The holy grail of US tax planning is the elimination of capital gains tax. This article will give you all you need to stop paying capital gains tax immediately and forever. It’s a little known secret only available from one of the US territories.
The first thing to know is that this is not an offshore tax plan. No offshore corporations, nominee directors, secret accounts or anything of the sort. In fact, you can keep all of your money in a United States bank.
Second, this strategy to stop paying capital gains taxes immediately has nothing to do with complex trusts, hiding assets, or anything that will get you in trouble. It’s a tax loophole that’s written into the US tax code and which applies to all US citizens.
In fact, none of the usual offshore tax strategies will help you reduce your US capital gains tax. We US citizens are taxed on are worldwide income. No matter where we live, the IRS wants their cut.
The only offshore tax tool which helps average Americans abroad is the Foreign Earned Income Exclusion. The first $100,000 of salary or business income is free of Federal income tax if we qualify for the Exclusion.
But the FEIE only applies to income from work… ordinary income. It doesn’t reduce US capital gains tax.
Let’s say a US citizen is living in Panama and earns $100,000 from their online business. They also sell stocks and a condo in Panama, generating long term capital gains from both.
This person won’t pay any income tax on their salary, but they will pay US capital gains tax at 20% on the condo and the stocks (I’ll also assume President Trump has done away with the Obamacare tax).
So, expats and those of us living and working abroad will pay US tax on our capital gains no matter where they’re earned.
Enough preamble. Here’s how to stop paying capital gains tax immediately.
As I said above, US citizens are taxed on their worldwide income. This is because Federal tax laws apply to us while we’re living abroad. The ONLY exception to this is found in the US territory of Puerto Rico.
Under Section 933 of the US tax code, residents of Puerto Rico are exempted from Federal income tax. That is to say, only the tax laws of Puerto Rico apply to American citizens living in Puerto Rico. Puerto Rico sourced income is taxed by Puerto Rico and not the US government.
This has allowed Puerto Rico to craft a tax code which is very favorable to business owners and high net worth individuals. It means Puerto Rico can make you an offer that can’t be matched by any foreign country.
Here are the two offers they came up with:
- Act 20 gives a 4% corporate tax rate to any business with at least 5 employees on the island which provides a service to companies or persons outside of Puerto Rico. For example, an internet marketing company, online business, etc.
- Act 22 gives residents of Puerto Rico a zero percent tax rate on dividends from their Act 20 company and a zero percent capital gains tax on assets acquired after becoming a resident of the island.
Act 22 isn’t new, but it’s rarely discussed in the offshore blogs and international tax planning sites. I’ve been writing about these tax benefits since 2012, but not many others have figured out the benefits of Puerto Rico.
In 2017, this seems to be changing. Finally the offshore publishing world has begun to give some time to Puerto Rico. For example, Simon Black of Sovereign Man wrote a post last month on Puerto Rico titled Boy was I wrong about this place…
Here’s how to qualify for Act 22 and stop paying capital gains tax…
To qualify for Act 22, you must move to Puerto Rico, make the island your home base, break as many ties with your state as possible, and spend at last 183 days a year in PR. You’re also required to buy a home in Puerto Rico and apply for Act 22. Moving there is not enough… you must be granted a tax holiday by the government.
This 183 day rule is basically the same requirement when moving from a high tax state like California to a low tax state like Texas. The difference is, when you move from CA to TX, you might cut your taxes from 40% to 30%. When you move from California to Puerto Rico you cut your taxes from 40% to 4%.
Let me close with two recommendations:
- Considering the amount of money at stake, I suggest you not play games with your days on and off the island. I would plan to spend 200 days in Puerto Rico to ensure your residency can’t be challenged by the IRS.
- Keep in mind that you will still pay US tax on US source income. For example, K-1s from a US company, US real estate, etc. These tax holidays cover capital gains on assets purchased after you become a resident of Puerto Rico and Puerto Rico sourced income but not US source income.
I hope you’ve found this article on how to stop paying capital gains tax helpful. For more information on moving to Puerto Rico, or on how to set up under Act 20 and 22, please contact me at firstname.lastname@example.org or call us at (619) 550-2743. We will be happy to assist you to get setup in Puerto Rico.