Puerto Rico Tax Benefits: Your Ultimate Guide to Savings
Puerto Rico Tax Benefits
With Puerto Rico tax benefits, individuals and businesses have a unique opportunity to save significantly. Whether you’re interested in Act 60 Business, Act 60 Investor, Act 20, or Act 22 incentives, this guide provides everything you need to know to maximize tax savings in Puerto Rico.Table of Contents
- Overview of Puerto Rico Tax Benefits
- Puerto Rico Tax Obligations for U.S. Citizens
- Act 60 Business Incentives
- Act 60 Investor Incentives
- Act 20: Export Services Incentives
- Act 22: Individual Investor Incentives
- Qualifying for Puerto Rico’s Tax Benefits
- Moving Year Tax Considerations
- Frequently Asked Questions
Overview of Puerto Rico Tax Benefits
Puerto Rico offers one of the most attractive tax incentive programs available today. For businesses and individuals looking to reduce their tax burdens, Puerto Rico’s unique status as a U.S. territory allows it to offer tax benefits not found on the mainland. Through programs like Act 60, Puerto Rico attracts businesses and investors, promoting economic development while offering qualified participants reduced corporate taxes, capital gains exemptions, and more.Puerto Rico Tax Obligations for U.S. Citizens
U.S. citizens who establish bona fide residence in Puerto Rico may be eligible for substantial tax savings. Under Section 933 of the U.S. Internal Revenue Code, income earned from Puerto Rican sources is exempt from U.S. income tax for qualifying residents. This exemption applies to all Puerto Rico-sourced income except salaries and pensions from employment with the U.S. government, including civilian and military roles.Understanding Section 933 of the Internal Revenue Code
- Residents for the Entire Taxable Year: U.S. citizens who are bona fide residents of Puerto Rico for the full taxable year are exempt from including Puerto Rico-sourced income in their gross income for U.S. tax purposes. However, this income cannot be used to claim deductions or credits against U.S. federal taxes.
- Change in Residence from Puerto Rico: U.S. citizens who have been bona fide residents of Puerto Rico for at least two years prior to relocating can exclude income derived from Puerto Rican sources earned during that residency period from their U.S. tax returns.
Act 60 Business Incentives
The Act 60 Business Incentives program, part of Puerto Rico’s Economic Development Act, targets businesses that export services outside of Puerto Rico. Companies qualifying under Act 60 can benefit from a low 4% corporate income tax rate, exemption from Puerto Rico’s dividend taxes, and no property tax on specific business properties. This program is especially advantageous for consulting, IT services, and other export-focused businesses.Key Requirements for Act 60 Business Incentives
To qualify for Act 60 Business incentives, a company must demonstrate that it generates at least 80% of its revenue from clients outside Puerto Rico. Businesses must also create jobs locally, benefiting the Puerto Rican economy while enjoying substantial tax savings.Act 60 Investor Incentives
The Act 60 Investor Incentives offer tax breaks for individuals who relocate to Puerto Rico. Under this program, investors can enjoy a 0% tax rate on long-term capital gains, interest, and dividends. This program is designed to attract high-net-worth individuals, making Puerto Rico an appealing place for investors and retirees seeking tax relief.Eligibility for Act 60 Investor Incentives
Individuals must establish bona fide residence in Puerto Rico and meet specific criteria to qualify. They must also contribute to the Puerto Rican economy by making a minimum annual donation to local charities. This requirement supports the local community while allowing investors to reduce their tax liabilities.Act 20: Export Services Incentives
Before the introduction of Act 60, Act 20 provided tax incentives for companies providing export services. While it is now part of the Act 60 framework, the original benefits still apply, including a reduced 4% corporate tax rate for export-focused companies. Businesses can benefit from this act if they offer consulting, marketing, or other exportable services.Act 22: Individual Investor Incentives
Act 22, also incorporated into Act 60, was designed to attract individual investors by offering a 0% tax on capital gains, interest, and dividends for new Puerto Rican residents. This program continues to attract American investors who are interested in maintaining U.S. citizenship while lowering their tax rates.Qualifying for Puerto Rico’s Tax Benefits
Qualifying for Puerto Rico tax incentives generally involves establishing a bona fide residence and meeting specific program requirements. For both business and individual incentives, applicants must demonstrate a genuine connection to Puerto Rico, such as maintaining a residence and spending a significant portion of the year on the island. Additionally, businesses are often required to hire local employees, ensuring the programs contribute to Puerto Rico’s economic development.Moving Year Tax Considerations
Taxpayers moving to or from Puerto Rico during the tax year may meet the requirements for bona fide residents of Puerto Rico. U.S. citizens who have been bona fide residents of Puerto Rico for at least two years before moving from Puerto Rico may exclude Puerto Rico source income from their U.S. tax return if they meet certain requirements. For instance, if a taxpayer relocates to the U.S. mid-year after earning Puerto Rico-sourced income, they will report only the U.S.-sourced income on their U.S. income tax return.Notifying the IRS About Residency in a U.S. Territory
If you are considering taking advantage of Puerto Rico tax benefits, it’s essential to comply with IRS regulations regarding residency in a U.S. territory. Proper notification helps maintain compliance and avoid potential penalties.
Filing Form 8898 for Residency Changes
When an individual moves to or from a U.S. territory like Puerto Rico and has worldwide income exceeding $75,000 in that year, they must file Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession, with the Internal Revenue Service (IRS). For married couples, the $75,000 threshold applies separately to each spouse.
Deadline for Filing Form 8898
Form 8898 should be filed by the due date for Form 1040 or Form 1040NR, including any applicable extensions. The form must be submitted to the following address:
Internal Revenue Service3651 S. IH 35
MS 4301 AUSC
Austin, TX 78741
Penalties for Non-Compliance
Failure to file Form 8898 or to provide complete and accurate information may result in a $1,000 penalty. Ensuring timely filing is a critical step for individuals benefiting from Puerto Rico tax benefits.
Determining Bona Fide Residency in a U.S. Territory
Understanding the criteria for bona fide residency is essential for taking full advantage of Puerto Rico tax benefits. Residency status determines eligibility for specific tax treatments and benefits associated with living in a U.S. territory.
General Requirements for Bona Fide Residency
To be considered a bona fide resident of a U.S. territory like Puerto Rico during the tax year, you must meet the following criteria:
- Meet the Presence Test, which requires:
- 183 days (or more) of physical presence in the U.S. territory during the tax year, or
- 549 days (or more) of physical presence in the U.S. territory over the tax year and the two preceding years, with a minimum of 60 days each year, or
- No more than 90 days in the U.S. during the tax year, or
- Presence in the U.S. territory for more days than in the U.S., with U.S. earned income not exceeding $3,000, or
- No significant connection to the U.S., such as a permanent home, voter registration, or a spouse or minor child residing in the U.S.
- You do not maintain a tax home outside the U.S. territory during the tax year.
- You do not have a closer connection to the U.S. or a foreign country than to the U.S. territory during the tax year.
Exceptions to Physical Presence
Certain days spent outside the U.S. territory may still count as days present in the territory under specific circumstances:
- Days spent outside the territory for qualified medical reasons affecting you or a family member (parent, spouse, or child) you accompany.
- Days outside the territory due to a disaster preventing your return.
- Days spent outside the territory due to a mandatory evacuation order.
Days Excluded from U.S. Presence
For the purposes of the Presence Test, certain days spent in the U.S. do not count as days present in the U.S., including:
- Days you spend less than 24 hours in the U.S. while traveling between two places outside the U.S.
- Days spent as a professional athlete competing in a charitable sports event.
- Days you are temporarily present as a full-time student.
- Days serving as an elected representative of a U.S. territory, or as an official or employee of the government of the U.S. territory or its political subdivisions.
Special Exceptions for Moving to or From a U.S. Territory
For the year you move to or from Puerto Rico or another U.S. territory, limited exceptions to the tax home and closer connection requirements may apply. These are detailed in the Instructions for Form 8898.
Frequently Asked Questions
1. What are the tax benefits of moving to Puerto Rico?
Relocating to Puerto Rico offers substantial tax benefits, including a 0% tax rate on capital gains, interest, and dividends for qualified residents under Act 60. Businesses can also enjoy a reduced 4% corporate tax rate.2. Do I need to live in Puerto Rico full-time to qualify for Act 60?
While you do not need to live in Puerto Rico full-time, you must establish a bona fide residence and typically spend at least 183 days per year on the island to meet residency requirements.3. Are Act 20 and Act 22 still available?
Yes, Act 20 and Act 22 benefits are now incorporated under Act 60, allowing individuals and businesses to continue enjoying the same incentives.4. How does Act 60 benefit businesses?
Act 60 offers a 4% corporate income tax rate for eligible businesses that export services. This incentive helps companies expand their operations in Puerto Rico while minimizing tax expenses.5. I have a business, but I also derive W2 income from a business located in the USA. What will be my W2 income tax?
If you qualify as a bona fide resident of Puerto Rico, your W2 income from a U.S.-based business is generally exempt from federal income taxes. However, you are still required to pay Puerto Rico income taxes and FICA (Social Security and Medicare) taxes. Here are the 2024 Puerto Rico income tax brackets:- 0% tax on the first $9,000 of taxable income
- 7% on income from $9,000 to $25,000
- 14% on income from $25,000 to $41,500
- 25% on income from $41,500 to $61,500
- 33% on income over $61,500
6. Must U.S. citizens who are bona fide residents of
Puerto Rico file a U.S. tax return? Yes, they may need to file if they receive income from sources outside Puerto Rico, salaries or pensions from U.S. government employment, U.S. Social Security benefits, or other U.S. taxable income. However, Puerto Rico source income is exempt from U.S. income tax under Section 933.7. Do Puerto Rico residents with U.S. government jobs have to file a U.S. tax return?
Yes. U.S. citizens who are bona fide residents of Puerto Rico and work for the U.S. government must report their U.S. government salary on a U.S. tax return. This income is not exempt under Section 933. For official details on Puerto Rico taxes, visit Puerto Rico Department of Hacienda. For official details on IRS taxes, visit the Internal Revenue Service. For additional insights on optimizing tax strategies, see our Tax Strategy Guide.