The Income Tax Implications of Moving to Puerto Rico

In this blog post, I will explore the potential income tax implications of relocating to Puerto Rico. The three primary questions that I hope to answer are as follows:

1. If you move to Puerto Rico, will you be subject to U.S. income tax?

A bona fide resident of Puerto Rico during the entire tax year will not be required to file a U.S. federal income tax return if their only sources of income are within Puerto Rico. If, however, an individual has income from sources outside Puerto Rico, they will be required to file a U.S. federal income tax return assuming that they earned amount above the U.S. filing minimum. An exception exists for U.S. government employees that I won't elaborate on further. U.S citizens and resident aliens who aren't bona fide residents are required to report their worldwide income on their U.S. federal tax return (https://www.irs.gov/taxtopics/tc901). Note that investment income earned while in Puerto Rico will generally be sourced to Puerto Rico (https://www.irs.gov/pub/irs-pdf/p1321.pdf - Source of Income).

1. What are the residency requirements to be considered a resident of Puerto Rico?

To be considered a bona fide resident of Puerto Rico, an individual must:

a) meet the presence test;
b) not have a tax home outside Puerto Rico; and
c) not have a closer connection to the United States or to a foreign country than to Puerto Rico (https://www.irs.gov/pub/irs-pdf/p1321.pdf).

The presence test consists of the following:

a) must be present for at least 183 days;
b) must have been present for at least 549 days during the last 3-year period;
c) cannot have been present in the U.S. for more that 90 days;
d) earned less than $3,000 (wages) in the U.S. and present outside of the U.S. longer than present inside the U.S.; or
e) did not have a significant connection to the U.S. during the tax year (https://www.irs.gov/pub/irs-pdf/p570.pdf).

1. How does Puerto Rico tax investment income?

The Puerto Rican Acts 22-2012 and 138-2012 (http://businessinpuertorico.com/documents/ACT-22-PG.pdf) allow U.S. citizens who become Puerto Rico residents before December 31, 2035 to be subject to tax exemption. The tax exemption extended to qualifying U.S. citizens is as follows:

a) Interest and dividends received during the exemption period will be exempt from Puerto Rico taxation; and
b) Long term capital gains may qualify for a full exemption or a reduced rate of 5%.

i) Any increase in value of securities after the citizen establishes residency in Puerto Rico will be exempt if the securities are disposed of before January 1, 2036;
ii) Any increase in value of securities before establishing residency will be subject to 10% tax rate, a reduced 5% rate will apply if the gain is recognized during the exemption period AND after 10 years from the date of residency.
iii) Any capital gains recognized after the exemption period will be subject to normal Puerto Rico personal income tax rates.

To qualify for the tax benefits outlined above, a taxpayer must meet the qualifications for residency defined above as well as request a tax exemption decree from the Secretary of Economic Development and Commerce.

Below are some other relevant articles worth reading on the topic:

http://puertoricotaxincentives.com/act-22-individual-investors-act/
http://www.lindsayandbrownell.com/international/tax-profile-puerto-rico.aspx
https://www.forbes.com/sites/laurengensler/2015/02/11/puerto-rico-new-age-tax-haven/#6b607e457c96

Disclaimer
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.