can someone please explain?
What’s the difference between BFR-PR and local residency requirements?
BFR-PR (a construct defined by the IRS) is actually not required by most if not all act Act 20 / 22 / 60 decrees. For most decrees, only local PR residency status (defined by PR government) is required. locally-defined PR residency is automatically achieved by meeting BFR-PR requirements. BFR-PR is NOT automatically achieved by meeting locally-defined PR residency requirements.
That distinction is laid out further in this post. It’s important that you read it to understand how Act 60 deals with the intersection of these two separate tax codes from the IRS and PR.
do I need to be a bona fide resident of PR to benefit from act 60?
In order to avoid federal taxation, you need to be a BFR-PR.
BFR is also important because you can use that status to gain Act 60 benefits in the year of your move if you meet certain requirements as laid out in the year of the move exception (mentioned later in this post).
what’s the bona-fide residency test?
BFR status is determined by the IRS via 3 tests. You must pass all to qualify as a BFR of a territory:
- the presence test
- the tax home test
- the closer connections test
the presence test
This test pertains to how many days you spent in PR, which counts as any day you spent any amount of time on the ground in PR. You will want to add a cushion beyond the minimum requirement of days as a safety factor in case of emergency, accidental misreporting, etc
IRS publication 570 lays out the presence test:
If you are a U.S. citizen or resident alien, you
will satisfy the presence test for the tax year if
you meet one of the following conditions:
- You were present in the relevant territory
for at least 183 days during the tax year.- You were present in the relevant territory
for at least 549 days during the 3-year period that includes the current tax year and
the 2 immediately preceding tax years.
During each year of the 3-year period, you
must be present in the relevant territory for
at least 60 days.- You were present in the United States for
no more than 90 days during the tax year.- You had earned income in the United
States of no more than a total of $3,000
and were present for more days in the relevant territory than in the United States
during the tax year. Earned income is pay
for personal services performed, such as
wages, salaries, or professional fees.- You had no significant connection to the
United States during the tax year.
the tax home test
Again quoting from IRS publication 570:
Your tax home is your regular or main place
of business, employment, or post of duty regardless of where you maintain your family
home. If you do not have a regular or main
place of business because of the nature of your
work, then your tax home is the place where
you regularly live. If you do not fit either of these
categories, you are considered an itinerant and
your tax home is wherever you work.
closer connections test
this test estimates where the “center of gravity” of your life is. are you actually living in PR, or are you there mainly as a tourist?
if you continue to have significant connections to the mainland like a house(s), cars, businesses, kids going to school, bank accounts, insurance, doctors, and professional services, then you may not pass this test. This test is a bit more subjective and looks at your connections in aggregate, so there are few hard and fast rules. having any one of the above (house, car, kids, etc) will not necessarily cause you to fail. in aggregate, however, they can combine to show you are not making a good faith effort at earnestly moving to PR. establishing many substitute connections in PR and severing mainland ones is your best bet here.
From pub 570:
You will have met the closer connection test if, during any part of the tax year, you do not have a closer connection to the United States or a foreign country than to the relevant U.S. territory. You will be considered to have a closer connection to a territory than to the United States or to a foreign country if you have maintained more significant contacts with the territories than with the United States or foreign country. In determining if you have maintained more significant contacts with the relevant territory, the facts and circumstances to be considered include, but are not limited to, the following.
• The location of your permanent home.
• The location of your family.
• The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by you and your family.
• The location of social, political, cultural, professional, or religious organizations with which you have a current relationship.
• The location where you conduct your routine personal banking activities.
• The location where you conduct business activities (other than those that go into determining your tax home).
• The location of the jurisdiction in which you hold a driver’s license.
• The location of the jurisdiction in which you vote.
• The location of charitable organizations to which you contribute.
• The country of residence you designate on forms and documents.
• The types of official forms and documents you file, such as Form W-8BEN or Form W-9.Your connections to the relevant territory will be compared to the total of your connections with the United States and foreign countries.Your answers to the questions on Form 8898,
Part III, will help establish the jurisdiction to which you have a closer connection.
examples are in pub 570
year of the move exception
there is an exception for the year of your move to a territory (distinct from the rules when moving out of a territory):
You will satisfy the tax home and closer connection tests in the tax year of changing your residence to the relevant territory if you meet all of the following:
- You have not been a bona fide resident of the relevant territory in any of the 3 tax years immediately preceding your move.
- In the year of the move, you do not have a tax home outside the relevant territory or a closer connection to the United States or a foreign country than to the relevant territory during any of the last 183 days of the tax year.
- You are a bona fide resident of the relevant territory for each of the 3 tax years immediately following the tax year of your move.
further examples laid out in pub 570 and here.
implications for filing taxes
IRS and state taxes
your BFR-PR start date
If you don’t meet the year of the move requirements, then the IRS sees the start date of your BFR-PR as Jan 1 of the first year you meet BFR-PR requirements.
If you meet the year of the move requirements, your BFR-PR date according to the IRS will be the date of your move, despite qualifying as a BFR-PR for the entire year.
gains realized before this date
Gains on assets that you both bought and sold before this BFR-PR date are US-sourced and therefore taxed normally by the IRS and your previous home state. That is, unless the asset is personal property, as some crypto is
gains on US-source assets sold as a BFR-PR after this date
If you choose to bifurcate gains, even unrealized gains up until this date (except with respect to the 10-year security rule) are US-sourced and therefore taxable at standard rates by the IRS and your state. This means that assets you bought prior to this date and sell at a later date while a decree-holding BFR-PR, would have their gains bifurcated. So you would pay normal IRS and state taxes on unrealized gains up until your BFR-PR start date, at which point the cost basis would reset, and gains from that date until sale will be PR-sourced and taxable under PR law and potentially exempt from PR taxes under the agreements in your decree.
If you choose not to bifurcate, all gains on the asset will be US-sourced. learn more about bifurcation here
PR taxes
if you meet the IRS’ BFR-PR requirements for the year, whether through the year of the move exception or otherwise, The PR government sees your date of residency as January 1, even if you were not relocated until later that year. Note that this is different than the IRS treatment. similar sourcing implications mentioned above apply for PR tax law, i.e. assets purchased after Jan 1 of the year you establish BFR-PR are considered PR-source, and therefore taxes on those assets can be modified by your act 60 decree
this video lays it out nicely. also, if you spend more time in Puerto Rico than the US, up to 30 days of international travel (outside the US) can count towards your Puerto Rico days.
You may also get PR extra days if you have medical emergencies or a natural disaster in PR (read: hurricane) prevents you from safely staying in/traveling to PR.
Add compliance implications section