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Updated April 23, 2019: It's said that the only things you can’t escape in life are death and taxes. While moving to Puerto Rico won’t help you live forever, it’s one of the few places on Earth where Americans can legally escape many forms of taxation.
Most countries tax their citizens based on residency. For example, if you are a Swedish citizen living in Thailand, you will owe taxes to Thailand, but not to Sweden. The U.S. has a system of global taxation. If you are an American living in Thailand, you’ll still have to pay U.S. taxes. While there are deductions and exceptions, it’s nearly impossible to escape the IRS, unless you live in Puerto Rico.
Puerto Rico falls in an interesting legal gray area. It’s part of the United States, but it’s a territory, not a state. Puerto Rico doesn’t receive voting representation in Congress and Puerto Ricans — though they are American citizens — can’t vote in federal elections. But they also don’t pay many federal taxes. Puerto Rico has the power to tax its residents, but, in an attempt to lure investment, the government slashed rates for new residents to next to nothing. Since Puerto Rico is part of the United States, any American can move there and become a resident. This creates a tax loophole: Americans who live in America pay U.S. federal taxes. Americans who live in foreign countries pay U.S. federal taxes. But Americans who move to Puerto Rico often don’t. With the correct tax planning, new Puerto Rico residents could legally pay a tax rate close to 0%.
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To gain and maintain your residency you’ll need to move your primary address to Puerto Rico, but you’ll only need to spend a minimum of 183 days in Puerto Rico per year. The rest of the time you can travel to other parts of the United States or the world. (Learn how to maximize your dollars while traveling the world by sea.)
Beyond moving you’ll need to fill out paperwork. To receive the benefits of Puerto Rico's Act 22, which created tax incentives for new residents, you’ll need to apply for a tax exemption decree. If your application is approved, your individual tax exemption decree will have the full details of your exact tax treatment, which may vary from person to person.
First, you won’t be able to vote in federal elections. If you have strong opinions on who should be president, drop them, because you’re losing your federal voting rights while you’re a resident of the island.
Second, Puerto Rico runs on Spanish. While you might be able to get by on English, it won’t feel like the rest of the United States.
Third, Puerto Rico is in the midst of an economic crisis and also has relatively high rates of violent crime, so safety may be an issue.
Fourth, salaried employees in regular jobs are basically out of luck. While you likely won’t have to pay U.S. federal income tax, you’ll face Puerto Rico income tax rates, which aren’t much better than U.S. federal rates. Which means that if you convince your boss to let you move to Puerto Rico and work remotely, you won’t really see any tax breaks once you get there. (Learn how tax brackets work.)
The tax breaks mostly apply to capital gains, investment and business income. That makes Puerto Rico’s tax benefits only truly available to investors or business owners.
All capital gains earned after moving to the island are tax-free, but you'll have to pay taxes on gains made before moving, which makes Puerto Rico an interesting option for eyeing retirement, and especially for those considering early retirement. For seniors, this could mean more cash on hand in retirement. For early retirees it could extend your runway considerably, allowing you to retire earlier than you’d thought.
Puerto Rico is essentially a legal tax haven, which means the primary benefits apply to those who would normally owe a lot of taxes. If you want to calculate what you might save by moving to Puerto Rico, simply look at your last tax return. But remember, a significant portion of Americans pay little to no income or capital gains taxes. Unless you make or inherited large amounts of money, moving probably makes little sense from a tax benefit perspective — although it would be a good way to brush up on your Spanish.
There are also more personal questions you’ll need to ask yourself: Is moving all the way to Puerto Rico to save a bit on your taxes really worth it?
If you’re a high-net worth individual or run a successful business that is mobile, then moving to Puerto Rico may relieve you of a significant tax burden. Whether the savings are truly worth it, however, is a question for you and a professional tax consultant.
Disclosure: Policygenius’ editorial content is not written by a tax professional. It’s intended for informational purposes and should not be considered tax advice. Please consult a tax professional for tax advice.
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