Act No. 77 of 2014 (“Act 77”) amends the Puerto Rico Internal Revenue Code of 2011 (the “PR Tax Code”) to, among other things, allow for the prepayment at a reduced tax rate of the income accumulated in certain retirement assets. The election for the prepayment is available from July 1, 2014 to October 31, 2014 (the “Prepayment Window Period”).
Prepayment of Amounts Held in Retirement Plans
Act 77 introduces a new Section 1023.21 to the PR Tax Code which provides that taxpayers may elect to prepay at a reduced tax rate all or part of the accumulated increase in the value of certain assets, including amounts accumulated under a qualified or non-qualified retirement pension plan. The reduced tax rate will be 8% in the case of assets taxed as capital assets and 15% in the case of assets taxable at ordinary income tax rates. Therefore, the applicable tax rate in the case of the prepayment on amounts accumulated under a non-qualified pension plan will be 15%.
Additional guidance is expected to be issued by the Puerto Rico Department of the Treasury with respect to the reduced tax rate applicable to amounts held under qualified pension plans, as well as to clarify whether the reduced tax rates will also be applicable to amounts actually distributed during the Prepayment Window Period.
Prepayment of Amounts Held in IRAs
Act 77 also introduces a new Section 1023.23 to the PR Tax Code to allow taxpayers during the Prepayment Widow Period to elect to pre-pay at an 8% reduced tax rate all or part of the taxable undistributed amounts accumulated and held in a Puerto Rico individual retirement account (“IRA”). The basis of the IRA will increase by the amount of the account upon which the tax is prepaid.
Note that Act 77 increases the penalty applicable in the event of a distribution from the IRA made before the taxpayer reaches age 60 to 30% (instead of 10%) if said taxpayer had elected to make a tax prepayment under Section 1023.23. However, no penalty will apply in the case of an IRA distribution made to a taxpayer prior to reaching age 60 for purposes of prepaying the 8% tax during the Prepayment Window Period.
Because of the general nature of this newsletter, nothing herein should be considered as legal advice or a legal opinion. For further information about the contents of this newsletter, or should you need further assistance in connection with these matters, please contact the firm’s Corporate – Tax Department.