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Andrew Henderson

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Finance • Legal Tax Reduction

3 Ways to Pay Lower Taxes as a US Citizen

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Whether you agree with Donald Trump or not, even the most ardent patriot or the most dissenting liberal can acknowledge that the United States may no longer be considered great. The US is still a vast, diverse and globally significant power, but with wealth disparity at an all-time high and division continuing to grow, the American dream is over for many. 

Be it onerous tax demands, more government intrusion, reduced quality of life, toxic politics or personal safety, the wake-up call for United States citizens is getting louder. 

For some, their American dream can now be found overseas. But while escaping the US to experience something new is more attractive than ever, getting out of the US tax system is far from easy. 

The US is one of only two countries in the world that has a citizenship-based tax system. That means that as a United States citizen, you will still pay taxes to the Internal Revenue Service (IRS) wherever you go.

In certain circumstances, the amount of tax may be reduced, or you may get some relief, but you will still have to file a tax return in the US. These taxes can rarely be eliminated.

Who Do US Taxes Apply To?

Who Do US Taxes Apply To

As well as US citizens, taxes apply to all US persons. If someone gets a green card, they are immediately treated as a US person for tax purposes for as long as they hold the card. Some people voluntarily pay taxes to the US, but for obvious reasons, this is rare. 

Finally, a non-US person who goes to the States frequently could be taxable there if they meet the substantial presence test. The substantial presence test in the US works differently than in other countries. UK citizens, for example, have the right to spend up to six months in the US through an Electronic System for Travel Authorisation (ESTA) online application.

However, if you go to the US for over three years and consistently spend significant time there each year, you could be considered a taxpayer by year three. Why? Because it’s calculated cumulatively.

For tax purposes, you are considered a US resident if you spend 31 days during the current year and 183 days over a three-year period, including the current year and the two years immediately preceding it. This includes all days in the current year, one-third of the previous year, and one-sixth of the days in the second year before the current year.

To illustrate the point, let’s say in 2023, you spent 150 days in the US; in 2022, you spent 90 days; and in 2021, you spent 30 days. The total over three years calculated by the substantial presence test would be 185 days, so now you’re in the US tax net. That is how non-taxpayers get caught up in the US system and must pay taxes on their worldwide income. 

There are, however, three options to avoid paying taxes as a United States citizen.

Living Offshore

The first option to lower your taxes as a United States citizen is to leave the US and live offshore. Under this arrangement, you can retain your US citizenship and choose to live in any one place or any combination of places, provided you do not trigger another country’s tax residence. 

By living in another country, being a nomadic traveller and leaving the US physically to benefit from offshore incentives, you can live in one place and be a tax resident of another. As long as you spend 330 days per year outside the US, a structured property strategy can reduce your tax liability to the IRS.

Another test the US applies is the bona fide residence test. You meet the bona fide residence criteria if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.

You may leave that foreign country for brief or temporary trips back to the United States or elsewhere as long as you clearly intend to return to your foreign residence or to a new foreign bona fide residence without unreasonable delay. 

Living offshore gives you location flexibility, low tax and business income along with an easy return to the United States, but it does not eliminate capital gains tax.

If appropriately structured, the US Foreign Earned Income Exclusion (FEIE) provides a tax-free salary of US$120,000 a year per spouse or partner. The amount is adjusted annually for inflation, so in 2024, that figure will amount to US$126,500. Anything over that will be taxed at standard rates by the US, but if set up correctly, a corporate structure can be taxed at 10.5%. 

You must meet specific requirements to qualify for this 10.5% rate. The Trump Tax Reform, officially known as the Tax Cuts and Jobs Act (TCJA), subjected US persons doing business offshore to the Global Intangible Low Tax Income tax (GILTI).

Before GITLI, it was possible to defer all income tax by keeping your funds in a foreign corporation. However, if at least half of a foreign company is collectively owned by US persons, it is deemed a Controlled Foreign Corporation (CFC) and must pay GILTI tax. 

This collective total is calculated on the shareholder’s basis rather than the company’s basis. The lower GILTI tax rate of 10.5% can only be applied to international businesses that do not engage in US business or trade. 

You must continue to file US tax returns and report all foreign corporations. 

If you’d like to learn more, Nomad Capitalist founder, Andrew Henderson, offers advice on offshore tax savings for US citizens in this video

"Can I Save Taxes Offshore as a US Citizen?"

Moving to Puerto Rico

The second route is to move to Puerto Rico, which is officially a US territory and does not require you to obtain residence. Doing so gives you an easy return to the US, a low tax on business income and no capital gains tax. However, there is no location flexibility and you are tied to Puerto Rico. 

For US citizens, moving to Puerto Rico is a way to stay on US soil and dramatically reduce their tax burden. A couple of tax incentives make this a good option if you don’t want to renounce your US citizenship and these are available under Act 60 for those who export services and investors. 

With Act 60, you can move your business to Puerto Rico and taxpayers are obligated to pay a flat 4% tax rate if they export services from there. Taxpayers also pay no tax on dividends income. You can reduce capital gains tax to zero by locating it in Puerto Rico but you will still pay US taxes on the capital gains you have accrued up to that point in the US. 

This involves moving or starting your company in Puerto Rico and exporting services from there. You will need to satisfy certain conditions. For example, if you have a manufacturing business, Puerto Rico will not help you because it is a US-sourced income. 

If you are involved in crypto and want to save on capital gains tax but don’t want to renounce, then Puerto Rico can be a good option. Or, if you have a location-independent business, like consulting, information technology or e-commerce, you can move to Puerto Rico, open a company there and pay minimal corporate tax as long as you export your services from there. 

So, you can go to Puerto Rico without renouncing your US citizenship and avoid paying capital gains tax. You need to meet a few requirements to be able to do this. The first is the physical presence test: you must live in Puerto Rico full-time for at least 549 days during the three-year period ending with the current taxable year. An added requirement is that you can’t be present in the United States for more than 90 days during the year. 

The next is the tax home test – Puerto Rico must be your tax home. Then there is the closer connection test, which requires you to have a stronger connection in Puerto Rico than on the US mainland.

In effect, this means you must be in Puerto Rico 183 days a year. You must also establish a bona fide existence by moving all the trappings of your life there, such as banking, driver’s licence, primary residence and kids’ schooling. The IRS will track you to make sure this is the case. 

Moving to Puerto Rico is ideal for people who eventually want to renounce or live overseas to dip their toes in the water. That way, you can test if living ‘outside’ the US appeals to you. 

Renouncing US Citizenship 

Renouncing US Citizenship 

Last, but certainly not least, is renunciation of US citizenship which is the best way to eliminate all US taxes. Every year, the number of people who renounce their US citizenship grows and there are now around 9.5 million US citizens embracing an expatriate life.

There are many reasons why people give up their passports and leave the United States. One of the most obvious is the tax benefits. If you renounce, you no longer have to file a US tax return or report your non-US bank accounts, foreign companies or income you earn unless it is US-sourced. In short, you no longer have to report or pay tax on anything you’re doing overseas.

From the date of expatriation, you become a US non-resident alien. There are no US compliance requirements and you avoid exposure to future tax changes that might force you to pay something.

By renouncing, you also clear up the confusion caused by different tax systems which can be hugely frustrating, as in the example of US citizens living in Canada being taxed by both systems in some way. Similarly, you no longer have to deal with foreign tax credits because tax won’t apply in the United States. Expatriation can also make estate tax planning more straightforward.

While renunciation is often the best option that’s not always the case, depending on your income type. Even if you have an overseas company and live overseas, employing people in the US can create a tax connection. If you have US-sourced income, you will still not be exempt from taxes, even if you renounce. If you have an on-the-ground business in the US, like manufacturing, then even as a non-citizen, you will pay tax because it is US-sourced.

Many people who leave the US retain investments there, rental properties or stocks that they pay taxes on, but you can still bank in the US and earn tax-free interest. So, it’s possible to keep that relationship if you’re used to banking with a particular bank.

As ever, alongside the many positives, there are some downsides, the biggest of which is that you no longer have access to the US job market. So, consider your employment prospects elsewhere before committing to renouncing and leaving. 

If you ultimately decide to renounce, the fee is US$2,350, though this is currently being challenged in the courts. In October 2023, a group of former Americans filed a lawsuit against the US government, alleging the fee is ‘arbitrary, capricious and illegal’.

The first step to renunciation is to get another passport. To leave America, you must establish citizenship in another country because you cannot be stateless.  This can be achieved in different ways such as citizenship by investment (CBI) or citizenship by descent (CDB).

Securing Caribbean citizenship by investment is ideal for some because it’s cost-effective and fast. Others may have a Citizenship-by-Descent (CBD) option to fall back on or have the right to naturalise somewhere they’ve lived for a significant number of years. 

A lot of US citizens are of Irish, German, UK or Italian extraction. For them, getting a Tier A passport through their family connection offers visa-free access to the United States. Citizenship of Caribbean countries does not. 

If CBD is not an option, wealthy US citizens who want to renounce but retain access to the US can choose Malta. By making a relatively sizeable donation to the country of around €1 million, including fees, charges and the additional cost of dependents, you can obtain citizenship in around 18 months. 

There are plenty of reasons to consider Malta, which we discuss here, but foremost is that you have unrestricted access to the European Union (EU) and no tax obligation to the US. 

Malta is a good option if you can invest in getting a passport quickly. On the other hand, if you’re happy to wait for access to the States, living in a place that will eventually give you a passport in seven years without investing is another potential route. 

However, if you prefer to avoid leaving the US permanently, there are alternatives. 

Choosing the Option That Best Suits Your Life

Choosing to renounce US citizenship is a tried and tested means of lowering your taxes and one which many of our clients have achieved with relative ease. But it takes planning to get a second passport and ensuring you have the ideal mix of location, lifestyle, tax planning, and asset protection strategies working together to achieve your goals.

You can still substantially lower your taxes without renouncing by choosing to live overseas or moving to Puerto Rico. But whatever you decide to do, it must be structured properly. Your strategy will need to incorporate the best solutions among all available options. That could mean moving to a zero-tax Caribbean Island or establishing a base in Europe or closer to home and paying some tax. 

It’s what we call ‘going where you are treated best’, and it looks different for each of the 1500-plus high-net-worth people we’ve helped. At Nomad Capitalist, we don’t offer vague and lazy advice, nor are we in this to tell you what you want to hear.

We discern what’s best for you by getting to know you, asking the questions that matter, doubling down on what makes you tick and working with you to create a bespoke, holistic action plan.

Rest assured, our global team of over 60 professionals and country-specific advisors leave no stone unturned when it comes to helping you win personal and financial freedom – and we’re very good at what we do. 

So, if you’re a United States citizen reviewing your options, take the first step towards your new life and discover the Nomad Capitalist difference here

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