Tax season is just around the corner and the computation of income taxes becomes the main topic during this period. Changes in the Puerto Rico tax law have made a significant impact on this computation during the past years. In particular, individual income taxes have been affected by such changes, specifically in the computation of the alternate basic tax (ABT).
What is the ABT?
For income tax purposes, there are certain tax exemptions and deductions that can significantly reduce an individual’s regular income tax amount. Consequently, a small number of high-income taxpayers were avoiding the payment of regular income taxes. Therefore, to ensure that those individuals pay at least a minimum amount of tax, the ABT computation was created to set a limit on certain exemptions and deductions provided for regular income tax purposes.
The ABT operates alongside the regular income tax. It requires many individuals to calculate their liability twice, once under the rules for the regular income tax and once under the ABT rules and then they are required to pay the higher amount.
In general, the ABT is computed as follows:
By eliminating or reducing certain exclusions and deductions, and taking into account differences with respect to when certain items are considered in computing regular taxable income and not for alternative basic taxable income,
Multiplying the amount computed in (1) by the appropriate ABT tax rates (which ranges from 10% to 24%.), and
Subtracting the ABT foreign tax credit.
Credits for Prior Years’ ABT paid for taxable year 2009 through 2013
Individuals that for taxable years 2009 through 2013 were subject to the ABT, have available a credit for the amount of ABT paid in excess of regular tax if it has not been used. Such credit is subject to a limitation of 25% on the excess of net regular tax over net alternate basic tax for the taxable year.