Escape Federal Income Tax Legally — What Puerto Rico Residency Could Mean for You
The first in a series on Puerto Rico’s Act 60 tax incentives and how they can transform your tax picture
What if you could legally exclude a substantial portion of your income from U.S. federal income tax — not through aggressive shelters or risky schemes, but through a well-established framework written directly into the Internal Revenue Code?
For individuals who qualify as bona fide residents of Puerto Rico, that’s exactly what’s available. And for the right taxpayer, the savings can be extraordinary.
The Federal Law Behind the Opportunity
The foundation is found in I.R.C. §§ 933 and 937. Under §933(1), a bona fide resident of Puerto Rico for the entire taxable year may exclude from U.S. gross income all income derived from Puerto Rico sources — with only a narrow exception for compensation paid by the U.S. government or its agencies. This isn’t a deduction or a deferral. It’s an exclusion.
Treasury Regulation §1.933-1 confirms the exclusion applies to both U.S. citizens and resident aliens — meaning this opportunity is available to a broad range of taxpayers, not just those born in Puerto Rico.
Do You Qualify? The Bona Fide Residency Test
Qualifying as a bona fide resident is the gateway to these benefits, and the rules under I.R.C. §937(a) and Treas. Reg. §1.937-1 are more flexible than many people assume. The test has three parts:
- Presence. The baseline is 183 days in Puerto Rico, but the regulations offer several alternative pathways — including a 549-day three-year test, a 90-day limited U.S. presence test, a minimal U.S.-source earned income test, and a “no significant connection to the United States” test. For many high earners, one of these alternatives may already fit their lifestyle.
- Tax Home. Your principal place of business — or regular place of abode if you have no fixed business location — must be in Puerto Rico. This is a facts-and-circumstances analysis, and with thoughtful planning, it is often achievable.
- Closer Connection. You must have a closer connection to Puerto Rico than to the U.S. or any foreign country. The IRS looks at where your family lives, where you bank, your driver’s license, voter registration, and social ties. This is a holistic test — and one that rewards genuine commitment to building a life in Puerto Rico.
This Is Just the Beginning
Bona fide residency is the foundation, but it’s only the first piece of the Act 60 puzzle. Upcoming articles in this series will explore:
- Puerto Rico sourcing rules and how they determine what income qualifies for exclusion
- The extraordinary treatment of investment income and capital gains under Act 60
- U.S. and Puerto Rico filing obligations for relocating taxpayers
- Special transition rules that apply when moving to — or from — Puerto Rico
The opportunity is real, and for the right taxpayer, it can be life-changing.
Ready to Explore Whether This Is Right for You?
The rules are technical, and getting them right matters. Whether you’re a business owner, investor, or high-income professional, a conversation about Puerto Rico residency planning could be one of the most valuable calls you make this year. If you have any questions about Puerto Rico residency, then please reach out to our team at (202) 455-6010 or schedule a confidential consultation.
