Puerto Rico is the only International Tax Plan for US Citizens
Christian Reeves

Puerto Rico is the Only International Tax Plan for US Citizens

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The IRS is targeting offshore tax plans, especially those in Malta. This is due to concerns that these plans are being used to avoid paying U.S. taxes. The IRS has been cracking down on offshore tax evasion in recent years, and this is likely to continue.

The IRS’s crackdown on offshore tax plans will have a negative consequence for those who have used these plans. These individuals may be subject to penalties and interest, and they may have to pay back taxes that they should have paid in the first place.

One of the only safe international tax plans for a U.S. citizen can be found in the U.S. territory of Puerto Rico. Under the Puerto Rico Act 60, U.S. citizens who move to Puerto Rico and become bona fide residents are exempt from federal income tax on their Puerto Rican source income. This includes income from employment, self-employment, and investments.

However, it is important to note that the Puerto Rico Act 60 is not a get-out-of-jail-free card. U.S. citizens who move to Puerto Rico and take advantage of the Act 60 tax benefits must still file U.S. federal income tax returns. They must also report all of their worldwide income on their U.S. tax returns, even if it is not subject to U.S. tax.

If you are considering moving to Puerto Rico to take advantage of the Act 60 tax benefits, you should speak with a tax advisor to make sure that you understand the rules and that you are complying with all applicable laws.

Act 60, also known as the Puerto Rico Tax Incentives Code, is a law that offers tax benefits to U.S. citizens who move to Puerto Rico and become bona fide residents. Some of the benefits of Act 60 include:

  • Exemption from federal income tax on Puerto Rican source income. This includes income from employment, self-employment, and investments.
  • Exemption from federal capital gains tax on gains realized on assets that are located in Puerto Rico.
  • Reduced corporate tax rate of 4%.
  • Exemption from municipal taxes.
  • Exemption from property taxes on certain types of property.

The requirements for eligibility under Act 60 include:

  • Becoming a bona fide resident of Puerto Rico. This means that you must spend at least 183 days in Puerto Rico during the taxable year.
  • Not being a resident of Puerto Rico at any time between January 17, 2006 and January 17, 2012.
  • **Not having been a resident of Puerto Rico for any part of the three taxable years immediately preceding the taxable year for which you are claiming benefits under Act 60.

If you are considering moving to Puerto Rico to take advantage of Act 60, you should speak with a tax advisor to make sure that you understand the rules and that you are complying with all applicable laws.

Here are some additional things to keep in mind about Act 60:

  • The benefits of Act 60 are not automatic. You must file a special tax election with the Puerto Rico Department of Treasury in order to claim the benefits.
  • The benefits of Act 60 are subject to change. The Puerto Rico government has the right to amend or repeal Act 60 at any time.
  • Act 60 does not apply to all U.S. citizens. There are certain categories of U.S. citizens who are not eligible for the benefits of Act 60, such as government employees and members of the military.

In summary, the IRS is targeting offshore tax plans, especially those in Malta. This will have a negative consequence for those who have used these plans. One of the only safe international tax plans for a U.S. citizen can be found in the U.S. territory of Puerto Rico. 

However, it is important to note that the Puerto Rico Act 60 is not a get-out-of-jail-free card. U.S. citizens who move to Puerto Rico and take advantage of the Act 60 tax benefits must still file U.S. federal income tax returns. They must also report all of their worldwide income on their U.S. tax returns, even if it is not subject to U.S. tax.

If you are interested in learning more about Act 60, please contact us at info@premieroffshore.com. We’ll be happy to assist you to set up your business in Puerto Rico.

Foreign Earned Income Exclusion 2020
Christian Reeves

Foreign Earned Income Exclusion 2020

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In this article, I’ll look at the Foreign Earned Income Exclusion 2020. The FEIE is the most powerful tool in the expat’s kit and is the focus of international tax planning for individuals and small business owners living abroad. The Foreign Earned Income Exclusion 2020 is the only major tax planning option left after Trump’s 2017 tax law changes. 

I wrote that the Foreign Earned Income Exclusion 2020 is the ONLY tax deal left after Trump’s changes to the US tax code. In previous years, small business owners could use the FEIE to eliminate the tax on their first $100,000+ and then retain profits in excess of the FEIE in an offshore corporation. These days are gone… we Americans can no longer retain profits in our offshore corporations tax-deferred. 

And there was a time when we had hope that the Foreign Earned Income Exclusion would be made obsolete by President Trump. During his campaign, he had indicated that he would move the US to a territorial tax system. Rather than taxing US citizens and residents on our worldwide income, we could pay tax only on profits made in the United States. 

Well, big corporations and multinationals moved to a territorial tax system, but the little guy got the shaft (per usual). We expats are still taxed on our worldwide income and we lost the ability to use an offshore corporation to retain profits over the Foreign Earned Income Exclusion 2020 amount tax-deferred. For more, see President Trump’s Tax Plan and Expats

With that in mind, here’s what you need to know about the Foreign Earned Income Exclusion 2020.

As stated above, the most important tool in the expat’s U.S. tax toolbox is the Foreign Earned Income Exclusion for 2020.  And, in most cases, the Foreign Earned Income Exclusion 2020 is the ONLY tax break you get for living abroad. 

If you qualify for the FEIE, you can exclude up to $107,600 in 2020 of earned income free from U.S. Federal income tax. This amount is up from $105,900 for the tax year 2019, $104,100 in 2018, $102,100 in 2017 and $101,300 in 2016. If you’re married, and both spouses qualify for the exclusion, your total combined exclusion may be up to $215,200.

There are two ways to qualify for the Foreign Earned Income Exclusion 2020. You can be out of the US for 330 out of 365 days or you can be a resident of a foreign country for a full calendar year. 

The first option, referred to as the 330-day test, is the easiest to use. Just be out of the US for 330 out of any 365 day period. For example, if you are out of the US from March 30, 2020, to March 15, 2021, you qualify for the Foreign Earned Income Exclusion 2020. 

The second option, known as the residency test, is much more challenging to implement. To oversimplify a complex topic, you need to move to a foreign country with the intention of making that place your home for the foreseeable future. You should have a residency permit and pay taxes in this new home. 

In most cases, you will use the 330 day test for the Foreign Earned Income Exclusion for the first year or two you’re living abroad. Once you’ve put down roots in a new country, you can switch to the residency test. 

Maximize the Value of the Foreign Earned Income Exclusion 2020

While you can’t retain earnings in an offshore corporation in 2020, you still need a structure in a tax-free country to maximize the value of the FEIE. 

First, if you use a personal bank account or a US company to run your business, you must pay self-employment tax on your income. The Foreign Earned Income Exclusion does not reduce self-employment or payroll tax. 

If you draw your salary from an offshore corporation, you can eliminate SE tax. This is a savings of about $15,000 a year for a single person earning $100,00 and about $30,000 for a husband and wife where both are working in the business. 

Second, if you operate a business without a corporate entity, the amount of your Foreign Earned Income Exclusion for 2020 will be reduced in proportion to your expenses. 

For example, the FEIE is $107,600 for 2020. Let’s assume you gross $160,000 from business and your net profit is $80,000 after deductible business expenses. You report this income on Schedule C and use Form 2555 to calculate the Foreign Earned Income Exclusion. 

Your allowed business expenses are about 50% of your gross. Because you are using Schedule C, your FEIE will be reduced in proportion to your deductible expenses. So, your available FEIE for 2020 is 50% of $107,600 = $53,800. 

You will be allowed to exclude $53,800 of your $80,000 net using the FEIE. Thus, you will pay US tax on $26,200. 

If you had operated your business through an offshore corporation for 2020, you would have paid zero in self-employment taxes and would have been allowed the full FEIE amount of $107,600. 

Perpetual Travelers and the Foreign Earned Income Exclusion 2020

There’s one group of expats that can never use the residency test. A perpetual traveler is someone that is out of the United States but never puts down roots. This group includes military contractors and those who can’t become residents of the country in which they work and Americans who travel constantly. 

If you’re a perpetual traveler, you won’t have a home base. You won’t get a residency visa and you will not pay taxes in any foreign country. In this case, you must use the 330-day test because you will never qualify for the Foreign Earned Income Exclusion 2020 using the residency test. 

Because the residency test allows you to spend more time in the United States, it might be in your best interest to gain residency in a low or no-tax country. For a list of options, see Which Countries Tax Worldwide Income?

One of the easiest residency programs for Americans is Panama’s Friendly Nations Reforestation Visa. Invest $25,000 in teak and get residency. For more on this topic see Best Panama Residency by Investment Program (note the investment amount has increased from $20,000 to $25,000 for 2020). 

I hope you’ve found this article on the Foreign Earned Income Exclusion 2020 to be helpful. If you need assistance preparing your US tax returns, drop me a line to info@premieroffshore.com and I will connect you with a tax prep expert. If you would like to form an offshore corporation to maximize the value of the FEIE, you can reach me by email or at (619) 483-1708

Income-Tax-Deductions
Christian Reeves

Itemized Deductions for 2020

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Itemized deductions are expenses on specific products, services, or contributions, that can be used to reduce your tax bill. These itemized deductions are only allowed if the taxpayer does not use the standard deduction to reduce the amount of taxes.

Some of the most popular types of itemized tax deductions used by taxpayers include charitable donations, child tax credit, adoption credit, mortgage interest, earned income tax credit, and medical expenses among many others.

You should not confuse itemized tax deductions with tax credits. Tax credits are a much simpler fiscal concept than tax deductions. With tax credits, you just subtract the number of tax credits to what you pay on yearly taxes, while tax deductions take into consideration many things such as what tax bracket you belong to.

There are many itemized deductions that you can include in your tax report, the list is quite extensive. You must do your research and make sure which deductions apply and which not, the following are some of the most popular itemized deductions for 2020.

By far one of the most popular items used to deduct taxes is by adding medical and dental expenses on your tax report. This includes payments done to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, etcetera.

Deductions using medical and dental expenses will remain the same percentage as in 2019 for 2020 which is 10%. Meaning that you will only be able to deduct those expenses that exceed 10% of your adjusted gross income. 

Taxpayers who reduce taxes through itemized deductions on federal income tax returns are permitted to reduce state and local real estate and personal property taxes including income taxes or general sales tax. 

These deductions done to state and local taxes are limited to a total of $10,000 dollars. Married taxpayers who file their taxes separately is $5,000 for each. These deductions are some of the most popular and it is quite easy to apply for them. 

Home Mortgage Interests may only be deducted on acquisition indebtedness interests such as your mortgage being used to buy, build, and/or repair your home. The amount that is allowed to do this can reach up to $750,000 or half which is $375,000 for those married taxpayers who file their taxes separately. 

Even though they have been a number of controversies involving charitable donations as a means to deduct taxes, these itemized deductions are still going strong. Although they are being scrutinized more than ever before and some changes were made for taxpayers who make charitable donations and then report them. 

Due to these changes and tax reforms the limit of cash donations allowed for public charities made an increase from 50% to 60% in 2020 and it will remain that percentage for the rest of the year. 

One of the major changes for itemized tax deductions in 2020 is for casualty and theft losses. Casualty and theft losses have been removed from the list except for the losses that can be proved in a federal disaster area.

Another major change on itemized deductions is the ones for job expenses and miscellaneous deductions which in 2019 were subject to a 2% deduction on Adjusted Gross Income. They have all been eliminated. 

The child tax credit had an extension of $2,000 for every child that qualifies that is refundable by up to $1,400. The $1,400 are subject to phaseouts and reviews by the corresponding fiscal authorities.

Adopting a child with special needs gives you as a taxpayer a credit of $14,300. The maximum credit that is allowed for any additional expenses is also $14,300. The amount fluctuates for taxpayers with an income that equals more than $214,520.

Student loan interest deduction for 2020 remains the same as it was in 2019 at $2,500. If you pay more than $85,000 you do not qualify for this deduction. This is one of the most sought after deductions, currently, there are a number of proposed reforms to make this number higher. 

Having a Medical Savings Account can be very beneficial for your tax plan. For individual taxpayers who are only covered by the Medical Savings Account, there is an annual deductible that is no less than $2,350 but no more than $3,550.

Shared individual responsibility payment has been eliminated for a variety of reasons, also the Pease Limitations for 2020 have been shut down. For Americans living outside of the country, the Foreign Earned Income Exclusion for 2020 is $107,600.  

I hope you’ve found this article on changes to the itemized deductions for 2020 to be helpful. For more information, or for assistance with international tax matters contact us at info@premieroffshore.com or call us at (619) 483-1708

tax deductions
Christian Reeves

Standard Deduction Amounts, Tax Exemptions, and Other Applicable Taxes

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Standard tax deductions are flat amounts of money that the tax system of the United States lets you deduct, plain and simple. Tax deductions allow an individual and a corporation to subtract applicable expenses to reduce the amount of taxes they have to pay. 

These tax deductions need to include some kind of proof to the IRS that they indeed apply for a deduction. Standard deduction amounts are expenses that are not subject to federal income tax, no questions asked. 

As an individual or corporation who pays yearly taxes you have the option to make tax deductions or to use standard deduction amounts to pay fewer taxes, but you can never choose both options. 

It would be smart and beneficial for you to make sure if you qualify for the federal standard deduction as some taxpayers are not allowed to apply for this. If you are married but you and your spouse file separate taxes and itemize deductions when you file your annual tax report then you will not be able to realize the standard deduction. 

Another situation in which an individual would not be able to make a standard deduction is if you file joint taxes with your spouse and he/she was a non-resident at any moment during the tax year.

It is simpler and much faster to make a standard deduction amount than to reduce taxes. You have to make an in-depth analysis of your fiscal situation and decide which option best fits your needs and will make you pay less in tax.

For 2020, the standard deduction amount increases to $12,400 from the $12,200 of 2019. The $12,400 is only applicable for individual taxpayers and for married couples who file their taxes separately. 

Heads of household have a standard deduction amount set for $18,650 for 2020. Married couples who file jointly have a standard deduction amount of $24,800, the same goes for surviving spouses.

You will also see that the standard deduction amount for taxpayers who are blind increased to $1,300. The $1,300 is an addition to the category that these blind taxpayers already fall under when paying their taxes. 

Unmarried taxpayers also have an additional standard deduction amount of $1,650. Individuals who are listed as dependents by other taxpayers cannot deduct an amount greater than $1,100 or $350 plus the earned income of the individual. This amount should not exceed the normal standard deduction amount. 

Just like last year, there will be no personal exemption amount for 2020. Standard deduction amounts are not the only tactic that a taxpayer can use to reduce taxes, there are other tax exemptions that he can take part in. 

Alternative Minimum Tax Exemptions is the amount that a taxpayer can deduct from the taxable income before calculating its liability. This amount depends on which tax bracket the taxpayer belongs to. 

For an individual taxpayer born in the United States the exemption amount is $72,900. For married couples who file their taxes jointly the number is $113,400, the same goes for surviving spouses. 

Married couples who file separately have an alternative minimum tax exemption of $56,700. Trusts and estates have a tax exemption limit of $25,400. It should be noted that trusts and estates operate differently depending on your situation so the amount may vary.

I mentioned two of the most popular options you have as a taxpayer to pay less taxes. But you might also know that regarding your situation you might also have to pay additional taxes that the ones you are used to.

One of these taxes that you might have to pay is the kiddie tax. The kiddie tax’s purpose is to tax unearned income of a child at a marginal rate of what the parent is already paying that year in taxes. 

It does not matter if the child is or can be claimed as a dependent on the parent’s tax return, the kiddie tax needs to be paid. Children under the age of 19 and college students under the age of 24 are subjects of this tax. 

When I mention unearned income I am talking about income from assets that are not wages or salary. Unearned income that will have to be paid under the kiddie tax is dividends and interests obtained by the child. 

As you can see there are a number of tactics that you can use to pay less in taxes. I just mentioned two of the most famous ones, but depending on your situation you may apply for more. 

I hope you’ve found this article on standard deduction amounts, tax exemptions, and the kiddie tax to be helpful. For more information, or for assistance in tax matters contact us at info@premieroffshore.com or call us at (619) 483-1708

tax rates 2020
Christian Reeves

IRS Releases Tax Rate Tables 2020 – Part 2

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Taxes are dreaded by a lot of Americans as they see them as this burden that needs to be tended to or it will cause mayhem, but I don’t believe they should be viewed like this. I may sound like a college professor telling his students to don’t wait until the last minute to study for the big test, but the same concept applies for taxes. 

Most Americans do not even know what tax bracket they fall under. I mentioned in the last article the taxes you have to pay as a couple, but even if you are married you have the option to pay for separate taxes filing separately.  

IRS professionals strongly advise couples to file their taxes jointly as there are many benefits and tax returns you can obtain from this, but there are situations when it is better for married couples to file separately such as: 

  • When you or your spouse have a large amount of out of pocket medical expenses
  • When both spouses work and earn approximately the same amount of money
  • Filing separately also cuts the deductions for IRA contributions and eliminates child tax credits among other tax breaks

Filing separately may look similar to filing jointly but do not get the both of them combined. If you and your spouse earn separately less than $9,875 you have to pay ten percent of your taxable income. 

Couples who separately earn between $9,876 and $40,125 have to pay $987.50 plus 12% of the amount over $9,875. The next tax bracket includes earnings between $40,126 and $85,525 which the amount to be paid is equal to $4,617.50 plus 22% of the amount over $40,125.

Going higher in the tax bracket, earning anywhere between $85,526 and $163,300 will lead you to pay $14,605.50 plus 24% of the amount over $85,525 in taxes. $163,301 to $207,350 is the next tax bracket which those who fall under this one has the pay the amount of $33,271.50 plus 32% of the amount over $163,300. 

As you can tell the amount differentiating the tax brackets is much lower than in those where the married couple files jointly. If you and your spouse earn $207,351 to $311,025 separately you will have to pay $47,367.50 plus 35% of the amount over $207,350. 

Finally, if your annual earnings is any amount above $311,026 the taxable income that you and your spouse has to pay is $83,653.75 plus 37% of the amount over $311,025. This is the final tax bracket for spouses filing separate tax reports. 

Another type of tax bracket that you might fall under depending on your situation is head of household. As head of household you file as an individual and you must meet certain requirements such as: 

  • Be unmarried or considered unmarried at the end of the year
  • Have paid more than half the cost of keeping up a home for the tax year
  • Have a qualifying child or dependent 

The tax bracket for head of household is as follows, if you earn below $14,100 dollars you get taxed 10% of your income. Following the first stage of the head of household income is for taxpayers who make anywhere between $14,101 and $53,700 who have to pay $1,410 plus 12% of the amount over $14,100. 

As you can see the difference between the amount of money in each stage of the tax bracket is quite far apart if you compare them to the other three that I have mentioned in this and the last article. 

A head of household who earns the amount of $53,701 to $85,500 has to pay $6,162 plus 22% of the amount over $53,700. If you earn anywhere between $85,501 and $163,300 then you have to pay $13,158 plus 24% of the amount over $85,500. 

Following those amounts, taxpayers who make $163,301 to $207,350 have to pay $31,830 plus 32% of the amount over $163,300. The next column of the tax bracket is for Americans whose income is a number between $207,351 and $518,400. If you fall under this column then you have to pay $45,926 plus 35% of the amount over $207,350. 

In the last column of the head of household bracket you will find that the last amount is $518,401 in order to calculate how much money you will have to pay if you are in this category, then you must add $154,793.50 plus 37% of the amount over $518,400. 

It is important to take into consideration that if you are a head of household who is receiving financial assistance toward your expenses from a parent or third party you can still qualify for this bracket as long as you prove that you are paying for 50% of your bills with your own capital.

Divorced parents can still fall under this category if your child lived in your home for more than half of the year. You can still file under head of household if the other parent has the right to claim the child as a dependent.

Filing as a head of household or as a separate married couple has a lot of layers and can get quite complicated at times. Please feel free to send us a message and we will help you through this complicated process. 

I hope you’ve found this article on the tax rate tables of 2020 to be helpful. For more information, or for assistance in tax matters contact us at info@banklicense.pro or call us at (619) 483-1708

tax rates
Christian Reeves

IRS Releases Tax Rate Tables 2020 – Part 1

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It’s that time of the year when the IRS releases its annual inflation adjustments. These adjustments calculate tax projections for the upcoming year and give taxpayers an estimate of what is to come regarding tax returns.

They include tax rate schedules, tax tables, and cost of living adjustments. It is important to mention that these are not the numbers and tables that you will use to prepare your taxes for 2019, but the ones that you will use to prepare for your 2020 tax returns in 2021. 

If you are not expecting any major changes in the next year then you should take these tax considerations at full, but if you are planning on getting married or starting a family then you can adjust these projections to best fit your needs and have a more accurate estimate of your tax payments. 

You will find the seven different tax brackets featured in 2020 which are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. You may also find a zero percent tax bracket, but that is a whole different story. 

For the average American who earns an income below ten thousand dollars (0-$9,875) the amount of tax that they will have to pay is 10%. This is in cases in which the taxpayer only works based on commission or has a part-time job. 

The most common tax bracket includes all taxpayers who earn anywhere from $9,876 to $40,125. The amount of tax that they will have to pay equals $987.50 plus 12% of the amount over $9,875. 

Next is for taxpayers who earn $40,126  to $85,525. In order to calculate how much you would have to pay in taxes, you must calculate $4,617.50 plus 22% of the amount over $40,125. Not that confusing or complicated if you think about it. 

You will see that the more money you earn the more you pay in taxes, that is how the fiscal system of the United States works and there is nothing you can do about it. If you earn anything from $85,526 to $163,300 you have to calculate $14,605.50 plus 24% of the amount over $85,525.

Moving up, if you are one of those fortunate Americans who earn the high volume income of $163,301 – $207,350 to figure out how much taxes you pay you will have to find the sum of $33,271.50 plus 32% of the amount over $163,300.

As you can tell the numbers continue to go up. Earning an income from $207,351 to $518,400 leads you to pay a total amount of taxes of $47,367.50 plus 35% of the amount over $207,350 US dollars. 

Finally, if you are a high earning income American the amount of taxes that you will have to pay is $156,235 plus 37% of the amount over $518,400. That is the highest amount of taxes that you will have to pay as an American. 

The numbers and the information that I gave you right now was only for individual taxpaying Americans. The situation is different for married individuals filing joint returns and surviving spouses. 

If the taxable income of you and your spouse is somewhere between zero and $19,750 you have to pay 10% on taxable income. When your earnings are $19,751 to $80,250 the amount that will be paid is $1,975 plus 12% of the amount over $19,750. 

Spouses earning $80,251 to $171,050 have to calculate $9,235 plus 22% of the amount over $80,250. An income of $171,051 to $326,600 will pay $29,211 plus 24% of the amount over $171,050. 

$326,601 to $414,700 has to figure out their taxes by adding up $66,543 plus 32% of the amount over $326,600. High earning couples who make anywhere from $414,701 to $622,050 have to pay $94,735 plus 35% of the amount over $414,700. 

For those high earning couples who make a combined amount of more than $622,051 the amount that they have to pay equals $167,307.50 plus 37% of the amount over $518,400. Hopefully, you are part of this tax bracket. 

There are many ways in which the amount of taxes that you have to pay may vary. A list of many factors to consider that may change how much you pay or in which tax bracket you fall under. 

Every taxpayer is in a very unique situation tax-wise, ad there are a ton of factors to consider before your accountant or you puts you in your corresponding tax bracket. Being 100% transparent is necessary for all matters involving taxes. 

After all, every taxpayer has the right to find ways to pay the least amount of taxes possible. This might sound a tad illicit, but you must remember that there is a sentence in a proper tax document that includes that very phrase.

If you need help with any topic involving your taxes and ways in which you may reduce the percentage that you pay please feel free to contact us. We will be your trusted guide in these matters.

I hope you’ve found this article on the tax rate tables of 2020 to be helpful. For more information, or for assistance in tax matters contact us at info@premieroffshore.com or call us at (619) 483-1708

trust and estate tax
Christian Reeves

Trust and Estate Tax Bracket 2020

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Before I begin to explain the amount of money that is included in the tax bracket for trusts and estates for the year 2020 I will explain a few things about what it entails as I believe that many Americans just see this listed on their tax sheet and have never considered if they can take advantage of it. 

In simplest terms, a trust is a fiduciary relationship between three different parties in which the head of the trust transfers property or assets to a second party for the benefit of the third party or beneficiary. 

An estate, as defined by texts of law, is the amount of money a person has accumulated whether he is alive or dead. It is the sum of all of the assets, property, legal rights, and any other source of income he has or is still accumulating. 

Trusts and estates have to pay taxes on the amount of income that they earn. Even if the person who owns the trust or estate is dead, taxes have to be paid. Any and all income must be reported to the proper authorities by the person who is controlling the trust or the estate. 

Same as in individuals and married couples who file annual tax reports, so do trusts and estates. They pay different taxes depending on the amount of money that they report on a yearly basis. 

In many cases, money that you inherit or are given through a trust will never have to pay taxes, such as when you are given stocks by a family member. You don’t have to pay taxes on those stocks until you sell them. 

Same goes for real estate, nothing is paid in taxes until it is sold. You have the option of paying income tax on interest right now or postponing the bill until you cash in the real estate or the bonds that you might have inherited. 

A trust needs to file a return if it has a gross income of more than $600 year during the full tax year or if there is any taxable income. Another reason why you might need to file a return on a trust is if there is a nonresident alien beneficiary. 

An estate needs to file a return if it also has a gross income of $600 or more or if a person in the estate is a nonresident alien beneficiary. The category where you will find trusts and estates is the K-1, 1041 income report. 

Income taxes are only paid if the assets inside the trust or estate are distributed among different parties. Capital gains and losses stay in the trust as they are part of the whole, this can be arranged to be distributed but it needs to be mentioned in the constitution of the trust. 

You must also explain in detail how the trust must be divided and report all income on the 1041. The amount each person gets must be shown. It is important that every one of these dividends is shown to the IRS. 

Trusts and estates also have a tax bracket on how their taxes work. As they function in a completely different way than regular individual taxpayers and married couples they have different columns depending on the amount of taxable income. 

If the taxable income in your trust or estate is under $2,600 then you are taxed for 10%. You can see that the amount that is taxed for trusts and estates is much lower than those in the other tax brackets. 

Taxable income that you get from your trust that is anywhere between $2,601 and $9,450 is taxed by calculating $260 plus 24% of the amount over $2,600. The next column is for people who hold trusts and estates and have a taxable income of $9,451 to $12,950, you will have to pay $1,904 plus 35% of the amount over $9,450. 

Finally, the last column of the tax bracket for people who are in trusts or in an estate which is for those who make more than $12,951 have to calculate $3,129 plus 37% of the amount over $12,950.

By these numbers alone you will see how beneficial it is for your tax planning to have a trust or an estate. While other tax brackets reach their final column with $518,000 and a 37% income tax, trust reach it with $12,750. 

For joint married couples the amount is $612,350 divided into two if they are filing separate reports. Few Americans know that they can use trusts and estates for lowering their taxable income, among other things. 

Trusts and estates can be used to benefit your children. It is a huge misconception that trusts and estates are only for the rich. There is a lot that goes into establishing a trust or an estate so don’t hesitate to send us a message so we can help you establish the trust or estate that best fits your needs. 

I hope you’ve found this article on trusts and estates and their tax bracket for 2020 to be helpful. For more information, or for assistance in international tax

How to Live Tax Free as an American
Christian Reeves

How to Live Tax Free as an American

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Here’s how to live tax-free as an American. If you’re willing to live, work, and invest abroad, it’s possible to live tax-free as an American – legally and without watching over your shoulder for the tax man.

First, note that this article is for US persons willing to live and work outside of the United States. It’s definitely NOT for those living in the US that have offshore accounts. If you want to live tax free as an American, you must move you and your business out of the United States!

Second, this article is focused on US persons. That is, US citizens and green card holders. Only the United States taxes its citizens on our worldwide income. Thus, only US persons need to go to these extremes to live tax free.

For example, a Canadian citizen can move to Panama, establish residency there, and live tax free. Simple enough. No need for complex structures or advanced planning described here.

If a US citizen does the same, they will pay US tax on capital gains and business income. Unless that US person follows the suggestions of this article, they’ll be stuck paying US tax while living in Panama.

Third, this post is about how to legally live tax free as an American. To accomplish this will require a lot of work and commitment on your part. It will also require you to hire a CPA or an international tax expert to prepare a plethora of tax forms required to keep you, the US expat, in compliance. For more, see: Offshore Filing Requirements.

Finally, unlike most articles on the web, this post takes President Trump’s tax plan into account. Trump did away with retained earnings in a foreign corporation, which really hurts medium sized businesses operated by US citizens abroad. For more on this, see: Use of an offshore corporation in 2018.

So, with all of that said, here’s how to live tax free as an American.

The premise of the US tax code is that US persons (citizens and green card holders) pay US tax on their worldwide income. No matter where you live, Uncle Sam wants his cut.

The first exception to this is the Foreign Tax Credit. You get a dollar for dollar credit for tax payments to foreign countries.

If you’re living in France with a 45% rate, and your US rate is 35%, you won’t pay tax to the United States. The Foreign Tax Credit eliminates double tax on your income, and, because France’s personal income tax rate is higher than the US rate, you pay zero to Uncle Sam.

If you were living in Argentina rather than France, you would pay a 9% rate to your local government. Thus, the amount owed to the United States would be 35% – 9% = 26%. If no other exception applies, you’ll pay the US 26% of your ordinary income to Uncle Sam for the right to hold a US passport or green card.

The only remaining exception to this after Trump did away with retained earnings is the Foreign Earned Income Exclusion.

If you qualify for the Foreign Earned Income Exclusion, you can exclude up to $104,100 of salary or business income from your US return in 2018. If a husband and wife are both working in the business, you can exclude a combined $208,200 from Federal income tax.

To qualify for the FEIE you must be 1) out of the United States for 330 out of any 365 day period, or 2) a legal resident of a foreign country for a calendar year.

Of these, the 330 day test is the easiest to qualify for but the most problematic in practice. Everyone tries to maximize their days in the US and the IRS loves to audit those using this version of the FEIE. Because the FEIE is all or nothing, if you miss the 330 days by even one day, you lose the entire exclusion.

Thus, I recommend the residency test whenever possible. Build a “home base” in a foreign country and get a residency visa to qualify for the FEIE without worrying about your US days so much. Of course, this means you must move to a country that will give you residency.

While selecting a country for residency is a very personal decision, I suggest you look for one with a zero tax rate and an eazy residency program. For example, Panama doesn’t tax foreign sourced income (income earned from abroad). Also, you can get residency in Panama with an investment of only $22,000. Finally, you can use your US IRA or other retirement account to get residency in Panama. For more on this, see: Best Panama Residency by Investment Program.

So, with the FEIE, you can earn $100,000 (single) or $200,000 (combined) from a business or in salary tax free. Capital gains are still taxable as earned with only the Foreign Tax Credit available to avoid double tax.

What if your business nets well over $200,000 and/or you have significant capital gains? What if your business nets $1 million? Then the only way to live tax free as an American is to move to the US territory of Puerto Rico.

If you move to Puerto Rico, spend at least 183 days a year on the island, and qualify for Act 20 and 22, you can live nearly tax free. Yes, you can net $1 million or more from a business operated from Puerto Rico, and pay very little in tax. To make it better, you’ll pay zero in capital gains.

Here’s how to live tax free as an American in Puerto Rico.

Because Puerto Rico is a US territory, it has unique tax laws. US tax laws apply to all US citizens living abroad. The ONLY exception to this are US citizens living in the US territories. Puerto Rico can create whatever tax laws it wants for its residents and these laws supersede US tax law.

A resident of Puerto Rico is a US citizen or green card holder that moves to the island, makes it their home base, and spends at least 183 days a year there. Only those legally allowed to live and work in the United States can move to Puerto Rico and qualify for these programs. All US immigration laws apply in the territories.

Under Act 22, a resident of Puerto Rico will pay zero tax on capital gains from assets purchased after you move to the island. If you buy and sell cryptocurrencies and stocks while a resident of Puerto Rico, you pay ZERO in tax to the United States.

Note that his tax holiday applies ONLY to assets acquired after you move to the island. No, you don’t get buy stocks and crypto while in the US, hold them for a few years, move to Puerto Rico for a few months, and sell them at zero tax. Those gains would be taxable in the United States and would not qualify for Act 22.

Then there’s Act 20. This is basically the inverse of the Foreign Earned Income Exclusion. Move to Puerto Rico and pay 4% corporate tax on business profits. Dividends from an Act 20 business to a resident of Puerto Rico are tax free… so, this 4% rate is all you will ever pay.

And you will never pay US tax on these capital gains or these business profits. Even if you move back to the United States in a few years, you will not pay US tax on the earnings taxed in Puerto Rico while you were a resident of the island. The only tax a resident of Puerto Rico pays on net business profits from an Act 20 business is 4% in Puerto Rico (and zero on capital gains and dividends).

Business profits is income after you take out a fair market salary. If you would ordinarily earn $100,000 for the work you’re doing, then you must take a salary of $100,000 from your Act 20 business. You’ll pay ordinary rates on this salary and then the excess will be taxed at 4%. This is why I call Puerto Rico’s Act 20 the inverse of the Foreign Earned Income Exclusion.

Let’s say your reasonable salary is $100,000 and your net profits are $1 million. You pay 30% on $100,000 in personal income tax to Puerto Rico and 4% on $900,000 under Act 20 for a total of $66,000 in tax. Of course, this is an oversimplification, but you get the idea.

Now consider the FEIE. Earn $1 million offshore while qualifying for the Foreign Earned Income Exclusion and pay zero US tax on your salary of $100,000. Then you’ll pay about 30% on $900,000 because Trump did away with the ability to retain earnings offshore. Total tax paid using the FEIE is about $270,000 on $1 million in net business profits.

For those earning in excess of the Foreign Earned Income Exclusion, or active traders with significant capital gains, Puerto Rico’s Act 20 and 22 are far better tax deals than the Foreign Earned Income Exclusion.

For those netting $100,000 (single) to $200,000 (joint) from a business, living abroad in a country like Panama is the best tax choice. You probably need to reach about $500,000 net before Puerto Rico makes sense.

I hope you’ve found this article on how to live tax-free as an American helpful. For more on setting up an offshore business or qualifying for Puerto Rico’s Act 20 and 22, please contact us at info@premieroffshore.com or call us at (619) 483-1708.

The IRS to Seize 362,000 US Passports
Christian Reeves

The IRS to Seize 362,000 US Passports

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The IRS plans to seize 362,000 US passports by refusing to renew passports of anyone with a substantial tax debt and now controls who is allowed to travel abroad. In this article, we’ll look at who is affected by this newfound authority and what you can do to protect yourself from the IRS.

Giving the IRS authority over your passport means that the taxman has the right to determine who travels outside of the country. Only those who have paid unto Caesar what he claims they owe shall be granted the privilege of international travel.

This represents a major change in how the United States government looks at the passports it issues. Americans have thought of a US passport as a birthright… or a right conveyed upon the select few who complete the immigration process. The passport tells the world that we are American citizens and gives us freedom of movement.

This all changed when the IRS asserted control over who is allowed a passport. As of today, a US passport is no longer a right, it’s a privilege. Only those whom the IRS deems worthy may travel. Only those who have paid their taxes are allowed to live and work outside of the country. Only those with clean tax accounts may visit family abroad.

Rest assured that the IRS will use your passport as a weapon to collect whatever taxes they believe you owe. If your passport is frozen because of a tax debt, there’s only one way to get it back. You must pay your debt in full.

Sure, you still have all the rights and protections you had before when battling the IRS. If you wish to dispute the amount owed, you’re free to do so. You can fight it out with the revenue officer, appeals, and finally the US Tax Court or in Federal Court.

But, this will take time. In my experience, an easy tax dispute case takes 6 months. A complex case, especially one involving a large amount of money, can drag on for years. Go to court and you’re looking at 3 to 4 years from the Notice of Deficiency to a resolution.

During this time, your passport will remain frozen. If you’re a US expat living and working abroad, can you really afford to return to the US for months or years to fight it out? Or will you be forced to pay up to get your passport back?

And what about us expats when the IRS begins revoking current passports? So far, the Service has only frozen passports, which means they refuse to renew a passport which has been lost or has expired. But the law also allows the IRS to revoke the passport of anyone who owes the IRS a substantial amount (more than $51,000).

If you’re an American abroad, and your only passport is revoked, you’ll be forced to return to the United States to settle your debt.

In most cases, expats learn of the loss of their passport when they attempt to enter a country and are refused. If this happens, you will be held in “airport jail” until the next flight to the United States. You will then be forcibly placed on a plane and sent home.

Yes, you will be the first fight to anywhere in the US. Whatever happens when you land, and how you pay your expenses once there, is your problem. If you have no family or friends to take you in, best of luck. When your only passport is revoked, the airline is required by law to return you to your home country for free, so they can give a damn where you’re dropped off.

You have no right to appeal or to an attorney. Because you were not allowed to “enter” the country, you have no legal rights. You are not being deported, you’re just being refused entry. The ONLY option at this point is the first flight back to your home country.

And I expect this to become standard practice by US agencies. Now that the government is treating your passport as a privilege rather than a right, I expect other agencies to take notice and get in on the money grab. What about expats with student loan debt, back child support, state taxes, or any number of other debts payable to government agencies?

Here’s How to Know if Your Passport’s Frozen

Basically, anyone who owes $51,000 or more to the IRS will have their passports frozen. This includes tax. interest and penalties. Thus, it’s very possible for a debt to have started out at $20,000 or so and to have grown to more than $51,000 with interest and penalties over a few years.

Also, any expat with a penalty for failing to report their foreign bank account (to file the FBAR form) or any of the offshore reporting forms (5471, 3520, etc.) is likely over the $50,000 limit. These penalties are often $50,000 not including taxes due.

Likewise, anyone who hasn’t filed their US returns should be worried. If the IRS computers have any information on you, they will create what is called a Substitute for Return on your behalf. These computer-generated returns create a tax debt in the system. This automated debt, plus interest and penalties, will then be used to freeze or rescind your passport and your travel privileges.

Quite a few expats end up in debt to the IRS computers because they don’t file their returns The biggest concern is with expats who have unfiled returns and a US brokerage account. The expat earned a small amount of money abroad or maybe was retired. He also had a small gain or loss in his US brokerage account.

The bottom line is that he didn’t think the gains were significant enough to bother filing a tax return… and he would be wrong, very wrong.

Your brokerage reports only sales to the IRS. That means IRS computers see only half of the transaction, the sale. They don’t know how much you paid for the stock and don’t know that you lost money unless you file a return.

You may have sold $1 million in stock for which you paid $1.2 million. You really lost $200,000, but the IRS computers calculate your tax due on a gain of $1 million! This happens all the time, especially with volume traders. A day trader could have used the same $100,000 in cash to generate millions in sales and still lost money at the end of the year.

In these cases, the expat doesn’t file a return and doesn’t receive any of the letters the IRS sends to his last known domestic address. Then the IRS computers take the sale data and create a wildly inaccurate Substitute for Return and a massive tax bill.

A few years pass and the expat mails in his US passport for renewal. Instead of getting a new passport back, he receives a letter saying is passport renewal is rejected and that he must resolve his tax debt in full before he applies again.

As I said above, 362,000 Americans have had their passports frozen and renewals rejected. So far, we’ve only seen renewal rejections. God help us expats when the IRS begins to revoke passports to force us home.

Per the IRS website, If you meet one of the following criteria, your passport won’t be revoked nor your passport renewal denied:

  • Being paid timely with an IRS-approved installment agreement
  • Being paid timely with an offer in compromise accepted by the IRS, or a settlement agreement entered with the Justice Department
  • For which a collection due process hearing is timely requested regarding a levy to collect the debt
  • For which collection has been suspended because a request for innocent spouse relief under IRC § 6015 has been made

Additionally, a passport won’t be at risk for anyone:

  • Who is in bankruptcy
  • Who is identified by the IRS as a victim of tax-related identity theft
  • Whose account the IRS has determined is currently not collectible due to hardship
  • Who is located within a federally declared disaster area
  • Who has a request pending with the IRS for an installment agreement
  • Who has a pending offer in compromise with the IRS
  • Who has an IRS accepted adjustment that will satisfy the debt in full

What Can You do to Protect Yourself

First, don’t lose your passport! If you owe money to the IRS. You won’t be receiving a new passport until your debt is paid in full. Be very careful with your travel document.

Second, move your investments and IRA accounts out of the United States to prevent them from being used to create an automated tax debt. Form offshore structures to hold accounts and maximize both privacy and asset protection. This also protects the accounts from being seized by the IRS.

Third, file your delinquent returns to get right with the IRS and continue filing each and every year going forward. Be sure to report the structures and accounts I suggested you create in #2 above. Even if your gains are small, all US expats should file their returns to prevent the IRS computers for doing it for them.

Fourth, take steps to protect your status as an expat while you have a valid passport. You can do this by a) securing a residency visa in the country where you live, and/or 2) by purchasing or otherwise acquiring a second passport.

A second passport gives you freedom of movement should you lose your US passport. With a second passport, you can leave the United States and travel to any country that grants you entry without a visa. Thus, the more visa-free countries you have, the more valuable the passport.

For example, you can purchase a passport from a country like Dominica for about $125,000. This will give you visa-free access to 122 countries. This second passport program can be completed in a few months

If you want an EU passport, consider Bulgaria. Purchase just over $1 million in government bonds and receive residency immediately and citizenship in about 18 months. This passport will give you visa-free access to 169 countries and territories.

In contrast, residency allows you to live in a particular country and to “earn” a second passport over a number of years. Once you have permanent residency, you won’t be forced out if you lose your passport. You won’t be able to travel, but you can’t be taken back to the US to pay up… you can negotiate from a stronger position and settle your tax debt from abroad on your terms.

The easiest country for a US citizen to obtain residency is Panama. Invest $20,000 in Panama’s reforestation visa program and get residency. You can apply for citizenship and a passport after you’ve been a resident for 5 years.

Keep in mind that you must have a valid US passport to apply for a second passport, citizenship or residency. Once your US passport has expired or has been revoked, you’re stuck. You will need to take action well in advance to protect your right to travel.

Fifth, the only country you can enter without a passport from the United States is Mexico. Any time you travel to a foreign country by air or sea, you must present a valid passport. So, if you fly into Mexico, you must have a passport.

The only exception is when you drive into Mexico. No passport is required and no checks are performed. Then, once you’re in Mexico, you can take a domestic flight to any city in the country using only your valid ID (such as a US driver’s license).

So, anyone who loses their passport can travel throughout Mexico so long as they enter at a land crossing.

The above on Mexico is based on years of personal experience and not a statement of the law. You should have a passport with you, valid or otherwise, but, once you’re in, you can travel throughout the country on your driver’s license.

I hope you’ve found this article to be helpful. For more information on a second residency or second passport, or to be connected with an expat tax expert, please contact me at info@premieroffshore.com or call us at (619) 483-1708.

The IRS will end the Offshore Voluntary Disclosure Program
Christian Reeves

The IRS will end the Offshore Voluntary Disclosure Program

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The IRS will end the Offshore Voluntary Disclosure Program on September 28, 2018. If you haven’t come forward by that time, you’re out of luck. In fact, the IRS has already begun to ramp down the 2014 Offshore Voluntary Disclosure Program and it’s becoming more difficult to get cases through.

From the IRS website, “Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”

And the Offshore Voluntary Disclosure Program has been a real cash cow for the Service. Since 2009, more than 56,000 Americans have used the program, paying $11.1 billion in back taxes, interest and penalties to keep the IRS from pressing criminal charges.

Of this number, about 18,000 people came forward in 2011. The number of taxpayers using the Offshore Voluntary Disclosure Program has steadily declined with only 600 applications in 2017.

What I call the Mini Offshore Voluntary Disclosure Program brought in another 65,000 Americans living abroad. Properly termed the Streamlined Filing Compliance Program was focused on American expats. Those who might not have known of their US filing obligations and want to get back into the US system.

It appears that most Americans have fallen in line and paid over to Caesar what he claims as his. This, and Foreign Account Tax Compliance Act (FATCA) have made the Offshore Voluntary Disclosure Program obsolete. The government has taken all it can from Americans and is now looking to new sources.

The Offshore Voluntary Disclosure Program, like the attack on crypto traders, was based on fear. The US IRS charged a few people in each big city and each state with crimes for having an unreported account. These criminal prosecutions got the Service all the free press they wanted and, as a result, thousands of people came forward voluntarily.

The Offshore Voluntary Disclosure Program was the most efficient and cost-effective marketing campaign in history. And it seems that the IRS is going to deploy the same army against crypto traders in 2018.

See Top two max privacy options to plant your flag offshore

The bottom line is, if you have an unreported offshore bank account or undisclosed assets, you must file for the Offshore Voluntary Disclosure Program now. Time’s up… no more delay and no more debate. It’s time to come clean or accept the risks.

From the IRS website: “Complete offshore voluntary disclosures conforming to the requirements of 2014 OVDP FAQ 24 must be received or postmarked by September 28, 2018, and may not be partial, incomplete, or placeholder submissions. Practitioners and taxpayers must ensure complete submissions by the deadline to request to participate in the 2014 OVDP.”

Note that, US expats and citizens living abroad should probably use the Streamlined Program and not the Offshore Voluntary Disclosure Program. This article considers ONLY the Offshore Voluntary Disclosure Program.

The purpose of the Offshore Voluntary Disclosure Program is to allow US resident taxpayers to come forward, report their foreign accounts, avoid criminal penalties, and reduce civil fines. Those who come forward will pay the tax plus interest on unreported foreign income.

In addition, they’ll pay an accuracy penalty of 20% and a 27.5% offshore penalty. See IRS FAQ 8 for a detailed calculation. In the example, coming forward cost the taxpayer $553,000 vs being liable for well over $4 million had the IRS been forced to track him down.

These taxes and penalties are calculated on the last 8 tax years for which the filing date of the return has passed. For example, if you were to file an OVDP in July 2018, you would amend and pay taxes for 2017, 2016, 2015, 2014, 2013, 2012, 2011, and 2010.

This is to say, you are to amend your personal income tax returns for these years. You will add on to the return any foreign income, such as interest, rental, business, etc. You will also add on any missing foreign entity forms, such as the Form 5471 and 3520. Finally, you will prepare an FBAR form reporting ALL foreign accounts.

Once all of this is ready, your tax preparer and a representative will prepare an OVDP application that includes a letter of explanation of the facts and circumstances of your situation. Again, all of this must be mailed by September 28, 2018.

I hope you’ve found this article on the ending of the Offshore Voluntary Disclosure Program to be helpful. For more information and to be introduced to an expert who can assist you with an OVDP or Streamlined Program, please contact us at info@premieroffshore.com or call us at (619) 483-1708  for a confidential consultation.

US Expats and Retained Earnings in Foreign Corporations for 2018
Christian Reeves

US Expats and Retained Earnings in Foreign Corporations for 2018

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The days of retained earnings in offshore corporations are officially over. No longer can those of us living and working abroad hold profits in excess of the Foreign Earned Income Exclusion inside of our corporations tax-deferred. Here’s what you need to know about US expats and retained earnings in foreign corporations for 2018.

Please note that this article is focused on offshore corporations owned by US persons in 2018. A US person is a US citizen or green card holder no matter where they live or a US resident. For a more detailed and code focused article on this topic, see: Bloomberg on Controlled Foreign Corporations.

Also, there’s some speculation in this post and things are subject to change. The IRS has not issued guidance on how Trump’s tax plan affects US expats and retained earnings in foreign corporations in 2018. Though, every expert I’ve spoken with agrees that the days of retained earnings in excess of the FEIE are over.

A few short months ago, we expat entrepreneurs were all excited about Trump’s tax plan. He was going to eliminate worldwide taxation and move the United States to a territorial tax system. The US is the only major country on earth that taxes its citizens abroad, so this sounded great.

Well, the final bill fell far short of President Trump’s campaign promises. While multinationals were converted to a territorial tax system, and no longer pay US tax on foreign-sourced profits of their international divisions, the small to medium sized expat entrepreneur got the shaft.

If you’re an American expat operating a business abroad, you’ll want to sit down before reading this post. My buddy Gary said it best, “Trump has cut the legs out from under the American expat in favor of the Apples and Googles of the world.”

Let me start by defining a few terms.

For my purposes here, an American expat is a US citizen or green card holder living outside of the United States. They qualify for the Foreign Earned Income Exclusion by being out of the US for 330 out of 365 days or by becoming a legal resident of a foreign country over a calendar year. A resident of a foreign country might spend a couple of months in the US, but never more than 183 days in a year.

Those who qualify for the FEIE in 2018 get to exclude up to $104,100 in ordinary income from their US tax return. That means they get up to $104,100 in salary or business income tax-free because they’re living abroad. All capital gains and salary in excess of the FEIE is taxable in the United States (I’ll leave the Foreign Tax Credit for another day).

US expat business owners have traditionally held profits in excess of the FEIE inside their foreign corporations as retained earnings. This allowed them to defer US tax on these profits until they took them out as dividends. For more on this, see my 2013 article, How to Manage Retained Earnings in an Offshore Corporation.

Then Trump’s tax plan came along and smashed American expat entrepreneurs. As with any tax overhaul, there are winners and losers. We expats apparently didn’t donate as much as the multinationals, so we’re the big losers.

The Tax Cuts and Jobs Act introduced major changes to the international tax provisions of the United States Internal Revenue Code of 1986, as amended, which generally govern the tax consequences to US persons with foreign corporations.  Some of these changes may have an impact on the tax structure of US expats.  

As a result of the new international tax provisions, the US owners of a foreign corporation, which are controlled by US persons, may be subject to (i) a “toll tax”, (ii) a tax on deemed “global intangible low-taxed income” (GILTI) and a minimum base erosion and anti-abuse tax (BEAT) in the United States, and thus US tax deferral on the income earned abroad in excess of the FEIE may be lost.

To put that into English, The Tax Cuts and Jobs Act hits expats on two fronts:

  1. We must repatriate foreign retained earnings from prior years and pay US tax at 15.5% on those profits. This tax can be spread over 8 years.
  2. The ability of expats to retain profits in a foreign corporation is eliminated. We must now pay US tax on our profits in excess of the Foreign Earned Income Exclusion. A business owner can earn $104,100 tax-free, or a husband and wife both working in the business can take out a combined $208,200 in 2018 free of Federal income tax.

So, an American expat that nets $1 million a year in his or her business will pay US tax on about $897,000, no matter where they live. The ONLY exception and the only place on the planet where Trump’s tax plan can’t reach is the US territory of Puerto Rico. More on that below,

The new tax law eliminated retained earnings in offshore corporations with a very small change to the law. It put just about every income category under the Subpart F of the tax code. Interestingly, oil revenue was the only item removed from Subpart F… I wonder how that happened.

Subpart F income in an offshore corporation is not eligible to be retained tax-deferred. It must be passed through to the shareholders and taxed. Shareholders pay tax on Subpart F income whether or not they actually receive it, much like income in a US LLC.

As a result, if your foreign corporation is a CFC, ordinary business income is now Subpart F income and taxable in the United States as earned.

For an article on the previous definition of Subpart F in a CFC, see: Subpart F Income Defined. If you’re a glutton for punishment, or just nostalgic for the good old days of 2017, see: How to Eliminate Subpart F Foreign Base Company Service Income.

I should also note here that US tax breaks for “pass-through entities,” such as domestic LLCs and S-Corporations are not available to expats. We got all of the bad and none of the good from Trump’s tax plan.

If you’re an American living and working abroad, you have a few options in dealing with Trump’s tax plan and the burden it puts on expats.

The most practical step is to form a US C corporation and start over with a new offshore corporation. Pay the repatriation tax on previous years in your old corporation and start fresh with a structure designed for 2018.

Building out a new structure that includes a US corporation might cut your US corporate tax by 50%. The current US rate is 21% and this can be reduced to 10.5% with a 50% credit in certain situations. In 2026 and beyond, the rate rises to 13.1%. For a detailed article from Harvard, see: Tax Reform Implications for U.S. Businesses and Foreign Investments and scroll down to the section on Low-Taxed Intangibles Income.

This US corporate strategy is much more complex than it sounds. Expat entrepreneurs need to watch out for double taxation. When you take out retained earnings from your US corporation as a divided, you’ll usually pay US tax on the distribution (on your personal return). Careful planning should go into building this structure and a long-term tax plan that minimizes double taxation must be developed.

Another option for businesses with partners abroad is to change their CFC status. The tax laws described here generally apply to Controlled Foreign Corporations. A CFC is a foreign corporation owned by US persons (residents, citizens and green card holders). If US persons own or control more than 50% of the business, it’s a CFC.

If you’re working with non-US persons abroad, you might restructure your business so it’s not a CFC. For example, a US company and a foreign company are working together on deals as separate entities. They might decide to join together in one corporation with each party owning 50% of the shares and having 50% control over the business.

Another option is to buy a second passport from a country like St. Lucia and renounce your US citizenship. Note that it’s not sufficient to buy a second passport to avoid US taxation. You must also renounce your US citizenship and go through the expatriation process. This will take many months and can have a tax cost (exit tax).

In my opinion, every US expat entrepreneur that wants to maintain their citizenship, and is netting $500,000 to $1 million a year in a portable business, should move to the US territory of Puerto Rico. Puerto Rico is the only safe haven on earth not affected by Trump’s tax plan.

If you’re willing to move to Puerto Rico, and spend 183 days a year on the island, you’ll cut your corporate tax rate to 4%. If that’s not enough, you’ll also cut your capital gains rate on assets acquired after you become a resident to 0% (yes, that’s zero, nada, nothing). This zero percent tax rate also applies to dividends from Act 20 companies. ‘

For information on Puerto Rico’s Act 20 and 22, see: Changes to Puerto Rico’s Act 20 and Act 22.

As you read through the many articles on my website about Puerto Rico, note the following changes for 2018:

  1. Act 20 no longer requires you hire 5 employees. You can move to Puerto Rico and be the only employee of your business.
  2. Just like offshore corporations, Puerto Rican corporations can no longer retain earnings. This means that US shareholders of Act 20 companies who are living in the US no longer get tax deferral. To put in another way, after Trump’s tax changes, Puerto Rico’s Act 20 is only available to US citizens and green card holders willing to relocate to the island and spend 183 days a year there.

For an article that compares Puerto Rico’s tax incentives to the FEIE, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

I suggest that Puerto Rico is best for portable businesses netting $500,000 to $1 million a year. I get to this number because of the fact that you, the business owner, must pay yourself a fair market salary. This salary is taxed at ordinary income rates in Puerto Rico. Then your corporate profits, which are net business income after you pay yourself a “reasonable” salary, are taxed at 4%.

You then distribute these profits to yourself as a tax-free dividend. Even if you move back to the United States, you’ll never pay personal income tax on the dividend. To see this is the US tax code, go to IRC Section 933.

So, Puerto Rico’s tax deal is basically the inverse of the FEIE. With the Exclusion, you get $100,000 tax-free and pay US tax on any excess. With Puerto Rico, you pay tax on your first $100,000 in salary and 4% on any excess.

If you don’t move to Puerto Rico, and remain offshore, your international businesses should be operated through a foreign corporation in a low or zero tax country. Operating your business without a structure or through a US corporation means you’ll also be stuck paying Self Employment tax at 15%. No matter your tax situation, an offshore corporation will almost always reduce your net IRS payment.

All expat business owners should be operating inside an offshore corporation to eliminate Self Employment tax and to maximize the value of the Foreign Earned Income Exclusion. You then report your salary from this company on IRS Form 2555 attached to your personal return, Form 1040.

I hope you’ve found this article on US expats and retained earnings in foreign corporations for 2018 to be helpful. This is sure to be a very hectic and confusing tax year. It’s in your best interest to seek planning advice from an international expert early in the year to minimize the impact of Trump’s tax plan on your bottom line.

For more information on restructuring your business, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to work with you to build a new and compliant international structure.

Big Changes Coming for Puerto Rico’s Act 20 Tax Incentive Program
Christian Reeves

Big Changes Coming for Puerto Rico’s Act 20 Tax Incentive Program

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It appears that Trump’s tax plan is bringing big changes to Puerto Rico’s Act 20 tax incentive program. These changes impact Puerto Rico because a PR corporation is treated as a foreign corporation for US purposes. Here are the changes coming to Puerto Rico’s Act 20 tax incentive program.

Note that this article is a compilation of my conversations with various tax experts in Puerto Rico. This is what they think will happen to Puerto Rico’s Act 20 under the Trump tax plan. This is not a statement of the law or tax advice… it’s pure speculation.

The IRS has not issued any guidance on these points. So, we’re left to conjecture and assumptions on how Trump’s tax plan will affect Act 20. We probably won’t have a clear understanding of these laws until November or December. By then, the 2018 tax year will be nearly over and you’ll be left holding the bag.

Here’s the guidance being put out by most of the major firms in Puerto Rico on the tax incentive programs:

The Tax Cuts and Jobs Act introduced major changes to the international tax provisions of the United States Internal Revenue Code of 1986, as amended, which generally govern the tax consequences to US persons with operations through foreign corporations, including Puerto Rico Act 20 entities.  Some of these changes may have an impact on the tax structure of Act 20 entities operating in Puerto Rico, at least with respect to US owners that do not become PR bona fide residents.  

As a result of the new international tax provisions, US shareholders of Act 20 companies, which are controlled by US persons, who are not PR bona fide residents, may be subject to (i) a “toll tax”, (ii) a tax on deemed “global intangible low-taxed income” (GILTI) and a minimum base erosion and anti-abuse tax (BEAT) in the United States, and thus US tax deferral on the income derived in Puerto Rico may be lost.

This means that Puerto Rico’s Act 20 is still viable for those living in Puerto Rico. If you qualify for residency in the territory, your income is excluded from US taxation under IRC Section 933. Thus, changes to the US tax code make no difference to you. Your Puerto Rico sourced income, including Act 20 and 22 income, is taxed only in Puerto Rico.

If you’re a resident of Puerto Rico, you pay PR ordinary income tax on your salary. Then you pay corporate tax on your net profits at a rate of 4%. Finally, you take out those profits as a tax-free dividend.

Residents do not retain earnings in their Act 20 company. Residents of Puerto Rico take out their profits as earned as tax-free dividends.

Residents of the United States are in a different boat… and that boat appears to have sprung a leak.

When a US resident sets up an Act 20 company in Puerto Rico, they generate Puerto Rico sourced income based on the work done in PR by their employees. Any income generated from work performed in the United States is US source and taxed in the US. Any income generated by work done in Puerto Rico is PR sourced and taxable in Puerto Rico.

The Puerto Rico corporation pays corporate tax at 4% and retains the remainder within the company. The benefit to the US resident is tax deferral. They’re paying 4% to hold the profits in the corporation without US tax. They only pay the IRS when they distribute those retained earnings years in the future.

It appears that Trump has eliminated retained earnings in foreign corporations that are owned by US residents. If companies can no longer retain profits abroad, the benefit of tax deferral is lost to the US resident shareholder.

If this analysis of Puerto Rico’s Act 20 holds up after regulations are issued, Act 20 will only benefit those willing to relocate to the island. This is what we’re telling all new applicants… to receive the tax benefits of Act 20 you must become a resident and spend 183 days a year on the island.

This change in the ability to retain earnings offshore would also apply to all foreign corporations owned by US residents. If you live in the US, you may have lost the ability to retain earnings in an offshore corporation, even when you have a business abroad.

The offshore rules are even more muddled than Puerto Rico. Companies might be able to retain profits from sales to foreign countries and not sales to the United States. Offshore corporations owned by US shareholders that earn in excess of the Foreign Earned Income Exclusion appear to have also lost the ability to retain earnings abroad.  

Also, if the foreign corporation is owned by a US corporation, you might have more room to maneuver. This is one of the factors limiting Puerto Rico’s Act 20. Act 20 companies must be owned by an individual or individuals. Currently, you can’t own an Act 20 company inside a US corporation.

If Puerto Rico changes the rules for ownership and allows US shareholders to insert a US corporation in between themselves and their Act 20 business, they might cut corporate taxes in half. It appears the US corporation would pay 10.5% tax under Trump’s tax plan minus the 4% tax paid to Puerto Rico (using the foreign tax credit).

However, the value of this maneuver is dubious. The US shareholder would then pay US tax when he or she takes the money out of the US corporation as a dividend. In such a situation, many will decide to move their business back to the United States, as the law intended.

And, what about those who have been operating their Act 20 company for a few years and have accrued retained earnings? You’re screwed.

Retained earnings in foreign corporations must be repatriated to the United States. Retained earnings will be taxed at 15.5% and you have up to 8 years to pay this tax.

I hope you’ve found this article on big changes coming for Puerto Rico’s Act 20 tax incentive program to be helpful. If you already have an Act 20 company with retained earnings and require more information, please contact me at info@premieroffshore.com. I’ll refer you to an experienced attorney on the island who can research your particular situation.

If you wish to move to Puerto Rico under Act 20 and 22, we will be happy to help you set up under the new law.

President Trump’s Tax Plan and Expats
Christian Reeves

President Trump’s Tax Plan and Expats

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You’ll find a lot of partisan bickering on the web about President Trump’s tax plan. Here’s my effort to give you the facts and just the facts (a la Joe Friday of Dragnet) on how President Trump’s tax plan affects expats and Americans living abroad.

Keep in mind that this article is focused on US citizens living and working abroad. US persons who qualify for the Foreign Earned Income Exclusion in 2018. I’ll leave State tax issues and changes to the code that don’t affect expats to others.

You’ll find that Trump’s tax plan made some cuts around the margins, but didn’t include expats in the corporate tax changes. Sure, we get the 2 to 4% reduction all Americans get, but we’re not affected by changes that will save multinationals billions.

Historically, US corporations have been taxed on their worldwide income. Double tax was eliminated with the Foreign Tax Credit and they could retain earnings offshore tax-deferred. But, when earnings were repatriated, they’d be taxed at ordinary rates.

President Trump changed all of this for big corporations. He moved corporations from a worldwide tax system to a residency-based tax system (also referred to as a territorial tax system). Businesses will pay US tax on their US sourced income and zero US tax on their foreign sourced profits. Trump also closed billion-dollar loopholes like the ability to move US source income offshore with payments for intellectual property.

We had hoped that American expats would get the same benefits. That individuals would move from a worldwide tax system to a residency based system. That we would pay US tax on US income and no tax on foreign sourced gains.

This didn’t happen. American citizens living abroad are still taxed on our worldwide income. I guess we expats weren’t a large enough voting block or that we didn’t donate as much to the campaigns as the multinational corporations.

As a result, we still must look to the Foreign Earned Income Exclusion and the Foreign Tax Credit to keep Uncle Sam away from our ordinary income (wages or business income). The FEIE for 2018 increased to $104,100, up from from $102,100 in 2017. The FEIE amount for 2016 was $101,300, 2015 was $100,800, and 2014 was $99,200.

This increase is based on the annual inflation adjustment for 2017 which applies to more than 50 provisions in the US tax code. For all the details see IRS Rev. Proc. 2017-58. It does not come from Trump’s tax plan.

One aspect of Trump’s move to a residency based system affecting the FEIE is a focus on residency. That is to say, the IRS seems to be moving away from the 330-day test and towards the residency test.

The IRS has figured out that auditing expats who are using the 330-day test to qualify for the Foreign Earned Income Exclusion is very profitable. Thus, they’re putting a lot of resources into targeting this group.

As a result, I’m telling my clients to convert to the residency test and conform with how the IRS now views corporations. Become a resident of a low tax country, making that your home base, and stop using the 330-day test to qualify for the Exclusion.

From the IRS’s perspective, you can be a resident of any country you like and qualify for the Exclusion. So long as it’s your home base, where you plan to live for the foreseeable future, and you where have a residency visa, you’ll qualify for the FEIE using the residency test.

The last of those criteria, getting a residency visa, is usually the most challenging. In my experience, the easiest country to get legal residency in is Panama. Simply invest $20,000 in Panama’s Friendly Nations Reforestation Visa and you’re in.

Where most countries require you to buy real estate or invest a large amount of money to start a business, Panama allows you to invest a relatively low amount in their green initiative and receive residency. For more, see Best Panama Residency by Investment Program.

Most expats shield the majority of their ordinary income from the IRS using the FEIE or the Foreign Tax Credit. Thus, the fact that Trump lowered personal tax rates by 2% to 4% makes little difference. You don’t pay US tax on your ordinary income anyway. And, if you do, you should be operating your business through an offshore corporation.  

What does affect most expats is US tax on capital gains. This rate remains unchanged at 20% (assuming the Obamacare tax is repealed). As a result, US citizens pay US tax on all capital gains, no matter where they live and no matter where the property or asset is located. If a US citizen living in Belize sells real estate in Belize, he or she will owe 20% on long-term capital gains tax to Uncle Sam.

What will help expats is that the standard deduction doubled under Trump’s tax plan. A single filer’s deduction increases from $6,350 to $12,000. The deduction for Married and Joint Filers increases from $12,700 to $24,000.

The vast majority of US expats will save big on their US taxes because of this change. We expats rarely have a mortgage on our international properties. Therefore, we don’t deduct mortgage interest on Schedule A and thus don’t itemize. An increase in the standard deduction will go directly to our bottom line in a dollar for dollar decrease in US tax on our capital gains.

This tax break is balanced against the loss of the personal exemption.  You can no longer deduct $4,150 for each dependent. As a result, expats with large families will see an increase in tax, even considering the increase in the standard deduction.

A change that affects new expats is the loss of the moving expense deduction. When you move abroad for work, you can generally deduct all moving expenses. For most expats, this amounts to thousands of dollars in the year they leave the United States.

I hope you’ve found this article helpful. The most important takeaway for most expats using the Foreign Earned Income Exclusion is that you should spend 2018 working toward the residency test. Whether you chose Panama, Belize, Nicaragua, or elsewhere, you need to get started as soon as possible.

Trade Bitcoin Tax Free
Christian Reeves

How to Trade Bitcoin Tax Free

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Each and every Bitcoin transaction is taxable. If you sell Bitcoin and buy Ethereum, that’s a taxable trade. If you use Bitcoin to buy a laptop on Amazon, that’s a taxable transaction. If you sell bitcoin, hold dollars in your wallet for a week, and then re-buy Bitcoin, that’s a taxable transaction. Here’s how to trade Bitcoin and pay zero capital gains tax.

Basically, anything that you do with Bitcoin is taxable. The IRS has determined that Bitcoin is a capital asset and not a currency. Thus, when you use that asset, you’re exchanging it and not spending it under our tax laws.

Even if you were to buy a Subway sandwich using Bitcoin, that would be a taxable transaction. You would be exchanging a fraction of a Bitcoin for the sandwich.

You would report your sandwich purchase on Schedule D of your personal income tax return. Your basis would be the price you paid for that fraction of a coin and your taxable gain would be the appreciation that occurred from when you bought the coin and when you exchanged it for lunch.

If you’re using a US wallet or cryptocurrency exchange, each and every trade is being tracked for tax purposes. Transfers out of your exchange to another wallet are being recorded as sales.

For example, you send $30,000 in Bitcoin from your Coinbase account to a desktop wallet. This $30,000 is recorded as a sale and reported to the IRS on Form 1099 at the end of the year. If you return that $30,000 to Coinbase, they’ll likely book it as a new deposit with zero basis. For more on this, see Coinbase Support.

And the IRS is coming after taxpayers hard. A district court just ruled that Coinbase must turn over the trading records of over 14,000 clients who had over $20,000 of cryptocurrency in their accounts.

With the IRS getting ready for an all out war against Bitcoin, many are looking for ways to trade cryptocurrency tax free. Here are the only 3 legal ways to trade Bitcoin tax free.

IRA & Retirement Accounts

Because Bitcoin is an asset, you can trade it in your retirement account or your defined benefit plan. All trades in your IRA will be tax free (ROTH) or tax deferred (traditional).

And, because of the nature of Bitcoin, you can take control of your retirement accounts and move it offshore. Bitcoin can be held and traded anywhere. You’re not required to use a US wallet or a US trading platform connected to the IRS.

To hold Bitcoin in your IRA in the United States, you should set up a self directed IRA. This gives you the ability and authority to manage your own account and eliminate investment advisory fees.

To take your retirement account offshore, you need to add an offshore IRA LLC to that self directed account. Your US custodian invests your retirement savings into your LLC and you take it from there.

Puerto Rico

Residents of Puerto Rico that qualify for Act 22 do not pay tax on their capital gains. As a US territory, Puerto Rico is free to make it’s own tax laws for its residents, which it did with Act 20 and Act 22.

Under Act 20, any qualifying business that moves to the territory will pay only 4% in corporate income tax. Act 20 gives a 100% tax exemption for the capital gains and passive income of any qualifying resident.

So, move out of your high tax state to Puerto Rico and pay zero capital gains on your Bitcoin transactions. No state tax and no federal tax on your investment profits.

Warning: the tax benefits of Puerto Rico only apply to assets purchased after you become a resident. No, you can’t move to Puerto Rico and sell the coins you’ve been holding. Assets acquired while you were in the US are taxable in the US and assets acquired after you become a resident of Puerto Rico are taxable in the territory.

Life Insurance Policy

Capital gains are tax free inside a life insurance policy. If you set up an offshore private placement life insurance policy, you can trade cryptocurrency tax free.

If you close the insurance policy during your lifetime, you’ll pay US tax on the gains (you got tax deferral from the policy). If you hold the assets in the policy until your death, they will pass tax free to your heirs (considering the step-up in basis).

Offshore PPLIPs are expensive to set up and maintain. Therefore, they’re usually only available for accounts of $2.5 million or more.

Conclusion

Those are the three legal ways for a US citizen to pay zero US tax on thier Bitcoin trades. Remember that it doesn’t matter where you live in the world. So long as you hold a blue passport, Uncle Sam wants his cut of your capital gains. If you move to a foreign country, you will still pay US tax on your Bitcoin gains.

The ONLY exception to worldwide taxation is found in the US territory of Puerto Rico. As a territory, income of residents is excluded from Federal tax under Section 933 of the US tax code.

I hope you’ve found this article helpful. For more information on setting up an offshore IRA LLC, a PPLIP, or qualifying for Act 22 in Puerto Rico, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

nonresident FEIE
Christian Reeves

How to become a nonresident of the United States

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The 330 day test for the Foreign Earned Income Exclusion is being eliminated by President Trump. If you want to keep this tax break, you need to become a legal resident of a foreign country as soon as possible. Here’s what you need to do to become a nonresident of the United States for tax purposes.

Of course, the most important component of the residency test for the FEIE is residency. You must be a legal resident of a foreign country for a full calendar year to qualify for the FEIE using the residency test. Where the 330 day test was over any 12 month period, the residency test is January 1 to December 31.

It doesn’t matter where you get your residency visa for US tax purposes. So long as you have legal residency in a country which is your home base, you’re covered.

Of course, if you want to minimize your worldwide tax obligations, you should become a resident of a country that doesn’t tax foreign source income. For more on this, see: Which Countries Tax Worldwide Income?

For those that want to live in Europe, the most popular residency visa is Portugal. Buy a home for 500,000 euros, or deposit 1 million euros in a local bank, and you can qualify for residency. A resident of Portugal can live anywhere in the EU. You just need to spend a few weeks  a year in Portugal.

The most popular visa in the world is Panama. Invest $20,000 in their friendly nations reforestation program and become a permanent resident. This visa can also lead to citizenship and a second passport in 5 years. For more, see: Best Panama Residency by Investment Program

Once you have your residency visa, you need to cut as many ties with the US and create as many ties with your new home country as possible.  That is to say, a US citizen who wants to become a nonresident for US tax purposes must truly move and become a part of their new community, including:

  • Selling your US home;
  • Leaving US employment and becoming an employee of an offshore corporation reported on IRS Form 5471;
  • Establishing and spending time in a home located in your new country. This home should be of equal size, cost, and amenities as your US home;
  • Establishing business and social ties in the new country;
  • Discontinuing business and social ties in the United States;

Do not:

  • Keep your US home and let the children live there;
  • Have children in school in the United States;
  • Vote in State elections (Federal elections by mail, listing your foreign home as your residence is OK);
  • Have mail sent to your old address in the US. Establish a PMB address if necessary;
  • Continue to use US physicians, dentists, or other professionals who require the taxpayer’s physical presence to transact business.

Remember that you need to be a nonresident for Federal and State tax purposes. Sometimes these tests are different. Here is a list of ties a California court listed as indicating residency (In the Appeal of Stephen D. Bragg, May 28, 2003, 2003-SBE-002).

  • The location of all of the taxpayer’s residential real property, and the approximate sizes and values of each of the residences;
  • The state wherein the taxpayer’s spouse and children reside;
  • The state wherein the taxpayer’s children attend school;
  • The state wherein the taxpayer claims the homeowner’s property tax exemption on a residence;
  • The taxpayer’s telephone records (i.e., the origination point of taxpayer’s telephone calls);
  • The number of days the taxpayer spends in California versus the number of days the taxpayer spends in other states, and the general purpose of such days (i.e., vacation, business, etc.);
  • The location where the taxpayer files tax returns, both federal and state, and the state of residence claimed by the taxpayer on such returns;
  • The location of the taxpayer’s bank and savings accounts;
  • The origination point of the taxpayer’s checking account transactions and credit card transactions;
  • The state wherein the taxpayer maintains memberships in social, religious, and professional organizations;
  • The state wherein the taxpayer registers automobiles;
  • The state wherein the taxpayer maintains a driver’s license;
  • The state wherein the taxpayer maintains voter registration and the taxpayer’s voting participation history;
  • The state wherein the taxpayer obtains professional services, such as doctors, dentists, accountants, and attorneys;
  • The state wherein the taxpayer is employed;
  • The state wherein the taxpayer maintains or owns business interests;
  • The state wherein the taxpayer holds a professional license or licenses;
  • The state wherein the taxpayer owns investment real property; and
  • The indications in affidavits from various individuals discussing the taxpayer’s residency

The above is basically a list of why expats have relied on the 330 day test. It’s easy, you don’t need to invest or spend money to get a visa, and you don’t need to worry about your ties to the US. Just be out of the US for 330 out of 365 days and you’re good to go.

The problem is that expats often pushed their days in the US and the IRS loves to audit these returns. Many don’t realize that travel days and time in international waters can count as US days. Because the FEIE is all or nothing, the risk in these cases is significant.

More importantly, President Trump is moving the US from a global tax system to a territorial tax system. This likely means an end to the 330 day test and a move towards residency.

Because it takes time to become a legal resident of a foreign country, and time to break ties with the US, and you must qualify for a calendar year, I’m recommending clients begin this process as soon as possible.

I hope you’ve found this article on how to become a nonresident of the United States for tax purposes to be helpful. For information on residency visas, or to setup an offshore business, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

Foreign Earned Income Exclusion for 2018
Christian Reeves

Foreign Earned Income Exclusion for 2018

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On October 19, 2017, the IRS announced the Foreign Earned Income Exclusion for 2018. The FEIE for 2018 is a nice bump up from 2017. Here’s what you need to know about the Foreign Earned Income Exclusion for 2018 and how it might be affected by President Trump’s residency based tax proposal

Under Section 911 of the US tax code, the Foreign Earned Income Exclusion for 2018 increases from $102,100 in 2017 to $104,100 in 2018. The FEIE amount for 2016 was $101,300, 2015 was $100,800, and 2014 was $99,200.

This increase is based on the annual inflation adjustment for 2017 which applies to more than 50 provisions in the US tax code. For all the details see IRS Rev. Proc. 2017-58.

However, the Foreign Earned Income Exclusion for 2018 is subject to change. President Trump is proposing major changes to the US tax code which could change the FEIE amount for 2018 (or, more likely 2019). He might also succeed in his effort to move the United States from a citizenship based tax system to a residency based tax system.

If President Trump is successful, and all of us expats are hoping he is, the FEIE will be eliminated and those who are residents of a foreign country will pay zero US tax on income earned abroad.

In order to understand the Foreign Earned Income Exclusion for 2018, and how it might change next year, allow me to summarize it here.

As I said above, the Foreign Earned Income Exclusion for 2018 is $104,100. If you’re living and working abroad, and qualify for the Foreign Earned Income Exclusion, you can exclude up to $104,100 in salary or wages on your US Federal income tax return.

This salary can come from your US employer, a US corporation you own, a foreign employer, or an offshore corporation you own. If it comes from a US company, you and your employer are liable for payroll taxes. If you get paid from a foreign corporation, you are generally exempt from payroll taxes (which are about 15% combined on $100,000 in wages).

The Foreign Earned Income Exclusion for 2018 is to be reported on your 2018 personal income tax return using Form 1040 and Form 2555. Only income earned outside of the US qualifies for the FEIE. That is to say, US source income goes on Form 1040 and not Form 2555.

At the time of this writing, there are two ways to qualify for the Foreign Earned Income Exclusion in 2018. You can be out of the country for 330 days during any 365 day period or be a legal resident of a foreign country.

President Trump is saying he’ll convert the US from a citizenship based tax system to a residency based tax code. If that happens, the 330 day test would likely be eliminated and only those who are legal residents of a foreign country would qualify for the Foreign Earned Income Exclusion in 2018.

Under this tax system, the FEIE would eventually be eliminated and those who are legal residents of a foreign country would be allowed to exclude all of their foreign income. It seems likely that that the Foreign Earned Income Exclusion for 2018 will remain as described herein and that we will move to a residency based system in 2019.

Regardless of whether President Trump succeeds, we’re advising all of our clients using the FEIE’s 330 day test to convert to the residency test during 2018. You should be ready by January 1, 2019 to qualify for the residency test. Here’s why:

First, the residency test is lower risk than the 330 day test. Many of our clients have been caught missing their 330 days and have lost the FEIE. If you miss your 330 by even one day, you lose the Foreign Earned Income Exclusion entirely and 100% of your worldwide income becomes taxable in the United States.

Second, the residency test is easier to use in the long term. Sure, it’s simple to calculate how many days you were in the US and how many days you were in a foreign country. But, counting travel days year in and year out is a real headache.

When you use the residency test, you don’t need to keep track of your days to closely. You can be in the US on business for 2 or 3 months a year without an issue. Try not to exceed 4 months a year and never spend more than 183 days in the US, and you’ll qualify for the residency test.

Third, the residency test requires you to be a resident of a foreign country for a full calendar year. That means it must start on January 1 of 2019. I’m recommending that our clients spend 2018 getting their affairs in order and planning for the FEIE throughout 2018.

It takes a great deal of time and effort to qualify for the residency test. You need legal residency in a country you can call your home base. Plus, you need to cut as many ties to your home country as possible and create as many ties to your new country of residence as possible.

So, plan to use the Foreign Earned Income Exclusion for 2018 with the 330 day test and be ready with the residency test in 2019.

This means that you must secure legal residency in a country that will be your home base to maximize the value of the Foreign Earned Income Exclusion in 2019. It doesn’t matter for US tax purposes which country. So long as you’re a legal resident, you’ll qualify for the FEIE and Trump’s residency based tax system if it passes.

Of course you don’t want to exchange one high tax country for another. You want to secure residency in a country that won’t tax your foreign capital gains and your foreign sourced profits. For a list of these countries, see: Which Countries Tax Worldwide Income?

For example, I don’t recommend Mexico or Colombia because they tax residents on their worldwide income. I do recommend Panama because this country taxes residents on their local source income but not their foreign sourced profits.

If you’re living in Panama and selling to persons in the US, Panama won’t tax those gains. If you’re living in Panama and selling to Panamanians, you will owe tax on those sales.  

Next, you need a country with an efficient residency program that fits your budget… and there are a number of options here.

For example, if you have the cash, you can get residency in the European Union through Portugal’s golden visa program. Portugal requires you deposit € 1,000,000 in a local bank or purchase real estate for € 500,000 or more.

If you wish to live in Asia, you can get residency in Hong Kong by investing about $1.3 million in a local business. You can also gain residency in the Malaysia with a deposit of about $135,000 in a local bank or in the Philippines by investing $75,000 in a government approved business.

The easiest and lowest cost residency for US citizens is Panama’s Friendly Nations Reforestation Visa program. Invest $20,000 in one of the approved reforestation projects and get residency immediately. And this investment covers you, your spouse, and your dependent children 18 years of age and under. Government and legal fees apply to each applicant in addition to the investment.

If you can make Panama your home base, I guarantee that the Panama Reforestation Visa is the most efficient residency program and the best way to qualify for the Foreign Earned Income Exclusion in 2018 and beyond. For more information on this program, see: Best Panama Residency by Investment Program

I hope you’ve found this article on the Foreign Earned Income Exclusion for 2018 to be helpful. For more information, or for assistance with residency in Portugal or Panama, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to assist you with your international tax plan and support  you through the coming changes.