As a general rule, income received by a person resident in Puerto Rico is subject to Puerto Rico income taxes, which is paid by means of income tax withholding or by filing an income tax return. However, certain income may be exempt from such tax. This is the case of the income earned by people between the ages of 16 and 26.
Act 135-2014, known as the “Incentives and Financing for the Young Entrepreneur Act.” grants to persons between the 16 and 26 years of age, inclusive, an income tax exemption of up to $40,000 for salaries, services rendered, and self-employment income earned during the taxable year. This exemption is applicable for taxable years 2014 through 2019.
This means that people who worked during the year 2016 and were between the ages of 16 and 26 years of age as of Dec. 31, 2016, may claim an exemption on their income tax returns for the income earned as an employee, independent contractor, self-employed or as a business-owner up to an amount of $40,000.
For example: Peter is 21 years old, worked during 2016 as a part-time employee in a supermarket, earning $11,000 during the year. Peter must file an income tax return, but will not pay any income tax over his income, since it is completely exempt.
But, how do you claim the exemption? In the case of individuals who are employees, they receive a form from their employer that summarizes the income earned during the year. This form is commonly known as the W-2 Form. The W-2 Form has a special box where the employer reports the exempt income, including the exempt income earned by the persons between the 16 and 26 years of age.
This box, in the case of the W-2 Form for the year 2016, is box number 16. The amount that is shown in this box should be entered in Box 1C of page 2 of the Puerto Rico Individual Income Tax Return for the year 2016 under “Exempt Salaries under Act 135-2014.” This amount, also, must be transferred to Line 31 of Part II of Schedule IE of such return.
It is key that the employer shows the exempt salaries in the correct box of the W-2 Form so that the employee may claim the exemption on his or her return. Otherwise, the Puerto Rico Treasury Department may question if the person qualifies for the exemption, and the processing of the return and any requested refund may be delayed.
So, if you received your W-2 Form and believe that you are entitled to this exemption, but the employer did not correctly report the exempt income in the W-2 Form, discuss with your employer if you qualify for the exemption, and, if necessary, kindly request that the employer amend the W-2 Form so you can claim the exemption in your return.
In the case of people who are not employees, but are independent contractors, self-employed individuals or business owners (sole proprietors), the exemption must be claimed using Schedule M, titled Professions and Commissions Income, or in Schedule K, titled Business Income, of the Puerto Rico Individual Income Tax Return and select the corresponding exemption under Act 135-2014. This amount must also be transferred to Line 31 of Part II of Schedule IE of such return.
If you already filed your Puerto Rico Individual Income Tax Returns for the years 2014, 2015 or 2016 without claiming the exemption, but qualified for it, you have the option of filing an amended return to claim the exemption and may be entitled to a credit or a refund.
It is important to note that, if the employer withheld income taxes over the salary of the employee who is between 16 and 26 years of age, the employee may claim the income tax withholding as a credit in their income tax return and request a refund of such withheld amount. Also, if the young employee earned less than $7,500 and is a regular employee, their parents, generally, may still claim them in their income tax return as a dependent, if they are 25 years old or less as of December 31.
For example: Lucy and John, married to each other, always claim their daughter, Jasmine, as a dependent in their income tax return. In 2016, Jasmine reached 24 years of age and worked as a cashier while completing her studies as a regular college student. Jasmine earned $7,000 in salaries as an employee, and her employer withheld income taxes for $500. Jasmine is entitled to an exemption over the complete income earned as an employee, and also to request a refund from the Puerto Rico Treasury Department of the $500 withheld by filing a separate income tax return. Lucy and John may still claim Jasmine as a dependent in their income tax return.
Act 135-2014 includes other tax incentives that may be applicable to young entrepreneurs between 16 and 35 years of age. For more information on such tax incentives, including qualification requirements, you may access the following link.
For professional advice on this and other tax matters, please contact your trusted Puerto Rico Certified Public Accountant (CPA).