Puerto Rico residents pay some federal taxes, but not the same ones mainland Americans do

Puerto Rico is a US territory, so the tax rules there are different from the 50 states. Most Puerto Rico residents do not pay federal income tax on money they earn while living there. However, they do pay other federal taxes—including payroll taxes for Social Security and Medicare, federal excise taxes on goods, and customs duties. The rules depend on where you live, where you work, and how long you have been in Puerto Rico.

If you were born in Puerto Rico or moved there and established residency under Act 60 (formerly Acts 20 and 22), you get a significant tax break on local income. But if you are a mainland American who moved to Puerto Rico recently, or if you work for a US employer while living there, your situation is more complicated. The IRS still considers you a US citizen and may tax your worldwide income depending on your residency status.

Key Takeaways

  • Puerto Rico residents who are bona fide residents do not pay federal income tax on income earned in Puerto Rico, but they do pay Puerto Rico income tax instead.
  • Payroll taxes for Social Security and Medicare are withheld from paychecks in Puerto Rico just as they are on the mainland.
  • Act 60 offers additional tax breaks to people who move to Puerto Rico and meet residency requirements, but you must establish bona fide residency first.
  • If you are a US citizen working remotely for a mainland employer while living in Puerto Rico, you may still owe federal income tax depending on how long you have lived there.
  • Puerto Rico residents pay federal excise taxes and import duties like all US territories, even though they do not pay federal income tax.

Federal income tax rules for Puerto Rico residents

Puerto Rico residents who are bona fide residents—meaning they live there for at least 183 days per year and have established their home there—do not pay US federal income tax on income earned in Puerto Rico. Instead, they pay Puerto Rico income tax, which is administered by the Puerto Rico Department of Treasury. This is the main tax advantage of living in Puerto Rico.

The catch is that you must actually live there. If you spend more than 183 days per year outside Puerto Rico, the IRS may treat you as a US resident for tax purposes and require you to file federal returns. The IRS also looks at where your family lives, where you own property, and where you have other ties. straightforward buying a house in Puerto Rico does not make you a bona fide resident if you spend most of your time elsewhere.

If you are a Puerto Rico resident and earn income outside Puerto Rico—for example, from a business you own on the mainland or from rental property there—you may owe federal tax on that income. The rules are complex and depend on the type of income and when you established residency.

Payroll taxes and Social Security in Puerto Rico

Puerto Rico residents pay payroll taxes just like mainland workers do. These taxes fund Social Security and Medicare and are withheld from paychecks automatically. Your employer deducts them the same way they would if you worked in Florida or New York. There is no exemption for Puerto Rico residents.

However, Puerto Rico has its own Social Security system for some workers. If you work for a Puerto Rico employer, you may pay into the Puerto Rico system instead of the federal system, depending on the type of job and when you were hired. Self-employed people in Puerto Rico also pay self-employment taxes, though the rate may differ slightly from the mainland rate. You should check with a tax professional or the Puerto Rico Department of Treasury to understand which system applies to your job.

Act 60 and the tax incentive program

Act 60 is a Puerto Rico law that offers tax breaks to people who move to the island and meet specific requirements. It replaced two older laws (Acts 20 and 22) in 2022. Under Act 60, new residents may pay only 0% tax on certain types of income, including capital gains, interest, and dividends, if they establish bona fide residency and meet other conditions.

To use Act 60, you must move to Puerto Rico, live there for at least 183 days per year, and register with the Puerto Rico Department of Treasury. You also cannot have been a Puerto Rico resident in the past 15 years. The program is designed to attract investors and business owners, but it has strict rules and requires documentation. Many people hire tax professionals to help them understand whether they may have access to and how to maintain their status.

Act 60 does not exempt you from payroll taxes or Puerto Rico income tax on wages earned there. It mainly reduces tax on investment income and business profits under certain conditions. The rules change, so you should review the current law or speak with a tax advisor before moving to Puerto Rico to take advantage of this program.

Other federal taxes Puerto Rico residents pay

Even though Puerto Rico residents do not pay federal income tax, they do pay other federal taxes. Federal excise taxes on gasoline, alcohol, and tobacco explore in Puerto Rico the same way they do on the mainland. Import duties and customs fees are also collected on goods entering Puerto Rico from outside the US territory.

Puerto Rico residents also pay federal payroll taxes for employees and employers, federal unemployment taxes, and federal estate taxes if their estate is large enough. They pay federal taxes on any income earned outside Puerto Rico, depending on their residency status. The key difference is federal income tax on local earnings, not the absence of all federal taxes.

What happens if you move to Puerto Rico from the mainland

If you are a US citizen living on the mainland and you move to Puerto Rico, you do not automatically stop owing federal income tax. The IRS will consider you a bona fide Puerto Rico resident only after you have lived there for 183 days in the calendar year and meet other residency tests. Until then, you may owe federal tax on your worldwide income.

In the year you move, you may owe federal tax for the part of the year you lived on the mainland and Puerto Rico tax for the part you lived in Puerto Rico. This is called a split-year return. You should file a federal return for the year you move and report your income for both periods. After you establish bona fide residency, you file only with Puerto Rico.

If you work remotely for a mainland employer while living in Puerto Rico, your situation depends on how long you have been there. If you are not yet a bona fide resident, you owe federal income tax on your wages. Once you establish bona fide residency, you owe Puerto Rico income tax instead. Your employer may not know about this change, so you may need to update your W-4 form or work with a tax professional to make sure the right amount is withheld.

Puerto Rico residents and US citizenship

Puerto Rico residents are US citizens. They cannot vote in federal elections while living in Puerto Rico, but they are still subject to US laws and regulations. This is why they pay payroll taxes, federal excise taxes, and other federal taxes even though they do not pay federal income tax on local earnings.

If a Puerto Rico resident moves back to the mainland, they become subject to federal income tax again on all their income. The transition back to mainland tax status can be complicated if you have investments or business interests in Puerto Rico, so many people consult a tax professional before moving.

Frequently Asked Questions

Do I have to pay federal income tax if I move to Puerto Rico?

Not if you establish bona fide residency and meet the 183-day rule. However, you must actually live there and have your home there. If you spend more than 183 days outside Puerto Rico or maintain strong ties to the mainland, the IRS may still tax you as a US resident. In the year you move, you may owe federal tax for the months you lived on the mainland.

What is the difference between Puerto Rico income tax and federal income tax?

Federal income tax is collected by the US government and funds federal programs. Puerto Rico income tax is collected by the Puerto Rico Department of Treasury and funds local government services. Bona fide Puerto Rico residents pay Puerto Rico income tax instead of federal income tax on local earnings, but the rates and rules are different. Puerto Rico income tax rates vary by income level.

Do I still pay Social Security and Medicare taxes in Puerto Rico?

Yes. Payroll taxes for Social Security and Medicare are withheld from paychecks in Puerto Rico the same way they are on the mainland. Some Puerto Rico workers pay into the local Puerto Rico system instead, depending on their employer and job type. You should check with your employer or the Puerto Rico Department of Treasury to confirm which system applies to you.

Can I use Act 60 to avoid all taxes in Puerto Rico?

No. Act 60 reduces tax on certain types of income like capital gains and dividends, but you still pay Puerto Rico income tax on wages and payroll taxes on all earnings. You also pay federal excise taxes and import duties. Act 60 is a partial tax incentive, not a complete tax exemption, and it has strict may be able to access rules.

What happens to my taxes if I move back to the mainland from Puerto Rico?

You become subject to federal income tax again on all your income, including income from Puerto Rico sources. If you own property or a business in Puerto Rico, you may owe tax to both Puerto Rico and the federal government on that income. The transition can be complex, so consult a tax professional before moving back to understand your obligations.