If you’re new to the world of offshore, then this article on offshore basics is for you. Thinking about starting a business abroad? Want to move you or your assets out of the United States? Offshore basics will tell you how… and what’s legal and what’s not for an American abroad. Many of the articles on my site are quite detailed. This one is intended to cover just the basics of going offshore.
First, let’s talk about the person living in the United States that wants to invest abroad. The bottom line is that Uncle Sam will tax your worldwide income. No matter where you invest, so long as you are living in the United States, there are very few breaks for going offshore… there are three exceptions below.
That’s not to say there are no benefits to moving your assets abroad… there are just no tax benefits in doing so. Investing abroad will give you access to dynamic markets, get you out of the United States dollar, and allow you to hedge or diversify much more effectively than you can here at home.
As for asset protection, so long as you set up the structure before someone comes after you, you’ll be able to maximize privacy and protection offshore. A trust or Panama Foundation will provide maximum protection and may minimize estates taxes.
- If your estate is over $5 million, a well designed trust or Panama Foundation will get those assets out of your taxable estate and make the transfer to heirs more tax efficient.
Note that the income earned in the offshore trust is taxable to you, the founder or settlor. Passive or investment income is always taxable to you – the U.S. person and “owner” of the assets until your passing.
- Transferring property to an offshore foundation, and then to your heirs will eliminate the 3.8% Obamacare tax on investment income. Your children will still pay tax at your rate, but should avoid the extra bump.
There are three major exceptions to the rule that investing offshore is tax neutral. They are: 1) the offshore IRA LLC, 2) the offshore captive insurance company, and 3) the offshore life insurance policy.
You can invest your retirement account in to an offshore LLC and keep the same tax benefits (deferral for a traditional IRA and tax free for a ROTH) you had onshore. If you invest with leverage or in to an active business, you may add a UBIT Blocker Corporation to your structure for big time tax savings not available in the United States. For more information on this topic, please see my various offshore posts on IRA and UBIT Blockers.
With an offshore captive insurance company, your business can (basically) reduce its U.S. taxes by $1.2 million per year… moving that money offshore. Any passive investment income that this premium generates is taxable in the U.S., but your business gets an immediate deduction for the $1.2 million insurance premium. If you would like more information, please send and email to firstname.lastname@example.org.
The offshore basics for offshore life policy are basically the inverse of the offshore captive. You can invest an unlimited amount of after tax savings (money you have already paid tax on) in to a single pay life insurance policy. Any returns earned in the policy are tax deferred or tax free. This assumes it’s a U.S. compliant offshore life policy and typical underwriting guidelines apply.
So, if you are living in the United States, the IRS wants its cut. What about those of us living abroad? If you’re out of the U.S. for 330 of 365 days, or are a tax resident of another country, then you qualify for the Foreign Earned Income Exclusion and get to earn up to $99,200 in salary for 2014 free of Federal Income Tax. If you’re self-employed, operate your business through an offshore corporation, you can draw a salary up to the FEIE and leave the balance in the company as retained earnings. This will usually be taxable in the U.S. only when taken out as a distribution. You should be able to leave it there tax deferred for many years. For more information on these topics, please check out my articles on moving your business offshore and the Foreign Earned Income Exclusion.
- Even if you’ll owe no tax because of the FEIE, you must file your U.S. tax forms each year.
If you retire abroad, you won’t see much of a tax benefit. Your passive income will be taxable in the U.S., though you should be able to avoid most state taxes.
That is to say that the offshore basics for a person who retires offshore is that their Federal tax rate will not change much. Their retirement, Social Security, and passive income will go to Uncle Sam. Most of the offshore loopholes are for active businesses.
There is one big exception… though, I guess, it’s not an offshore basic, because it isn’t offshore.
If you move (retire) to Puerto Rico, you can eliminate all capital gains taxes on your passive income. This only applies to assets you acquire after you move to PR, and requires you to become a resident of the island.
You see, when you retire to a foreign country, U.S. Federal law controls. When you move to the U.S. territory of Puerto Rico, their tax code takes precedence… and they have a great deal for you. See my articles on Puerto Rico for more information.
I’ll conclude this post on offshore basics with a suggestion: If you have a foreign souse or a foreign business partner, and are living abroad, you have some significant planning options.
- A foreign spouse or partner is one who is neither a U.S. resident or a U.S. citizen for tax purposes. Anyone who holds a U.S. passport or green card is a U.S. person.
For example, your spouse can open an offshore bank or brokerage account and trade her funds without paying U.S. tax. She can also buy real estate and do business without the U.S. looking over her shoulder.
If you’re operating a business with a foreign partner, and that partner owns 50% or more of the business, you will find there are many tax advantages not available to a company owned 100% by Americans.
For example, the business will not be a Controlled Foreign Corporation, so its income may not be taxable in the United States (assuming it is not U.S. source income), and your filing obligations will be reduced. Take a read through the instructions for IRS Form 5471 for more information on your filing obligations.
I hope this article on offshore basics has been helpful. Feel free to contact us for information on moving your business or assets offshore.