The enticing tax incentives offered under Puerto Rico’s Act 60 come with some requirements. To enjoy the tax benefits, three residency tests must be passed that are known as the Bona Fide Residency Tests: presence test, tax home test, and closer connection test.
Before the IRS will allow the reduced Act 60 rates, you must prove that you have made Puerto Rico your home. And once you have checked all the boxes of the requirements, Form 8898 must be filed to notify the IRS of your new residency.
Note: Bona fide residency is not the same as residency, and it is not as simple as establishing owning property there. These bona fide residency tests are administered to prove you intend to stay in Puerto Rico for some time and that you are limiting your time within the US.
Passing the Presence Test
The most complicated and hard to pass of the three is the presence test. There are multiple ways to pass this test, and you must only meet one of the conditions laid out:
- You stay in Puerto Rico at minimum 183 days a tax year
- You were present in Puerto Rico for at least 549 days of a three-year period of the current tax year and the two previous tax years (which of that you were on the island for at least 60 days during those)
- You were not present within the US more than 90 days during that tax year
- You did not earn more than $3000 in earned income during the tax year within the US, and you have been present in Puerto Rico more days than the US
- You show no major connections to the US during the current tax year
To count as day as present within Puerto Rico, you must be physically there for any part of the day. Say you are briefly present in Puerto Rico that day; that day can be counted as present.
On a fortunate note, the presence test allows you 30 days of automatic present days for international travel. If you meet the requirements for those 30 days, you only technically must be present in Puerto Rico for 153 days. The conditions are following:
- You must spend more time in Puerto Rico than the US during the tax year
- If you are aiming for the three-year period condition, you must spend at least 549 days in Puerto Rico in those three years
There are certain exemptions that may apply. If you must leave the island to receive or accompany family for qualifying medical treatment, you can still count those days as present. Should you have to evacuate or cannot return to Puerto Rico because of some natural disaster, you may also get those days to count as present.
Passing the Tax Home Test
This is the simplest of the three tests to gain bona fide residency. The only requirement is: do not have a tax home outside of Puerto Rico during any portion of the tax year.
Regardless of where you reside, your tax home is the primary residence or at least your regular place of employment. If you do not have a regular or primary place of employment, your tax home is then considered your primary place of residence.
Luckily, should you move during the tax year, the IRS does offer a unique exemption to help you pass the tax home test and the closer connection test.
Passing the Closer Connection Test
Used to determine your loyalty to Puerto Rico, the closer connection test demonstrates your intentions of remaining part of the island life. Giving everyone a chance per their lifestyle, the IRS considered many factors for this test. Some of the following is considered per tax year:
- Where your permanent home is at
- Where your immediate family lives
- Where your personal belongings are stored
- Where you bank at
- Where you conduct business
- Jurisdiction of your driver’s license
- Jurisdiction of your voter registration
- Where charitable organizations are located that you donate to
- Which forms you file, such as Form W-8BEN or Form W-9
- Where your affiliate organizations are located (politically, religiously, professionally, socially, etc.)
To pass the closer connection test you need to prove that you are dedicated to having a life in Puerto Rico. Heedless of how you plan to pass this third test, it should be your goal to maintain and build a life there. Proving you have ties to the local community does not mean you have to cut ties to your life back in the US. It just shows that you are building a life in Puerto Rico that you will have for some time to come.
Passing the Tax Home and Closer Connection Tests Within the Year You Move
To elaborate on a point discussed earlier, should you move to Puerto Rico partway through a tax year, you can still satisfy the last two tests:
- You were not a bona fide resident within a three-year tax period of Puerto Rico
- You did not have a tax home outside of Puerto Rico for a minimum of 183 days
- You are a bona fide resident of Puerto Rico for the year you moved plus the two years previously
It is recommended to fully maximize the Act 60 tax benefits and satisfy your tests, that you move before July 1 of the given tax year. This ensures all conditions are met and little complications may happen.