No-Tax Retirement Options
June 22, 2012, Panama City, Panama: It is possible, even as an American, to live or retire completely tax-free.
Dear Live and Invest Overseas Reader,
Americans spend more on taxes every year than they do on food, clothing, and housing combined.
It helps if you live in a low-tax state and city. Then you can be spending less than some of your fellow Americans living in higher-tax zip codes. However, I'd say that the idea isn't that you should think about moving from Philadelphia, say (where your total state and city tax burden can amount to as much as 17% of your income...this on top of your federal obligation), to Sioux Falls, for example (South Dakota imposes no state income tax), or to Stafford, Texas (where you'll pay no property tax).
No, no...that's not the answer.
Here's the answer: Move to a no-tax foreign country!
That's how to make your retirement dollars stretch a whole lot further.
As you compare tax burdens between where you're living now and any foreign country where you're considering taking up residence, remember that your federal tax hit is only the beginning. Start with federal income tax rates...but then remember to add state, city, and local rates.
Sticking with our example, as a resident of Philadelphia, Pennsylvania, your total income tax burden could be 17% (in state and city income tax, depending on your level of income) plus, say, 35% (in federal income tax, again, depending on your income)...or 52%!
But, remember, again, that this isn't the full story. Income tax--federal, state, city, etc.--isn't the only tax we pay.
In addition, Americans pay at least 7.65% of their annual salaries in Social Security. That brings the total for our friend living in Philly to more than 59%. Poor guy.
Then there's sales tax.
In Europe you don't notice sales tax, as it's already added in to the sticker price for whatever you're buying, but European VAT (value-added, or sales tax) ranges from 17.5% to 25%. This is one reason shopping in Europe is more expensive than shopping in the United States even if the currency rates are at parity.
It's also why, when we were living in Europe, we made a point of shopping for clothing, for example, and electronics when traveling (in the States, say, or in Asia).
Then there's property tax.
This can be a big part of your overall tax burden living in the United States...and it can disappear altogether when you move overseas, for many countries don't impose property tax at all. When they do, they tend to be far kinder about it than the U.S. tax authorities.
Croatia and Ireland are two examples of European countries that currently impose no property tax. France charges a tax that works out to less than one-quarter percent (.25%) of the property value.
Most Central American countries charge some kind of property tax, but, again, nothing like you'll pay in the States. And Panama offers a property tax exemption on construction (not land).
Then there's wealth tax.
This is something most Americans don't consider at all, even though some U.S. states charge it. Wealth tax is imposed either on your worldwide assets if you're resident in the country or simply on your assets in the country if you're not considered resident for tax purposes. France and Argentina, among other countries, impose a wealth tax.
Yikes. Consider the full tax story all at once like this, and it's easy to see why it's so hard to save any of the money we manage to earn.
Want to minimize your tax burden? Here's what you do:
Be a citizen of one country, resident in another, and hold your assets in a third. With the exception of U.S. citizens, who are taxed on their worldwide income no matter where they reside, setting yourself up according to this three (or more) country rule can allow you to pay zero or close to zero in taxes each year.
Even U.S. citizens residing overseas get a tax break on their earned income (for the time being...Obama has indicated he'd like to change this), thanks to the foreign-earned income exclusion.
Furthermore, as an American abroad, you may not be able to escape your U.S. federal income tax burden...but you should be able to organize things so that you are no longer liable for any state or city income tax...or for Social Security.
Choose a jurisdiction that imposes no property tax, no wealth tax, and no or low sales tax...and your tax situation can improve dramatically.
The world's top tax havens right now? There's no clear-cut answer to that question. It depends, first, on your jurisdiction of citizenship. If you carry a UK passport, the United States could qualify as a tax haven for you.
Most universal tax haven I know is Monaco. Reside here, and you could pay no taxes of any kind, period. However, to reside here, you'll have to gain permission from the prince. Sorry, I've never had the pleasure of making his acquaintance, so I can't help with an introduction.
The Isle of Man is a tax haven...Malta is a tax haven...Andorra qualifies...
So does Belize...and, in some ways, Uruguay and the Dominican Republic.
World's most user-friendly tax haven? That'd be Panama.
P.S. The tax advantages and benefits for foreign residents in Panama will be one of the featured topics during our upcoming Live & Invest in Panama Conference. Full details of this important event, scheduled for July 11-13 here in Panama City, are available here.
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