Did you know that not all income you receive in Puerto Rico is taxable? The Puerto Rico Internal Revenue Code offers exemptions that can save you money, but they come with specific rules. Today, we’ll dive into three common ones: life insurance payouts, gifts and inheritances, and compensation for injuries or illnesses. Here’s what they are, their limits, and when they apply (or don’t). Let’s get started!
1. Life Insurance: Is Your Payout Tax-Free?
If you’re a beneficiary of a life insurance policy after a loved one passes away, good news: that money is usually exempt from income tax. Whether it’s $10,000 or $100,000, you don’t report it as taxable income. But there’s a catch.
- Limit: The exemption covers the principal amount, but interest earned on it (say, due to a delay in payment) is taxable. If you get $50,000 and $2,000 is interest, that $2,000 goes on your Schedule FF.
- When it applies: If you inherit a payout after the insured’s death, it’s exempt. For example, Maria gets $100,000 after her father’s passing—no taxes owed.
- When it doesn’t: If the insured cashes out the policy while alive, any profit is taxable. Also, interest included in the payout isn’t exempt.
Tip: Keep the insurer’s payment proof for 6 years, even if you don’t submit it with your return.
2. Gifts and Inheritances: Tax-Free Goodies (Almost Always)
Getting a cash gift, an inheritance, or property feels great—and it’s even better because it’s usually not taxed as income. The Code sees this as a wealth transfer, not earned income.
- Limit: There’s no cap on the exempt amount, but watch for exceptions. If the inheritance includes pre-transfer earnings (like rent), those are taxable.
- When it applies: Pedro gets $5,000 from his aunt for his birthday: exempt. Ana inherits a $200,000 house from her mom: also exempt.
- When it doesn’t: If the “gift” is payment for a service (like painting a house), it’s taxable income. Same goes for inherited interest or rent earned before the transfer.
Note: While income tax doesn’t apply, inheritances might face the Estate and Gift Tax, paid by the estate, not you.
3. Compensation for Injuries or Illnesses: Tax Relief in Tough Times
If you receive money for a physical injury or illness—from an insurer, lawsuit, or otherwise—that payment is exempt. This includes some disability benefits tied to physical conditions.
- Limit: It only covers physical injuries. Emotional damages without a physical basis don’t qualify, and there’s no cap on the exempt amount.
- When it applies: Carlos gets $50,000 after breaking his leg in an accident: exempt. Laura wins $20,000 in a lawsuit over a work-related illness: also exempt.
- When it doesn’t: Payments for lost wages are taxable. If a disability policy was paid by your employer, benefits might be partly taxable.
Tip: Keep medical certificates or legal agreements on file for 6 years.
These exemptions can be a big help, but details matter. Missteps—like not separating interest from a life insurance payout—could lead to adjustments and penalties. If you’re unsure, check the Individual Income Tax Booklet from the Puerto Rico Treasury or consult a specialist.
Disclaimer:
The information provided is for informational purposes only and should not be considered legal or tax advice. Consult with a qualified attorney or tax advisor to discuss your specific situation.