Is there any truth to the rumor that residents of U.S. Territories and Possessions, such as Puerto Rico, enjoy the benefits of U.S. Citizenship while not paying income taxes? If so, how is this justified?
Rumour?
Depends on what you mean by “benefits.”
I don’t know all the details, but presumably we’re talking about the five principal inhabited possessions who send non-voting delegates to Congress – the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, and American Samoa. None of them have full voting representation in the national legislature.
Puerto Ricans are all U.S. citizens, by federal statute. So far as I know, they don’t pay federal income taxes. However, they don’t get to send electors to the Electoral College. To a large extent they have autonomy with regards to local matters.
Residents of the District of Columbia are U.S. citizens and they do pay federal income taxes and they do send electors to the Electoral College. Their local government is to a large extent subject to congressional whim. For example, unlike most municipal governments, the District of Columbia government is denied the authority to tax those who earn income within its jurisdiction but reside outside it.
I’m not sure about the details on the other three territories.
As to how it is justified – I don’t know what the official justifications are, or even if there are any official ones. It is a fact, though, that to one extent or another, the residents of these territories are denied full local democratic autonomy or full representative participation in the national government or both. You could consider it something of a tradeoff.
The U.S. was founded on the principle that we are against taxation without representation. Puerto Ricans and others who live in territories elect no representatives to Congress and cannot vote for the President. They are not represented in government and have no say about the laws or taxes. Ergo, they cannot be taxed.
That’s the answer to the GQ. If you want to debate whether this is a good or bad thing, you need to open a new thread in Great Debates.
Cite, please? Unless I’m mistaken, there are a lot of assumptions here. I can’t consider this a factual answer, unless you give me a Supreme Court case (or other authority) that says so.
I don’t think it’s so cut-and-dried. The residents of the District of Columbia, as I said above, do pay federal income taxes. I’m not aware that it has been explicitly determined that residents of the other territories cannot be taxed.
The section of US Code dealing with territories and possessions is Title 48. If you search the title for “income tax”, (on the right side of page) you’ll find all the info you need. Here’s a section for Guam: http://www4.law.cornell.edu/uscode/48/1421i.html
[Evil gov’t bureaucrat]
NO ONE gets out of taxes!!! Muhahahaha!
[/egb]
Oh, and devans, welcome to the boards!
It’s true; Puerto Ricans don’t pay federal income taxes. They don’t have a congressman per se, but do elect a resident comissioner to Congress who has committee voting priviliges. They can vote in presidential primaries, but not elections (having, as ascenray said, no electors).
Trivia: The Resident Commissioner from Peurto Rico is the only person in Congress who serves a four year term.
How can one use this information to their advantage?
My understanding of US taxation is that if an American citizen moves abroad, they pay both US tax and the local tax (Germany for example). Germany will tax only income earned in Germany, while the US is rather unique in taxing all income regardless of where it was generated, although the US will give you a credit for your foreign taxes paid on the first $80,000 of income. So as a practical result US citizens effectively pay the higher of the US or German rate on the first $80K, and potentially a double tax thereafter. This is my understanding - I could be off a bit.
How does this work for PR’s? Aren’t they citizens? How does one become a PR, then? Could I become a PR and then move to a foreign country and not pay US tax somehow?
Well, I think it depends on what you’re doing in said foreign country. For instance, I’m in the Army serving in Germany. I am exempt from all German taxes, including sales tax. If I purchase anything on the local economy (which I do quite often), I can get the tax removed by filling out a form. It saves a bundle on large purchases, but I obviously don’t do it for small things. I also live on the economy and do not pay taxes on my electricity, phone, or any other regular bills. It’s kind of nice. 
Jman
I believe it’s a matter of establishing legal residence. If Puerto Ricans move to the U.S. and establish legal residence, they are subject to federal income taxes. Conversely, a U.S. citizen who moves from the States and establishes legal residency in Puerto Rico would not pay federal taxes (but would pay PR local taxes). I would imagine the IRS would look closely at whether the individual was actually a legitimate resident if there was some suspicion of a tax dodge.
No cite, but I would guess that legal residents of PR would not have to pay federal income tax if they were resident in another country,
By the way, under specific circumstances foreign residents can exclude the first $80,000 of their income from federal taxation, regardless of whether it is taxed by the foreign government or not. I am a U.S. citizen resident in Panama, and because of my particular (somewhat unusual) circumstances I pay no income taxes either to the U.S. or to Panama.
How high are Puero Rican local taxes? That seems relevant to know whether they are “getting a good deal”.
Puerto Rican income taxes are pretty high (compared with state income taxes) because most Federal services provided to the states are not provided to PR. So moving there won’t save you very much on income taxes. The IRS has a very detailed publication on Peurto Rican taxes here.
Lets say you are retired and living on investment income. If you move to Argentina, you still pay US tax. But I guess if you were PR, your US tax is zero.
So I guess what I am asking is what makes a PR a PR for US tax purposes. Someone has suggested its residency in PR, which means potentially if they move to Argentina then they must pay US tax. And similarly, a person from NY could move to PR and avoid income tax, but if they move back to NY then they must pay US income tax?
What about Washington, D.C.?
Puerto Rican taxes are roughly equivilent to US Fed Tax. This isn’t a tax haven.
Legal residence is not necessarily the same as your actual residence. Legal residence for tax purposes will be defined by state (and presumably PR) law. Legal residence will often be determined on the basis of where you own a house or pay rent (where your “principal residence” is), but may include other factors.
I am legally a resident of Panama for U.S. tax purposes, but legally a resident of D.C. (the last place I lived in the U.S.) for the purpose of voting in Federal elections (absentee).
My guess is that a U.S. citizen who established a legal residence in PR, and then moved to some other country from there, would not be liable for U.S. Federal income taxes. But there may be specific laws that govern this.
DC has a unique status as the federal district, with Congress specifically given the right and duty “To exercise exclusive legislation in all cases whatsoever.”
Its residents can also vote for electors in the Electoral College since Amendment XXIII passed in 1961. (Technically, they did so for the first time in the 1964 presidential election.)
Does that make it legal? Evidently. (And there is nothing comparable for territories. Does anyone know if residents of Alaska and Hawaii ever had to pay federal income taxes before they became states?)
I can’t find an exact reference to the imposition of the federal income tax on D.C., but its residents are still screaming about “taxation without representation.”
Stampout Taxation without Representation in Washington DC!