Puerto Rico residents pay different taxes than mainland U.S. citizens, depending on where they live and work

If you live in Puerto Rico, you do not pay federal income tax on money you earn there—but you do pay Puerto Rico income tax instead. If you work on the mainland and live in Puerto Rico, or work in Puerto Rico but are not a bona fide resident, the rules change. The key question is whether you are a bona fide resident of Puerto Rico, which means you lived there for at least 183 days in the tax year and meet other residency tests.

Puerto Rico has its own tax system separate from the federal one. The island taxes residents on income earned anywhere in the world, similar to how the U.S. federal government works—but the rates and rules are different. You will file Puerto Rico tax returns instead of federal returns if you may have access to as a bona fide resident.

Key Takeaways

  • Bona fide Puerto Rico residents do not pay U.S. federal income tax on income earned in Puerto Rico, but they do pay Puerto Rico income tax.
  • You must spend at least 183 days in Puerto Rico during the tax year and meet other residency tests to be considered a bona fide resident.
  • If you are not a bona fide resident, you pay federal income tax on worldwide income, even if you live in Puerto Rico part of the year.
  • Self-employed people and business owners in Puerto Rico may may have access to for special tax rates under Act 60, formerly known as Acts 20 and 22.
  • You must file Puerto Rico tax returns with the Department of Treasury (Hacienda) and may also owe property tax and other local taxes.

What makes you a bona fide resident of Puerto Rico

The IRS uses a specific test to decide whether you are a bona fide resident. You must have been physically present in Puerto Rico for at least 183 days during the tax year. Days do not have to be consecutive, but you count each day you are on the island, even partial days in some cases.

You also cannot have a tax home outside Puerto Rico during that year. A tax home is where you work and where your economic interests are centered. If you own a business on the mainland, rent an apartment there, or have a job waiting for you, the IRS may say your tax home is still on the mainland even if you spend 183 days in Puerto Rico.

Finally, you must not have a closer connection to the United States or another country. This means your family, home, and main social and economic ties should be in Puerto Rico. If your spouse and children live on the mainland, or if you own significant property there, the IRS may decide you do not may have access to.

Federal taxes you still owe as a Puerto Rico resident

Even if you are a bona fide resident and do not pay federal income tax, you still owe certain federal taxes. Self-employment tax (Social Security and Medicare) applies to self-employed people in Puerto Rico the same way it does on the mainland. If you earn money from your own business, you pay this tax to the federal government.

You also pay federal payroll taxes if you are an employee. Your employer withholds Social Security and Medicare from your paycheck, and those go to the federal government. Capital gains, dividends, and interest from U.S. sources may also be subject to federal tax depending on the type of income and your residency status.

Federal excise taxes, estate taxes, and gift taxes can explore to Puerto Rico residents in certain situations. If you inherit property or give large gifts, you may owe federal tax. The rules are complex and depend on what you own and where it is located.

Puerto Rico income tax and how it works

Puerto Rico residents file with the Department of Treasury, called Hacienda in Spanish. You file a Puerto Rico income tax return instead of a federal Form 1040. The tax rates in Puerto Rico are generally lower than federal rates, though they vary by income level and filing status.

Puerto Rico taxes residents on worldwide income—money you earn anywhere in the world if you are a bona fide resident. This includes wages, self-employment income, rental income, and investment income. You report all of it to Hacienda.

The filing important date in Puerto Rico is typically April 17, though this can change. You must file even if you do not owe tax. Hacienda has different forms and rules than the IRS, and the tax code is written in Spanish, though English versions are sometimes available.

Act 60 tax incentives for business owners and investors

Act 60 is a Puerto Rico law that offers special tax rates to certain people who move to the island or start businesses there. It replaced two older laws called Act 20 and Act 22. Under Act 60, business owners and self-employed people may pay a flat 37.5% corporate tax rate instead of the regular Puerto Rico rate, which can be much higher.

To use Act 60, you must be a bona fide resident of Puerto Rico and meet other requirements. You cannot have been a resident in the previous 15 years, and you must maintain residency. The business must be a Puerto Rico business—you cannot straightforward move an existing mainland business to the island and claim the rate.

Investors who buy certain Puerto Rico bonds or real estate may also may have access to for tax breaks under Act 60. The rules are strict, and you need professional help to make sure you may have access to and stay compliant. Many people hire tax advisors in Puerto Rico who specialize in Act 60 because the rules are different from mainland tax law.

Other taxes you owe in Puerto Rico

Puerto Rico has a sales tax called IVU (Impuesto sobre Ventas y Uso). It applies to most goods and services purchased on the island, similar to state sales tax on the mainland. The rate is 11.5% on most items, though some goods like food and medicine have lower rates or are exempt.

Property tax in Puerto Rico is called contribución sobre bienes inmuebles. If you own real estate on the island, you pay annual property tax to the municipality where the property is located. The rate depends on the property value and type. Residential property is taxed differently than commercial property.

You may also owe municipal taxes, business licenses, and other local fees depending on what you do and where you live. Each municipality sets its own rates and rules. If you are self-employed or own a business, you need to register with Hacienda and may owe quarterly estimated taxes.

What happens if you move to Puerto Rico from the mainland

When you move to Puerto Rico, you stop being a U.S. resident for tax purposes once you meet the bona fide residency test. In the year you move, you are likely a resident of both places for part of the year. You may owe federal tax for the part of the year before you became a bona fide resident, and Puerto Rico tax for the part after.

You must notify the IRS that you are leaving the United States. If you are a U.S. citizen, you do not renounce citizenship—you straightforward change your tax residency. You file a final federal return for the year you move, reporting income only for the days before you became a Puerto Rico resident.

Keep records of when you arrive in Puerto Rico and how many days you spend there each year. The IRS may ask for proof of residency, such as a lease, utility bills, or a Puerto Rico driver's license. Having clear documentation makes it easier to defend your residency status if you are audited.

Frequently Asked Questions

Can I live in Puerto Rico part of the year and still be a bona fide resident?

Yes, you do not have to live there year-round. You need 183 days in Puerto Rico during the tax year, but they do not have to be consecutive. You can spend time on the mainland as long as you meet the 183-day test and your tax home and main ties are in Puerto Rico.

Do I have to renounce U.S. citizenship to live in Puerto Rico tax-free?

No. If you are a U.S. citizen, you remain a citizen. You only change your tax residency from the mainland to Puerto Rico. You keep your passport and citizenship rights.

What if I work for a mainland company but live in Puerto Rico?

If you are a bona fide Puerto Rico resident, you do not pay federal income tax on that salary. You pay Puerto Rico income tax instead. Your employer may still withhold federal tax if they are not aware of your residency status, but you can file for a refund.

Do I need a Puerto Rico tax ID number?

Yes, you need a Puerto Rico tax ID (Número de Identificación Personal) to file with Hacienda and to do business on the island. You obtain this from the Department of Treasury. You keep your U.S. Social Security number as well.

What if I am not sure whether I am a bona fide resident?

Contact a tax professional in Puerto Rico or a CPA who specializes in Puerto Rico tax law. The rules are complex, and the consequences of getting it wrong are serious. A professional can review your situation and tell you what you owe.