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By Dr. James M. Dahle, WCI Founder
For those of you who are geographically challenged, Puerto Rico is part of the United States. It is a US territory, located on an island in the Caribbean. You do not need a passport to visit, and you spend US dollars there. The vast majority of people speak Spanish as their primary language, although about 50% of the island also speaks English.
Why in the world am I writing about a Caribbean Island on The White Coat Investor blog? No, I am not talking about a recent adventure I might have taken. No, I am not cautioning premeds against attending offshore medical schools. I'm talking about the biggest tax break you've never heard of: Act 60.
What Is Act 60?
Act 60 (formerly known as Acts 20 and 22) allows certain people to avoid both federal and state income taxes on their income. With a few changes in your life, you could be one of those people.
Act 20 came from the Export Services Act of 2012. Basically, it provided tax incentives for Puerto Rican companies that exported services outside of Puerto Rico. Act 22 was also passed in 2012 and is called the Individual Investors Act. It allows for federal tax exemption on interest and dividends for Puerto Rico residents. Act 60 was passed in 2019, and it basically updated both of these prior acts.
Puerto Rico Act 60 Tax Incentives
Puerto Rico is not a very rich place, and it wants rich people and their companies to come to Puerto Rico. So, it's going to bribe them to do so. States and municipalities do this all the time, so it should be no surprise to see a territory doing it. US territories already have a pretty unique tax structure. If you were a 100% resident of these places, you either filed a US federal return or a return in that territory. Puerto Rico's tax code is a bit complex, but as a general rule, you have much lower tax brackets. They range from 7%-33% for most income, but if you are self-employed and offering services only, they range from 6%-20%.
Suffice it to say, there is a pretty large difference in your tax bill when you drop the top tax bracket from 37% to 20%. In addition, Act 60 (and its predecessors) basically exempts all of your passive income from taxation. You don't have to pay taxes in the US on it and you don't have to pay taxes in Puerto Rico on it. Catching on yet?
Stop Paying Taxes on Passive Income
Once you live in Puerto Rico, your passive income is now “Puerto Rico source income,” and Section 933 of the Internal Revenue Code says you don't have to pay federal taxes on Puerto Rico source income. Act 60 says you don't have to pay Puerto Rico taxes on passive income.
More information here:
10 Tax Loopholes for Real Estate Investors
Act 60 Puerto Rico Requirements
How long do you have to live in Puerto Rico to qualify for Act 60? You must spend at least 183 days per year in Puerto Rico. That means you can still spend the entire hurricane season somewhere else.
Puerto Rico Act 60 and Capital Gains
Interest and dividends are 100% tax-exempt. So are capital gains that occur AFTER you become a resident. If you buy shares for $10, they appreciate to $20, you move to Puerto Rico and sell them, you will pay capital gains. But if they appreciate from $20 to $40 after you move to Puerto Rico, you only pay capital gains on $10 per share, the amount they appreciated before you moved. Unless you hold them for 10 years after moving; then you only pay 5% capital gains on them. If you establish a company in Puerto Rico to handle your direct real estate investments located on the mainland, those rents also become Puerto Rico-sourced, tax-free, passive income.
More information here:
6 Ways Passive Income Beats Active Income
The Catch with Act 60
There has to be a catch, right? Yes, there's a catch. A few of them actually.
- This only lasts through 2035. After that, you'll owe taxes on that passive income.
- You have to apply. It costs $750. If you are accepted, you have to pay $5,000 more.
- You have to make a $10,000 charitable contribution, submit a report, and pay $300 each year.
Still, you can imagine there are an awful lot of people thinking about moving to Puerto Rico.
How to Apply for Act 60
Once you establish residency (home, driver's license, bank accounts, etc.), you apply on the Single Business Portal for business-related tax breaks. Individual investors apply. You don't even have to do it on your own. It's not like this hasn't been done before; thousands of people have relocated to Puerto Rico for these tax benefits. There are English-speaking companies that (for a fee) will walk you through the process.
Puerto Rico Act 60 Business Incentives
Besides just individual investors, lots of businesses are considering moving to Puerto Rico, too. These are qualifying export services businesses. Incentives include:
- 4% corporate tax rate
- 100% tax exemption on distributions from earnings and profits
- 50% tax exemption on municipal taxes
- 75%-100% tax exemption on municipal and state property taxes (depending on the size of the business)
Note that you are required to pay yourself a reasonable salary which is taxed at regular Puerto Rico tax rates.
Entrepreneurship Community in Puerto Rico
There is a rapidly growing community of entrepreneurs in Puerto Rico taking advantage of Act 60. Tech companies, financial services companies, and real estate investors are concentrating and growing exponentially there. I'm told it is pretty welcoming. There are obviously some challenges, but if you are retired or can do location-independent work and love the islands, this could be a match made in heaven.
More information here:
Entrepreneurship and Passive Income
5 Financial Considerations for American Doctors Wishing to Live Abroad
Is Act 60 Worth Geographic Arbitrage?
We've talked about geographic arbitrage before, and the Puerto Rico Act 60 does have residency requirements. Most people think we're talking about going from California to Texas or Nevada. But in reality, there is an even bigger arbitrage available to you—all found conveniently in a little Caribbean paradise. ¡Vamonos!
If you need help with tax preparation or you’re looking for tips on the best tax strategies, hire a WCI-vetted professional to help you figure it out.
What do you think? Would you relocate to Puerto Rico primarily for tax reasons? Why or why not? Would this geographic arbitrage be worth it? Comment below!
The unelected Junta Fiscal changed the rules back in 2021 and it no longer applies to doctors. Just to the ones who previously had embraced it. Any workaround? 😡
I think Jim is referring to Act 60 in his article (previously Act 20/22): it was not halted by the Federal Oversight Board. On the other hand, Act 14 (4% tax on physicians) is different and it is only for physicians: this was a actually halted to apply by Oversight Board on 2021. But many people who actually applied and were given the incentive (about 6,000 physicians), take advantage of this tax benefit. Plus, we don’t pay most of the federal taxes. Great!
Define “it” please.
Are social security and annuitized income qualifying passive income? If so, wow!!
Jim,
I’m a proud listener of your podcast and follower of your page for the past 10 years. Thanks for what you do. Act 60 is great for many people to invest in PR but they have to live in Puerto Rico for half a year. It is very attractive for continental US citizens here but there is a growing negative sentiment among locals because they are driving real estate and cost of life a bit too high compared to natives. I also wanted to mention that there is a local tax incentive for many physicians living in the island. It was available to apply from 2016-2021 (applications were halted by the Fiscal Oversight Board) and consisted of an tax incentive, paying only 4% state tax (and no federal taxes) for 15 years. Many of the physicians that were able to apply are taking advantage of this tax incentive. You only have to do community service for certain hours, work with the state insurance plan or work at a academic center. And obviously, only practice in Puerto Rico. The objective was to keep physicians from leaving the island (there is actually a shortage of many specialties). Let me know if you would like to talk more about! PR is actually a great place to practice medicine! Take care.
Dr. Elias J. Sobrino Najul
Hematology/Oncology Physician
Here is a English website describing the details:
https://ferraiuoli.com/news/act-no-14-2017-known-incentives-act-retention-return-medical-professionals/
Thanks for the additional details!
How about a high income retired physician, would it work to be a snowbird to Puerto Rico for 183 days per year each winter?
Let’s say you have 800k in income from RMDs, dividends, passive business income, and real estate rental income. And let’s assume you live in a high tax state so that your marginal tax rate is around 50% combined, between federal, state, and NIIT. It sounds like you could enjoy the warm weather and the beach each winter, and reduce your taxes by a six figure amount.
Yes it will work.
I can see this rule changing and the tax advantage being taken away in the next few years.
Why? Territorial status allows it. Part of not been a state and persistently been treated as a colony and second class citizens. At least, there are some advantages to it.
The only constant is change.
Hello
What about Roth conversions?
Can you elaborate how that would look like?
If you live in PR they’d be subject to PR taxes I believe. But I’m no PR tax prep expert.
Any US sourced income (i.e. funds contributed to retirement accounts while working on the mainland) would still be subject to US federal taxes.