FlagSageWhat this covers
Puerto Rico is a US territory, not a foreign country, so a US citizen who moves there remains a US citizen in the US tax system. Bona fide residence is the IRS status that decides whether Section 933 applies. Publication 570 says bona fide residents of Puerto Rico generally pay tax to Puerto Rico on their worldwide income, file a US return reporting worldwide income except Puerto Rico source income, and cannot take US deductions or credits allocable to the excluded income.
Understand what Section 933 does and does not exclude
Section 933(1) excludes from US gross income the income a bona fide resident of Puerto Rico for the entire tax year derives from sources within Puerto Rico, except amounts received for services as an employee of the United States or its agencies. It also bars deductions and credits properly allocable to the excluded income. Puerto Rico has no separate country record here; federal residence rules are in the United States record.
Publication 1321 says US citizens who are bona fide residents for the entire year but receive income from sources outside Puerto Rico, or income as a US government employee in Puerto Rico, must file a US return. Because part of the income is excluded, part of the standard deduction or itemized deductions must be allocated to it before you can tell whether you must file at all.
Source rules decide what counts as Puerto Rico income. Publication 570 sets them out. One rule matters a lot for people who move with investments: if you were a US citizen or resident who was not a bona fide resident of the territory in any of the 10 years before the year of a sale, gains on certain investment property you owned before becoming a resident, such as stock and securities, are not treated as Puerto Rico source income for the Code, so they cannot be excluded on the US return.
Check the three bona fide residence tests
Publication 570 and Publication 1321 say you are generally a bona fide resident of Puerto Rico if, during the tax year, you meet all three of these tests. This is a different test from the bona fide residence test used for the foreign earned income exclusion, and Publication 54 defines a foreign country as territory under the sovereignty of a government other than the United States, so Puerto Rico is not one for that exclusion.
- Presence test: meet one of the five presence conditions described below.
- Tax home test: you did not have a tax home outside Puerto Rico during any part of the year. Your tax home is generally your regular or main place of business, employment or post of duty, regardless of where your family home is.
- Closer connection test: during no part of the year did you have a closer connection to the United States or a foreign country than to Puerto Rico. The IRS looks at facts such as your permanent home, family, belongings, banking, driver's license, voter registration, the organizations you belong to and the residence you state on forms.
Count your days for the presence test
For US citizens and resident aliens, Publication 570 says you meet the presence test if you meet any one of five conditions. Days are counted when you are physically present at any time during the day, and a day spent in both the United States and Puerto Rico counts as a Puerto Rico day. Some days outside Puerto Rico can count as present, such as days away for qualifying medical treatment, days you cannot return because of a declared disaster or evacuation, and up to 30 days of other travel outside both places in some cases. A day ledger such as the day ledger tool helps keep the record.
| Condition | What it requires |
|---|---|
| 183 days | At least 183 days present in Puerto Rico during the tax year |
| 549 days over 3 years | At least 549 days in Puerto Rico during the current and two preceding tax years, with at least 60 days in each of those years |
| 90 days in the US | No more than 90 days present in the United States during the tax year |
| $3,000 of US earned income | No more than $3,000 of earned income in the United States, and more days in Puerto Rico than in the United States |
| No significant US connection | No permanent home in the United States, no current voter registration there, and no spouse or minor child whose main home is there, subject to listed exceptions |
Use the special rules for the year you move
In the year you move to a territory, Publication 570 says you can satisfy the tax home and closer connection tests if you were not a bona fide resident in any of the 3 tax years before the move, you had no tax home outside the territory and no closer connection elsewhere during any of the last 183 days of the year, and you are a bona fide resident for each of the 3 tax years after the move. You still need the presence test for that year.
For the year you leave Puerto Rico, a US citizen who was a bona fide resident for at least the two tax years before the move can be treated as a bona fide resident for the part of the year before the move, provided they keep the closer connection to Puerto Rico up to the date they stop having a tax home there. Publication 570 says Puerto Rico source income earned before the move can then be excluded, except US government wages. Leaving is also a residence question for the place you go to; see leaving a country for tax.
File Form 8898 when your status changes
Form 8898 reports that you became or stopped being a bona fide resident of a US territory. The instructions say you must file it for a tax year in which your worldwide gross income is more than $75,000 and you take the position that you began or ended bona fide residence, measured against earlier returns. Worldwide gross income includes income you exclude.
The instructions say to file Form 8898 by the due date of Form 1040, including extensions, and to mail it separately to the IRS address in Austin, Texas, not with the return. Failing to file, or filing incomplete or incorrect information, can bring a $1,000 penalty unless the failure is due to reasonable cause and not willful neglect.
Remember that self-employment tax still applies
Section 933 is an income tax exclusion. Publication 54 says a US citizen or resident who owns and operates a business in Puerto Rico must pay self-employment tax on net earnings of $400 or more from it, whether or not the income is exempt from US income tax. Residents who do not otherwise file Form 1040 use Form 1040-SS. See self-employment tax abroad.
Read Act 60 decrees as Puerto Rico tax, checked against DDEC
Act No. 60 of July 1, 2019, the Puerto Rico Incentives Code, brought Puerto Rico's tax incentives together. DDEC's Office of Incentives processes applications and supervises decrees through its Incentives Portal. Act 38-2026, enacted March 10, 2026, amended the rules for resident individual investors, and DDEC explained the changes in Informative Bulletin 2026-004 of April 24, 2026.
These points come from that bulletin and describe Puerto Rico tax only. They do not change the IRS tests, Section 933 or the 10-year rule on pre-move gains.
- Applications received by December 31, 2026 are treated as requests for the 0% Puerto Rico tax rate on net capital gains, interest and dividends under the Incentives Code, with a decree expiring December 31, 2035.
- An applicant can instead request a 4% fixed rate on net capital gains, interest and dividends with a decree expiring December 31, 2055. Holders of existing decrees can ask to extend to 2055, which moves them to the 4% rate.
- Applicants filing before January 1, 2027 must not have been Puerto Rico residents between January 17, 2006 and January 17, 2012. Applicants filing after December 31, 2026 must not have been residents for the six years before relocating.
- For applications filed on or after January 1, 2027, the primary residential property must be held in the applicant's own name, jointly with a spouse, or through a grantor trust, and registered or pending registration.
- DDEC runs a background check and asks for a criminal record report. The bulletin says convictions for listed financial crimes are grounds for dismissal or denial of an application.
Common misconceptions
Questions to take to a professional
- Which of the five presence conditions do I meet each year, and what records show it?
- Where is my tax home given where my business, clients and employer are?
- Do any of my ties to the mainland, such as a home, voter registration or family, point to a closer connection there?
- Which of my income is Puerto Rico source income under Publication 570, and which stays taxable in the US?
- How does the 10-year rule apply to investments I held before moving?
- Do I need to file Form 8898 this year?
- If I apply for a DDEC decree, which application date and rate options apply to me under Act 38-2026?
Questions people ask
Do US citizens in Puerto Rico pay federal income tax?
Section 933 excludes Puerto Rico source income of a bona fide resident for the entire year, except US government employee pay. Income from sources outside Puerto Rico stays subject to US tax. Publication 1321 explains when a US return is required.
How do I become a bona fide resident of Puerto Rico?
The IRS says you must meet the presence test, have no tax home outside Puerto Rico and have no closer connection to the United States or a foreign country during the tax year. Publication 570 describes each test and the special rules for the year you move.
What are the five presence tests for Puerto Rico?
Publication 570 lists 183 days in Puerto Rico; 549 days over three years with at least 60 each year; no more than 90 days in the US; no more than $3,000 of US earned income with more days in Puerto Rico than the US; or no significant connection to the US. Meeting any one satisfies the presence test.
When do I file Form 8898?
The instructions say to file it for a year in which you begin or end bona fide residence in a US territory and your worldwide gross income is more than $75,000. It is due by the Form 1040 due date and is mailed separately. The penalty for not filing is $1,000 unless there is reasonable cause.
Is the Act 60 0% rate still available?
DDEC Informative Bulletin 2026-004 says applications received by December 31, 2026 are treated as requests for the 0% Puerto Rico rate on net capital gains, interest and dividends, with decrees expiring December 31, 2035. A 4% rate with decrees to 2055 is the other option under Act 38-2026.
Do I pay self-employment tax in Puerto Rico?
Yes, in general. Publication 54 says US citizens and residents who run a business in Puerto Rico owe self-employment tax on net earnings of $400 or more, even if the income is excluded from US income tax.
Where this guide stops. A qualified US tax professional judges bona fide residence and prepares the US return and Form 8898. A Puerto Rico tax professional handles the Puerto Rico return filed with the Puerto Rico Department of the Treasury (Hacienda). The Office of Incentives of the Puerto Rico Department of Economic Development and Commerce (DDEC) processes Act 60 decree applications. FlagSage does not prepare returns, apply for decrees or judge residence.
Sources
- 26 U.S.C. 933, Income from sources within Puerto RicoPrimary law
- Publication 570 (2025), Tax Guide for Individuals With Income From U.S. TerritoriesOfficial guidance
- Publication 1321 (October 2025), Special Instructions for Bona Fide Residents of Puerto RicoOfficial guidance
- Instructions for Form 8898 (10/2024)Official guidance
- Publication 54 (12/2025), Tax Guide for U.S. Citizens and Resident Aliens AbroadOfficial guidance
- DDEC Informative Bulletin No. 2026-004, Amendments enacted under Act No. 38-2026 (April 24, 2026)Official guidance
- Puerto Rico Incentives Code, Act No. 60 of July 1, 2019, as amended (English, Office of Management and Budget, rev. May 18, 2026)Primary law
Related
- Countries covered
- United States
- Sources
- 7 sources listed above
- Tax year
- Current rules as checked
- Review
- Not professionally reviewed
Sources checked November 9, 2026