Taxpayers with exempt Puerto Rico source income

Case Study

During this tax year, Rafael worked for the U.S. government and his wife, Sara, worked for a local grocery store. They file a joint income tax return.

Their incomes were:

Who	Income	Liability to Puerto Rico
Rafael	$29,000	$3,220
Sara	$18,000

At the end of the year, their joint tax liability to Puerto Rico is $3,220. Because they have income from Puerto Rico sources that is not taxable to the U.S.,they must reduce the foreign tax paid or accrued to Puerto Rico by the taxes allocable to the exempt income. Taxpayers cannot claim a foreign tax credit for taxes paid or accrued to Puerto Rico allocated to the exempt Puerto Rico income.

Under the accrual method, which portion of their Puerto Rico tax liability may they claim against their U.S. tax, Rafael's or Sara's?