No-Tax Retirement Choices

A friend and Correspondent sent me this link yesterday:

The article makes the point that Americans, for example, spent more on taxes last year than they did on food, clothing, and housing combined.

The U.S. News & World Report piece goes on to tell readers about low-tax American states and cities. The idea is 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).

This reporter misses the boat entirely.

Move to a “low-tax” U.S. city?

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.

The U.S. News article makes one point well: When considering your tax liability, remember that your federal tax hit is only the start.

As you compare tax burdens between where you’re living now and any foreign country where you’re considering taking up residence, start with the federal income tax rates…then add state, city, and local rates on both sides.

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, 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 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 20-year 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.

Kathleen Peddicord

TODAY:

“Kathleen, I’ll be filing my final dispatch from Laos later today,” writes intrepid Correspondent Paul Terhorst from the road.

“Meantime, Vicki and I are preparing for our next adventure. We leave next week for Yunnan province in southern China.

“The Chinese have made Yunnan a top tourist destination within their own country, and a few Westerners have been going there for the past 10 years or so. The highlight: Lijiang, a thousand-year-old village with a perfect microclimate, tucked in a valley in the Tibetan foothills.

“We’ll meet up with friends from Occidental College, two of whom speak Chinese, although many people in the Yunnan hill tribes speak only their own language.

“The Chinese are working with the Laos, Thais, and Burmese to build roads to and from Yunnan. In the medium term, the roads should facilitate the movement of goods and passengers among the four countries.

“Part of the project involves improving the old Burma road, which the Brits and Americans used in World War II to funnel supplies from Burma to Kunming, Yunnan’s capital. Today the Chinese part of the Burma road, as well as roads through Laos and Thailand, have been sealed. Only Burma drags its feet, mainly because their side of the old Burma road goes through rebel territory.

“But stay tuned. The road should open sooner rather than later…”

MAILBAG:

“What is the normal cost of a bank introduction in Panama and how do you arrange it?”

— Bill T., United States

It is possible to walk into a bank and open an account on your own–possible but not easy. HSBC and Scotia would be the best options if you want to go at it alone.

Note that, during our May Live & Invest in Panama Conference, we’ll be introducing attendees to our preferred banking contacts in Panama City.

***

“I hear that Uruguay is bad for Internet businesses. I need fast, reliable, cheap Internet. I understand that Panama is top for this, but it is too commercial, as in stressful, for me. Can Uruguay be that bad?”

— Palermo, Europe

New Uruguay contact Diego de Freitas, expert on all things Internet in that country and director of Clicking (www.clicking.com.uy), responds:

“I can guarantee that you will be able to get fast and reliable Internet service in Uruguay. I’m not sure, though, what you consider ‘cheap.’

“Yes, Internet can be more expensive in Uruguay than in the United States when you compare the costs in U.S. dollars. To give you an idea, the cost can range from US$17 a month (512 Kbps download /128 Kbps upload plan) to US$165 a month (3072 Kbps download / 256 Kbps upload).

“In Uruguay, you’re connecting mostly with Globalcrossing (using an Argentinean gateway), which has a satellite backup. I have been working in the Internet business in this country since 1998, and I remember only one time, about six years ago, when most of the local connections went down. The outage lasted for about an hour-and-a-half.”