Does Puerto Rico Tax Pensions and Social Security?

Puerto Rico does not tax Social Security benefits and fully exempts U.S. military retired pay, but it does tax pensions and most other retirement distributions. If you are asking whether Puerto Rico taxes pensions and Social Security, the short answer is that bona fide residents owe zero local tax on Social Security and military retirement, a partial exclusion applies to U.S. federal government pensions, and private pension and 401(k) distributions are taxed at Puerto Rico’s regular income tax rates, which top out at 33%. On top of all that, you keep filing a U.S. federal return, and some of your retirement income will be taxed by both governments.

Social Security Benefits

Bona fide residents of Puerto Rico pay no local income tax on Social Security retirement or disability payments. For retirees whose Social Security is the main source of income, this is one of the clearest advantages of the island.

The federal side is less generous. Social Security benefits are U.S.-source income under Section 861, so they cannot be excluded from your federal return under Section 933.¹ Up to 85% of your benefits can be federally taxable depending on your combined income.² When you run the combined-income calculation, you do not reduce your other income by amounts excluded under the Puerto Rico bona fide resident rules.³

Military and Government Pensions

Military retirement pay is fully exempt from Puerto Rico income tax beginning with the 2025 tax year. Legislation signed by the governor in August 2024 established the exemption.⁴ Non-disability military retired pay still remains taxable at the federal level, because it is U.S.-source income that Section 933 does not reach.

Pensions from the U.S. federal government get a partial exclusion. Residents under age 60 can exclude the first $11,000 per year from Puerto Rico taxable income, and residents 60 and older can exclude $15,000.⁵ Anything above the exclusion is taxed at Puerto Rico’s regular rates. Pensions paid by the Commonwealth of Puerto Rico government or its agencies also carry a local exemption on the first portion, with reduced rates on amounts beyond it.

Private Pensions, 401(k)s, and IRAs

Once you qualify as a bona fide resident, Puerto Rico taxes your worldwide income under its own Internal Revenue Code. Distributions from private qualified plans like 401(k)s, traditional IRAs, and corporate pensions are ordinary income, taxed on a graduated scale that starts at 0% on the first $9,000 of net taxable income and reaches 33% on income above $61,500.

Lump-sum distributions received on separation from employment carry 20% withholding at the source. That rate can drop to 10% or 5% if reinvestment conditions are met. The withholding is a prepayment, not a separate tax, and it is credited against what you owe when you file your Puerto Rico return.

Private employer annuity payments get a partial exclusion. Residents under age 60 can exclude a portion each year, and those 60 or older receive a larger exclusion. After the exclusion, you recover your cost basis in the annuity tax-free under Puerto Rico’s standard rules, and only the remainder is taxed at regular rates.

Roth IRA distributions become exempt from Puerto Rico income tax once you reach age 60, not 59½. Both contributions and growth qualify at that point. If you take money out of a Puerto Rico IRA before 60, the distribution is taxable and faces a 10% early withdrawal penalty under Section 1081.02(g) of the Puerto Rico Internal Revenue Code. Distributions from a qualified employer-sponsored plan received on separation from service are not subject to the early withdrawal penalty, regardless of age. Converting a traditional IRA to a Roth is a taxable event in the conversion year.

One trap worth flagging: moving assets from a mainland U.S. qualified plan to a Puerto Rico plan that is not qualified under both the federal Internal Revenue Code and the Puerto Rico tax code is treated as a taxable distribution for U.S. income tax purposes.⁶ Tax-deferred rollovers only work between “dual-qualified” plans that satisfy both codes.

Why Act 60 Does Not Lower Your Pension Tax

A frequent misconception is that Act 60 cuts the Puerto Rico tax rate on pension income. It does not. Chapter 2 of Act 60, formerly Act 22, covers individual investors and applies to capital gains, dividends, and interest. It offers a 0% rate on capital gains that accrue after you become a resident, a 10% rate on long-term gains from pre-residency securities sold within 10 years, and a 5% rate on pre-residency securities sold after 10 years of residency.

Distributions from qualified retirement plans are ordinary income under Puerto Rico law, not capital gains. The Act 60 rates do not apply to them. The capital gains provisions can help retirees with large taxable brokerage accounts, but the money leaving your 401(k) each month runs through the standard Puerto Rico brackets.

You Have to Be a Bona Fide Resident First

None of the local benefits above exist for you until you qualify as a bona fide resident of Puerto Rico. The IRS applies three tests, and you have to meet all three for the entire tax year.⁷ Failing even one means you are still taxed as a mainland resident federally, and the exclusions do not help you.

Physical Presence

You generally need at least 183 days of physical presence in Puerto Rico during the tax year. An alternative route lets you qualify if you spent no more than 90 days in the United States that year.⁷ Waivers of the time requirement exist for war or civil unrest but rarely come up for Puerto Rico.⁸

Tax Home

Your tax home cannot sit outside Puerto Rico at any point during the year. Tax home is wherever your main place of business or employment is located. Retirees sometimes assume this test is irrelevant to them, but the IRS still looks at where any income-producing activity happens and where your main economic ties are anchored.⁷

Closer Connection

This is the test that trips people up most often. Your connection to Puerto Rico has to be stronger than your connection to the mainland or any foreign country. The IRS weighs where your permanent home is, where your family lives, where your driver’s license was issued, where you are registered to vote, where you bank, and where you keep personal belongings and important documents.⁷ Keeping a mainland house “just in case” or staying on your old state’s voter rolls can sink an otherwise valid residency claim.

The Federal Return and the Double Tax Problem

Moving to Puerto Rico does not end your relationship with the IRS. U.S. citizens file Form 1040 every year and report worldwide income, no matter where they live.⁹

Section 933 lets bona fide residents exclude Puerto Rico-source income from U.S. gross income.¹⁰ The problem for retirees is that most mainland pension income is not Puerto Rico-source. Pension distributions have two components: the contribution portion is sourced to where you performed the services that earned the pension, and the investment earnings portion is sourced to where the pension trust is located.⁷ If you spent your career on the mainland and your plan is held by a U.S. trustee, the whole distribution is U.S.-source, and Section 933 does nothing for it.

The sourcing works differently for someone who performed services in Puerto Rico. The contribution portion is Puerto Rico-source in that case, even if the investment earnings from a U.S.-based trust remain U.S.-source.⁷ Only the Puerto Rico-source portion qualifies for the Section 933 exclusion.

Here is where retirees get surprised. Puerto Rico taxes your worldwide income as a resident, including distributions from mainland retirement plans. The federal government taxes the same distributions because they are U.S.-source and cannot be excluded. The same pension check is in reach of both governments.

The foreign tax credit is the main tool for softening the overlap. If you report Puerto Rico-source income on your federal return, you can claim a credit for Puerto Rico tax paid on that income using Form 1116.¹¹ You must reduce the credit by any Puerto Rico tax allocable to income you excluded under Section 933.¹² For U.S.-sourced pension income that Puerto Rico also taxes, the Section 904 limitation applies, and the arithmetic gets involved. If significant pension income is in play, a tax professional who works both jurisdictions is worth the fee.

Filing With Both Governments

Puerto Rico’s individual return is Form 482, filed with the Departamento de Hacienda by April 15, with a six-month automatic extension available on request. If your balance due will be at least $1,000 and your income is not subject to withholding, you make quarterly estimated payments on April 15, June 15, September 15, and January 15.

You also file Form 1040 with the IRS. Worldwide income goes on the return, including the Puerto Rico-source income you later exclude under Section 933; the excluded amount is reported for informational purposes and then subtracted to reach your taxable amount.¹³

1
Internal Revenue Service. Social Security – IRS Courseware – Link and Learn Taxes
2
Internal Revenue Service. IRS Reminds Taxpayers Their Social Security Benefits May Be Taxable
3
Internal Revenue Service. Publication 554 (2025), Tax Guide for Seniors
4
The Official Army Benefits Website. Commonwealth of Puerto Rico Military and Veteran Benefits
5
VA News. Unlocking Veteran Tax Exemptions Across States and U.S. Territories
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Internal Revenue Service. International Issues Affecting Retirement Plans
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Internal Revenue Service. Publication 570 (2025), Tax Guide for Individuals With Income From U.S. Territories
8
Internal Revenue Service. Exceptions to the Bona Fide Residence and the Physical Presence Tests
9
Internal Revenue Service. Bona Fide Residents of the Commonwealth of Puerto Rico – Tax Credits
10
Office of the Law Revision Counsel. 26 USC 933 – Income From Sources Within Puerto Rico
11
Internal Revenue Service. Topic No. 902, Credits and Deductions for Taxpayers With Puerto Rico Income
12
Internal Revenue Service. Instructions for Form 1116 (2025)
13
Internal Revenue Service. Special Instructions for Bona Fide Residents of Puerto Rico Who Must File a U.S. Individual Income Tax Return