There are many ways to pay less tax US tax. You can set up an IRA, defined benefit plan, or medical savings account. If that’s not enough, and you’re just done with the IRS, there are two ways to legally pay zero taxes get Uncle Sam out of your pocket forever.
Keeping in mind that US citizens are taxed on our worldwide income no matter where we live, there are two ways to stop paying US taxes are:
- Give up your US citizenship and move to a zero tax country or
- Move to the US territory of Puerto Rico.
The only way to keep your US citizenship and pay zero taxes is to move to Puerto Rico.
First, a few comments on giving up your US citizenship. Then I’ll get to how to keep your blue passport and pay zero taxes by moving to Puerto Rico.
Giving up your US citizenship is permanent, expensive, and is to traumatic for most. There are no takeback when it comes to giving up your citizenship. Only about 3,000 Americans give up their passports each each year, while there are millions of us living abroad.
And, before you can give up your US citizenship, you must have a second passport in hand. You can buy a passport from countries like Dominica for $120,000 or you can get one from St. Lucia with an investment of $550,000 and $50,000 in fees. These are the two best second passport programs for 2017.
If you don’t have the cash to buy a second passport, you can earn one by living in a country for 5 years. For example, invest $20,000 in Panama’s friendly nations reforestation visa program and get residency. You can apply for citizenship and a second passport after 5 years of residency.
Then there’s the time and cost of the US expatriation process. You must pay any back taxes, possibly go through an audit of your last 5 years, and pay capital gains tax on any appreciated assets. This exit tax applies to citizens with a net worth of $2 million or more.
The bottom line is that giving up your US passport is expensive and a last resort for most. A very small percentage of Americans become expatriates. Many become legal residents of a tax friendly country like Panama to give themselves an escape route, but few give up their US citizenship.
While we love to talk about giving up our citizenship, it’s very hard to pull the trigger. And there is a better option… one that’s very easy with no audit, no exit tax, and no stress. You can keep your US citizenship and never pay the IRS another dollar!
As I said above, US citizens are taxed on our worldwide income. So long as we hold a US passport, the IRS wants its cut. Even when we move to a foreign country, the US government will tax our capital gains and our business income (less the Foreign Earned Income Exclusion).
Also, US citizens living abroad have all kinds of US filing obligations. We must file our US tax return, a Foreign Bank Account Report, report our assets, etc. An error on any of these forms can cost you dearly. For more information, see: Tax Filing Requirements for Expats
There is one and only one exception to this rule – if you move to a US territory, you pay only territory tax. Move to a US territory and you no longer need to file your US returns and no longer need to pay anything to the IRS (assuming you don’t have any US source income, rental properties, interest, dividends, etc.).
Also, the FATCA and foreign reporting requirements don’t apply, so no FBARs, foreign corporation returns, etc. Moving to a US territory eliminates all of the tax filing headaches of living in a foreign country.
Of course, there’s not much benefit to moving to a territory if your new tax rate is similar to your US Federal rate. You’re just swapping one hungry beast for another. Historically, moving to a territory had about the same tax benefit as moving to a zero tax state like Florida or Texas
When you move to a territory, you pay only territory tax, not US Federal or state tax. Territories setup their systems to mimic US Federal rates, so no big savings were to be had.
Then Puerto Rico’s economy imploded. The island declared a form of bankruptcy in May of 2017, making it the largest US bankruptcy in history with $123 billion in debt. Second place goes to Detroit that filed bankruptcy on a mere $18 billion.
Major changes to Puerto Rico’s tax laws on July 11, 2017 made this territory the best option for US citizens who want to stop paying the IRS. Puerto Rico has made it possible to keep your US citizenship and pay zero tax. In fact, you’re required to keep your US citizenship to get this tax deal!
Because Puerto Rico is a US territory, only legal US residents and citizens can move to this island. Only legal residents of Puerto Rico can benefit from these tax deals. So, you must have either US citizenship or a green card to use this tax haven.
Anyone born in Puerto Rico is a US citizen and flights between the territory and the mainland are domestic, meaning no immigration checkpoint to cross.
Here’s the offer:
- Puerto Rico’s Act 22 gives you a zero percent tax rate on capital gains on assets acquired after you move to the island. Act 22 is focused on stocks and fund investments, as well as local real estate and dividends. It does not apply to US source income such as capital gains on US real estate.
- Puerto Rico’s Act 20 gives you a 4% tax rate on business income earned from work on the island. Set up an internet business, or a business that provides a service from Puerto Rico to people and companies outside of Puerto Rico, and pay only 4% tax on your net corporate profits.
This business tax holiday, Act 20, is guaranteed for 20 years and is best suited to those netting $250,000 or more. This is because you’ll need to take out a salary from the business first, which is taxed at ordinary rates by Puerto Rico (not the United States). Then you pay 4% tax on your net corporate profits after your salary.
If you’re making $100,000 or less, you should move your business offshore and pay zero tax using the Foreign Earned Income Exclusion. If you’re making $250,000 or more, Puerto Rico is a better deal. And, the more you earn the more you save with Act 20. See: Puerto Rico vs. Panama, which is better for my business.
To restate the offer, move to Puerto Rico and pay zero percent on capital gains and 4% on your corporate profits. No foreign jurisdiction or state can come close to matching this tax deal. The only way to keep your US citizenship and pay zero to the IRS is to move to the US territory of Puerto Rico.
In order to qualify for Act 20 and/or Act 22, you must move to Puerto Rico and spend at least 183 days a year on the island. You should cut as many ties with your state as possible and make Puerto Rico your home.
It’s much easier to move to Puerto Rico than to qualify for the Foreign Earned Income Exclusion. The FEIE required you to spend 330 out of 365 days a year out of the US while moving to a territory is the same as leaving one high tax state for a zero tax state like Florida or Texas.
I don’t expect this offer to last forever… 2 or 3 years at best. The government is desperate to bring in high networth entrepreneurs, but that can change. Once you have your tax holiday, it’s guaranteed for 20 years. But, things can change quickly in the tax haven game.
I often tell business owners that they should hope that Act 20 is repealed. If no new decrees are being issued, your business becomes all the more valuable when you go to sell.
I hope this article on how to keep your US citizenship and pay zero taxes has been helpful. For more information, please contact me at firstname.lastname@example.org or call us at (619) 550-2743. We’ll be happy to help you to move your business to Puerto Rico or to secure an Act 22 decree.
Note that this post includes updated information based on a July 11, 2017 change to the law. For more up to date information, please see: Puerto Rico Eliminates 5 Employee Requirement and Changes to Puerto Rico’s Act 20 and Act 22.