In U.S. Puerto Rico, There's No Federal Income Tax For Those Who Move There
Categories: Tips & Tricks
But several cautions are in order. There are rules to limit big appreciation from the past and moving there right before you sell. (In that example, you pay a 5% tax). But even more fundamentally, you have to actually move. Your tax home—your real home—must be in Puerto Rico. Remember, just like any move from one state to another, it has to look and be real.
Try to avoid messy facts that don’t look like a permanent move. If possible, sell your home, move your family, sever connections to your old local clubs, etc. After all, if you are later ruled not to be a Puerto Rico resident, the IRS is back in the picture asking for back taxes, penalties and interest.
To qualify, an individual must not have been a resident of Puerto Rico within in the last 15 years. You must become a resident of Puerto Rico by December 31, 2035, and you must reside there for at least 183 days a year. You also have to do the paperwork, filing an application with the tax authority there. Once that’s approved, it’s a binding contract and you’ll get:
Tax-free interest and dividends earned after you become a resident.
No long-term capital gains tax on appreciation after you become a resident.
5% tax on long-term capital gain for appreciation before you move for any sales during your first 10 years as a resident.
A bit of legal advice about the decision:
Puerto Rico also has great incentives for business owners. If you have a business that can be moved, that can be a real tax home run both for you and the company.
You may be wondering why such an offer would be put out there. I've spent some time in Puerto Rico. There are beautiful resort locations, and there is also very high crime in the cities. More than 35% of Puerto Ricans are on food stamps. When you go there, there are places where traditional Mom and Pop businesses have thrived for hundreds of years, but the recent transition to big chain conglomerates like Walmart have changed the scope of local businesses, and many struggle to survive. Some of Walmart's busiest stores in the world are there, and at times, you can hardly move in the giant stores. Considering that Puerto Rico is very short on commodities compared to the size of it's population in a small place, the people must import much of what they have. Puerto Rico is a U.S. territory, so you don't need a passport to go there, but bringing your car to town comes with a high tax cost. Certain things are very expensive, such as electricity which has struggled through the years to be dependable. This makes Puerto Rico a prime location for solar and wind power installations that will more than cover their cost in a short period of time.
Bringing wealth into Puerto Rico is an attempt by local governors to help the people, and by the U.S. government to bring private funds into the country to put people to work, and curb the poverty levels and entitlement spending. In turn, by bringing the average income up and putting people to work, crime goes down and it's a win-win for everyone involved.
From town to town, there is such diversity and beauty all in one place that is quite spectacular. From the giant EL Yunque caverns and underground river to the Mountain itself, from small town living to a variety of beautiful cities with buildings of all ages, from the old Military Fort at El Morro to the churches of old, there is a beauty there for sure to behold. But it is the beaches that most flock to, where year in and year out, the water is warm, and the sand smooth. Now you can go there for the beaches and the tax savings. Who know's how long such a window of opportunity will last.