The Only Legal Way to Escape US Taxes Besides Death and Renunciation
By Nick Giambruno, Editor, International Man
When I hear about strategies that purport to legally allow US citizens to avoid having to pay income taxes, the first thing that usually comes to mind is that it is some sort of dodgy cockamamie scheme.
This is because the US government is no slouch when it comes to shaking down its citizens for every penny it can get away with. The mind-boggling spending on welfare and warfare policies necessitates this. It would be dangerously foolish in the extreme to think you could slip one past them.
There really was no sure way to legally escape the suffocating grip of US taxes besides death and renouncing your US citizenship… until recently.
Every other country in the world (besides the US and Eritrea) practices a system of residence-based taxation. This means that citizens are not liable for paying income taxes to their home country if they become a legal resident of another country and earn their income there.
Take, for example, an American expat and a Canadian expat who both live and earn income in Singapore. The Canadian would only be responsible for paying the much lower Singapore income taxes, while the American would be responsible for paying Singapore income taxes AND American income taxes (though the IRS does allow for around $100k of foreign earned income to be excluded from income taxes if certain conditions are met).
This is because the US taxes its citizens by virtue of their citizenship (citizenship-based taxation), regardless of where they live and earn their money. Even leaving the US permanently does not absolve you from paying US income taxes. Though Eritrea also practices citizenship-based taxation, it is an impoverished African country and has no ability to effectively enforce it. That’s the key difference. The US government can effectively enforce its citizenship-based taxation policies thanks to its massive economic, political, and military weight and the fact that it does not recognize any limit to its jurisdiction (consider FATCA and Edward Snowden).
American expats are therefore in the uniquely unfavorable position of having arguably the worst tax policies and a government that can effectively enforce them. For many, it is a tight and suffocating tax leash. It is no wonder, then, that a record number of Americans gave up their citizenship last quarter to escape these onerous requirements. (You can find more about citizenship-based taxation versus residence-based taxation in this article.)
There is, however, another way besides death and renunciation to legally escape US income taxes, thanks to the Caribbean island of Puerto Rico.
Puerto Rico is an unincorporated territory (commonwealth) of the US, and this allows it to have a special tax arrangement. Namely, legal residents of Puerto Rico who earn their income in Puerto Rico do not pay US federal income taxes (though they still have to file a federal tax return).
All Puerto Ricans are already US citizens, and since it is a commonwealth of the US, Americans are generally free to stay on the island without restriction and do not even need a passport to travel there.
In order to obtain legal residency status in Puerto Rico and the associated tax benefits, one would have to be physically present on the island for at least 183 days a year.
While US citizens who become legal Puerto Rican residents do not have to pay US federal income taxes on income earned on the island, they still have to pay local Puerto Rican taxes. This only amounts to 4% in certain cases, a pittance in comparison to combined US federal, state, and sometimes city income taxes.
This low 4% rate only applies if the services are performed in Puerto Rico for clients outside of Puerto Rico—otherwise a local income tax of as much as 33% is applicable. For example, an investment manager based in Puerto Rico who performs services for US-based clients would be eligible for the lower income tax rate. Consult a tax expert to discuss individual cases and circumstances.
In addition, Puerto Rico recently slashed its taxes on dividends and interest to ZERO, and capital gains taxes to as low as zero (maximum of 10%).This is part of a recent program over the past year or so in which Puerto Rico has been promoting itself as a tax-friendly jurisdiction open to Americans, in order to compete with its better-known Caribbean neighbors like the Cayman Islands.
Taken together, Puerto Rico is an attractive destination for American companies and individuals who have portable incomes, such as software developers, writers, Internet businesses, and especially those dealing with investments, like hedge funds, in which the majority of the earnings are derived from investment income like dividends, interest, or capital gains.
Spending half the year in Puerto Rico, with its beautiful white sand beaches, Caribbean climate, and close proximity to the US is not a bad proposition.
In short, thanks to a system of citizenship-based taxation, becoming a legal resident of Puerto Rico is the only way for Americans to keep their US citizenship and legally avoid US federal income taxes.
There have been at least 40 Americans who have taken advantage of this special arrangement with Puerto Rico and moved there during the past year. Earlier this year billionaire hedge fund manager John Paulson was said to have been exploring this option. Check out the short clip below from Bloomberg about an American who has moved to Puerto Rico for exactly these reasons.
Of course, the US government could always pressure Puerto Rico to change its policies, but people in the know view that as unlikely.
For now, Puerto Rico and its special tax situation definitely deserve consideration for Americans.
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Might wanna check out the local laws and crime rates before you make the move. Might find that PR resembles DC.
One small, itsy bitsy, teeny little problem. You have to live in Puerto Rico. Ummm, been there done that.
I would raher have my testicles smashed with a hammer eachhour than do it again.
1. What is stopping the gubment from turning PR into a state? Ob ama already thinks it is, maybe a new executive order on the way out?
2. Crime must be off the charts, we ship there and about 25% of our shipments never make it. Just like in El Paso, the percentage of broken boxes, especially high dollar, small box (like specialty steel fasteners) have accidents quite a bit. Must burn the thief’s ass when he only gets scrap value, my guess is he pitches it once broken open.
3. If PR is so great, then why have so many immigrated to the US? Maybe great for the likes of Paulson, but for the average Joe? And once the gubment teat breaks, what kind of crazytown will PR be with the starving masses?
Thanks, but not for me. I’d rather disappear into northern Michigan with the hopes of breaking into Canada.
Teresa – crime there is off the charts. I survived attempted carjackings, etc., during my time there. It is a crime capital, for sure.
My experience was that the women work, and the men drink. Nice.
I think that the ricans have to vote if they are going to become a state. Umm – why the fck would they do that? They get all the bennies and the passport – and NO US TAXES! They would have to be even stupidier than I think they are to do that.
More than 50% of the population of Puerto Rico is on welfare.
This article is dated. The U.S. has changed tax laws, requiring tax liability of anyone, anywhere. Even Switzerland, and yes, Singapore. There is no place left to hide from the IRS.
AWD – I believe that PR is still exempt from fed taxes. US citizens are otherwise up for tax on their worldwide income. Eritrea and the US are the only 2 nations on earth that tax based on citizenship and not on place of residence.
“In general, United States citizens and resident aliens who are bona fide residents of Puerto Rico during the entire tax year, which for most individuals is January 1 to December 31, are only required to file a U.S. federal income tax return if they have income sources outside of Puerto Rico or if they are employees of the U.S. government. Bona fide residents of Puerto Rico generally do not report income received from sources within Puerto Rico on their U.S. income tax return.”
I thought I read somewhere that becoming Amish is another way out. No social security, medicare, most work for cash only so pay very little income tax.
Sure they pay property tax and sales tax, but still get to keep most of what they earn, and live here as well. It doesn’t really matter though, we all know it will get much worse before it (if ever) gets better.
Card – so sorry, but that is an old wive’s tale similar to the ones where Native Americans are covered in rivers of government gold. You iz American, you iz slave, payz up.
This belongs in the Believe it or not category.
Few who actually labor and produce any product of value, make more than $100k, so they could live most anywhere and not pay US taxes.
It is only the ‘fat cats’ that try to avoid taxes. They should be caught and punished, and will be as the noose tightens. It will be a much better world when the investment counselors/firms are history. Skimmers taking without producing is usury, not banking. The stock market casino and its incestuous products need to go, and soon, if the world is to continue to support life.
Caught and punished for not paying taxes?
Biden said: “We want to take money and put it back in the pocket of middle-class people. It’s time to be patriotic … time to jump in, time to be part of the deal, time to help get America out of the rut.”
Even with changing the way GDP is calculated QE 3 must continue, the head nut is talking about doubling exports, again, so I suppose the gov will now change the way exports are calculated, maybe if they add the inflation we export? There is talk of a GPS tax, where a tracking devise is installed in all vehicles and we are taxed (additionally) on the miles we drive, lower on the highways, higher in the cities.
Sorry, paying more taxes is not the solution.
The Amish don’t pay Social Security taxes .