Zero Taxes in Puerto Rico for Americans?

[bwall]

So, I stumbled across a post in the Off-Topic section and it got me to thinking. There has to be a flaw in my logic here somewhere but I just can't find it. Perhaps someone here can tell me where I'm wrong:

1) Americans pay taxes on world-wide income. Anywhere in the world, with just one (?) exception.

2) That exception is in Puerto Rico, a US Territory (not a state). Perhaps also in Guam, and US Virgin Islands, etc?

3) Because they are not states, they have no representation in Washington D.C. and we all know "No taxation without representation." Right? Therefore no taxation at the federal level; i.e. no federal personal income tax.

4) After 6 months, a US citizen is granted residency.

5) Therefore, it is possible to become a resident quickly and income earned there is not taxed at the federal level. Local Puerto Rico income tax is still applicable, of course. It is around 4%.

6) This will work for anyone who can earn money independent of their location (Think Internet, etc). They can re-locate their business and be in great shape, tax-wise.

One potential down side; you have to actually move and live there. But, it's an island in the Caribbean, so how bad can it be? Cost of living should be much lower than coastal USA.

[Orvell]

Lol, well one major downside would be the current Puerto Rico debt crisis, which is ongoing and Definitely A Problem, which means a lot of unknowns.
I'm not keeping up with the news like I should, but it's something folks ought to consider. XD
That said, retiring (or working) on a paradise island doesn't sound bad at all!

[CanuckExpat]

How much money are you looking to earn while living abroad? US Citizens and Permanent Residents living abroad have to file a tax return, but there is a foreign earned income exclusion which means you won't have to pay US taxes if your income is up to $100,000 give or take.

(If you are only making $10-20k or so, then you don't even have to file a tax return I think)

[bwall]

The S-Corp that I own is planning on earning over $1m for 2016, perhaps more depending on sales. So, it is definitely worthwhile to look in to for us.

[Undecided]

Don't you still need to pu yourself a salary, and then pay PR's higher taxes (at least for MFJ rates) on that?

[beltim]

3) Because they are not states, they have no representation in Washington D.C. and we all know "No taxation without representation." Right? Therefore no taxation at the federal level; i.e. no federal personal income tax.

There are probably other errors in your post, but I know for a fact that this one is wrong.  Residents of Washington, D.C. have no representation in Congress and yet they're fully responsible for paying federal income tax.

"No taxation without representation" was a slogan for the Revolutionary War.  It is not a law.

[bacchi]

A resident of Puerto Rico has to pay income tax on US sourced income.

https://en.wikipedia.org/wiki/Taxation_in_Puerto_Rico#Federal_taxes

[bwall]

A resident of Puerto Rico has to pay income tax on US sourced income.

https://en.wikipedia.org/wiki/Taxation_in_Puerto_Rico#Federal_taxes

Right. That is why I would be moving the company to Puerto Rico. Therefore, the income earned would be from the Puerto Rican company, not US sourced.

[bwall]

3) Because they are not states, they have no representation in Washington D.C. and we all know "No taxation without representation." Right? Therefore no taxation at the federal level; i.e. no federal personal income tax.

There are probably other errors in your post, but I know for a fact that this one is wrong.  Residents of Washington, D.C. have no representation in Congress and yet they're fully responsible for paying federal income tax.

"No taxation without representation" was a slogan for the Revolutionary War.  It is not a law.

Thank you for pointing out that residents of D.C. are indeed oppressed and need to apply the values of the Spirit of 1776. I will remember them in the future as such. Please let me know what other errors are in the post.

[bwall]

Don't you still need to pu yourself a salary, and then pay PR's higher taxes (at least for MFJ rates) on that?

Yes, I would still pay myself a salary. Where can I find out more about MFJ and PR higher tax rates?

[Apples]

Don't you still need to pu yourself a salary, and then pay PR's higher taxes (at least for MFJ rates) on that?

Yes, I would still pay myself a salary. Where can I find out more about MFJ and PR higher tax rates?

The poster above informing you that D.C. residents pay taxes without representation was informing you that your logical inference that since people in PR aren't in a state, they therefore don't pay taxes because the aren't represented was incorrect since there are actually people paying taxes sans representation.  Also, have you looked at Wikipedia?  https://en.wikipedia.org/wiki/Taxation_in_Puerto_Rico

It looks like you have to be there a year to be a "bona fide resident" and that you have a different federal income tax rate but way fewer, if any deductions.  You can also read about what taxes Puerto Rico levies.

[DavidAnnArbor]

There are efforts to raise the tax rates in Puerto Rico because of the debt crisis, and the potential of default.

[cgofish]

Puerto Rico does have a few interesting programs if your interested in moving or starting a services based business there or are an individual investor.  These are their ACT 20 and ACT 22 laws.

I've looked into it quite a bit and may consider a service based business in the next phase of my life.   

Act 20 Tax Incentives

0% Taxes on Earnings and Profit: The exemption includes a 100% tax exemption of earning and profit distributions on income generated from export services.

3-4% Flat Income Tax: A 4% flat income tax rate on income generated from export services, or a 3% tax when more than 90% of an service provider’s gross income is from export services.

0% Property Tax: 100% property tax exemption for the initial 5 years of operation for certain export services including corporate headquarters, call centers, shared service centers for accounting, finance, marketing, human resources, and other centralized management services. After the 5-year period expires, a 90% tax exemption will apply for the remainder of the Tax Exemption Decree.

The islands economy is a mess right now but some areas seem to be doing ok.  You have to become a PR resident to take advantage of these.   Plenty of information online and here for a start: http://www.the2022actsociety.org/

 

[Axecleaver]

You still pay payroll taxes (FICA, FUTA). That wiki page says they plan to implement a 10.5% VAT tax which would definitely put a crimp in any business that flows lots of revenue with small margins. It will also have the effect of making all goods and services 10.5% more expensive to residents, unless there are exclusions.

Hawaii has a VAT on services, too, it seems to work well for economies that are tourism-based and/or government services based. My guess is they put the VAT in to channel money to the state entity from dollars the US Government spends there.

[cgofish]

craiglepaige - what part of PR is your family from?   I agree there are some issues down there but it is an amazing place. 

We have a hard time going anywhere else for vacation.   Rincon and Vieques are our favorites and we've never felt unsafe in either of those areas but there are other areas of the island where I'd just keep on driving....   Then again we have areas of Florida that I'd do the same.

My Fiance is from the island and we hope to FIRE there when we get to that point.   Our hopes are that things will start progressing in the right direction for the island as it is an amazing and beautiful place.   

Outside of the natural beauty 99% of the people you meet and interact with are friendly and honestly have much more of a sense of community than I've ever seen here in the states.   Where in the states does some random mid 20's young man walk into a Starbucks and tell a complete stranger to enjoy their coffee.....every morning while eating breakfast in one of the local Panaderías (Bakery) we would be greeted with a  "Buen provecho" and it was usually from someone here in the states that we would stereotype as a "thug".   Granted this may be in the areas we frequent but we love it their good and bad.