Insight: Tax implications for those who move to or from Puerto Rico
Understanding residency rules and planning ahead with CPA Omar Mues.
Moving to or from another country and understanding the tax implications of such a decision should be one of the most important steps taken before moving. Life as ordinary as you know it will change, and so will the tax considerations of your change in residency. Therefore, proper planning should be done beforehand so you can make a well-informed decision.
As you may know or have heard, Puerto Rico has been a possession of the U.S. since 1898. As part of this political relationship, the U.S. government can implement laws for the U.S. territories that differ from those for states. In the case of income taxation, Puerto Rico has fiscal autonomy, which means it has, in part, the authority to approve its tax laws.
Here, I will address at a high level the residency requirements for U.S. and Puerto Rico tax purposes. For U.S. income tax purposes, there are guidelines for residency rules for individuals who move to or from U.S. possessions, including Puerto Rico. Under these rules, an individual must comply with three tests every year to be considered a bona fide resident of Puerto Rico. These three tests are the presence test, tax home test and closer connection test.
The presence test can be met if the individual satisfies one of five alternatives, the most well-known being presence in Puerto Rico for 183 days. The tax home test determines the individual’s regular place of business, which should be Puerto Rico. If no regular place of business exists, the tax home test can be met by maintaining an office in the individual’s residence.
The closer connection test examines personal circumstances to determine whether an individual has closer ties to Puerto Rico than anywhere else. It considers factors such as, but not limited to, the location of one’s permanent home, family, personal belongings, routine personal banking activities, jurisdiction of one’s driver’s license and voting location.
For Puerto Rico income tax purposes, the term “resident individual” is defined as an individual who is domiciled in Puerto Rico. It is presumed that an individual is a resident of Puerto Rico if the individual has been present in Puerto Rico for at least 183 days during a calendar year. The determination of domicile for Puerto Rico residency depends on the subjective intent to live in Puerto Rico indefinitely, as supported by the facts of each case.
As you can see, both jurisdictions have their own set of rules. Therefore, you should discuss with your tax adviser the applicability of the residency rules to your personal situation. For further guidance on the U.S. bona fide residency rules, please refer to “Publication 570: Tax Guide for Individuals with Income from U.S. Possessions” from the IRS.
Please contact the certified public accountant of your choice for additional information regarding tax considerations when moving to another country or any other tax implications.
Author Omar Mues is a certified public accountant and a member of the Puerto Rico Society of CPAs Tax Committee.
