What Does Biden’s Proposed Tax Hike Mean for Puerto Rico’s Tax Incentive Program? - Relocate to Puerto Rico with Act 60, 20, 22

Blog: Articles to Help You Navigate Puerto Rico

If keeping more of your hard-earned income appeals to you, you might have already researched Puerto Rico’s Act 60 tax exemption program. The program boasts a 0% capital gains tax rate and a 4% corporate tax rate. Thousands of Americans have already moved to the U.S.-owned Caribbean island under the program to take advantage of Act 60’s tax benefits, with Puerto Rico’s stunning beaches and vibrant culture serving as two added incentives in favor of the move. The tax incentive program, which was first created as the 2012 Act 20 and Act 22 programs, could not have come at a better time as President Biden prepares to announce the largest federal tax hike since 1993.

The COVID-19 pandemic has already seen several trillion dollars in government spending, with the March 2021 stimulus act costing $1.9 trillion alone. Biden’s latest initiative, which plans to target climate, infrastructure, and assistance for poorer Americans, will last well beyond the pandemic. This program, which is expected to be unveiled in April or May 2021, will cost between $2 trillion and $4 trillion. Unlike previous COVID-19 stimulus bills, this program will not exclusively rely on government debt for funding. Instead, it fits into the Biden administration’s plan to increase the tax rate, with Treasury Secretary Janet Yellen asserting that the United States can afford higher rates.

Biden’s Plan to Raise Taxes

Biden’s initiative, which is largely unrelated to the pandemic, would likely become effective in 2022. The tax plans were drawn up by senior White House officials, including National Economic Council Deputy Director David Kamin, who published a 2019 paper on taxing the rich. However, Biden’s tax hike is not just for the ultra-wealthy. All households making more than $400,000 annually are liable for a tax increase.

Biden’s plan includes:

  • Raising the corporate tax rate from 21% to 28%
  • Increasing the global minimum tax on U.S. corporations from 13% to 21%
  • Raising the income tax rate for individuals making more than $400,000
  • Raising the capital gains tax rate for individuals making more than $1 million
  • Providing additional funding to the Internal Revenue Service (IRS) to conduct more tax audits on corporations
  • Expanding the estate tax

Biden is also expected to create new measures to prevent corporations from claiming tax havens as their legal residence. However, even under this new plan, there is still one legal tax haven for U.S. citizens and companies.

Moving to Puerto Rico Under the Act 60 Tax Benefit Program

What Are the Requirements for Act 60?

John Paulson, head of Paulson & Co., Inc., is convinced that Puerto Rico has economic potential. He has already committed personal and institutional capital to several investments on the island. Paulson is also a major supporter of the Act 60 tax benefit program. “[Puerto Rico is] the only place a U.S. citizen can go and literally avoid, legally, all their taxes,” he remarked in a 2016 conference. However, to move under the popular Act 60 Individual Resident Investor and Export Services tax programs, a decree holder must fully commit to living on the island. To qualify for Act 60, a decree holder must satisfy the presence test, the tax home test, and the closer connection test.

There are five ways a decree holder can qualify for the presence test. Two deal with the number of days the decree holder is physically present in Puerto Rico during the tax year. For instance, a decree holder can satisfy the presence test by spending at least 183 days on the island in a tax year. The three other ways focus on the decree holder’s connections to the United States—a decree holder can satisfy the presence test by spending fewer than 90 days in the United States during the tax year, for example.

The tax home test is more straightforward and only requires decree holders to maintain their tax home in Puerto Rico for the entire tax year. The decree holder’s tax home is either their office or, if they work at home, their home, making this test simple enough to satisfy.

Decree holders often find the closer connection test a more challenging test to satisfy as it is more subjective than the other two tests. The closer connection test is concerned with whether the decree holder has stronger connections to Puerto Rico than the United States. To help satisfy this test, a decree holder can sell their U.S. house, obtain a Puerto Rican driver’s license, or register to vote in Puerto Rican elections, among other measures.

Why Are Americans Choosing to Move to Puerto Rico Under Act 60?

2021 has seen record gains in the stock market and many cryptocurrencies. Many U.S. investors and businesses have already moved to Puerto Rico to take advantage of the island’s gorgeous weather, low prices, and vibrant Hispanic culture, in addition to its tax benefits.

Consider moving to the island in 2021 to take advantage of the income and capital gains tax benefits before Biden’s tax plan comes into effect. While Act 60’s residency tests may seem intimidating, they are relatively easy to satisfy. Once you do so, you will be able to call this Caribbean paradise home and keep more of your hard-earned income.

Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together “PRelocate”) are law firms, and this is not legal advice. You should use common sense and rely on your own legal counsel for a formal legal opinion on Puerto Rico’s tax incentives, maintaining bona fide residence in Puerto Rico, and any other issues related to taxes or residency in Puerto Rico. PRelocate does not assume any responsibility for the contents of, or the consequences of using, any version of any real estate or other document templates or any spreadsheets found on our website (together, the “Materials”). Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction.

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