Digital Nomad
US and Puerto Rico Tax Inflation Adjustments & Puerto Rican Source Income Rules Every Nomad Should Know
New 2026 IRS inflation-indexed tax thresholds and changes to Puerto Rico source income rules affect U.S. citizens and residents living in or earning from Puerto Rico.
By NomadicTax Research Team • 5-8 min read • August 12, 2026
## 2026 Inflation Adjustments in U.S. Federal Tax Law
As of **tax year 2026**, the IRS has updated more than 60 federal tax provisions, including standard deduction thresholds, tax rate brackets, and estate and gift tax exclusions under the “One, Big, Beautiful Bill” (OBBB) legislation. These updates largely affect U.S. citizens and resident aliens but have important side-effects for individuals with Puerto Rican source income. ([irs.gov](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill?utm_source=openai))
### Key Figures
- **Standard deductions** rise to $32,200 (married filing jointly), $16,100 (single or married filing separately), and $24,150 (head of household). ([irs.gov](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill?utm_source=openai))
- **Top marginal rate** remains at 37% for income over $640,600 (single) and $768,700 (married filing jointly). ([irs.gov](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill?utm_source=openai))
- **Estate tax exemption** climbs to $15,000,000 for 2026. ([irs.gov](https://www.irs.gov/irb/2025-45_IRB?utm_source=openai))
- **Foreign Earned Income Exclusion** increases to **$132,900**. This is particularly relevant for those earning abroad or in U.S. territories. ([irs.gov](https://www.irs.gov/publications/p505?utm_source=openai))
## Puerto Rico-Source Income Rules
- Bona fide residents of Puerto Rico may **exclude income from Puerto Rican sources** on their U.S. returns. However, services performed as U.S. government employees are excluded from that benefit. ([irs.gov](https://www.irs.gov/taxtopics/tc902?utm_source=openai))
- Child Tax Credit (CTC) and Additional Child Tax Credit (ACTC) are available; for tax year 2025 (filed in 2026), the initial CTC per qualifying child is $2,200, with up to $1,700 refundable under ACTC. ([irs.gov](https://www.irs.gov/taxtopics/tc902?utm_source=openai))
## What Digital Nomads & Expats Should Consider
- Even if residing in or earning in Puerto Rico, U.S. citizens must assess whether they meet **bona fide resident status** to claim exclusions.
- Amounts excluded from income due to residency cannot be used for claiming certain U.S. deductions or credits.
- Monitor whether U.S. source income or income from a U.S. employer appears on your return—for example, remote work for a U.S. company while residing in Puerto Rico may still trigger federal income tax and exclusions may not apply.
## Example Situations
- A U.S. citizen living full-time in Puerto Rico with most income from Puerto Rican sources, who also qualifies as a bona fide resident, may essentially exclude that income from their Form 1040. But if part of income comes from working directly for the U.S. government, that portion is taxable.
- A remote worker providing services to U.S. clients while residing in Puerto Rico needs to separate income referable to Puerto Rican vs. U.S. source, and ensure compliance with both sets of rules.
## Practical Tips
- Maintain documentation to prove bona fide residency—physical presence, tax home, ties to Puerto Rico.
- Use tax software or work with an advisor to properly prepare foreign tax credits when needed, and to avoid double-claiming deductions or credits.
- Stay current with IRS publications; items like Publication 15 (Employer’s Tax Guide) and Publication 505 (Withholding and Estimated Tax) have updated sections for 2026. ([irs.gov](https://www.irs.gov/publications/p15sp?utm_source=openai))
By understanding these inflation adjustments and Puerto Rican source income rules, digital nomads and expatriates can structure income and filings to maximize benefits and remain compliant.