Tax Planning
What Bona Fide Residency Means for Tax Credits in Puerto Rico and U.S. Territories
A guide for U.S. citizens and residents in U.S. territories on qualifying bona fide residency and claiming tax credits under the current IRS rules.
By NomadicTax Research Team • 5-8 min read • August 31, 2026
## Defining Bona Fide Residency
To become a **bona fide resident** of Puerto Rico or another U.S. territory like the U.S. Virgin Islands, Guam, Northern Mariana Islands, or American Samoa, you must satisfy three tests in Publication 570: the *presence test*, *tax home test*, and *closer connection test*. ([irs.gov](https://www.irs.gov/publications/p570?utm_source=openai))
## Tax Credits & Filing Obligations for Bona Fide Residents
- If you’re a bona fide resident of Puerto Rico for the entire tax year and your income comes only from Puerto Rican sources (excluding U.S. federal government wages), you generally **don’t file a U.S. federal tax return**, but do file with Puerto Rico. ([irs.gov](https://www.irs.gov/individuals/international-taxpayers/individuals-living-or-working-in-a-us-territory?utm_source=openai))
- If you have **income from outside Puerto Rico** or U.S. sources, you may need to file Form 1040, excluding Puerto Rico-source income, and claim tax credits if you paid taxes to the U.S. or territory. ([irs.gov](https://www.irs.gov/individuals/international-taxpayers/individuals-living-or-working-in-a-us-territory?utm_source=openai))
- Bona fide residents used to need three or more qualifying children to claim the Additional Child Tax Credit (ACTC), but that requirement has been removed. One or more qualifying child now suffices. ([irs.gov](https://www.irs.gov/publications/p570?utm_source=openai))
## Recent IRS Updates to Keep in Mind
- **Publication 570 (2025)** has been updated to reflect changes in the ACTC, standard deduction amounts, and reporting rules. These apply for the tax year 2025—returns filed in 2026. ([irs.gov](https://www.irs.gov/publications/p570?utm_source=openai))
- **Publication 15 (2026)** clarifies withholding obligations for federal employers in Puerto Rico under the 5517 agreement (issued in 1988) that mandates withholding Puerto Rico income tax instead of federal, for employees whose place of work is Puerto Rico. It also reiterates that federal agencies must file employment tax reports with Hacienda. ([irs.gov](https://www.irs.gov/publications/p15sp?utm_source=openai))
## Examples for Residents & Borderline Cases
**Scenario A**: You lived in Puerto Rico all of 2025, have income solely from a local business, and no U.S. government wages. You qualify as a bona fide resident and file only a Puerto Rico return—no U.S. IRS return required. ACTC is available if you have at least one qualifying child.
**Scenario B**: You earn local income plus dividends from U.S. corporations. You’re a bona fide resident of Puerto Rico, so you exclude Puerto Rican income on U.S. return, include U.S. source income, and may claim foreign tax credit if you paid taxes to Puerto Rico. With changes in ATS credits, you might claim credits even with fewer qualifying dependents.
## Best Practices
- Confirm bona fide resident status early—track days of presence, home-base, and your personal connections.
- Keep detailed records of income source (Puerto Rico vs U.S.), employer type, and location of work.
- Use updated IRS publications (Pub. 570, Pub. 15, etc.) to check eligible credits and thresholds.
- Consult a tax advisor when mixing sources of income across territories and the U.S., especially with foreign dividends or U.S. government wages.
## Bottom Line
The rules around bona fide residency are powerful—they determine what tax you pay and where. Recent changes have made tax credits more accessible (fewer children required), clarified withholdings under the 5517 agreement in Puerto Rico, and updated deductions. Understanding these can save money and ensure compliance.