Here's something I've been wondering, totally hypothetical but could be real for someone else:
Puerto Rico has this new tax law that basically limits taxes to like 4% or less, if you are a resident of PR. Let's say Bob is an American who expects to have a big exit in 2015 (or he has lots of GOOG stock and wants to sell it). Normally Bob would pay US capital gains taxes (15-20%, maybe 23.8%), plus California taxes (assuming he lives in CA). Instead, Bob moves to Puerto Rico, establishes residency. Then he sells his shares for US dollars, and pays Puerto Rico taxes. Then Bob moves back to mainland US, having saved lots of money.
Yes, the flaw in the above scenario is that for capital gains that have a cost basis that began prior to becoming resident in Puerto Rico ("built in gains"), you will owe taxes at both the US federal and Puerto Rican levels.
3 scenarios:
If the business was started and sold prior to becoming a Puerto Rican resident, then taxes would be owed at US federal and state levels like normal.
If the business was started while resident on US mainland and then you moved and became resident in Puerto Rico (the OP's scenario), it gets a lot more complicated. Just considering capital gains from a sale of the business to keep it easier, you will owe taxes to both the US and Puerto Rico. These are called "built in" capital gains. You can look up details on this, but taxes are owed to the US and to Puerto Rico at rates that change over time depending on how many years you are resident in Puerto Rico before selling the business. This is the most complicated scenario.
If you start a qualifying Puerto Rican business after becoming resident in Puerto Rico and after having been accepted into Act 22, then you would start with a zero cost basis. This is the best case scenario. When you sell this business, you could owe 0% capital gains. However, during the lifetime of this business, you will still pay FICA taxes (15.3%) on earned income to the US Federal government up to the regular cut off levels, personal Puerto Rican earned income taxes on a portion of your income, and 4% corporate tax on business income. This is the easiest scenario since it starts with a zero cost basis.
Btw, IANAL.
TLDR 1.) Started & sold business in Cali, no capital gains tax benefit. 2.) Started business in Cali and sold after becoming resident in PR, crazy complicated, but taxes do apply at both federal and puerto rican level. 3.) Built and sold business in PR after acceptance into Act 22, and after becoming resident in PR, 0% capital gains tax, but other taxes apply during the lifetime of the business.
For those interested, residency is 183 days per year.
US citizens overseas are required to declare all income (and capital gains) to the IRS regardless of source. They still have to file returns in the US. Bob will owe tax as a result, but he can probably write off the 4% he payed in PR against his US taxes. He's not a resident of California, so he likely avoids the state tax.
(Note: I don't know specifically about Puerto Rico, but generally the above is the case for US citizens in foreign countries.)
Which seems to support your idea! "Capital gains are sourced to your place of residence."
Any dividend income would be taxable, since you have to file an IRS return for all ex-PR income, but it looks like not the CG.
Quite a loophole - thanks for prompting the research.
EDIT: There are some quite long-term residency requirements to avoid CG on things you owned before moving to PR though. I don't think it'd work in the year timeframe you asked about.
PR is a US Territory. Technically, you never left the country.
"In general, United States citizens and resident aliens who are bona fide residents of Puerto Rico during the entire tax year, which for most individuals is January 1 to December 31, are not required to file a U.S. federal income tax return if they have income only from sources within Puerto Rico." www.irs.gov/taxtopics/tc901.html
There are caveats. One that I know for sure is that if you are self-employed, you still must file & pay FICA taxes to the US federal government.
In this case Bob would pay IRS 20% tax for the price appreciation happened when he lived in CA. The 4% tax applies only to the price gain during his stay in Puerto rico.
This is inaccurate. The 4% number is a figure that applies to businesses that are export related and that apply and receive approval for Act 20. It's a 4% tax on the inc's business income and is unrelated to capital gains.
After you give up your citizenship you are still required to file with the IRS for the following ten years, correct? (Assuming you ever want to enter the US again.) What are your tax obligations during that time, though?
> After that you only file income tax returns if you have income from US sources or you become a US resident.
Example: So your US corporation "pays" your Ireland corporation, who than pays you in the EU? Would that avoid the income from being considered US sourced?
The US taxes you on wages only if you are within the borders when you do the work. So a noncitizen doing work outside the USA and getting paid by a US customer or employer is not taxable in the USA on those wages.
You would not need that intervening corporation in Ireland for income tax reasons but there are probably good business reasons for putting a layer between you and the US company.
If you are a US citizen you are taxed on your wages no matter where you are on Planet Earth. Some relief is possible (first approx $100k not taxable, for instance).
@deciplex - you are right if you live in a country with an income tax.
If you live in a country with no income tax then your US income tax is a net cost to you -- making you poorer compared to that British coworker who makes the same salary as you but pays no UK tax. Look around Dubai. Count Americans and count British people. Tax is part of the reason.
>If you are a US citizen you are taxed on your wages no matter where you are on Planet Earth. Some relief is possible (first approx $100k not taxable, for instance).
Correct me if I'm wrong, but after that $100K deduction you're essentially paying the higher of the local tax, or the US tax?
you are paying BOTH - another reason this is an issue.
expats pay tax on full amount to host country, plus tax on amount over $92k to US. So the money over $92K is double taxed - making it "pointless" (not completely, obviously) to earn that extra
If the US source income has tax withheld at the correct amount (default is 30%) then no tax return is required.
The magic is in understanding the metaphysics of the definition of US source. Just because the money comes from a US customer doesn't mean that you have US source income.
If I hire a web developer in Canada and he designs my site whilst sitting in a chair in Vancouver, the income he ears from me is not US source. Weird I know. For services, income is sourced where the human body who did the work is physically located. God what an awful sentence.
Ah, that makes sense, actually. What about someone in Canada, selling a product on a website hosted in the US, with a customer billing address in the US?
My intuition says "not us source" because the production and administration of the product was in Canada.
There are also categories of income which are exempt from witholding, such as royalties. For instance, Canadian authors receive royalty cheques from Amazon with no witholding if they submit a W-8BEN. Is their income "non-US source" because the owner is not resident in the US?
The income tax treaty can reduce US tax on income paid to Canadians down to zero, depending on the type of income. That's what you are seeing with the W-8BEN.
For selling stuff across borders, source of income is where ownership changes hands from seller to buyer. If the buyer owns the item as soon as it goes into a DHL pouch in Canada, then it is Canadian-source income and the US can't tax it.
Correct. If you are "rich" ($2 million net worth or $157k average tax bill over the previous five years) then you pretend you sold everything. The first $680k of gain is tax free but you pay tax on everything above that. Bad things happen to your retirement plans and IRAs.
The news cycle for this topic is quarterly since the government releases statistics on that time cycle. That's why you see the topic written about fairly frequently.
I talk to journalists all the time. I try to be helpful in some times they thank me by putting a quote in the article. Sometimes not.
You have to solve two problems -- your place of citizenship and your place of residence. Dominica and St. Kitts are the two places most people look to buy citizenship. There are other more expensive places too.
Residence - this is easier to arrange. If the country will give you a tourist visa you're in, at least temporarily.
This is probably not the right forum to approach you in, but is there any chance you would be able to take a few questions from me either here or by e-mail? I am a dual citizen (but I have never lived in the country) and am so afraid of doing something wrong with regards to US tax obligations. I am especially worried that I would accidentally make myself liable by simply owning my home or having a savings account in my native country.
I realize your job is to handle these things, and I am not in any way trying to say "can you please answer some questions for free so I don't have to hire you later on" - I'm just a regular guy with a regular income and a regular life in another country who happens to have been born to a US citizen a long time ago. I cannot in any way afford to consult with an international tax attorney.
Feel free to ignore this random stranger asking for advice using a throwaway account :-)
A few questions if you don't mind. Do you know if any of your clients who have renounced citizenship have had trouble coming back in to the United States to visit friends or family or for business? Is it common for countries to tax personal income if it was earned overseas and the expatriate lives where the income was earned? Does the US do that? Has the IRS taken any interest in the contacts of your clients who are citizens? Finally, have any of your clients regretted the decision?
The USA is the only country that taxes its citizens who live outside the country. I think that's what you're asking. British citizens living abroad don't pay UK income tax.
The IRS hasn't taken any interest in my clients -- the tax returns are clean and that's all they should care about. But the Lois Lerner affair shows that they are corrupt, unfortunately.
The people I know who give up citizenship almost all do it with extreme regret. I assume this feeling persists even after the fact.
I've been strongly considering expatriating, either to Canada or even more exotic locations such as Dubai/UAE. I have no real intentions of breaking from the US as a citizen, but perhaps you could clarify for me.
1. I've heard that under a certain tax bracket this does not happen. Is that true?
2. I hear Canada will actually let you write off taxes you've paid to the US.
Taxes pay for government services, which the citizenry of the United States broadly speaking wants, though they quibble every 4 years about the relative mix and funding levels. Tax laws are complex, highly technical, and require application of a voluminous body of rules to the infinite variety of potential fact patterns.
Many citizens, particularly those who have complicated fact patterns in their personal lives, are not capable of calculating their own taxes or would prefer to avoid doing so. Tax accountants and attorneys assist citizens in their obligations to calculate and pay the taxes required by the law, without paying more than they are obligated to pay.
I have a great accountant. (Hiya Cameron. waves) He sherpas me through my increasingly complicated international tax situation every year, which will never include renouncing my US citizenship but does often include such scintillating topics as "Does the US Revenue Code consider Japanese Self-Employment tax to be an income tax or not? If it does, should my income tax return for 2013 reference Japanese self-employment tax paid in 2013 or accrued in 2013? Is it most to my advantage to treat that as a necessary expense incurred by my business or as a deductible foreign tax or in some other fashion defined by the US-Japan Tax Treaty?" I pay Cameron so that I don't have to spend a week figuring that out, and can instead ship software, write emails, and otherwise move the business forward.
Really? Would you care to elaborate on your position, as it seems a touch sophomoric.
We're talking about American expats who permanently live abroad, do not utilize taxpayer-funded services, and aren't planning on returning home. Hell, they aren't even utilizing what one might call the privilege of American citizenship. From the government's perspective, there's really no difference between an expat and a corpse (excluding the IRS, naturally).
In that context, how can choosing to renounce their citizenship be considered immoral? Particularly when that citizenship comes with the rather significant problems that are the result of a federal tax code that taxes overseas income for taxpayers abroad whose income will never see the United States (nor, for that matter, will the taxpayer). If we're going to argue about ethical codes, how do you taxing worldwide income and the onerous penalties that disproportionately affect the lower quintiles?
Puerto Rico has this new tax law that basically limits taxes to like 4% or less, if you are a resident of PR. Let's say Bob is an American who expects to have a big exit in 2015 (or he has lots of GOOG stock and wants to sell it). Normally Bob would pay US capital gains taxes (15-20%, maybe 23.8%), plus California taxes (assuming he lives in CA). Instead, Bob moves to Puerto Rico, establishes residency. Then he sells his shares for US dollars, and pays Puerto Rico taxes. Then Bob moves back to mainland US, having saved lots of money.
Is there a flaw in the above situation?