Since we’re considering moving to Puerto Rico, I’ve had lots of questions about taxes. The island is a U.S. territory, after all, and I have been wondering if there are tax advantages to moving there.
The short answer is – YES!
I have spent the last couple of weeks researching individual and business taxes in Puerto Rico and was very glad to learn that it has some great tax breaks, even for the average person.
Yes, it is true that Puerto Rico’s tax system is based on the U.S. tax code, but it is different enough to be noted as an advantage to moving there. I’m not an expert on taxes but I can certainly appreciate the savings I can achieve by relocating to the island.
Here are the three biggest advantages:
First, most U.S. citizens residing in Puerto Rico (that do not work for the federal government) can avoid paying U.S. federal personal income taxes. You do not have to pay this tax if your income comes from Puerto Rico sources. The rules are nuanced but well worth looking into with the help of a professional accountant – can you imagine cutting your federal income taxes to almost nothing? WOW!
Second advantage of moving to Puerto Rico is that Puerto Rico has no long-term capital gains tax or dividends tax. Of course, to qualify there are strict requirements for residency and some paperwork. But once you qualify, if you are collecting money on investments or distributions of company profits you are likely going to be able to avoid paying Uncle Sam.
Third advantage and perhaps the most important to us, is the low Puerto Rico income tax of only 4% – yes, Puerto Rico does have its own income tax. Since we are not planning on full retirement and need to continue to make money after the move, this is very important to us. If we run a business that serves customers outside of Puerto Rico (such as an online business), we only need to pay 4% on our income! That is incredibly low compared to the states.
There are, of course, other tax advantages, like really low real estate taxes, but the above are the gist of what, in my mind, are the most important.
Don’t forget that Puerto Rico has its own tax rules and, as always, to avoid any messy situations, you should consult a qualified tax professional to figure out if you qualify for any of the above. From what I’ve seen, there is lots of paperwork to fill out in order to qualify but I think it is well worth it.
Caution: moving to Puerto Rico does not exempt you from all taxes; you cannot escape them entirely. There are still several taxes you still must pay.
Example of taxes in Puerto Rico that you still have to pay:
Other U.S. federal taxes, like payroll, Social Security and Medicare taxes
Local Puerto Rico income taxes (these are often in lieu of the federal income tax)
I hope you find this post useful. I have certainly learned quite a bit about taxes in Puerto Rico as part of this process and I feel that it is a major plus for Puerto Rico as a retirement destination. I’m a bit surprised at how many folks told us to stay away from Puerto Rico because of cost of living and/or crime. The reality seems to be quite a bit different – I don’t know why that would surprise me. We are finding all sorts of financial benefits to moving there, not the least of which are taxes and lower cost of healthcare (more on that soon). It is all certainly putting Puerto Rico solidly near the top of our list for retirement locations.