Publication 1321 (10-2015) SPECIAL INSTRUCTIONS FOR BONA FIDE RESIDENTS OF PUERTO RICO (FORM 1040 OR 1040A)

American Opportunity Tax Credit

If you are a bona fide resident of Puerto Rico who will file a U.S. Federal Income Tax Return, Form 1040, and claim an exclusion for income earned in Puerto Rico, you will have to make certain adjustments on your return. These special instructions explain the adjustments, and how to make them on your return.

Bona Fide Residents of Puerto Rico: Generally, you are a bona fide resident of Puerto Rico if during the tax year, you:

discusses these requirements and provides information on the special rules that apply in the year you are moving to or from Puerto Rico.

American Opportunity Tax Credit

Bona fide residents of Puerto Rico will receive the refundable part of this credit from the Puerto Rico Treasury Department.

Who Must File

In general, section 933 of the U.S. Internal Revenue Code requires that U.S. citizens who are bona fide residents of Puerto Rico during the entire taxable year, but who receive income from sources outside Puerto Rico and/or receive income as a civilian or military employee of the U.S. Government in Puerto Rico, must file a U.S. Federal income tax return. The income you receive from Puerto Rican sources is not subject to U.S. income tax. Because some of the income is exempt (under Code section 933)

 1. Enter STANDARD

    DEDUCTION

 If your filing status

 is (see caution below)                                          ______

Single

                  under 65 enter $6,300           ______

                         65 or older enter $7,850        ______

Married filing jointly

  both under 65 enter $12,600     ______

                         one 65 or older enter $13,850   ______

                         both 65 or older enter $15,100  ______

Head of household

       under 65 enter $9,250           ______

                         65 or older enter $10,800       ______

Qualifying widow(er)

    under 65 enter $12,600          ______

with dependent child

    65 or older enter $13,850       ______

CAUTION:

 If someone can claim you as a dependent, enter amount from

 the Standard Deduction Worksheet in the instructions for Form 1040 or

 Form 1040A, as applicable.

2.

 Allowable portion of STANDARD DEDUCTION

a.

 Gross income subject to U.S. tax (include

       taxable social security benefits); use Worksheet

       1 of

 to compute your taxable social

       security benefits)                                ______

b.

 Total gross income from all sources (including

       exempt P.R. Income)                               ______

c.

 Divide line 2a by line 2b                         ______

d.

 Multiply STANDARD DEDUCTION (line 1) by line 2c   ______

3.

 Enter personal exemptions (personal exemptions are

    allowed in full):

       married filing jointly $8,000                     ______

       if someone can claim you as a dependent enter

       "0"                                               ______

       all others enter $4,000                           ______

4.

 Add lines 2d and 3                                   ______

You must file a return if your gross income subject to U.S. tax (line 2a) is equal to or more than line 4. 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 $4,000.

Source Of Income

The source of income is important in determining if the income may be excluded under section 933 of the Internal Revenue Code. The table below describes the general rules for determining the source of your income:

                   Example Of Source Of Income Rules

Item of Income                   Factor Determining Source

 Salaries and other compensation  Where the service is performed

 Pensions:

   Contributions                  Where services were performed that

                                  earned the pension

   Investment earnings            Where pension trust is located

 Interest                         Residence of the payer

 Dividends                        Location of payer

 Rents                            Location of property

 Royalties:

   Natural resources              Location of property

   Patents, copyrights, etc       Where the property is used

 Sale of real property            Location of property

 Sale of personal property        *Seller's tax home (but see

Special

                                  Rules for Gains From Dispositions

                                  of Certain Property

 for exceptions)

 *

Special Rules

 ======================================================================

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 possession. You are subject to these special rules if you meet both of the following conditions:

If you meet these conditions, gains from the disposition of this property will not be treated as income from sources within the relevant possession for purposes of the Internal Revenue Code. Accordingly, bona fide residents of American Samoa and Puerto Rico, for example, may not exclude the gain on their U.S. tax return. However, there is a special election that you can make to allocate gain/losses between the U.S. and Puerto Rico from disposition of certain property. For additional details see

.

Deductions

It is important to remember that deductions which apply to your exempt Puerto Rican income are not deductible on your Federal income tax return. For example, if you incurred employee business expenses on wages that are exempt from tax on your Federal return, the employee business expenses are not deductible on the Federal return. Self employment tax deduction: If you are a bona fide resident of Puerto Rico and you exclude all of your self-employment income from gross income, you cannot take the deduction for part of your self-employment tax on Form 1040, line 27, because the deduction is related to excluded income. You must pay self-employment tax on net self-employment earnings of $400 or more. For more information see Publication 570 "Self Employment Tax Deduction" in chapter 4.

Deductions for personal exemptions are allowed in full and need not be allocated.

Deductions that do not specifically apply to a particular income item must be allocated between your gross income subject to U.S. tax and your total gross income from all other sources. Examples of deductions that do not definitely apply to a particular type of income are alimony payments and certain itemized deductions (such as medical expenses, charitable contributions, and real estate taxes and mortgage interest on your personal residence). To find the part of the deduction that is allowable, you must apportion those items that do not apply to any specific type of income based on the ratio that your gross income subject to Federal tax bears to gross income from all sources.

EXAMPLE: You and your spouse, both under 65, are U.S. citizens and bona fide residents of Puerto Rico for the entire year. You file a joint return. During 2015 you earned $15,000 from Puerto Rican sources and your spouse earned $25,000 from the U.S. Government. You have $16,000 of itemized deductions that do not apply to any specific type of income. These are medical expenses (doctor's fees) $4,000, real estate taxes $5,000, home mortgage interest from a financial institution of $6,000, and charitable deductions of $1,000 (cash contributions). You apportion deductions for your Federal tax return as follows: multiply the deduction to be allocated by a fraction. The numerator of the fraction is your gross income subject to Federal tax and the denominator is your total gross income from all sources (including exempt Puerto Rican income).

            gross income subject

               to Federal tax

Formula:

 ----------------------- × deduction = allowable portion of

           gross income from all                     deduction

                  sources

-- Itemized Deductions should be modified as shown in the sample below:

 Medical Expenses (doctor's fees)

 $25,000 × $4,000 = $2,500 (Enter on line 1 of Schedule A.)

 -------

 $40,000

Real Estate Taxes

 $25,000 × $5,000 = $3,125 (Enter on line 6 of Schedule A.)

 -------

 $40,000

Home Mortgage Interest

 $25,000 × $6,000 = $3,750 (Enter on line 10 of Schedule A.)

 -------

 $40,000

Charitable deduction

 (cash contributions)

 $25,000 × $1,000 = $625 (Enter on line 16 of Schedule A.)

 -------

 $40,000

Enter on Schedule A only the allowable portion of each deduction. Deductions directly allocable to the income subject to Federal tax (such as employee business expenses and other miscellaneous deductions) need not be allocated.

Taxpayers Who Do Not Itemize Deductions

Standard Deduction

The standard deduction and the additional standard deduction for taxpayers who are blind or age 65 or over are deductions that do not apply to any particular type of income. If you do not itemize, they must be apportioned by the ratio that gross income subject to Federal tax bears to gross income from all sources. This adjustment must be made before you enter your standard deduction on line 40 of Form 1040 or line 24 of Form 1040A.

Use the following worksheet to apportion the standard deduction.

 ----------------------------------------------------------------------

Worksheet For Puerto Rico Filers With Exempt Income Under Section

 Who Do Not Itemize Deductions

 ----------------------------------------------------------------------

1.

 Enter STANDARD DEDUCTION: If you checked Form 1040,

    Filing Status box

1,

 enter $6,300                                            }

                                                               }

2 or 5,

 enter $12,600                                      }

                                                               } ______

3,

 enter $6,300                                            }

                                                               }

4,

 enter $9,250                                            }

CAUTION:

 If you are 65 or over and/or blind, enter amount from the

 Standard Deduction Worksheet in the instructions for Form 1040 or

 Form 1040A, as applicable;

or

 If someone can claim you as a dependent, enter amount from the

 Standard Deduction Worksheet in the instructions for Form 1040 or

 Form 1040A, as applicable.

2.

 Allowable portion of STANDARD DEDUCTION:

a.

 Gross income subject to U.S. tax              ______

b.

 Total gross income from all sources

       (including exempt P.R. income)                ______

c.

 Divide line 2a by line 2b                     ______

d.

 Multiply Standard Deduction (line 1) by line

       2c and enter this amount on Form 1040, line

       40 or Form 1040A, line 24 (allowable portion

       of STANDARD DEDUCTION)                        ______

 Write the following above line 40, Form 1040A:

 "Standard Deduction modified due to exempt income under

 section 933."

 ----------------------------------------------------------------------

John and Mary are U.S. citizens, under 65, and bona fide residents of Puerto Rico for all of 2015. They file a joint income tax return. During 2015 they received $15,000 of income from Puerto Rican sources not subject to U.S. income tax; $20,000 of federal wages subject to U.S. income tax and $6,000 interest income from a bank account in the U.S. They do not itemize deductions. Line 37 of their Federal tax return, Form 1040, shows $26,000. They will apportion their standard deduction as follows:

 ----------------------------------------------------------------------

Worksheet For Puerto Rico Filers With Exempt Income Under Section

 Who Do Not Itemize Deductions

1.

 Enter STANDARD DEDUCTION: If you checked Form 1040,

    Filing Status box

1,

 enter $6,300                                            }

                                                               }

2 or 5,

 enter $12,600                                      }

                                                               }

12,600

3,

 enter $6,300                                            }

                                                               }

4,

 enter $9,250                                            }

CAUTION:

 If you are 65 or over and/or blind, enter amount from the

 Standard Deduction Worksheet in the instructions for Form 1040 or

 Form 1040A, as applicable;

or

 If someone can claim you as a dependent, enter amount from the

 Standard Deduction Worksheet in the instructions for Form 1040 or

 Form 1040A, as applicable.

2.

 Allowable portion of STANDARD DEDUCTION:

a.

 Gross income subject to U.S. tax              

26,000

b.

 Total gross income from all sources

       (including exempt P.R. income)                

41,000

c.

 Divide line 2a by line 2b                    

 .6341

d.

 Multiply Standard Deduction (line 1) by line

       2c and enter this amount on Form 1040, line

       40 or Form 1040A, line 24 (allowable portion

       of STANDARD DEDUCTION)                        

 7,990

 Write the following above line 40, Form 1040A:

 "Standard Deduction modified due to exempt income under

 section 933."

 ----------------------------------------------------------------------

If you have income from P.R. sources not taxable on the Federal tax return, you must reduce your foreign taxes paid or accrued by the taxes allocable to exempt income. To find the amount allocable to the exempt income, multiply the taxes paid or accrued to Puerto Rico by a fraction. The numerator of the fraction is the exempt income (under IRC           Income from P.R. sources not subject