Digital Nomad
Digital Nomad Residency & U.S. Territory Tax Rules: How Bona Fide Residence Works in Puerto Rico and USVI
Navigating the U.S. tax framework for digital nomads based in Puerto Rico or the U.S. Virgin Islands can unlock major tax advantages. Understanding bona fide residence and territory source income is key.
By NomadicTax Research Team • 5-8 min read • September 13, 2026
## What it means to be a **bona fide resident**
If you’re a U.S. citizen or resident alien living in a U.S. territory (like Puerto Rico or the U.S. Virgin Islands), qualifying as a bona fide resident for a tax year can shift much of your tax burden under federal law. According to IRS Pub. 570 (2025):
- You must meet the **presence test**, meaning being physically present in the territory for at least **183 days** during the year. ([irs.gov](https://www.irs.gov/publications/p570?utm_source=openai))
- You must not have a tax home outside that territory. ([irs.gov](https://www.irs.gov/publications/p570?utm_source=openai))
- You must not have a closer connection to the U.S. or another foreign country than to the territory. ([irs.gov](https://www.irs.gov/publications/p570?utm_source=openai))
## Reporting income & claiming credit under these rules
Once bona fide, your **territory-source income** (e.g. local services, rents, or business income generated inside Puerto Rico or USVI) may be **excluded from U.S. federal tax**. ([irs.gov](https://www.irs.gov/publications/p570?utm_source=openai)) Income from outside the territory typically remains subject to U.S. tax.
If you need to file a U.S. federal return, you’ll generally use Form 1040, but you’ll **exclude territory income** and possibly adjust deductions accordingly. Note that some credits, like the Additional Child Tax Credit, have been expanded for bona fide Puerto Rico residents—now available even if you have just **one qualifying child**. ([irs.gov](https://www.irs.gov/publications/p570?utm_source=openai))
## Recent legislative changes that affect digital nomads in territories
- The **“One, Big, Beautiful Bill Act” (2025)** introduced tax provisions including:
- Increased standard deductions. ([irs.gov](https://www.irs.gov/newsroom/working-families-tax-cuts-individuals-and-workers?utm_source=openai))
- Permanent tax rate brackets (10%, 12%, 22%, 24%, 32%, 35%, 37%). ([irs.gov](https://www.irs.gov/irb/2025-45_IRB?utm_source=openai))
- Elimination or reduction of taxes on tips, overtime, car loan interest, and enhanced deductions for seniors, depending on modified AGI, filing status, and excluded income. ([irs.gov](https://www.irs.gov/publications/p570?utm_source=openai))
## Case example: A digital nomad in Puerto Rico
Imagine Emma, a U.S. citizen, moves to Puerto Rico on **June 1, 2025**, works entirely locally for the rest of 2025, lives in PR, has no business in the mainland U.S. She would likely:
- Meet the 183-day presence test (since she was in PR more than half the year);
- Not have a closer connection to U.S. states;
- Have her Puerto Rico-sourced income excluded from U.S. tax;
- File a **Puerto Rico tax return** only for her local income;
- Not owe U.S. federal tax on her Puerto Rico income, but would need to report any U.S.-source income (if she earned some from U.S. clients).
## Actionable steps for Digital Nomads
- Keep careful **records of travel and days spent** in territory vs U.S.
- Establish **local residence** — housing, community ties, voting registration (where possible).
- Monitor your income **source** — if it’s earned in territory vs outside.
- Plan for federal returns (if required) but track deductions, credits like the **Additional Child Tax Credit** if you have qualifying children.
- File **Form 8898** if you begin or end bona fide residence with global gross income over $75,000. ([irs.gov](https://www.irs.gov/publications/p570?utm_source=openai))
**Summary**
developing bona fide residence in U.S. territories opens powerful tax treatment for digital nomads. Understanding rules, staying organized, and leveraging recent changes can lead to meaningful savings.