The “Tax Free” Haven…Is
There Such A Thing?
Well, yes…and no. Why don’t we split the difference?
There are options for those looking to buy property, do business
or live either in the United States or abroad and enjoy tax “friendly”
havens. Knowing which type of tax you are most liable for will determine
where to find your tax friendly spot.
Ben Franklin was right when he said the only certain things in
life were death and taxes. It may in fact be truer today, than ever
before. Why? The global village talked about so much in the 1990’s
is now a reality. Even in what seems like a remote area of the world,
has some electronic link to the rest of the world – we’re
leaving our footprints everywhere. Most countries have tax information
exchange agreements with the United States, and even if you venture
to one with no such agreement, the IRS won’t be far behind
you.
But enough with the gloom…there is a light on the horizon
– several actually. Your first step to finding a tax friendly
spot is to know which tax is your greatest liability. At the bottom
of this page, you’ll find a partial list of tax liabilities
and the places to best avoid them – but remember, as a U.S.
Citizen, you’ll always have to fulfill your obligation to
Uncle Sam. Even if you renounce your citizenship and move to another
country, you’ll owe the IRS for years to come.
Under U.S. tax laws, the worldwide income of any U.S. citizen
or resident alien is subject to tax. Whether you're living
in the United States or overseas, and even if the money came to
you as wages, independent contractor payments, or unearned income
from investments, pensions, rents, royalties, etc. The IRS is legally
due a percentage.
Didn’t we say enough with the gloom? OK, here’s some
more sunshine: There is a break for U.S. taxpayers who live
internationally. These U.S. citizens may be able to exclude
all or some of their foreign income from American taxes:
There are two simple ways to see if you qualify for this exemption:
- You have a tax home in a foreign country, AND
- You meet either the Internal Revenue Service's “bona
fide residence” or “physical presence” requirements.
A tax home is your principal place of business, employment or
post of duty. You have to show the IRS that you actually live abroad,
that you’re not just a “tourist” of sorts that
travels and earns money in other countries. That might get you off
the IRS tax, but remember - if the country you live and work in
has income tax laws, you are responsible for paying them. Be sure
you are familiar with that country’s tax laws BEFORE you move,
buy a home or take a job.
The other way is to establish a genuine home in a particular foreign
country for a full tax year OR spend a minimum of 330 days abroad
earning money.
Even more sunshine: Overseas Housing Tax Break
If you are living in a foreign country and earning money, and you
qualify for the foreign income exclusion, you may be able to claim
part of your overseas housing costs. Here are some things to consider:
- If you are an employee, you can exclude from U.S. taxes a portion
of your salary that you pay toward your overseas lodgings.
- If you are self-employed, foreign housing costs can be claimed
as a deduction.
If you’re going to claim both income and housing exclusions,
figure your housing tax break first as that will limit how much
of your foreign income you can exclude. If your foreign earned income
is less than your housing costs, you cannot claim the housing costs.
Here are the allowable expenses:
- Rent
- Repairs
- Utilities (but not the telephone)
- Property Insurance
- Furniture Rental
- Parking
Careful though, because the IRS specifically excludes “lavish”
or “extravagant” foreign housing allowances. Good to
know when scouting for real estate abroad.
IRS Forms You’ll Need (click on the links
to be taken to the IRS web site and downloadable forms):
U.S. Possessions Don’t Qualify as Foreign Countries
So, if you’re living in the U.S. Virgin Islands or Puerto
Rico you cannot claim the foreign-earned-income exclusion.
However, if you’re a U.S. citizen living in American Samoa,
you could possibly claim a “U.S. possession exclusion”.
A similar exclusion will soon be available for those living Guam
and the Northern Marianas when new agreements with the United States
take effect. Click here for details: Publication 570, Tax Guide
for Individuals With Income From U.S. Possessions.
There is more information from the IRS on all of these topics, just
click here to access: Publication
54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
Best Course of Action for Finding Your Dream Home in a
Foreign Locale
Investigate tax ramifications thoroughly! Before you choose your
dream locale, see what taxes you may have to pay there. The U.S.
currently has tax
treaties with over 50 countries. These agreements allow for
U.S. citizens residing in foreign countries to be taxed at a reduced
rate or to be exempt
from U.S. income taxes on certain foreign earned income. By
and large, these treaties allow each country to credit the amount
of tax paid to the other country in pretty much the same way that
U.S. states allow residents to deduct their federal income tax.
Knowing which countries have treaties and what their particular
tax laws are is KEY to being able to enjoy your overseas home.
Click here to see the countries that currently have treaties
with the U.S.: Tax
Treaties.
And here’s that list of tax friendly U.S. states and foreign
countries that we promised you earlier. Remember that tax laws change
quite frequently, so we cannot guarantee the accuracy of this information.
The Vicki Wong Team cannot and does not give tax advice, we only
suggest some areas for you to explore and things to be aware of.
Always consult a professional tax law specialist or accountant and
be aware that tax laws can and do change.
Tax Friendly U.S. States:
|
No state income tax *
|
Alaska |
Tennessee *(income tax limited to dividends
& interest only) |
Florida |
Texas |
Nevada |
Washington State |
New Hampshire *(income tax limited to dividends & interest
only) |
Wyoming |
South Dakota |
|
*Counties and other localities can and do levy their own sales
taxes, plus property taxes, fuel, alcohol and tobacco taxes.
Tax Friendly Countries Outside the U.S.
| No personal income tax * |
Andorra |
Monaco |
Bahamas |
United Kingdom *(no tax on foreign earned income) |
Cayman Islands *(no tax on foreign earned income) |
Ireland *(no tax on foreign earned income) |
Channel Islands |
Vanuatu |
No property tax:
Vanuatu
No capital gains tax:
Bahamas
Vanuatu
No inheritance tax:
Bahamas
Vanuatu
No withholding tax:
Vanuatu
Tax friendly (low tax rates or other incentives for individuals
and/or companies)*
Anguilla |
Liechtenstein |
Seychelles |
Antigua & Barbuda |
Luxembourg |
St. Kitts |
Aruba |
Macau |
St. Vincent |
Bahamas |
Malta |
Grenadines |
Barbados |
Nauru |
Switzerland *(if you become a resident) |
Belize |
Netherland Antilles |
Turks & Caicos |
Campione d’Italia |
Nevis |
|
Cook Islands |
Panama |
|
Cyprus |
Samoa |
|
Latvia |
San Marino |
|
|
