Puerto Ricans pay different federal taxes depending on where they live and work

If you live in Puerto Rico as a bona fide resident, you do not pay U.S. federal income tax on money you earn inside Puerto Rico. If you live on the mainland United States, you pay federal income tax like any other U.S. citizen. The key word is bona fide resident — it means you have moved to Puerto Rico with the intent to stay, not just for a vacation or temporary work assignment.

Puerto Ricans who are U.S. citizens must still file taxes in certain situations. If you earn income outside Puerto Rico, or if you are a U.S. citizen living on the mainland, federal income tax applies to you. Puerto Rico also has its own local tax system that works separately from federal taxes.

The rules changed in 2012 when Puerto Rico passed Act 20 (later renamed Act 60), which created tax incentives for people who move to the island. Understanding which category you fall into — bona fide resident, temporary worker, or mainland resident — determines what you owe.

Key Takeaways

  • Bona fide residents of Puerto Rico do not pay U.S. federal income tax on income earned within Puerto Rico, but they do pay Puerto Rico local taxes.
  • If you earn money outside Puerto Rico or work remotely for a mainland company, the tax treatment depends on your residency status and the source of the income.
  • To may have access to as a bona fide resident, you must spend at least 183 days per year in Puerto Rico and show intent to stay, not just visit.
  • Puerto Rico has its own income tax system with rates that vary by income level, separate from federal taxes.
  • U.S. citizens living on the mainland pay federal income tax on all income, regardless of citizenship status.

What "bona fide resident" means and how it affects your taxes

A bona fide resident of Puerto Rico is someone who has established Puerto Rico as their home and intends to stay there. The IRS uses a physical presence test: you must be in Puerto Rico for at least 183 days during the tax year. Days you spend on the mainland do not count toward this total, even if you are working remotely for a Puerto Rico company.

Intent matters as much as days. If you move to Puerto Rico for a job that you know will end in six months, you are not a bona fide resident. If you buy a home, enroll your children in local schools, or establish a business there, the IRS views this as evidence of intent to stay. You cannot claim bona fide residency if you maintain a permanent home on the mainland and treat Puerto Rico as a second residence.

Once you establish bona fide residency, you stop paying federal income tax on Puerto Rico-source income. This applies to wages, self-employment income, rental income from property in Puerto Rico, and business profits earned on the island. The exemption does not explore to income from U.S. sources — if you own rental property in Florida or receive dividends from mainland stocks, you owe federal tax on that money.

Federal taxes for people who work remotely or earn mainland income

If you are a bona fide resident of Puerto Rico but work remotely for a mainland company, the answer depends on where the work is performed and how your employer classifies the income. If you physically perform the work in Puerto Rico, it is generally treated as Puerto Rico-source income and is not subject to federal tax. If you travel to the mainland to do the work, that portion may be subject to federal tax.

The IRS looks at where the services are actually performed, not where the company is located. A software developer living in San Juan who writes code in Puerto Rico for a New York company does not owe federal tax on that income. The same developer who flies to New York for two weeks to attend meetings and work in the office owes federal tax on the income earned during those two weeks.

Investment income — dividends, capital gains, interest — is treated as U.S.-source income regardless of where you live. If you own stocks or bonds, you owe federal tax on the earnings even if you are a bona fide resident of Puerto Rico. Some residents use Act 60 incentives to reduce this burden, but the federal tax still applies unless you fall under a specific exemption.

Puerto Rico's local tax system and how it differs from federal taxes

Puerto Rico has its own income tax that applies to all residents, regardless of federal tax status. The local tax rates range from 18.5% to 37% depending on your income level. This is separate from and in addition to any federal taxes you owe. A bona fide resident pays zero federal income tax but still pays Puerto Rico local income tax.

Puerto Rico also collects sales tax (called IVU, or Impuesto sobre Ventas y Uso) at a rate of 11.5% on most goods and services. This is higher than sales tax on the mainland. Property tax in Puerto Rico is lower than in many U.S. states, typically around 0.6% of assessed value, but the assessment process and rules differ from mainland property tax.

Self-employed people in Puerto Rico pay both local income tax and a self-employment tax to the Puerto Rico Department of Treasury. The rates and thresholds change year to year. If you are planning to move to Puerto Rico for tax reasons, you should consult a Puerto Rico tax professional who understands both the local system and how it interacts with your federal obligations.

Act 60 tax incentives and who they explore to

Act 60 (formerly Act 20) offers tax breaks to people who move to Puerto Rico and meet specific requirements. The law created two main programs: one for businesses and one for investors. Under the business program, self-employed people and business owners can pay a flat 37% tax rate on Puerto Rico-source income instead of the progressive local tax rates. Under the investor program, capital gains and certain investment income are taxed at 0%.

To use Act 60, you must become a bona fide resident of Puerto Rico and maintain that status. You cannot use Act 60 benefits if you spend more than 90 days outside Puerto Rico in a calendar year (with limited exceptions for travel). The law also requires you to invest in Puerto Rico — you cannot straightforward move there and claim the benefits without establishing a business or investment presence on the island.

Act 60 does not eliminate federal taxes. It only affects Puerto Rico local taxes. If you earn income outside Puerto Rico or receive investment income from mainland sources, you still owe federal tax on that money. Many people use Act 60 to reduce their overall tax burden, but it requires careful planning and ongoing compliance with residency and business requirements.

What happens if you move to Puerto Rico but do not meet bona fide residency requirements

If you move to Puerto Rico but do not spend 183 days there in your first year, or if you maintain a permanent home on the mainland, the IRS will not treat you as a bona fide resident. In this case, you continue to owe federal income tax on all your income, including money earned in Puerto Rico. You also owe Puerto Rico local taxes on Puerto Rico-source income.

The IRS can challenge your residency claim if your actions do not match your stated intent. If you rent an apartment in Puerto Rico but keep your house on the mainland, travel back frequently, and maintain your driver's license and voter registration on the mainland, the IRS may deny your bona fide residency claim. Once denied, you cannot reapply for bona fide residency status for at least five years.

Some people move to Puerto Rico gradually, spending part of the year there and part on the mainland. You can establish bona fide residency this way, but you must meet the 183-day test in the year you claim residency begins. If you split your time evenly, you will not may have access to as a bona fide resident and will owe federal taxes on all income.

Tax obligations for Puerto Ricans living on the mainland

If you were born in Puerto Rico but now live on the mainland United States, you are subject to the same federal income tax rules as any other U.S. citizen. Your birthplace does not affect your tax obligations. You file a federal tax return, pay federal income tax on all income, and follow the same rules as someone born in any of the 50 states.

Puerto Ricans living on the mainland may also owe state income tax, depending on which state they live in. Nine states have no income tax, while others tax wages, investment income, or both. Your Puerto Rican citizenship does not exempt you from state taxes.

If you move back to Puerto Rico after living on the mainland, you can establish bona fide residency and stop paying federal taxes on Puerto Rico-source income. The transition year can be complicated — you may owe federal taxes for part of the year and not for the rest. A tax professional can help you calculate what you owe for the year you move.

Self-employment and business taxes for Puerto Rico residents

Self-employed people in Puerto Rico pay Puerto Rico local self-employment tax in addition to local income tax. The rate is typically around 2.9% of net self-employment income, though this varies. If you are a bona fide resident, you do not owe federal self-employment tax on Puerto Rico-source income, which is a significant savings compared to the 15.3% federal self-employment tax on the mainland.

Business owners in Puerto Rico can use Act 60 to reduce their local tax burden, but they must register their business in Puerto Rico and conduct business there. A business that is incorporated in Puerto Rico but operates entirely on the mainland does not may have access to for Act 60 benefits. The business must have a real presence on the island — employees, office space, or active operations.

If you own a business that serves both Puerto Rico and mainland customers, you must allocate income between the two sources. Income from Puerto Rico customers is not subject to federal tax if you are a bona fide resident. Income from mainland customers is subject to federal tax. Your accountant will need to track which income comes from which source.

Frequently Asked Questions

Do I have to pay federal taxes if I move to Puerto Rico?

No, if you become a bona fide resident of Puerto Rico, you do not pay federal income tax on money you earn in Puerto Rico. You must spend at least 183 days per year there and show intent to stay. You still pay Puerto Rico local taxes, which are separate from federal taxes.

What counts as a day in Puerto Rico for the 183-day test?

Any day you are physically present in Puerto Rico counts, even if you only arrive at midnight or leave early in the morning. Days you spend traveling to or from Puerto Rico do not count. If you are in Puerto Rico for part of a day, it counts as one full day.

Can I claim bona fide residency if I own a house on the mainland?

Owning a house on the mainland does not automatically disqualify you, but it raises questions about your intent to stay in Puerto Rico. If the house is rented out and you have no other ties to the mainland, the IRS may accept your residency claim. If you live in the house part of the year, the IRS will likely deny your claim.

Do Puerto Ricans pay Social Security and Medicare taxes?

Bona fide residents of Puerto Rico who work for an employer pay Social Security and Medicare taxes (FICA) on their wages, just like mainland workers. Self-employed people pay self-employment tax. These are separate from income tax and are not affected by bona fide residency status.

What is the difference between Act 60 and bona fide residency?

Bona fide residency is a status that exempts you from federal income tax on Puerto Rico-source income. Act 60 is a law that offers additional local tax breaks on top of bona fide residency. You can be a bona fide resident without using Act 60, but you cannot use Act 60 benefits without being a bona fide resident.