IRS Publication 1321 – IRS Forms, Instructions, Pubs 2026 – If you’re a bona fide resident of Puerto Rico navigating U.S. tax obligations, IRS Publication 1321 is a crucial resource. This document provides special instructions for those who must file a U.S. individual income tax return using Form 1040 or Form 1040-SR. Updated as of October 2025, it outlines how to handle income exclusions, deductions, credits, and more to ensure compliance while minimizing tax liabilities. Whether you’re a U.S. citizen living in Puerto Rico full-time or a military member stationed there, understanding these rules can help you avoid common pitfalls and maximize eligible benefits.
In this SEO-optimized article, we’ll break down the key elements of IRS Publication 1321, including who qualifies as a bona fide resident, filing requirements, income sourcing, deduction adjustments, available tax credits, and filing tips. This guide is based on the latest IRS guidelines to help Puerto Rico residents file accurately for the 2025 tax year and beyond.
What is IRS Publication 1321?
IRS Publication 1321, titled “Special Instructions for Bona Fide Residents of Puerto Rico Who Must File a U.S. Individual Income Tax Return (Form 1040 or Form 1040-SR),” explains the unique tax rules under Section 933 of the Internal Revenue Code. It focuses on how bona fide Puerto Rico residents can exclude certain income from U.S. taxation while adjusting deductions and credits accordingly. The publication is essential for anyone with mixed income sources—such as earnings from Puerto Rico and the U.S. mainland—who needs to file federally.
The document is available in English and Spanish versions, making it accessible for bilingual users. Key updates in the October 2025 revision include references to the permanent termination of personal exemptions under the One Big Beautiful Bill Act (OBBBA) signed in July 2025, as well as standard deduction amounts for the current tax year (e.g., $15,750 for single filers under 65).
For Puerto Rico residents, this publication clarifies that while most local income is exempt from U.S. taxes, income from U.S. sources or as a government employee requires reporting. It also provides worksheets to calculate adjusted deductions, ensuring you don’t overpay or face penalties.
Defining a Bona Fide Resident of Puerto Rico
To benefit from the exclusions in IRS Publication 1321, you must qualify as a bona fide resident of Puerto Rico. According to the IRS, this generally means meeting three criteria during the tax year:
- Presence Test: You must be present in Puerto Rico for a significant portion of the year.
- Tax Home: Your primary place of business or employment (tax home) must be in Puerto Rico.
- Closer Connection: You shouldn’t have stronger ties to the United States or a foreign country than to Puerto Rico.
These rules are detailed further in IRS Publication 570, which covers special scenarios like moving to or from Puerto Rico. For example, if you’re relocating mid-year, you may need to prorate your residency status and file additional forms.
U.S. citizens who meet these tests can exclude Puerto Rico-sourced income (except for U.S. government employment) from their U.S. return. This exclusion is a major tax advantage, but it requires careful adjustments to avoid IRS audits.
Who Must File a U.S. Tax Return as a Puerto Rico Resident?
Not all Puerto Rico residents need to file a U.S. federal return. IRS Publication 1321 specifies that you must file Form 1040 or 1040-SR if you’re a bona fide resident for the entire year and have:
- Income from sources outside Puerto Rico.
- Income as a civilian or military employee of the U.S. government earned in Puerto Rico.
Active duty members of the U.S. Armed Forces who claim Puerto Rico as their legal residence are treated as U.S. government employees. They must report all military pay, regardless of where services are performed, but can treat it as Puerto Rico-sourced for exclusion purposes in some cases.
To determine if you meet the filing threshold, use the “Who Must File Worksheet” in Publication 1321. This tool adjusts your standard deduction based on the ratio of U.S.-taxable income to total gross income (including excluded Puerto Rico earnings). For instance:
- Single filer under 65: Standard deduction starts at $15,750.
- Married filing jointly, both under 65: $31,500.
If your adjusted U.S.-taxable income equals or exceeds this prorated amount, filing is required. For married filing separately, the threshold is just $5 if any U.S.-taxable income exists. Dependents should refer to the Form 1040 instructions for their standard deduction worksheet.
Even if not required to file for income tax, you might need to submit Form 1040-SS for self-employment taxes or to claim refundable credits like the additional child tax credit.
Source of Income Rules for Puerto Rico Tax Filers
Understanding income sourcing is key to applying the Section 933 exclusion. IRS Publication 1321 outlines these rules to determine if income is from Puerto Rico (excludable) or U.S./foreign sources (taxable):
- Salaries and Compensation: Sourced where the service is performed.
- Social Security Benefits: Always U.S.-sourced (use Publication 915 for taxability).
- Pensions: Contributions sourced by service location; investment earnings by trust location.
- Interest and Dividends: Based on the payer’s residence.
- Rents and Royalties: Tied to property location or usage.
- Property Sales: Real property by location; personal property generally by seller’s tax home.
- Unemployment Compensation: Based on where services were performed.
- Capital Gains from U.S. RICs: Sourced by shareholder’s residence.
Special note for military personnel: Active duty pay is considered Puerto Rico-sourced if you’re a bona fide resident, even if earned elsewhere. Gains from pre-residency investments may have additional rules—consult Publication 570.
Excluding Puerto Rico income means you can’t deduct related expenses on your U.S. return, which leads to the need for deduction adjustments.
Adjusting Deductions for Excluded Puerto Rico Income
One of the core instructions in IRS Publication 1321 is apportioning deductions to reflect only U.S.-taxable income. Deductions linked to excluded income aren’t allowable.
Standard Deduction Adjustments
If you don’t itemize, use the provided worksheet to prorate your standard deduction:
- Enter your full standard deduction based on filing status.
- Calculate the ratio: (Gross income subject to U.S. tax) / (Total gross income, including excluded amounts).
- Multiply the standard deduction by this ratio and enter on Form 1040, line 12e, with a note: “Standard Deduction modified due to excluded income under section 933.”
Example: A married couple with $15,000 excluded Puerto Rico income and $26,000 U.S.-taxable income (total $41,000) would get $31,500 × ($26,000 / $41,000) = $19,974.
Itemized Deduction Adjustments (Schedule A)
For itemizers, allocate non-specific deductions like medical expenses, charitable contributions, real estate taxes, and home mortgage interest using the same ratio. Enter the adjusted amounts on the relevant Schedule A lines.
Example: Filers with $96,000 U.S. income and $24,000 excluded (total $120,000) adjust $11,000 medical expenses to $8,800.
Qualified Business Income Deduction and other Schedule 1 adjustments follow similar allocation rules. Personal exemptions are no longer available post-OBBBA.
Tax Credits Available to Puerto Rico Residents
Credits must also be adjusted for excluded income, and Puerto Rico earnings count toward income limits for eligibility.
- Child Tax Credit and Additional Child Tax Credit: Special rules apply; see Schedule 8812 instructions. Puerto Rico residents may claim these but must include excluded income in calculations.
- Earned Income Credit: Not available to bona fide Puerto Rico residents.
- American Opportunity Tax Credit: The refundable portion comes from the Puerto Rico Treasury.
- Foreign Tax Credit (Form 1116): Reduce credits for Puerto Rico taxes allocable to excluded income. Example: With $18,000 excluded and $60,000 total Puerto Rico income, prorate $3,010 taxes to $903 disallowed.
Military residents can claim credits for Puerto Rico taxes on service pay to prevent double taxation.
Special Rules for U.S. Government and Military Employees
U.S. government civilian or military income earned in Puerto Rico is fully taxable on your U.S. return. However, active duty pay for Puerto Rico residents is treated as local-sourced, allowing exclusions in certain scenarios. Use the foreign tax credit to offset Puerto Rico taxes on this income.
How to File and Report Income for Puerto Rico Residents?
Report only U.S.-taxable income on Form 1040 or 1040-SR. Use worksheets like those in Publication 915 for Social Security. File electronically or by mail following general IRS guidelines—no specific Puerto Rico address is noted beyond standard filing centers.
Include all adjustments and notes as required. For self-employment, consider Form 1040-SS if no income tax return is needed.
Reporting Changes in Bona Fide Residence
If you start or end Puerto Rico residency mid-year and your worldwide gross income exceeds $75,000 (including excluded income), file Form 8898 by your Form 1040 due date. Spouses file separately if both qualify. Failure to file incurs a $1,000 penalty.
Final Tips for Compliance and Resources
Staying compliant as a Puerto Rico resident involves careful record-keeping and using IRS tools like the worksheets in Publication 1321. Common mistakes include forgetting to prorate deductions or mis-sourcing income. For personalized advice, consult a tax professional or visit IRS.gov for free resources.
Download the latest Publication 1321 from the IRS website, and cross-reference with Publications 570 and 915 for deeper insights. By following these guidelines, you can file confidently and take full advantage of tax benefits for bona fide residents of Puerto Rico.