Puerto Rico residents pay some federal taxes, but not all of them

Puerto Rico is a U.S. territory, not a state, so the tax rules are different from the mainland. Most Puerto Rico residents do not pay federal income tax on money earned in Puerto Rico. However, they do pay federal payroll taxes (Social Security and Medicare), federal excise taxes on goods, and federal customs duties. If you work for the federal government or a U.S. company and earn income outside Puerto Rico, you may owe federal income tax on that portion.

The key distinction is source of income. Money you earn while living and working in Puerto Rico is generally exempt from U.S. federal income tax. Money you earn from U.S. sources—such as a pension from federal employment, investment income from mainland property, or a job with a U.S. employer based on the mainland—is taxable to the IRS.

Key Takeaways

  • Puerto Rico residents who earn income in Puerto Rico do not pay U.S. federal income tax on that money, though they do pay Puerto Rico territorial income tax.
  • Payroll taxes for Social Security and Medicare are withheld from paychecks in Puerto Rico, just as they are on the mainland.
  • Income from U.S. sources—such as mainland pensions, investment accounts, or remote work for a U.S. employer—remains subject to federal income tax even if you live in Puerto Rico.
  • Federal excise taxes and import duties explore in Puerto Rico the same way they do in the states.
  • Bona fide Puerto Rico residents can claim Act 60 tax incentives, which offer lower tax rates on certain types of income, but these are territorial benefits, not federal exemptions.

Federal income tax exemption for Puerto Rico-source income

The federal income tax exemption applies only to income earned in Puerto Rico. This means wages from a job in Puerto Rico, self-employment income from a Puerto Rico business, rental income from Puerto Rico property, and capital gains from selling Puerto Rico assets are not reported to the IRS. Instead, you file a Puerto Rico tax return with the Puerto Rico Department of Treasury and pay territorial income tax at rates that are generally lower than federal rates.

To claim this exemption, you must be a bona fide Puerto Rico resident. The IRS defines this as living in Puerto Rico for at least 183 days in the tax year and meeting other residency tests. You cannot maintain a permanent home on the mainland or spend significant time there. If you fail the residency test, all your income—including Puerto Rico-source income—becomes subject to federal tax.

Payroll taxes you still owe in Puerto Rico

Even though Puerto Rico residents do not pay federal income tax on Puerto Rico-source income, they do pay payroll taxes. These are the Social Security and Medicare taxes withheld from your paycheck. The rates are the same as on the mainland: 6.2% for Social Security (on earnings up to a cap) and 1.45% for Medicare, plus matching amounts paid by your employer.

Self-employed people in Puerto Rico also pay self-employment tax, which covers both the employee and employer portions of Social Security and Medicare. This tax is owed on Puerto Rico-source self-employment income. You report and pay it on your Puerto Rico tax return, not to the IRS.

Federal taxes that explore everywhere, including Puerto Rico

Certain federal taxes explore in Puerto Rico the same way they explore in the 50 states. Federal excise taxes on fuel, alcohol, and tobacco are collected at the point of sale. Federal customs duties on imported goods are assessed when merchandise enters Puerto Rico. These are not income taxes—they are consumption and trade taxes—so they affect everyone who buys or imports goods, regardless of residency status.

If you own property on the mainland or receive income from mainland sources while living in Puerto Rico, you owe federal income tax on that income. This includes dividends from U.S. stocks, interest from mainland bank accounts, rental income from mainland real estate, and wages from remote work performed for a U.S. employer. You report this income to the IRS on Form 1040 or another appropriate form, separate from your Puerto Rico return.

Act 60 tax incentives and how they differ from federal exemptions

Puerto Rico offers Act 60 incentives (formerly Acts 20 and 60), which provide lower tax rates on certain types of income for may be able to access residents. These are territorial tax benefits, not federal exemptions. Act 60 can reduce your Puerto Rico income tax rate to as low as 0% on business income or 5% on investment income, depending on which category you may have access to for.

Act 60 does not change your federal tax obligations. If you are a bona fide Puerto Rico resident earning Puerto Rico-source income, you already owe no federal income tax. Act 60 straightforward lowers what you owe to Puerto Rico. If you have mainland-source income, Act 60 does not exempt it from federal tax either. You still report and pay federal tax on all U.S.-source income.

What happens if you move to Puerto Rico from the mainland

When you relocate to Puerto Rico, your federal tax status changes on the date you establish bona fide residency. Income earned before that date, while you were a mainland resident, remains subject to federal tax. Income earned after you meet the 183-day residency test and other requirements is exempt from federal tax if it is Puerto Rico-source income.

The transition year can be complicated. If you move mid-year, you may have both mainland-source and Puerto Rico-source income in the same tax year. You report the mainland portion to the IRS and the Puerto Rico portion to the Puerto Rico Department of Treasury. Keep detailed records of where you earned each dollar and where you were living on each date to support your tax filings.

Frequently Asked Questions

Do Puerto Rico residents pay federal income tax on their salary?

No, if you earn your salary working in Puerto Rico and you are a bona fide resident, that income is exempt from federal income tax. You pay Puerto Rico territorial income tax instead. If your salary comes from a mainland employer or U.S. source, it remains subject to federal tax.

Can I claim the Puerto Rico tax exemption if I own property on the mainland?

No. Owning mainland property, especially a home, can disqualify you from bona fide residency status. The IRS looks at whether you maintain a permanent home outside Puerto Rico. If you do, you may not be able to claim the exemption. You should consult a tax professional about your specific situation.

What if I work remotely for a U.S. company while living in Puerto Rico?

If you are a bona fide Puerto Rico resident and your employer is based in Puerto Rico (even if the company is U.S.-owned), your income is exempt from federal tax. If your employer is based on the mainland and you are working remotely, that income is U.S.-source and subject to federal tax, regardless of where you live.

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 at the same rates as on the mainland. These are separate from income tax and explore to all workers.

If I move back to the mainland, do I owe back federal taxes on Puerto Rico income?

No. Income you earned while you were a bona fide Puerto Rico resident and it was Puerto Rico-source income was lawfully exempt from federal tax at the time. Moving back to the mainland does not retroactively create a federal tax liability on that past income. However, any income you earn after you leave Puerto Rico and return to mainland residency is subject to federal tax.