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Puerto Rico Tax Guide 2026: Act 60, IRC §933 Federal Exemption & Moving to PR

Quick Answer: Puerto Rico residents receive a unique US tax advantage: under IRC §933, bona fide Puerto Rico residents are exempt from US federal income tax on Puerto Rico-source income. Critically, PR residents are still US citizens — there is no citizenship change. Act 60 (formerly Acts 20 and 22) offers additional incentives: 0% Puerto Rico capital gains tax on appreciation occurring after you become a bona fide PR resident, and a reduced 4% PR corporate tax rate for qualifying export services businesses. The qualification requirement is genuine bona fide residency — spending 183+ days/year in PR, having your closer connection to PR, and having no significant contacts with the US. The IRS actively audits Act 60 participants.

By Daniel, founder of CountryTaxCalc.com

Last Updated: April 2026

Key Facts

IRC §933 — The Foundation of Puerto Rico's Tax Advantage

Under Internal Revenue Code §933, bona fide residents of Puerto Rico are exempt from US federal income tax on income derived from sources within Puerto Rico. Key facts: you remain a US citizen and retain all citizenship rights; you do not give up your US passport or citizenship; you must file a US federal return (Form 1040) but exclude your PR-source income; you must be a bona fide resident of Puerto Rico (IRS Form 8898 filed when establishing or ending PR residency). Income NOT excluded by §933: US-source income (wages from US employers, US-based business income, US investment income); income from sources outside Puerto Rico. IRC §933 does not apply unless you are a bona fide resident — the IRS tests this rigorously. Partial year: §933 applies only for months you are a bona fide PR resident.

Puerto Rico Act 60 — Individual Investor Decree (Chapter 2)

Act 60 (2019), formerly Act 22 (2012), provides qualifying individual investors with: 0% Puerto Rico capital gains tax on appreciation in capital assets that accrues AFTER the taxpayer becomes a bona fide PR resident; 0% Puerto Rico tax on interest and dividends received from Puerto Rico-sourced entities (businesses operating under Act 60 decrees). What is NOT exempt: gains on assets that appreciated BEFORE you moved to Puerto Rico (pre-move gain is allocated and still taxed); US-source income (wages, US investments — taxed at federal rates); Social Security income (taxable by PR). Application process: file a formal decree application with the Puerto Rico Industrial Development Company (PRIDCO), pay the required $5,000 filing fee, and receive a signed decree valid for 15 years, renewable for 15 more. Annual reporting and compliance: Act 60 holders must file annual reports with PR Treasury, make an annual charitable contribution of $10,000 to a Puerto Rico charity, and maintain bona fide residency continuously.

Puerto Rico Income Tax Brackets for Non-Act-60 Income

Puerto Rico has its own income tax system for PR-source income not covered by Act 60. PR income tax rates (2026): 0% on first $9,000; 7% on $9,000–$25,000; 14% on $25,000–$41,500; 25% on $41,500–$61,500; 33% on income above $61,500. Standard deduction: $3,500 single / $7,000 married. PR alternative minimum tax applies. Employment income from PR employers: subject to these PR brackets. Self-employment income from PR business operations: subject to PR self-employment tax (similar to federal SE tax). Comparison to federal: PR's top rate of 33% is below the federal 37% — but for most income, federal is also avoided under §933, making the effective rate just the PR rate.

Bona Fide Residency Tests — What the IRS Checks

The IRS applies a three-part test to determine bona fide PR residency under IRS Publication 570 and Rev. Rul. 83-17. All three tests must be met: (1) Presence test: 183+ days in Puerto Rico during the tax year (physical presence tracked via boarding passes, credit card records, phone location data). Counting days: partial days generally count as whole days; days in PR for medical treatment don't count; days in transit don't count. (2) Tax home test: your tax home must be in Puerto Rico (where your regular or principal place of business is). (3) Closer connection test: you must have a closer connection to Puerto Rico than to the US — evaluated on: where you maintain your principal residence; where your family members live; where your personal belongings are located; where your vehicle is registered; where you hold professional/social memberships; where you conduct your business; where you file your tax returns. The IRS audits Act 60 participants for failure to meet all three tests — particularly the closer connection test, as many Act 60 participants maintain close personal and business ties to mainland US.

Pre-Move vs Post-Move Capital Gains — Critical Distinction

Act 60 exempts only capital gains on appreciation that occurs AFTER you become a bona fide PR resident. Assets that appreciated before your PR move must be allocated: pre-move gain = still taxable (at federal rates when you sell, as ordinary income or capital gains depending on asset type and holding period); post-move gain = exempt from both federal and PR tax under Act 60. Example: you buy stock at $100K in 2020; move to PR in 2024 when stock is worth $400K; sell in 2027 when stock is worth $700K. Result: $300K pre-move gain (taxable at federal rates) + $300K post-move gain (exempt under Act 60). The IRS requires you to establish FMV of assets at the date you become a PR resident — this valuation becomes the basis allocation point. Proper documentation at the time of move is critical.

Puerto Rico Sales Tax (IVU) and Other Taxes

Puerto Rico imposes its own sales tax (Impuesto sobre Ventas y Uso — IVU): standard rate: 10.5% (11.5% in some municipalities with local additions). Exemptions: most food items, prescription medications, gasoline. Professional services are subject to IVU in PR (unlike most US states). Property taxes: PR imposes property taxes, but rates are generally lower than most US states (effective rates 1–2% range, with significant exemptions for primary residences). Municipal licence tax (patente municipal): businesses operating in PR municipalities pay annual licence taxes based on sales volume. Social insurance: Puerto Rico has its own Social Security system contribution for PR-government employees, but private sector employees participate in US federal Social Security (FICA applies to PR wages).

Puerto Rico occupies a unique legal status that creates one of the most powerful tax planning opportunities available to US citizens: as a US territory, Puerto Rico is treated as a 'foreign country' for US income tax purposes under IRC §933, meaning bona fide Puerto Rico residents are exempt from US federal income tax on Puerto Rico-source income — while retaining full US citizenship. Combined with Puerto Rico's Act 60 investor incentives (0% capital gains on post-move appreciation, 0% dividend tax from Puerto Rico businesses, 4% corporate tax), the PR tax structure has attracted thousands of American entrepreneurs, investors, and remote workers. This guide explains how the IRC §933 exemption works, the Act 60 individual investor decree, the bona fide residency requirements, and what the move actually entails.

Who Benefits Most From Puerto Rico's Act 60?

Not everyone benefits equally from Act 60. The financial calculus depends heavily on your income type and amount.

Ideal Candidates for Act 60

The Act 60 benefits are most powerful for: investors with large unrealised capital gains who can move to PR before selling (future gains on post-move appreciation are 0% PR, 0% federal); cryptocurrency investors (major PR crypto community — Cryto Base San Juan is largely Act 60 holders); traders and investors managing their own portfolios (income becomes PR-sourced; post-move gains exempt); successful entrepreneurs who can transfer their business operations to PR under Act 60 Chapter 3 (export services); remote workers whose employer is comfortable with a PR address. Less suited for: salaried employees whose employer requires physical presence in the mainland US (income is US-source, not PR-source — §933 doesn't apply); individuals whose business requires them to spend 180+ days on the mainland; anyone with close personal or business ties that make 'closer connection to PR' implausible.

The Cost of Living Tradeoff

Puerto Rico offers a significantly lower cost of living than major mainland US cities — particularly real estate. San Juan property prices are a fraction of NYC, LA, or Miami. The quality of life in PR's coastal communities (Dorado, Rincon, Palmas del Mar) appeals to many Act 60 residents. However: Puerto Rico has infrastructure challenges (power grid reliability, internet quality outside major hubs); healthcare quality varies (trauma centres and specialty care can be limited); schools (private schools preferred by Act 60 community, with significant costs). The Act 60 community in PR has created a substantial expat infrastructure — networking events, co-working spaces, and social communities specifically for mainland Americans who moved to PR.

The $10,000 Annual Charity Requirement

Act 60 individual investors must annually contribute at least $10,000 to Puerto Rico-based non-profit organisations. This is a real cash outflow — but for many Act 60 holders saving $100,000+/year in taxes, the $10,000 charitable requirement is a negligible cost. The contribution can be split across multiple PR non-profits. Documentation required for annual compliance report.

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Frequently Asked Questions

Q: Do I need to renounce my US citizenship to benefit from Puerto Rico's Act 60?

Absolutely not — this is a common misconception. Puerto Rico is a US territory and Act 60 holders remain full US citizens with US passports. You can travel freely between the US mainland and Puerto Rico. You continue to pay US federal income tax on US-source income. The §933 exemption only covers Puerto Rico-source income. Act 60 does not require any change in citizenship status — it requires genuine PR residency. This is the core appeal: reduce income taxes dramatically while retaining US citizenship and all its benefits.

Q: Can I work remotely from Puerto Rico for a US employer and get the tax benefit?

It depends on how your income is classified. If you are an employee of a US mainland employer, your wages are generally considered US-source income — NOT Puerto Rico-source income — regardless of where you physically work. §933 only excludes PR-source income. Your W-2 wages from a US employer remain fully subject to federal income tax even if you live in PR. To make the tax benefit work for employment income, you typically need to become: a PR-based independent contractor (1099) working for yourself; an employee of a Puerto Rico entity; or the owner of a Puerto Rico business providing services under Act 60's export services chapter. Remote employees of US employers generally do not get §933 or Act 60 benefits on their salary income.

Q: What happens if I sell my stock portfolio after moving to Puerto Rico?

If you have properly established bona fide PR residency under Act 60: gains on appreciation that accrued AFTER your move date are exempt from both federal income tax and Puerto Rico income tax. Gains that accrued BEFORE your move date are still federally taxable when you sell. You must have established a fair market value for your portfolio on the date you became a PR resident — this is your basis allocation point. Example: $500K portfolio at time of move (all pre-move gain vs cost basis). If you sell for $600K after moving, the first $500K–$[original cost basis] gain is pre-move and federally taxable; the $100K gain above PR-move FMV is Act 60 exempt. Document asset values carefully on your PR residency establishment date.

Q: Does Puerto Rico have a Medicaid/ACA healthcare programme for Act 60 residents?

Puerto Rico has its own Medicaid programme (Mi Salud) and is part of the US healthcare system — Medicare applies to PR residents aged 65+. However, the Affordable Care Act's marketplace exchange is available in PR with different rules than the mainland: some ACA subsidies and requirements differ in PR. Many Act 60 residents use private health insurance, often through US insurers with Puerto Rico coverage. Major hospitals in San Juan (Hospital Auxilio Mutuo, San Lucas, Ashford) provide quality care. For complex specialist care, some PR residents travel to the mainland. Budget for private health insurance in your overall Act 60 financial modelling.

Disclaimer: This guide provides general tax information for educational purposes only. Puerto Rico Act 60 tax benefits require meeting specific bona fide residency tests that are subject to IRS audit. Individual decree terms may vary. Tax laws in Puerto Rico and the US change frequently. This is not tax advice. Before relocating to Puerto Rico for tax purposes, consult with both a Puerto Rico-licensed CPA and a US federal tax specialist experienced in §933 and Act 60 compliance.