Why IRS Form 8898 Matters When You Move to Puerto Rico
IRS Form 8898, the Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession, tells the IRS that you became, or stopped being, a bona fide resident of Puerto Rico or another U.S. territory during the tax year. For business owners and investors who relocate to Puerto Rico, it is usually due for the year of the move and again for any year in which they leave. Missing it carries a separate penalty, and the information on it should match every other filing that supports your residency.
Moving to Puerto Rico does not end your United States citizenship or turn you into a nonresident alien. Puerto Rico is a United States territory. A United States citizen who becomes a bona fide resident of Puerto Rico continues to file Form 1040 when required, and excludes Puerto Rico source income from federal gross income under Section 933 of the Internal Revenue Code. Form 8898 is the statement that documents the change in residency behind that treatment.
Who Must File Form 8898
Under the IRS instructions, you must file Form 8898 for a tax year when your worldwide gross income for that year is more than $75,000 and you meet one of the residency conditions listed in the instructions. For most people relocating to the island, that condition is that you became a bona fide resident of Puerto Rico during the year. The same filing is required for the year in which you stop being a bona fide resident, for example when you move back to the mainland.
The $75,000 threshold is measured on worldwide gross income, not on income from Puerto Rico. Business owners, executives, and investors moving to the island usually exceed it in the year of the move. If you are married, review the instructions for how the threshold applies to each spouse.
When and Where to File
Form 8898 is filed separately from your income tax return. The IRS instructions state that it should not be filed with your tax return. It is due by the due date of your Form 1040, including extensions, and it is mailed to the IRS address listed in the current instructions. If you extend your Form 1040, the deadline for Form 8898 moves with it.
Because it is filed separately, Form 8898 is easy to overlook. A return preparer who files your Form 1040 electronically will not transmit Form 8898 with it, so confirm in writing who is responsible for preparing and mailing it and keep proof of the mailing.
Penalty for Not Filing
Section 6688 of the Internal Revenue Code imposes a $1,000 penalty for each failure to provide the residency information Form 8898 requires, and the IRS instructions apply the same penalty to a form filed with incomplete or incorrect information, unless the failure is due to reasonable cause and not willful neglect. The penalty is separate from any tax owed. A missing form also weakens your position if the IRS later questions whether you were a bona fide resident, because it is part of the record that supports the start date of your residency.
What Form 8898 Does and Does Not Do
Form 8898 reports a position. It does not create bona fide residency or prove it. Residency depends on the three tests in Section 937(a) of the Internal Revenue Code and Treasury Regulation 1.937-1: the presence test, the tax home test, and the closer connection test. The form asks for the facts behind those tests, including the date your residency began or ended, your presence, your tax home, and connections such as your permanent home, family, driver license, voter registration, and banking relationships. Our article on the 183 day rule in Puerto Rico explains the presence test in more detail.
The answers on Form 8898 should match your Puerto Rico income tax return filed with the Puerto Rico Department of the Treasury (Hacienda), your Act 60 annual report if you hold a decree, and the documents in your residency file. Inconsistencies between these filings are a common starting point for an inquiry.
Form 8898 and Act 60 Decree Holders
An individual resident investor decree under Act 60 requires bona fide residency in Puerto Rico, so the first year of a decree is often also the year Form 8898 is due. The decree and the form operate in different systems. The decree is a contract with the Government of Puerto Rico that governs Puerto Rico tax. Form 8898 is a federal statement that supports your federal position under Sections 933 and 937. Filing one does not satisfy the other. Read more about Act 60 tax incentives.
Your Federal Filing After the Move
After you become a bona fide resident, you report on Form 1040 any income that is not from Puerto Rico sources, such as United States source wages, dividends from United States corporations, and in some cases gains on property you held before the move, when that income meets the filing threshold. Puerto Rico source income is excluded under Section 933. For the year of the move, Treasury Regulation 1.937-1(f) applies the tax home and closer connection tests only to the last 183 days of that year, provided you meet the presence test for the year, were not a bona fide resident in any of the three prior years, and remain one for each of the following three years.
Your former state may also take the position that you remain domiciled there. State residency is decided under state law and is not settled by Form 8898. Closing state ties, such as a home, a driver license, and voter registration, deserves the same attention as the federal filing.
Common Mistakes With Form 8898
The first mistake is attaching Form 8898 to the income tax return. The instructions call for a separate filing. The second is ignoring the form because the move happened late in the year. The obligation turns on the change in residency and the $75,000 threshold, not on how many months remain in the year. The third is forgetting the form in the year of departure. Leaving Puerto Rico triggers the same filing if the threshold is met. The fourth is reporting a residency start date that does not match the travel log, the lease or deed, and the Act 60 file.
Next Steps
If you are relocating to Puerto Rico or have recently moved, confirm whether Form 8898 is due for the year of your move, who will prepare and mail it, and whether the facts in your residency file support the date you report. Our firm offers a free initial evaluation at lawyerinpr.com/start.
Christian M. Frank Fas, Esq. is a Puerto Rico licensed attorney with over 25 years of commercial and business law experience.