Why is the source of Income Important?

U.S. citizens and residents are taxed by the United States on their worldwide income, no matter where it originates. However, for the following taxpayers, the source of income is important:

• Taxpayers with income from Puerto Rican sources, since it may be exempt from U.S. tax
• Those who wish to claim a foreign tax credit, since the credit must be calculated on the basis of taxable foreign or Puerto Rican income
• Nonresident aliens who are taxed by the U.S. only on U.S. source income

This lesson focuses on U.S. citizens. All taxpayers referenced are U.S. citizens unless otherwise noted.

Special tax rules apply to nonresident aliens who are bona fide residents of Puerto Rico.