Cut Your Tax Bill In Half Living In Paradise
We didn’t move from the U.S. to Ireland 10 years ago to save on taxes. And that’s not why we’re moving to Panama this summer either.
But, no question, controlling your tax liability can make a big difference in your standard of living. Reduce your tax bill from, say, 40% a year to, say, 20% a year and it’s like giving yourself a raise and super-charging your investment portfolios. You’re earning no more, but you’ve got a whole lot more disposable income.
So, again, we’re not moving to Panama to reduce our tax burden, and neither should you. You can’t organize your life according to tax code. But you don’t want to ignore it either.
We Americans have it double tough. No matter where we go, our obligations to Uncle Sam follow. When we take up residence in a foreign jurisdiction, therefore, we’ve got double the tax masters. We’re beholden to both the IRS and the local tax collector.
We must understand the tax requirements on both sides, and we must file annual tax returns in both jurisdictions…but that is not to say we owe double the taxes.
On the contrary. As an American abroad, you can reduce your annual tax burden, even significantly, from what you were paying when you were residing full-time within U.S. borders.
This is where things get interesting…and complicated.
Don’t worry. You don’t have to become an international tax guru to manage this part of your new life in paradise. After more than 20 years researching this stuff and more than 10 years paying taxes in multiple jurisdictions, I’m still no expert. But I’ve been fortunate enough to get to know people who are.
Which leads to my first and probably most important piece of advice on this subject: When planning to move, retire, or invest overseas, don’t try to become a global tax authority. Hire one.
In fact, hire two. One in the jurisdiction where you’re planning to live or invest…and another in your home country.
During one of our scouting trips to Ireland before our move 10 years ago, we met with Ernst & Young in Dublin. We didn’t know what we didn’t know, but we knew enough to ask for help.
At the time, Ireland taxed its residents on a remittance basis. That is, living in Ireland, you paid tax only on whatever money you earned or brought into the country. You could earn hundreds of thousands of dollars a year. But if you brought (remitted) only $50,000 per year into the Emerald Isle…the Irish tax authorities expected their cut of that $50,000 only. Maybe you owed other tax authorities in other countries other tax on other pieces of your total income…but Ireland cared only about the piece of your income that flowed into Ireland.
The Ernst & Young tax guy we met with explained this to us and then he made a critical recommendation. He told us to organize ourselves so that all assets held prior to our move to Ireland were lodged in separate accounts from any assets we might ever bring into Ireland. This way, there could be no confusion. The Irish tax collectors could never lay claim to any assets clearly separate from other assets that might ever be remitted to Ireland.
And, then, he said, as long as you’re living in Ireland, make sure that money you don’t intend to remit to Ireland goes into those other accounts. Make sure everything is clearly separate from the start…and keep it that way.
We followed his advice.
In addition, as Americans residing abroad, Lief and I both were able to take advantage of the earned-income tax exemption, meaning that our first $80,000 to $85,000 of income each year apiece (the amount of the exemption has increased over the past decade and stands today at $85,700) was free from U.S. tax.
Plus, Ireland and the U.S. have a double-taxation agreement, meaning we didn’t owe tax in the States on any income taxed in Ireland.
Bottom line, by organizing ourselves carefully, as Irish residents, we were able to reduce our overall rate of tax to less than 20% per year.
The tax laws in the Emerald Isle have changed significantly in the past decade, and Ireland no longer taxes its residents on a remittance basis. Today, Ireland taxes residents on their worldwide income…just as the U.S. does (with some complicated exceptions).
As I said, we’re not moving to Panama because of its tax laws…but it hasn’t escaped our notice that the country’s position on taxing its foreign residents is about as good as it gets.
In Panama, we’ll be paying tax only on the money we earn in Panama. You gotta’ love that.
Panama is not the only tax-advantaged jurisdiction worth a close look right now. Belize is another place where, as a resident, you pay tax locally only on the money you earn locally.
Furthermore, Belize is one of the easiest places in the world to become a full-time (legal) foreign resident…at least if you’re older than 45. Show the Belize immigration authorities that you’ve got a guaranteed income of at least $2,000 per month ($24,000 per year) from outside Belize, and you’ll qualify for Qualified Retired Person (QRP) status. They’ll roll out the welcome mat.
And they won’t even require that you’re physically present in the country more than one month per year. A friend refers to it as “virtual residency.” Belize is a beautiful, safe, friendly, affordable little country. In fact, it’s one of my favorite places in the world and my favorite spot in the Caribbean. But if full-time Belize life doesn’t appeal to you, no problem, say the Belizeans. Spend a month a year with us. In return, you can claim full-time Belize residency.
If you’re an American, this offer is particularly appealing. For, if you’re a full-time resident of Belize…you can’t be a full-time U.S. resident. Which means you’re eligible for the U.S. foreign-earned-income exclusion.
It’s not quite that straightforward, and, again, you’ll want an expert to help you organize yourself properly. But the idea of becoming a full-time resident of a foreign jurisdiction for tax purposes is not only possible, it’s also legal and safe…and it can cut your overall annual tax burden dramatically, even in half.
It’s even possible, depending on your circumstances, to become a resident of Panama, for example, or a QRP in Belize and live tax-free. It depends on how much income you earn and where it comes from. But, again, it’s possible, and it’s legal. You just need counsel you can trust to help you consider the options and make a plan.
Don’t Google “foreign tax specialist” or “international tax advisor.” You’ll find lots of resources that way…but none you can trust. The Internet is awash with guys who’ll set you up with offshore structures for a fee and who’ll be glad to help you get one over on the IRS.
You don’t want to get one over on the IRS. You just don’t want to pay that U.S. government agency $1 more of your income than you absolutely have to each year.
And you don’t necessarily want offshore structures either.
I have no idea what you do want…or need. And, probably, neither do you. But I can tell you this: Take the advice of some offshore expert you find with the help of Google, and your chances of ending up someplace you don’t want to be (engaged in a one-on-one conversation with a representative of the IRS, for example) are probably increased.
Neither should you dash off an e-mail to your U.S. accountant or attorney asking for help managing the tax consequences of your new life or investments abroad. He won’t have answers for you, and your questions will make him nervous.
My U.S. attorney a decade ago, at the time we were planning our move to Ireland, told me not to mess around with the earned-income exclusion for Americans living abroad. “It’s too risky,” he counseled me. “Better just to pay what you owe and not to try to get away with anything.”
I understood almost nothing about any of this at the time, but I knew enough to know he didn’t know enough. He’s no longer my attorney.
I didn’t replace him immediately or easily–though not for lack of trying. I began looking for a competent, experienced, and open-minded U.S. tax advisor as soon as I realized my attorney of many years was none of those things when it came to the issues faced by Americans living and investing abroad.
In my position as publisher of International Living over the past two-plus decades, I met lots of guys who called themselves “offshore tax experts.”
Finally, less than a year ago, I found a guy who I’d call an offshore tax expert.
Our situation has grown ever-more-complicated in the decade since we left the States, but he has organized and simplified as he has counseled us in how our Panama plans will impact our U.S. tax obligations.
He knows his way around the offshore world. He knows what’s allowed and what’s not, and he respects the rules. He also knows how to solve problems and how to get things done. Our experience with him over the past 10 months has been remarkably efficient, painless, and productive…wholly different from our experience with the half-dozen other offshore advisors we tried to work with prior to finding him.
I told you, though, that you need not one, but two global tax authorities, one to manage tax, reporting, and structure issues for you in the States…and one to manage those things in your jurisdiction of residency.
For us, the Panama side of things is managed by longtime friend and counselor.. Over the past nine years of doing business in this country, she has helped us buy and sell real estate, open bank accounts, form corporations, hire and pay employees, acquire residency (through the reforestation visa program)… I know no Panama attorney more experienced or more competent at helping foreigners live and invest safely and successfully in this jurisdiction. And I know a lot of Panama attorneys.
P.S. The best way to become a foreign resident of Panama today is through an investment in timber. After considering the eight options for obtaining legal residency in this country, we chose reforestation, for many reasons, including the modest capital requirement–as little as $40,000 per applicant right now.
However, it looks like this is going to change. The Panamanian ministry that manages this visa program has proposed doubling the cost of a single renewable reforestation visa. As of Aug. 26, if the proposal goes through, it’ll cost you $80,000, instead of $40,000, to organize residency this way.
Even so, it’ll be the best bet, in my opinion. I like hard assets, investments you can see and touch, even go to visit. The purchase of a reforestation visa in Panama is precisely that. With your visa, you also get a hectare of land planted with trees and titled in your name.
At least if you arrange your reforestation visa through United Nature, you do. With some other groups, your reforestation investment gains you a Panama resident’s visa…but not a piece of titled land. You may be paid out from the production of the plantation, but you don’t own a piece of it outright. With United Nature, you do.
Managed timber has beaten the stock market over the past 30 years, returning about 15% a year, while stocks, during the same period, have returned only, on average, about 11% annually.
Furthermore, not only is timber a good way to beat the markets, it’s also a great way to hedge them. Timber operates blissfully ignorant of things like NASDAQ, housing bubbles, and Wars on Terror.
Meantime, the demand for this commodity continues to grow, while the supply, especially for certain kinds of timber, like teak, the world’s most valuable hardwood, is limited.
The world’s remaining natural teak forests are being logged at a rapid rate. Some predictions are that Burmese forests could be logged completely in the next few years, meaning the growing world demand would have to be fulfilled by teak plantation production. And, right now, there aren’t a lot of teak plantations worldwide.
Meantime, United Nature’s 14-year-old 3,000-hectare plantation in Panama’s Darien region is thriving.
If we hadn’t decided to move to Panama and therefore weren’t shopping residency options, we probably still would have bought some of United Nature’s teak. Our residency requirement was only the impetus to act sooner rather than later.
Which is my best advice for you right now: Act sooner rather than later if you’re interested in Panama residency (and all the tax benefits that entails).