Law 257 of December 10, 2018 (Law 257-2018) established a new Earned Income Credit (EIC) for individuals that have lived in Puerto Rico for the entire calendar year, that work and that comply with certain income requisites.
To this effect, the Treasury Department (TD) issued the Internal Revenue Circular Letter 20-01 (CC RI 20-01) to inform on: (1) the requisites that apply for individuals that claim the Credit; (2) the maximum benefit available for each eligible individual; (3) the limits that apply; and, (4) the ways in which the Credit is to be calculated.
General Requisites
The Earned Income Credit may be claimed on the Individual Income Tax Return by those taxpayers that comply with the following:
- Have lived in Puerto Rico for the entire tax year on which the credit is claimed.
- They have earned net income at the time they file the Tax Return.
- They have not been claimed as dependents on any other Tax Return for the same tax year.
The Credit will only be available to those taxpayers whose Tax Return includes a 12-month period. For an individual to be eligible for the Credit, he must be considered a bona fide resident of Puerto Rico during the entire tax year. Therefore, if a person moves to Puerto Rico during the tax year, lives in Puerto Rico for part of the year, and even though he has complied with 183-day requisite of residence, he will not be able to claim the Credit on that year’s Tax Return. In addition, the Credit can be claimed only if the taxpayer or spouse has not died during the calendar year for which the Tax Return is filed or at the time it is filed, including extensions.
On the other hand, if the taxpayer moves out of Puerto Rico after December 31, 2019 and at the time he files the Tax Return does not live in Puerto Rico, will not be able to claim the Credit even though he lived in Puerto Rico during the entire 2019 tax year.
Additional Credit Eligiblity Requisites
- Both the taxpayer’s spouse (for married couples) and dependents must have lived in Puerto Rico during the entire tax year on which the Credit is to be claimed and at the time the Tax Return is filed.
- Both the taxpayer and spouse must be 27 years old at the end of the tax year, or younger than 65.
- Children of the taxpayer or spouse will only be considered dependents if they are 18 years or younger. However, children 25 years or less that are full time students, and comply with the residence requisite, may be considered dependents.
- Married taxpayers must file jointly. Married taxpayers that file separately do not qualify for the Credit.
- The taxpayer that claims the Earned Income Credit will not be able to claim the low income-65 year or older Credit.
Earned Net Income
The term “earned net income” refers to salaries, wages, tips, pensions, or to any other compensation for services rendered by an employee to his employer. Such amounts must have been informed on the withholding voucher, Form 499R-2/W-2PR, or on the retirement plans informative declarations, Form 480.7C.
Any individual that receives net income in excess of $2,200 for interests, dividends, rent or royalties, sale of capital assets, payments of alimony or child support due to separation or divorce; or any other income that is not considered earned net income, will not be able to claim the Credit.
The Earned Income Credit will be determined for each taxpayer individually. However, the Credit will be calculated based on the sum of income earned by both spouses. For married taxpayers, the Credit will be determined by the net income earned jointly by the couple.
Calculation and Limits to Determine the Credit
Taxpayers with no dependents:
- 5% up to a maximum of $300
- With a net income of $18,000 and up to $20,500-12% in excess of $18,000
Married Taxpayers that file jointly:
- Joint income of more than $18,000 but not in excess of $21,750-8% in excess of $18,000
Taxpayers with one dependent:
- 5% up to a maximum of $900
- With a net income of $13,000 and up to $20,500: 12% in excess of $13,000
Married Taxpayers that file jointly:
- Joint income of more than $13,000 but not less than $24,250: 8% in excess of $13, 000
Taxpayers with two dependents:
- 10% up to a maximum of $1,500
- Income of more than $16,000 but not less than $28,500: 12% in excess of $16,000
Married Taxpayers that file jointly:
- Joint income of more than $16,000 but less than $34,750: 8% in excess of $16, 000
Taxpayers with three or more dependents:
- 5% up to a maximum of $2,000
- Income of more than $17,000 but not less than $33,500: 12% in excess of $17,000
Contribuyentes casados que radiquen planilla conjunta:
- Joint income of more than $17,000 but not less than $42,000: 8% in excess of $17, 000
