Could Puerto Rico Become A Tax Haven Option?

 

Island_life

For American citizens, the options for tax savings in foreign jurisdictions are pretty limited if they want to remain a U.S. citizen. The  long-arm of the IRS reaches everywhere, even for “Americans” who don’t live, work, or benefit at all from residency in the United States. Uncle Sam still has a hand in their wallets as long as they continue to carry that blue passport.  The United States is in a very small minority of countries that taxes its citizens on worldwide income, even if they do not reside in the States or do business there.  Indeed, simply being married to a U.S, citizen is enough to trigger the over-reaching FBAR reporting requirements for foreign accounts held by U.S. citizens or their spouses.

For years, the popular myth of secret Swiss bank accounts held by every U.S. financier, and tropical isles outside the reach of U.S tax authorities for every wealthy stock market swindler, was alive and well in the minds of the average Joe Citizen. Rage against the perceived unfairness of the wealthy crystallized with the “99%” movement, and politicians were quick to follow suit. More legislation, reporting requirements, and draconian banking enforcement has made it more difficult than ever for a U.S. citizen to do ANY level of banking outside their home country, the reporting hassles for the foreign banks who have to stay on the “good side” of the U.S. government. aren’t worth taking American banking clients. Silicon Valley Facebook billionaire Eduardo Saverin was crucified by the media and U.S. politicians when he dared to renounce U.S. citizenship, even though it saved him millions, and came at a time when he hadn’t lived in the United States for years, nor was he born there. American-born success stories are faced with a difficult choice, either expatriate and become a citizen of a different country (which comes with its own peculiar reporting requirements and taxes), or grit their teeth and bear it when it came to paying top-dollar under the IRS progressive tax structure and having to submit to extensive levels of detailed reporting on any foreign account they were fortunate enough to be able to open in an international banking environment that is practically closed to Americans.

It’s no surprise that many of the nation’s wealthy have long looked for a win-win situation; something where they could remain U.S. citizens with all the benefits and advantages that entails, but still be able to cut-down on rapidly rising tax bills that continue to rise with every new partisan political pet project. Where there is a will, there is a way, and the rich looking to save some tax dollars may have found it in an island just off our nation’s coastline; Puerto Rico.

Citizens who graduated from the U.S. public school system may remember from junior high that Puerto Rico is a protectorate of the United States. Puerto Ricans carry U.S. passports, but are not subject to the same federal and state taxation system that mainland Americans are. In many ways, it is the best of both worlds for travelers from this Caribbean island, visa-free travel all over the world, protection by the largest remaining superpower on the world stage, yet not have to pay the bill when the rent comes due. Now, a new program underway looks like it may give wealthy Americans the same type of benefits: retain their U.S. passport and citizen status, yet cut their tax bill tremendously.

To be sure, this “economic revitalization” approach has been tried before (The U.S. Virgin Islands had a similar program enacted a decade ago, with limited usage) and didn’t create the huge economic benefit in island outposts that the politicians had hoped for. Under “Act 22”, Americans who relocate to Puerto Rico can see a massive reduction in their annual tax bill, while still remaining U.S. citizens. The biggest issue for most looking to relocate is the “183 day requirement”, which tends to be strictly enforced. Anyone taking advantage of this program to reduce their taxes must reside in Puerto Rico for a full 6 months+1 day of each calendar year, a tough level to meet for people who are presumably happy where they currently live, and are less excited to move to a poorer island with high unemployment, and away from what they know. Still, the idea of avoiding all capital gains income and full exemption for all ordinary income earned within Puerto Rico, legally and with the full “blessing” of the IRS (at least until 2035) will probably make at least some wealthy people consider pulling up roots to move to a picturesque island getaway that is just a 1-hour flight from Miami airport, even if for  just a few years worth of (tax) holiday.

Leave a Reply

Your email address will not be published. Required fields are marked *