We are residents of the USA, in Illinois, and have a consulting business that does work in Puerto Rico as a contractor. Our PR clients have had to withhold taxes from our payment for services.

How do we deal with our PR income and withholdings on our Federal and State tax returns? We know if you are a resident in PR and earn money there or elsewhere you have no Federal liability.

Our questions

1. Do we have to file in PR?

2. Do we simply deduct our PR income from our Federal and state returns, effectively paying no fed and state income taxes on that money? Where on the IRS forms do we account for that?

3. Or do we instead deduct only the PR taxes paid from our Fed and state tax?

4. Does questions above NOT apply and is there some other way we can avoid double taxation--or not?

Any advice, help, insight would be much appreciated.