Guide to Income Tax in Puerto Rico
- Posted: December 24, 2018
- Posted by: Sheila Olson
- Last Reviewed: November 22, 2022
Figuring out taxes on this Caribbean island can be complicated. We break it down for you in the overview that follows.
- Personal Exemptions
- Profession-Specific Tax Incentives
- Consult a Tax Advisor First
Puerto Rico’s Tax System is Different
Puerto Rico may be a U.S. territory, but it has its own tax system. That means that, in general, bona fide residents of Puerto Rico who receive decrees for Act 60 (formerly Acts 20 and 22) and other Puerto Rican tax incentives, no longer have to deal with the IRS—they deal only with the Puerto Rican tax system, which can be remarkably favorable for those holding tax incentive decrees.
There are many similarities between Puerto Rico and the rest of the United States. The court system, banking system, and statutory laws in Puerto Rico won’t be unusual for you. However, when it comes to taxes, Puerto Rico is like a foreign country that still has Medicare and Social Security.
This is good news for you if you have an Act 60 decree.
Many who relocate from the mainland to Puerto Rico will no longer have to submit Form 1040 with the IRS annually. Instead, your tax on wages, dividend and interest income, and capital gains will generally be due to the Puerto Rican government.
As a bona fide resident of Puerto Rico, you probably won’t be responsible for federal income tax payments unless you fall under one of the following categories:
- Employee of the US federal government or US armed forces
- Do business with the US federal government
- Earn income from sources outside of Puerto Rico
- Belong to a Puerto Rico-based corporation that intends to send funds to the United States
Not having to pay these doesn’t mean you are exempt from federal taxes entirely. You’ll still pay customs taxes, for example. Employers also pay Federal Insurance Contributions Act (FICA) payroll taxes (for Medicare and Social Security) and taxes under the Federal Unemployment Tax Act.
What Makes Puerto Rico Better Than Other Tax Havens?
Only a handful of countries implement a worldwide income tax system, and the United States is one of them. Even if you moved to the other side of the world and never returned to the United States, you would still be required to pay this.
The only way out would be to renounce your US citizenship, which is undesirable for most Americans and incurs an expatriation tax of 23.8% on your unrealized capital gains.
The one solution? Move yourself (and your business, if applicable) to Puerto Rico.
Technically, you’ll still be in the United States, but you won’t have to pay US taxes. There’s no expatriation fee (because, after all, you are still in the United States). In this sense, Puerto Rico is Americans’ only true tax haven.
Puerto Rico allows you to escape from US taxes without giving up your citizenship and still offers you the protection of the US law and banking system.
What Taxes Do You Need to Pay in Puerto Rico?
Puerto Rico’s many tax incentives don’t let you entirely escape income taxes. While they may waive or lower some taxes, there are still others you will be required to pay.
If you fall into Puerto Rico’s highest-earning category, you might have to give up 33% of your income to the Puerto Rican government. And given that Puerto Rico’s average income is quite a bit lower than the mainland’s, you only have to make more than $61,500 in a year to be a much higher earner.
What the Individual Resident Investor Tax Incentive (formerly Act 22) saves you is the income tax on dividends, interest, and capital gains—under this tax incentive, these are taxed at 0%, as long as you are a bona fide resident of Puerto Rico.
Similarly, with the Export Services Tax Incentive (formerly Act 20), you are required to pay yourself a reasonable salary and must pay income tax on that amount, but otherwise, your corporate income tax rate is only 4%. That’s far lower than the 21% tax rate on the mainland.
Puerto Rico Income Tax Rate
Puerto Rico’s tax table is fairly simple, but the important thing to note is that the threshold for high earners is much lower than on the mainland. Puerto Rico personal tax brackets are different; you only need to earn above $61,500 to land yourself in the highest-earning category, which is subject to a tax rate of 33%.
Calculating Your Income Taxes
Since these are marginal income tax brackets, it may not be immediately apparent how much you’ll have to pay in income taxes total.
For a better sense of what you’ll owe, try this handy calculator. Plug in your estimated pre-tax income. It will show you your overall tax rate, take home pay, and total tax amount.
These are broad strokes; the calculator doesn’t factor in certain other deductions for which you may be eligible. We’ll address some of those below.
Alternative Basic Tax Income
Alternative basic tax (ABT) income applies to selected types of income exempt from regular income tax. Generally, ABT applies to self-employed individuals instead of typical salaried employees who receive a W-2. ABT income is subject to Puerto Rican income taxes.
You can earn up to $25,000 in ABT income for free, and up to $50,000 will incur an ABT rate of 1%. ABT income in excess of $250,000 is subject to an ABT rate of 24%.
Self-Employed Tax Rates
If you are a self-employed individual rendering service, you may choose to pay Puerto Rico’s optional self-employed tax rates instead of the regular income tax rates. To qualify, at least 80% of your income must come from your self-employed services.
The income tax is calculated based on your gross income. The rate is only 6% on the first $100,000 and increases to only 20% at the highest bracket, $500,000. This can be a favorable option for self-employed individuals.
Tax Deductions and Credits
It pays—literally—to look out for all the tax deductions and credits for which you may be eligible as a new resident of Puerto Rico.
Let’s review adjusted gross income (AGI), which is a key concept to understand in tax planning. Your AGI is simply your total gross income, minus selected deductions (or “adjustments,” that can include a portion of self-employment taxes, self-employed health insurance premiums, and alimony payments, among other things). Your AGI determines your eligibility for other deductions and credits and affects how these figures are calculated.
Here are some of the most common additional tax deductions and credits that may apply to you.
You’ll be able to take a personal exemption of $3,500 for each individual taxpayer and $7,000 for married taxpayers. There is also an exemption of $2,500 for each of your dependents.
Contributions to certain qualified charitable organizations that provide services to Puerto Rican residents are deductible.
The Child Tax Credit was expanded to Puerto Rico in 2021. As a bona fide resident of the island, you can now claim a credit of up to $1,500 for each qualifying child under the age of 18. However, the credit amount decreases upon reaching certain modified AGI thresholds; consult Form 1040-SS for details.
Contributions to Puerto Rican educational individual retirement accounts (IRAs) and interest on student loans are deductible as well.
Interest on your home may be deductible, up to the lower of $35,000 or 30% of your adjusted gross income. You can also deduct losses on your primary residence and some types of personal property.
You can deduct eligible medical expenses that exceed 6% of your adjusted gross income in a year.
If you contribute to qualified retirement plans, including government retirement plans, those contributions are deductible. The same goes for contributions to Puerto Rican IRAs; you can deduct up to $5,000 in contributions to your IRA. Married taxpayers filing jointly have a deductible contribution limit of $10,000.
Profession-Specific Tax Incentives
In addition to the Act 60 tax incentives we discussed earlier, members of certain professions—such as physicians, scientists, young entrepreneurs, and agricultural specialists—may be eligible for additional tax incentives.
Consult a Tax Advisor First
This is a broad overview and tax rules are nuanced and changeable. Be sure to speak with a qualified tax expert before taking any of these deductions.
Puerto Rico Corporate Income Tax Brackets
Wondering about Puerto Rico corporate income tax brackets for your business? Your qualified relocated business that exports services to the United States may be eligible for a low 4% tax rate.
Be careful. If your relocated business does not meet eligibility requirements, you’ll be responsible for paying much higher tax rates. Companies in Puerto Rico deemed to be non-resident corporations are subject to a tax rate of 18.5% in addition to a graduated surtax, per the following table:
How to File Taxes in Puerto Rico
Rules on filing taxes in Puerto Rico can get tricky. Factors like your residency status, profession, and source(s) of income affect how and what you must file. You can file your individual tax return as one of the following:
- Individual taxpayer
- Married filing jointly
- Married filing separately
Consult IRS Publication 1321 for information on adjustments you’ll need to make on your return and how to make them.
Also note that if you become or cease to be a bona fide resident of Puerto Rico during the year for which you’re filing your tax return, you’ll have to fill out and submit IRS Form 8898. If you do not, you may be fined $1,000.
Federal Income Tax Returns
As a bona fide resident of Puerto Rico, you shouldn’t have to file a US federal income tax return at all if all your income is wholly sourced from Puerto Rico. If you do have income from sources outside of Puerto Rico, you must file a US federal income tax return if the amount meets the US filing threshold.
You can find additional details about thresholds and more from IRS Publication 570.
Filing for Self-Employment Taxes
Let’s return to the self-employment taxes we touched on earlier; to report self-employment income and pay self-employment tax, you must file Form 1040-SS or Form 1040-PR. Each of the links has detailed instructions on how to fill out each form.