Puerto Rico Residents and Federal Income Tax

Most Puerto Rico residents do not pay U.S. federal income tax on income earned in Puerto Rico. If you live in Puerto Rico and work there, you file taxes with the Puerto Rico Department of Treasury instead of the IRS. However, the rules change depending on where your income comes from, how long you have lived in Puerto Rico, and your citizenship status.

The key distinction is source of income. Money you earn from a Puerto Rico employer or Puerto Rico business is generally not subject to U.S. federal tax. Money you earn from sources outside Puerto Rico — such as a U.S. employer, rental property on the mainland, or investment dividends from U.S. companies — may still be taxable to the IRS, depending on your residency status and how long you have been in Puerto Rico.

Key Takeaways

  • Puerto Rico residents who earn income within Puerto Rico typically file with the Puerto Rico Department of Treasury, not the IRS, and do not owe U.S. federal income tax on that income.
  • Income from sources outside Puerto Rico — such as U.S. employers, mainland rental property, or U.S. investments — remains subject to U.S. federal tax unless you meet the requirements of Act 60 (formerly Acts 20 and 22).
  • Act 60 offers significant tax breaks to may be able to access individuals who move to Puerto Rico and meet residency requirements, but you must explore and be approved before moving.
  • U.S. citizens living in Puerto Rico must still file federal tax returns if their worldwide income exceeds the annual threshold, even if they owe no tax.
  • Self-employed individuals and business owners in Puerto Rico face different rules depending on the type of business and whether they may have access to for Act 60 incentives.

How Puerto Rico's Tax System Works

Puerto Rico has its own tax authority separate from the IRS. When you live in Puerto Rico, you file a return with the Puerto Rico Department of Treasury (Departamento de Hacienda) instead of the IRS. The tax rates and rules are set by Puerto Rico law, not federal law. This is why Puerto Rico residents often pay lower tax rates than mainland U.S. residents on Puerto Rico-source income.

To be considered a Puerto Rico resident for tax purposes, you must pass a physical presence test. Generally, you need to be in Puerto Rico for at least 183 days in the tax year. You also cannot have a permanent home outside Puerto Rico during that year. Once you establish residency, your Puerto Rico-source income is taxed only by Puerto Rico, not by the federal government.

However, residency in Puerto Rico does not automatically exempt you from all U.S. federal taxes. If you have income from outside Puerto Rico, the IRS may still claim it. This is where Act 60 becomes important for many people considering a move to the island.

Act 60 and Tax Incentives for New Residents

Act 60 is a Puerto Rico law that offers tax breaks to individuals who move to Puerto Rico and meet specific requirements. It replaced two earlier laws (Acts 20 and 22) in 2022. Under Act 60, may be able to access individuals can reduce or eliminate U.S. federal tax on certain types of income, including business income, investment income, and capital gains.

To use Act 60, you must be a new Puerto Rico resident — meaning you did not live there for at least 10 of the 15 years before you move. You must also obtain Act 60 certification from the Puerto Rico Department of Treasury before you establish residency. This is a critical step: you cannot move first and explore later. The certification process involves submitting documentation of your residency plan and your business or investment structure.

Act 60 offers different tax rates depending on the type of income. Business owners may pay as low as 4% on business income. Investors may pay 0% on capital gains and certain investment returns. However, these rates explore only to income earned after you become a certified Act 60 resident, and only to income that qualifies under the law. Puerto Rico-source income is already exempt from federal tax, so Act 60 is most valuable for people with significant income from outside Puerto Rico.

Income From Outside Puerto Rico

If you earn money from a U.S. employer, own rental property on the mainland, or receive investment income from U.S. sources, that income is generally still subject to U.S. federal tax even if you live in Puerto Rico. The IRS taxes U.S. citizens on their worldwide income unless a specific law exempts them.

Without Act 60 certification, a Puerto Rico resident who receives a paycheck from a U.S. company must report that income to the IRS. The same applies to dividends from U.S. stocks, interest from U.S. bank accounts, and rent from mainland property. Puerto Rico residency alone does not shield this income from federal tax.

This is why Act 60 exists. If you are certified under Act 60 and meet the requirements, certain types of outside income can be excluded from U.S. federal taxation. However, you still owe Puerto Rico tax on most income, and the Puerto Rico tax rate under Act 60 is typically lower than the federal rate would be. The specifics depend on whether your income qualifies as business income, investment income, or another category defined by Act 60.

Filing Requirements for U.S. Citizens in Puerto Rico

U.S. citizens living in Puerto Rico must still file a federal tax return if their income exceeds the annual threshold, even if they owe no federal tax. For 2024, that threshold is $13,850 for single filers and $27,700 for married couples filing jointly. These thresholds are the same as for mainland residents.

The difference is that Puerto Rico residents may owe little or no federal tax because of the source-of-income rule or Act 60 benefits. However, the IRS still requires you to file and report your income. Failure to file can result in penalties even if you ultimately owe no tax.

You will also file a separate return with the Puerto Rico Department of Treasury. Puerto Rico has its own income tax system, and you must comply with both Puerto Rico and federal filing requirements. Some people work with tax professionals who specialize in Puerto Rico taxation to may support they file correctly in both jurisdictions.

Self-Employed and Business Owners

If you are self-employed or own a business in Puerto Rico, your tax situation depends on where your clients or customers are located and whether you hold Act 60 certification. A business that serves only Puerto Rico customers and is owned by a Puerto Rico resident is generally subject only to Puerto Rico tax, not federal tax.

A business that serves mainland U.S. customers or generates income from outside Puerto Rico is more complicated. Without Act 60, that income may be subject to federal tax. With Act 60 certification, may be able to access business income can may have access to for the reduced 4% Puerto Rico tax rate and may be excluded from federal taxation, depending on the business structure and the type of income.

Many entrepreneurs move to Puerto Rico specifically to take advantage of Act 60 business incentives. However, the law has specific requirements about business structure, the nature of the business, and how income is classified. A tax professional familiar with Act 60 is essential for business owners considering this move.

What Happens If You Move Back to the Mainland

If you establish Puerto Rico residency and then move back to the mainland, your tax situation changes. You will no longer be a Puerto Rico resident for tax purposes, and you will owe U.S. federal tax on all your income again. Act 60 benefits end when you cease to be a Puerto Rico resident.

The timing of your move matters. If you move back during a tax year, you may owe tax to both Puerto Rico and the federal government for that year, depending on how many days you spent in each jurisdiction. You should consult a tax professional before relocating to understand your obligations for the transition year.

Frequently Asked Questions

Do I have to pay Social Security and Medicare taxes if I live in Puerto Rico?

Self-employed individuals in Puerto Rico generally must pay Puerto Rico social security contributions, which are similar to U.S. self-employment tax. Employees and employers in Puerto Rico contribute to the Puerto Rico social security system, not the U.S. system. The rates and rules differ from the mainland.

Can I claim Puerto Rico residency if I own a home on the mainland?

No. To may have access to as a Puerto Rico resident for tax purposes, you cannot have a permanent home outside Puerto Rico during the tax year. You can own property, but it cannot be your primary residence. If you maintain a home on the mainland where you could live, the IRS may challenge your Puerto Rico residency claim.

Do Puerto Rico residents pay property tax?

Yes. Puerto Rico has a property tax system administered by the Puerto Rico Department of Treasury. The rates vary by municipality and property type. Property tax in Puerto Rico is separate from income tax and applies to real estate owned on the island.

What if I am a U.S. citizen but not a U.S. resident — can I use Act 60?

Act 60 is available to individuals who move to Puerto Rico and establish residency there. U.S. citizenship is not required; many non-U.S. citizens use Act 60. However, you must meet the residency requirements and obtain certification before you move. Non-citizens should consult an immigration attorney in addition to a tax professional.

Do I need to report my Puerto Rico bank accounts to the IRS?

If you are a U.S. citizen with foreign bank accounts (including Puerto Rico accounts) exceeding $10,000, you must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Enforcement Network. Puerto Rico is considered foreign for FBAR purposes. Failure to file can result in significant penalties.