart C: Should you file a tax return?

Source Rules for Income

The origin of the income determines the source either the U.S., Puerto Rico, or foreign.

• U.S. citizens and residents are taxed by the United States on their worldwide income, no matter where it originates.

• The source of income is very important to nonresident aliens because they are taxed by the U.S. only on U.S. source income.

• Source rules are also used to determine the foreign tax credit.

The following table will help you to decide the source of income.

Table 1: Determining Source of Income

Item of Income	Factor Determining Source
Salaries and other compensation	Where the service is performed*****
U.S. Social Security Benefits	U.S. Source income by definition (IRC Sec. 861)******
Pensions	Contributions: Where services were performed that earned the pensions. Investment earnings: Where pension trust is located.
Interest	Residence of the payer
Dividends	Location of the payer
Rents	Location of the property
Royalties: Natural resources, Patents, copyrights,etc.	Natural resources: Location of property. Patents, copyrights, etc.: Where the property is used.
Sale of stock or other nondepreciable personal property	Seller’s tax home (but see Special Rules for Gains From Dispositions of Certain Property in Publication 570 for exceptions)*******
Sale of real property	Location of the property
Capital Gain Distribution paid by U.S.	Residence of shareholder
Unemployment Compensation.	For U.S. income tax purposes, generally the source of income is where the taxpayer performed the underlying services

*Special Rules: Active Duty members of the U.S. Armed Forces: The source of military service pay, in compliance with military orders, for members of the armed forces who claim Puerto Rico as their legal residence is Puerto Rico even if the services are performed in the United States, another territory or a foreign country. However, if they are not a bona fide resident of Puerto Rico, their military service pay will be income from the United States even if they perform services in Puerto Rico.

***** Bona Fide Residents of Puerto Rico should use Publication 915, Social Security Benefits and Equivalent Railroad Retirement Benefits, to determine how much of their Social Security Benefits may be taxable.

***** There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt instruments, diamonds, and gold) owned by a U.S. citizen or resident alien prior to becoming a bona fide resident of a territory. For additional details see Publication 570.

Standard Deduction

Allocation of the Standard Deduction When the Taxpayer Has Excluded Puerto Rico Source Income

The standard deduction is a dollar amount that reduces the amount of income on which the taxpayer is taxed.

The standard deduction depends on:

• the taxpayer’s filing status,

• whether the taxpayer (or the taxpayer’s spouse) is age 65 or older and/or blind, and

• whether the taxpayer can be claimed as a dependent on another taxpayer’s return.

For those taxpayers who do not itemize, the standard deduction must be apportioned on the ratio of gross income subject to U.S. federal tax to gross income from all sources. This adjustment must be made prior to entering the standard deduction on Form 1040, line 12e or line 12e of Form 1040SR.

Filing Status Standard Deduction

Single $15,750

Married filing jointly, or Qualifying Surviving Spouse $31,500

Married filing separately $15,750

Head of household $23,625

If the taxpayer is 65 or older at the end of the year and/or blind, he or she is allowed a higher standard deduction.

Chart C: Standard Deduction Worksheet

Child Tax Credit and Additional Child Tax Credit

The American Rescue Plan Act of 2021 amended the requirements for bona fide residents of Puerto Rico who claim the additional child tax credit. For tax year 2025, bona fide residents of Puerto Rico with one qualifying child who are not required to file a U.S. income tax return and have Social Security and/or Medicare taxes withheld from their wages or paid Self-Employment tax will be eligible to claim the credit.

Requirements

To qualify, the taxpayer must meet the following conditions:

• Be a bona fide resident of Puerto Rico

• Have one or more qualifying children under 17 years old at the end of the tax year (born on 2008 or after)

• Must claim the child as a dependent

• Child must have a valid Social Security Number

Income limits on this credit?

To be eligible for the full amount of credit, Modified Adjusted Gross Income (MAGI) cannot exceed:

• $400,000 for married filing a joint return

• $200,000 For all other filing statuses

Amount of Credit

For 2025, the amount of credit is $2,200 per qualifying child. Up to $1,700 of the credit is refundable if the taxpayer has earned income subject to U.S. tax or had Social Security and Medicare taxes withheld or paid Self-Employment taxes.

The credit is reduced $50 for each $1,000 (or fraction thereof) of income limits indicated above. The taxpayer must consider all income received in Puerto Rico.

Modified Adjusted Gross Income (MAGI)

Is determined under the U.S. Internal Revenue Code (and not under the income tax laws of Puerto Rico). For this limit, MAGI includes items excluded under IRC Section 933 such as wages, interest, dividends, unemployment compensation, alimony received (if taxable), and taxable amount of pensions and annuities. Include any profit or (loss) from Schedule F, Profit or Loss From Farming, or Schedule C, Profit or Loss From Business (Sole Proprietorship). Also, include your taxable social security benefits. Also, please verify the instructions of Form 1040 SS and Form 1040 SS (sp).

How to claim the credit?

If the taxpayer pays self-employment tax use Form 1040 SS (sp), Declaración de Impuestos Federal sobre el Trabajo por Cuenta Propia (Incluyendo el Credito Tributario Adicional por Hijos para Residentes Bona Fide de Puerto Rico) or Form 1040 (SS) U.S. Self Employment Tax Return (Including the Child Tax Credit for Bona Fide Residents of Puerto Rico). Bona fide residents of Puerto Rico who do not have to file a federal income tax return use Form 1040 SS (sp) or Form 1040 SS to claim the additional child tax credit if they have at least one qualifying child and have Social Security and Medicare taxes withheld or paid Social Security and Medicare taxes on self-employment income.

Bona fide residents of Puerto Rico who must file a federal income tax return must complete Form 1040, or Form 1040SR, and Schedule 8812, Credits for Qualifying Children and Other Dependents.

Interview Tips for the Additional Child Tax Credit

Qualifying Child

Steps	Question	Answer
1	Is this child your son, daughter, adopted child, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example, your grandchild, niece, or nephew)?	• IfYes, go to Step 2. • IfNo, you cannot claim the additional child tax credit for this child.Stop if the taxpayer has no other children.
2	Is this child 16 years old or younger at end of the tax year?	• IfYes, go to Step 3. • IfNo, you cannot claim the additional • child tax credit for this child.Stop if the taxpayer has no other children.
3	Did the child provide over half of his or her own support?	• IfNo, go to Step 4. • IfYes, you cannot claim the additional child tax credit for this child.Stop if the taxpayer has no other children.
4	Did the child live with you for more than half of tax year? If did not live with you for the required time, exceptions apply such as; • Exception to Time-Lived-with-You • Kidnapped Child • Children of Divorced or Separated or Never Married Parents.	• IfYes, go to Step 5. • IfNo, you cannot claim the additional child tax credit for this child.Stop if the taxpayer has no other children.
5	Is this child a U.S. citizen, U.S. national, or resident of the United States? Note:A national is an individual who, although not a U.S. citizen, owes his or her allegiance to the United States. U.S. nationals include American Samoans and Northern Mariana Islanders who become U.S. nationals instead of U.S. citizens.	• IfYes, go to Step 6. • IfNo, you cannot claim the additional child tax credit for this child.Stop if the taxpayer has no other children.
6	Does the child have a valid Social Security number?	IfNo, you cannot claim the additional child tax credit for this childStop if the taxpayer has no other children. IfYes, the child is a qualifying child. Go to step 7.
7	Is the child your dependent? Only the taxpayer who is claiming the child as a dependent can claim the child for the child tax credit.	IfYes, the child is a qualifying child. Go to Step 8. IfNo, you cannot claim the additional child tax credit for this child.Stop if the taxpayer has no other children.
8	Were you a bona fide resident of Puerto Rico during 2025?	IfYes, go to Step 9 IfNo, Stop. Use Schedule 8812 and Form 1040 to claim the credit. Consult Pub. 4012 Tab G for more information.
9	Are you required to file a U.S. Individual Income Tax Return (Form 1040/1040SR)? (Refer to Who Must File?	IfYes, Stop. Use Schedule 8812 and Form 1040 to claim the credit IfNo, use Form 1040 SS (sp) or Form 1040 SS to claim the credit.

Other Dependents Non-Refundable Credit

There is a $500 non-refundable credit per dependent other than a qualifying child. This credit can only be used to reduce the federal income tax obligation and cannot be claimed on Form 1040 SS (SP) or 1040 SS. See the Nonrefundable Credits section in Publication 4012.

Child and Dependent Care Credit

The Child and Dependent Care Credit is a non-refundable and can only be used to reduce the federal income tax obligation. For instructions on how to claim this credit on Form 1040, see the Nonrefundable Credits section in Publication 4012.

Bona Fide Residents of Puerto Rico

In order to be able to exclude the income sourced in Puerto Rico, the taxpayer must be a bona fide resident of Puerto Rico for the entire tax year.

Generally, taxpayers are considered bona fide resident of Puerto Rico if during the tax year, the taxpayer:

• Meet the presence test,

• Do not have a tax home outside Puerto Rico during any part of the tax year, and

• Do not have a closer connection, during any part of the tax year, to the U.S. or to a foreign country than to Puerto Rico.

Presence Test

If you are a U.S. citizen or resident alien, you will satisfy the presence test for the entire tax year if you meet one of the following conditions.

1. You were present in the relevant territory for at least 183 days during the tax year.

2. You were present in the relevant territory for at least 549 days during the 3-year period that includes the current tax year and the 2 immediately preceding tax years. During each year of the 3-year period, you must be present in the relevant territory or at least 60 days.

3. You were present in the United States for no more than 90 days during the tax year.

4. You had earned income in the United States of no more than a total of $3,000 and were present for more days in the relevant territory than in the United States during the tax year. Earned income is pay for personal services performed, such as wages, salaries, or professional fees.

5. You had no significant connection to the United States during the tax year.

Tax Home

You will have met the tax home test if you did not have a tax home outside the relevant territory during any part of the tax year. Your tax home is your regular or main place of business, employment, or post of duty regardless of where you maintain your family home. If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work.

Closer Connection

You will have met the closer connection test if, during any part of the tax year, you do not have a closer connection to the United States or a foreign country than to the relevant U.S. territory.

You will be considered to have a closer connection to a territory than to the United States or to a foreign country if you have maintained more significant contacts with the territory(s) than with the United States or foreign country. In determining if you have maintained more significant contacts with the relevant territory, the facts and circumstances to be considered include, but are not limited to, the following:

• The location of your permanent home.

• The location of your family.

• The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by you and your family.

• The location of social, political, cultural, professional, or religious organizations with which you have a current relationship.

• The location where you conduct your routine personal banking activities.

• The location where you conduct business activities (other than those that go into determining your tax home).

• The location of the jurisdiction in which you hold a driver’s license.

• The location of the jurisdiction in which you vote.

• The location of charitable organizations to which you contribute.

• The country of residence you designate on forms and documents.

• The types of official forms and documents you file, such as Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting, or Form W-9, Request for Taxpayer Identification Number and Certification.

Your connections to the relevant territory will be compared to the total of your connections with the United States and foreign countries. Your answers to the questions on Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Territory, Part III, will help establish the jurisdiction to which you have a closer connection.

Refer taxpayer to Publication 570 for more details.

Special Rules for Year of Move to Puerto Rico

Taxpayers moving to Puerto Rico during the year may still be able to meet the tax home and closer connection test for that year.

Taxpayers will satisfy the tax home and closer connection test in the tax year of move to Puerto Rico if they meets all of the following:

• Taxpayer has not been a bona fide resident of Puerto Rico in any of the 3 tax years immediately preceding the move.

• In the year of move, taxpayer does not have a tax home outside Puerto Rico or a closer connection to the U.S. or foreign country than to Puerto Rico during any of the last 183 days of the tax year.

• Taxpayer is a bona fide resident of Puerto Rico for each of the 3 tax years immediately following the move.

Year of Move from Puerto Rico

Taxpayer will be considered a bona fide resident of Puerto Rico for the part of the tax year preceding their move from Puerto Rico if:

• Taxpayer is a U.S. citizen,

• Taxpayer is a bona fide resident of Puerto Rico for at least 2 tax years immediately preceding the tax year of move,

• Cease to be a bona fide resident of Puerto Rico during the tax year,

• Cease to have a tax home in Puerto Rico during the tax year, and

• Have a closer connection to Puerto Rico than to the U.S. or a foreign country throughout the part of the tax year preceding the date on which the taxpayer ceases to have a tax home in Puerto Rico.

Taxpayers who meet the above conditions can exclude the income sourced in Puerto Rico prior to their move from Puerto Rico .

Reporting a Change in Bona Fide Residence

If you became or ceased to be a bona fide resident of Puerto Rico you may need to file Form 8898. This form must be completed when the worldwide gross income, including Puerto Rico excluded income, in that tax year, is more than $75,000. When figuring whether your worldwide gross income is more than $75,000, do not include any of your spouse's income. If both you and your spouse are required to file Form 8898, file a separate Form 8898 for each of you.

Mail Form 8898 separately from your tax return by the due date (including extensions) for filing Form 1040.

Mail form to: Internal Revenue Service

3651 S. IH 35 MS 4301AUSC Austin TX 78741

One of the conditions of filing this form is having worldwide gross income in that tax year of more than $75,000. Completing this form is out-of-scope for the VITA /TCE Program.

Adjustments to Income

Adjustments to income are amounts that a taxpayer can subtract from their total income. The result is adjusted gross income, which the taxpayer uses to compute certain deductions that are subject to income limitations.

There are several adjustments to income that mostly affect Puerto Rico residents:

• Self-employment tax deduction

• Student loan interest deduction

• Alimony Paid

• IRA

What do I need?

• Taxpayer’s Intake/Interview & Quality Review Sheet

• Publication 970

• Form 1098-E, Student Loan Interest Statement

• Social Security Number (SSN) of the spouse paying/receiving alimony

Puerto Rico Excluded Income

Adjustments that apply to excluded Puerto Rico source income are not deductible on a federal tax

return.

Self-Employment Tax Deduction

Individuals who do not have a U.S. tax filing requirement, but have income connected with a trade or business in Puerto Rico:

• Must file Form 1040-SS (sp) or Form 1040 SS, U.S. Self Employment Tax Return, to report their selfemployment income

• May have to pay self-employment tax

• Cannot take the self-employment tax deduction on Form 1040, Schedule 1 Part II Line 15 because this deduction is related to excluded income.

Student Loan Interest Deduction

Taxpayers, who paid interest on a student loan during the tax year, may be able to deduct up to $2,500 of the interest paid. If the taxpayer paid $600 or more in interest to a single lender, the taxpayer should receive a statement from the lender showing the amount of interest paid.

Alimony Paid

Taxpayers who paid alimony to a resident of Puerto Rico during the tax year may deduct their payments regardless of whether the recipient reports their income.

Alimony paid pursuant to a divorce or separation instrument executed on or before December 31,

2018 is deductible. Under the Tax Cuts and Jobs Act, alimony payments are no longer deductible by the payer and are not included as income to the recipient if the divorce or separation agreement was executed after December 31, 2018.

IRAs

Puerto Rico residents may be able to contribute money to an IRA and take the IRA deduction on their U.S. income tax return. To take the deduction:

• The taxpayer must have earned income from U.S. sources. Income excluded under IRC Section 933 is not eligible for an IRA deduction.

• All other rules for IRA contributions are met.

• The IRA trust account must be in the U.S.

Itemized Deductions

Itemized deductions are subtractions from a taxpayer’s Adjusted Gross Income (AGI) that reduce the amount of income that is taxed. Most taxpayers have a choice of taking a standard deduction or itemizing deductions. Taxpayers should use the type of deduction that results in the lowest tax. Itemized deductions include medical expenses, taxes, deductible interest, charitable contributions, casualty and theft losses, and other itemized deductions. The itemized deductions are recorded on Schedule A and then transferred to Form 1040. Schedule A should include only the allowable portion of each deduction.

Determining the Allowable Portion of the Standard Deduction or Itemized Deductions

For Puerto Rico filers who itemize, the itemized deductions must be allocated based on total gross income from all sources (including Puerto Rico source income). This allocation decreases each itemized deduction. Refer to Publication 1321, Special Instructions For Bona Fide Residents Of Puerto Rico Who Must File A U.S. Individual Income Tax Return, for more information.

To calculate the allowable portion of a deduction for each itemized deduction use the following formula

Formula for allowable portion:

Gross Income Subject to U.S. tax

X Deductions = Allowable portion Gross Income from all sources (Including P.R. excluded income)

Round all fractions to four places.

The numerator of the fraction is the gross income subject to U.S tax and the denominator is the total gross income from all sources. See the example for Elias and Delani below for the computation of the standard deduction.

Elias Noble and Delani Santa are filing a joint return and both are under age 65. This year, Elias earned $40,000 as a federal employee in Puerto Rico and Delani earned $10,000 from her job at a bank in Puerto Rico.

Formula for allowable portion of the standard deduction:

= $40,000 X $31,500 50,000

= 0.80 X $31,500

= $25,200

Puerto Rico Excluded Income

Deductions that apply to excluded Puerto Rico income are not deductible on a federal tax return.

Deductions that do not specifically apply to a particular type of income must be allocated between gross income subject to U.S. tax and total gross income from all sources. Examples of deductions that do not apply to a particular type of income are alimony payments and certain itemized deductions, such as:

• Medical expenses

• Charitable contributions

• Real estate taxes on the taxpayer’s home

• Mortgage interest on the taxpayer’s home

Example Elias and Delani are filing a joint return. They are bona fide residents of Puerto Rico and both are under 65 years of age. Elias works for the federal government and Delani for a bank in Puerto Rico. During 2025, Elias earned $ 40,000 as a federal employee and Delani earned $10,000 from her job. They have itemized deductions of $7,000 that do not apply to any specific type of income (medical and dental $1,000, real estate taxes $2,000 and mortgage interest on their home of $4,000. Each deduction is allocated as follows:

Effect of Puerto Rico excluded, income on itemized deductions:

Itemized	Expense Amount	Formula: Allowable Portion	Deduction
Medical and Dental	$1,000	(40,000 ÷ 50,000) x 1,000	$0*****
Real Estate Taxes	$2,000	(40,000 ÷ 50,000) x 2,000	$1,600
Mortgage Interest	$4,000	(40,000 ÷ 50,000) x 4,000	$3,200
Total	$7,000		$4,800
*****Medical expenses must exceed 7.5% of the taxpayer’s Adjusted Gross Income.

To figure the standard deduction amount for Elias and Delani use the “Worksheet For Puerto Rico Filers With Excluded Income Under Section 933 Who Do Not Itemize Deductions” in Publication 1321. The allowable portion of the standard deduction for Elias & Delani is $25,200 ($31,500 x 0.80). The allowable amount of the Itemized deductions from Schedule A is $4,800. In most cases, your federal income tax will be less if you take the larger of your itemized deductions or the standard deduction.

It may be advantageous for the taxpayer to itemize deductions only if the amount is larger than the allowable standard deduction amount.

Social Security Benefits

Social security benefits are payments made under Title II of the Social Security Act. They include OASDI (Old Age, Survivors, Disability Insurance), and some workers’ compensation benefits. Generally, if social security benefits are the taxpayer’s only source of income, then the benefits are not taxable and the taxpayer probably does not need to file a federal income tax return.

If the taxpayer received social security benefits plus other income (including excluded Puerto Rico source income), up to 85% of the social security benefit may be taxable.

Social security benefits are reported to the taxpayer on Form SSA-1099, Social Security Benefit Statement. To correctly calculate the taxable portion, you need to know the amount in box 5 (Net Benefits) of Form SSA-1099.

Calculating the Taxable Portion

The One Big Beautiful Bill Act (OBBBA) permanently terminates the deduction for personal exemptions.

However, OBBBA adds $6,000 bonus deduction for seniors age 65 and older; phased out at higher incomes (2025–2028). Now, residents of Puerto Rico with excluded Puerto Rico source income under Internal Revenue Code Section 933 can only claim the adjusted standard deduction to reduce the taxable portion of the Social Security benefits. Publication 1321 is used to calculate the allowable portion ot the standard deduction.

Are the benefits taxable? To determine if any portion of the social security benefits is taxable, compare taxpayer’s (and spouse’s, if married filing jointly):

• Base amount (corresponding to the taxpayer’s filing status), and

• Total income (including excluded Puerto Rico source income and interest), plus one-half of the social security benefits

If the total income is more than the base amount for the taxpayer’s filing status, part of the social security benefits may be taxable. In general, the higher the taxpayer’s total income is, the greater the taxable portion of social security benefits will be (up to 85% of the benefits received ).

Worksheet 1 Figuring Your Taxable Benefits Residents of Puerto Rico with excluded Puerto Rico source income must use the Worksheet 1 in Publication 915 to calculate the taxable portion of social security benefits, not the worksheet included with Form 1040 instructions.

• Enter the amount from box 5 of each of the Form(s) SSA-1099s on line 1 of Worksheet 1. Also, enter this amount on line 6a of Form 1040 or 1040SR.

• Include benefits received by both spouses if filing Married Filing Jointly

• Do not include any dependents’ SSA-1099s

• Enter the total amount from Form 1040 or 1040SR, lines 1z, 2b, 3b, 4b, 5b, 7 and 8 on line 3 of the Worksheet 1

• Enter the amount from Form 1040 or 1040SR, line 2a, on line 4 of the Worksheet 1

• On line 5 of the Worksheet 1, enter the total of any exclusions/adjustments for: adoption benefits (Form 8839, line 28), Foreign Earned Income or Housing (Form 2555, lines 45 and 50), certain income of bona fide residents of Puerto Rico *****

• Give the completed worksheet to the taxpayer for their records

Wages, excluded and taxable interest, dividends, taxable IRAs and pensions (without the $11,000 or $15,000 exemption amount granted by the Puerto Rico Treasury Department),net capital gain or loss (up to $3,000), net income from self-employment and any other Puerto Rico source income excluded under Section 933.

Base Amount Taxpayer’s base amounts are determined by their filing status.

Filing Status	Base Amount
• Married Filing Separately (and taxpayer lived with spouse for any part of tax year)	$0
• Single • Head of Household • Qualifying Surviving spouse • Married Filing Separately (and taxpayer lived separately form spouse for entire tax year)	$25,000
• Married Filing Jointly	$32,000

Filing Status

For taxpayers who plan to file as Married Filing Separately, be sure to ask whether they lived with

Income Calculation When calculating the taxable portion of’ taxpayer’s social security benefits, compare the base amount to the total of:

• Excluded income earned by Puerto Rico residents

• All other income, including tax-exempt interest

• One-half of the:

◦ Social security net benefit for the year (Form SSA-1099, box 5) or

◦ Railroad Retirement Benefits (Form RRB-1099, box 5)

If the amount on line 8 of the Worksheet 1: Figuring Your Taxable Benefits exceeds the taxpayers’ base amount (line 9 of the worksheet), complete the worksheet to determine the taxable portion of Social Security benefits (Line 19 of the worksheet). Enter this amount on line 6b of Form 1040 or 1040SR.

Foreign Tax Credit

What is the foreign tax credit (FTC)?

The foreign tax credit was created to avoid double taxation when foreign source income is taxed by both the U.S. and the country or U.S. territory from which it is derived.

For Puerto Rico residents, the foreign tax credit reduces a taxpayer’s tax liability by some or all of the Puerto Rico taxes paid or accrued during the tax year.

What form is used to claim the foreign tax credit?

Form 1116 is used to claim the Foreign Tax Credit

Who may take the credit?

Taxpayers who paid income taxes to a foreign country or U.S. territory may be entitled to take the foreign tax credit.

Qualifying Taxes

The foreign tax credit, generally include taxes paid to a foreign country or U.S. territory on:

• Wages

• Dividends

• Interest

• Royalties

• Annuities

Interview Tips for the Foreign Tax Credit

Steps	Question	Answer
1	Did you receive income from Puerto Rico or foreign sources? Refer to Table 1, Determining Source of Income	• IfYes, go to Step 2 • IfNo, Stop. You cannot claim FTC
2	Was this income taxable to the United States?	• IfYes, go to Step 3 • IfNo, Stop. You cannot claim FTC. Explain to the taxpayer they cannot take the credit on excluded Puerto Rico income.
3	Did you pay income taxes to Puerto Rico or foreign country?	• IfYes, you may be eligible to claim FTC. You must use Form 1116 to figure out the credit. • IfNo, explain to the taxpayer they cannot take the credit because the credit is limited to the allocated amount of U.S. taxes imposed on the foreign income, or the actual amount of foreign tax paid or accrued*****

Carry back and forward rules may allow a taxpayer to use excess foreign taxes paid in prior years to be used in current year. This topic is out-of-scope for the VITA/TCE Program. Publication 514, Foreign Tax Credit for Individuals, explains in detail the computation to claim the unused foreign taxes paid or accrued.

The taxable gross income sourced in the foreign country or U.S. territory that is to claim the Foreign Tax Credit, taxpayer must determine taxable to the United States.

Taxable Income from Sources Outside the United States

Form 1116, Foreign Tax Credit Gross Income from sources Outside the United States (line 1 of Part 1, Form 1116):

Amounts entered on Part I, line 1a of Form 1116 are gross income figures.

Gross income does not include:

• excluded income from foreign or territory sources excluded under IRC Section 933 or the Cost of Living Allowance (COLA) earned by federal employees which is excluded under IRC Section 912.

U. S. Armed Forces: The source of military service pay, in compliance with military orders, for members of the armed forces who claim Puerto Rico as their legal residence is Puerto Rico even if the services are performed in the United States, another territory or a foreign country. Therefore, this income is included in line 1a of Part I, Form 1116. However, if they are not a bona fide resident of Puerto Rico, their military service pay will be income from the United States even if they perform services in Puerto Rico and is not included in Part I of Form 1116.

Categories of Income A separate Form 1116 must be completed for each category of income listed in the heading section and only one income category can be checked per form.

Examples of Categories of Income Passive Category Income: Includes dividends, interest, royalties, rents and annuities

General Category Income: Includes wages and salaries.

Foreign Tax Credit – Allocation of Income

Compensation for services or retirement income performed within and outside the United States If you can not segregate compensation for services or retirement income performed partly within and partly outside the United States, use the following formulas to compute foreign income.

Allocation of Income for compensation for services and retirement income In order to determine how much income should be considered foreign for purposes of Form 1116, an apportionment should be made on a time basis.

Use a time basis to figure your compensation for labor or personal services from the relevant territory. Do this by multiplying your total compensation by the following fraction:

Formula for compensation for services:

Days in Puerto Rico and/or foreign country

Amount of foreign income X Total Compensation = Total number of days for total payment (line 1a of Part 1, Form 1116)

When the retirement income corresponds to services performed both withing and outside the United States, use the following formula to compute the foreign income:

Formula for retirement Income ( Distributions attributable to contributions):

Years in Puerto Rico and/or foreign country

Amount of foreign income X Annual pension = Total years of service (line 1a of Part 1, Form 1116)

Deductions and Losses

Taxable Income from Foreign Sources In order to arrive at the taxable income from foreign sources you must determine the deduction and losses from the foreign or territory income reported in Part I, line 1a of Form 1116.

Deductions that are definitely related to the foreign source income (line 2 of Part I, Form 1116) Examples of some expenses that are definitely related to specific income:

• Moving expenses (deduction suspended for tax years 2018-2025 except for members of the Armed Forces of the United States). The One Big Beautiful Bill Act of 2025 permanently terminates the moving expenses deduction (except for the Armed Forces).

Pro rata share of other deductions not definitely related (lines 3a-3g of Part I, Form 1116) Foreign gross income must be reduced by an allowable portion of other expenses and deductions (such as the adjustments for alimony paid (TCJA eliminates deductions for alimony payments required by post-2018 divorce agreements), certain itemized deductions, or the standard deduction) which are not definitely related to specific items of income.

Certain Itemized Deductions or Standard Deduction (line 3a of Part I, Form 1116) If itemizing deductions, enter on line 3a certain itemized deductions such as medical expenses, general sale tax, and real estate taxes for your home. These amounts are taken from lines 4, 5a and 5b of Schedule A.

Schedule A will already show deductions modified due to excluded income under IRC Section 933 (Puerto Rico source income).

Standard Deduction If not itemizing, enter the standard deduction. If the standard deduction was modified due to excluded income under IRC Section 933 (Puerto Rico source income), enter on line 3a of Form 1116 the allowable portion of the standard deduction as figured on line 2d of the Publication 1321 worksheet.

Other deductions (line 3b of Part 1, Form 1116) Enter any other deductions that do not definitely relate to any specific type of income (for example, the deduction for alimony paid) (TCJA eliminates deductions for alimony payments required by post-2018 divorce agreements) and any other deductions that are not definitely related to a specific class of income, including deductions shown on Schedule 1, Part II, Adjustments to Income.

Gross foreign source income (line 3d of Part I, Form 1116) Enter on line 3d gross foreign source income which includes Puerto Rico source income taxable to the U.S. from the category checked in Part I of Form 1116. Do not include the COLA on line 3d or any other excluded income.

Gross income from all sources (line 3e of Part I, Form 1116) Enter on line 3e gross income from all sources and all categories, both U.S. and foreign. Do not include the COLA on line 3e or any other excluded income. If the taxpayer does not have income sourced in the U.S. and is only completing Form 1116 for one category of income, line 3d and 3e will be the same.

Line 3f - Divide line 3d by line 3e and round off the results to four decimal places. Enter the results, but don’t enter more than “1”.

Pro rata share of interest expense (line 4 of Part I. Form 1116) The interest expense is subject to a separate allocation on Form 1116, line 4. If your gross income (including Puerto Rico excluded income) does not exceed $5,000, all of the mortgage interest expense can be allocated to U.S. source income and does not need to be included in this part. Otherwise, deductible home mortgage interest (including points) is apportioned using a gross income method. Use the Worksheet for Home Mortgage Interest on Form 1116 to apportion this interest.

Other interest expense (line 4b of Part 1, Form 1116) .Other interest expense includes investment interest, interest incurred in a trade or business, and passive activity interest. See Publication 514 for more information.

Losses from foreign sources (line 5 of Part 1, Form 1116) . If you have capital losses from foreign sources, see Publication 514 for more information.This is out of scope for VITA.