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When U.S. citizens move to Puerto Rico to take advantage of tax incentives under Act 60 (formerly Acts 20 and 22), they must navigate specific U.S. tax compliance requirements. One of the most important — and often overlooked — is IRS Form 8898. This form plays a key role in notifying the IRS of a change in residency status and is required for many individuals establishing bona fide residency in Puerto Rico. Failing to file it when required can jeopardize access to Act 60 benefits and result in penalties.
What Is Form 8898?
Form 8898, officially titled “Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession,” is used to inform the IRS when a U.S. taxpayer begins or ends residency in a U.S. territory, including Puerto Rico.
The form is used to establish and document residency status for tax purposes. Filing Form 8898 helps the IRS determine whether you meet the criteria to be treated as a bona fide resident of Puerto Rico under Section 937 of the Internal Revenue Code.
Who Must File Form 8898?
You must file Form 8898 if:
- You are a U.S. citizen or resident alien,
- You had gross income of $75,000 or more in the year before moving to or from Puerto Rico,
- And you established or ended bona fide residency in Puerto Rico (or another U.S. territory) during the tax year.
The form must be filed by the due date of your federal tax return (generally April 15) for the year in which the residency change occurred.
How Form 8898 Connects to Act 60
While Form 8898 is not specific to Act 60, it is highly relevant for anyone seeking to benefit from Act 60’s tax incentives. The IRS requires proof that an individual has become a bona fide resident of Puerto Rico in order to exempt Puerto Rico-sourced income (such as interest, dividends, or capital gains) from U.S. federal taxation.
Act 60 offers major tax benefits, including:
- 100% exemption on Puerto Rico-sourced dividends, interest, and long-term capital gains for qualifying individual investors,
- A 4% corporate tax rate on income from qualifying export services provided from Puerto Rico.
But these benefits are only available to bona fide residents. Filing Form 8898 (when required) helps document the start of that residency and may be referenced by the IRS when reviewing your eligibility.
What’s Reported on Form 8898?
Form 8898 includes:
- Your identifying information,
- The date you became (or ceased to be) a bona fide resident of Puerto Rico,
- Details on your income from Puerto Rico versus the U.S. mainland,
- A series of questions to assess whether you meet the IRS’s “bona fide residency test”, which includes the presence test, tax home test, and closer connection test.
Penalties for Noncompliance
Failure to file Form 8898 when required can result in a $1,000 penalty. More importantly, not filing may raise questions about your residency status and disqualify you from claiming Puerto Rico tax benefits under Act 60. The IRS has increased scrutiny in this area, especially as more high-income individuals relocate to Puerto Rico.
Final Thoughts
If you are considering or have already moved to Puerto Rico to benefit from Act 60’s tax incentives, it is crucial to understand your U.S. compliance obligations. Form 8898 is a key part of that process. Filing it accurately and on time helps ensure that you can take full advantage of Puerto Rico’s tax benefits without running afoul of the IRS.
As always, consult with a tax advisor experienced in Puerto Rico residency and U.S. territorial tax law to make sure you’re fully compliant.