Puerto Rico taxes explained in one sentence: the island runs its own income tax system through the local treasury (Hacienda), and bona fide residents can exclude their Puerto Rico-source income from U.S. federal tax under Section 933, but federal payroll taxes, an 11.5% sales tax, municipal business taxes, property taxes, and a sharp federal estate tax trap still apply. The headline rates look familiar if you’re coming from the mainland. The details don’t.
Who Taxes You: Hacienda, the IRS, or Both
Everything turns on whether you qualify as a bona fide resident of Puerto Rico. The IRS applies three tests: physical presence on the island for at least 183 days during the tax year (or an alternative multi-year presence formula), no tax home outside Puerto Rico, and no closer connection to the mainland or a foreign country than to the island.1Internal Revenue Service. Publication 570 – Tax Guide for Individuals With Income From U.S. Territories Clear all three and Puerto Rico taxes your worldwide income while the IRS generally leaves your Puerto Rico-source earnings alone.2Office of the Law Revision Counsel. 26 U.S. Code 933 – Income From Sources Within Puerto Rico
The exclusion is not a full exit from the federal return. If you earn income from outside Puerto Rico (mainland investments, a rental property in Florida, freelance work for a stateside client), you still file a U.S. return and report that non-Puerto Rico income when it crosses the normal filing threshold. U.S. government employees, including military members stationed on the island, report their federal pay regardless of residency.3Internal Revenue Service. Topic No. 901, Is a Person With Income From Sources Within Puerto Rico Required to File a U.S. Federal Income Tax Return
Social Security and Medicare apply to Puerto Rico wages exactly as they do on the mainland. Employers withhold 6.2% for Social Security and 1.45% for Medicare and match those amounts.4Internal Revenue Service. Topic No. 903, U.S. Employment Tax in Puerto Rico Self-employed residents pay self-employment tax using Form 1040-SS.5Internal Revenue Service. About Form 1040 (PR), Self-Employment Tax Return – Puerto Rico Moving to the island does not switch off FICA.
Individual Income Tax Rates
Puerto Rico’s individual income tax is progressive, with rates starting at 0% on the first portion of income and climbing to a top marginal rate of 33% on income above roughly $61,500. The brackets are narrower than federal ones, so middle-income earners reach higher marginal rates faster than they would stateside.
There is no standard deduction. Instead, the code provides personal exemptions plus itemized deductions: qualified medical expenses above 6% of adjusted gross income, student loan interest, and mortgage interest on a primary residence, among others. Caps and phaseouts shift with legislative amendments, so figures should be confirmed against the current year’s rules.
Long-term capital gains for residents are generally taxed at around 15%, with variation by asset type and acquisition date. Interest from Puerto Rico banks is typically subject to withholding at the source, so the bank handles the tax before the money reaches the account.
Sales Tax at the Register
Puerto Rico’s consumption tax, the Impuesto sobre Ventas y Uso (IVU), is 10.5% at the commonwealth level plus a 1% municipal surcharge, for 11.5% total on most purchases. Electronics, clothing, furniture, and prepared meals all land at the full rate.
Groceries and medicine are treated differently. Unprepared food and food ingredients, such as fresh produce, meat, milk, and rice, are exempt. Prepared foods, candy, and carbonated drinks are not. Prescription medications and insulin are exempt.
Services between registered businesses qualify for a reduced 4% rate with no municipal component, and designated professional services (legal, accounting, engineering, architecture, appraisals, and similar regulated fields) also qualify for the 4% rate. Businesses with annual gross receipts of $50,000 or less are exempt from IVU on their services entirely.
What Businesses Pay
Corporations face a 18.5% base income tax plus a graduated surtax on net taxable income above $25,000. The surtax rises in tiers:
- Up to $75,000: 5%
- $75,001 to $125,000: 15%
- $125,001 to $175,000: 16%
- $175,001 to $225,000: 17%
- $225,001 to $275,000: 18%
- Over $275,000: 19%
At the top, the combined rate reaches roughly 37.5% on income above $275,000. Businesses operating under an Act 60 decree often pay far less (more on that below).
Every business also owes a municipal license tax, the patente municipal, to each municipality where it operates. It is calculated on the prior year’s volume of business, and each municipality sets its own rate schedule.6Justia Law. Puerto Rico Code Title Twenty-One, Subtitle 3, Chapter 71, 651f – Computation of License Tax Businesses operating in more than one municipality allocate the tax by the share of activity in each. Act 60 decree holders receive a 50% exemption.7InvestPR. Tax Benefits and Policy
On the personal property side, businesses report movable assets (machinery, inventory, supplies, leasehold improvements) to the Municipal Revenue Collection Center (CRIM) using book value as of January 1 each year. Rates run from roughly 5.8% to 9.8% depending on the municipality. Missing a payment can trigger liens or administrative penalties.
Real Property Tax and the 1957 Assessment
Property tax on real estate is unlike anything on the mainland for a specific reason: assessments are still based on what it would have cost to build the structure in 1957, the last island-wide appraisal. Buildings put up after 1957 are valued as though they were built that year, using per-square-foot estimates from that era.8Government of Puerto Rico. CRIM Certified Fiscal Plan 2022 – Improving Property Tax Collections Assessed values bear almost no resemblance to current market prices, which keeps real property tax bills remarkably low by U.S. standards. The final bill combines a commonwealth base rate with a variable municipal rate.
Act 60 Incentives
Act 60-2019, the Puerto Rico Incentives Code, consolidated earlier incentive laws into one framework aimed at both businesses and individual investors.
For companies, an export services or manufacturing decree replaces the standard corporate brackets with a flat 4% rate on eligible income. Eligible activities include software development, consulting, engineering, financial services, call centers, research and development, and advertising, provided the clients are outside Puerto Rico. Dividend distributions from incentivized earnings receive a 100% exemption from additional withholding.9Worldwide Tax Summaries. Puerto Rico – Corporate – Tax Credits and Incentives Businesses with annual revenue above $3 million must employ at least one full-time-equivalent worker for export services, or three for manufacturing. The standard grant lasts 15 years, renewable for another 15.7InvestPR. Tax Benefits and Policy
For individuals, the investor incentive (which absorbed the former Act 22) gives qualifying bona fide residents a 100% exemption on capital gains from securities and digital assets that accrue after residency is established.7InvestPR. Tax Benefits and Policy Gains that accrued before the move do not qualify for the full exemption. Residency testing on these decrees is closely scrutinized.
The Federal Estate Tax Trap
This is the part newcomers miss. For federal estate tax purposes, a person who is a U.S. citizen solely by birth in a U.S. territory is treated as a “nonresident not a citizen.” That classification carries a $60,000 federal estate tax exemption on U.S.-situs assets, against the $15 million exemption available to mainland domiciliaries in 2026.10Internal Revenue Service. Estate Tax
U.S.-situs assets include stock of U.S. corporations, mainland real estate, and tangible property located in the U.S. Assets located in Puerto Rico, foreign real estate, foreign bank accounts, and life insurance proceeds sit outside the federal estate tax here. The rate on amounts above $60,000 tops out at 40%. Anyone who relocated to the island under Act 60 and still holds a mainland brokerage account full of U.S. equities should plan around this. One partial escape: shares of U.S. corporations can be transferred as lifetime gifts without triggering federal gift tax for nonresident non-citizens, even though the same shares would be taxable if held at death.