What are the tax implications for US citizens living in Puerto Rico?

1. Who owes U.S. federal income tax if you live in Puerto Rico?

The Internal Revenue Service says a U.S. citizen who is a bona fide resident of Puerto Rico during the entire taxable year generally is not required to file a U.S. federal income tax return for Puerto Rico-source income — but must file if they have U.S.-source or other outside-Puerto-Rico income ^[1]. IRS publications describe examples and special worksheets showing Puerto Rico-source amounts excluded from U.S. tax and how to apportion deductions when some income is U.S.-taxable ^[2].

2. What “bona fide resident” means and why it matters

Becoming a bona fide resident is not informal. Tax law under IRC §933 and related rules requires meeting residency tests (physical presence, tax home, and closer connections) and properly sourcing income to Puerto Rico; failure to meet these tests can lead to U.S. tax liability for the income claimed as Puerto Rico-sourced ^{[1] [2] [7]}. Practitioners warn there are many “tripwires” — a taxpayer who commutes to a U.S. office or retains closer ties elsewhere risks losing the exclusion ^[7].

3. The big draw: Act 60 (formerly Acts 20/22) tax incentives

Puerto Rico consolidated earlier incentive laws into Act 60 (often still discussed as Acts 20/22). These incentives can offer dramatically lower Puerto Rico tax rates — for example, reduced corporate rates for exported services and exemptions or zero tax on certain capital gains, interest, and dividend income for qualifying new residents — which is why many U.S. taxpayers consider relocating ^{[4] [3] [5]}. Law firms and advisors present scenarios where capital gains realized after establishing residency are taxed at zero by Puerto Rico, producing outcomes that look favorable compared with U.S. mainland rates ^{[8] [4]}.

4. Enforcement risk: IRS and state scrutiny

The IRS has targeted high‑income taxpayers seeking to claim territorial exemptions without satisfying residency and sourcing rules; audits and enforcement actions are a material risk ^{[6] [5]}. State tax authorities (especially high-tax states) may also challenge claimed changes of domicile to Puerto Rico — reporting shows states like New York and California conduct residency audits that can result in substantial collections, and Puerto Rico movers have been the subject of scrutiny ^[6].

5. What remains taxable to the U.S. even for Puerto Rico residents

Available sources emphasize that U.S.-source income and certain types of income (for example, federal wages, some interest, or income from U.S. sources) remain subject to U.S. federal tax even if you are a Puerto Rico bona fide resident; these items may trigger a federal filing obligation ^{[1] [2]}. Sources also note that residents still face U.S. reporting obligations for foreign financial accounts (e.g., FBAR) when applicable, and some Social Security benefit rules require special consideration ^{[9] [2]}.

6. Practical takeaways and tradeoffs

Relocating to Puerto Rico can deliver significant tax savings for the right taxpayer if they truly relocate, change the source of their income to Puerto Rico, and comply with Act 60 application and residency rules — but it requires careful planning, adherence to granular IRS residency and sourcing tests, and awareness of state audit risk if previously domiciled in a high‑tax state ^{[3] [7] [6]}. Advisors and law firms stress obtaining expert advice because the benefits hinge on facts and documentation; the IRS and courts have challenged perceived abuses in other territorial incentive programs ^{[5] [6]}.

7. Where reporting leaves unanswered questions

Available sources discuss the general rules, Act 60 incentives, and enforcement focus, but they do not provide a one-size-fits-all checklist for every personal situation; specific outcomes depend on individual facts, timing of gains (pre‑ or post‑residency), and whether income is properly sourced to Puerto Rico ^{[2] [3]}. For definitive guidance tailored to your circumstances, sources uniformly recommend consulting tax counsel experienced in both U.S. and Puerto Rico tax law ^{[9] [3]}.

Summary: bona fide Puerto Rico residency can shift tax on Puerto Rico-source income from the U.S. to Puerto Rico and, under Act 60, lead to very low Puerto Rico taxes on certain income — but those benefits depend on strict residency and sourcing rules and face active IRS and state scrutiny ^{[1] [4] [6] [5]}.