Moving Your Tax Residence To Puerto Rico
Despite minor tax cuts in 2017, many Americans believe they are overtaxed. State income taxes can be extremely inconvenient, especially today. Paying astronomical state taxes in California, New York, or anywhere else was never fun. However, given that you can only deduct $10,000 on your federal tax return, that paper cut has even more lemon juice in it. Some people who are concerned about state taxes relocate to tax-free states such as Texas, Florida, Washington, or Nevada.
Leaving over taxes in locations like California is nothing new, but some people use trusts to avoid paying California and other state taxes. Some Americans even renounce citizenship, completing an exit process with the IRS and the State Department, but this is far too harsh for many. Puerto Rico appears appealing, with adverts implying that you don’t have to give up your passport but can pay a fraction of the taxes you already pay. It sounds almost too fantastic to be true.
After all, aren’t Americans taxed on their foreign earnings? Yes, but Puerto Rico is a United States Commonwealth, a territory of the United States that is still independent in some aspects. Its tax system is a mix of US and non-US. Many Americans are relocating to get Puerto Rico residency for tax purposes. You might be able to slash your income taxes to the bone if you can actually transfer yourself and/or your firm. However, you must exercise caution.
Puerto Rico Taxation
In Puerto Rico, the relationship between the IRS and the taxman is complicated, with some Puerto Ricans having to file with the IRS, some with the Puerto Rico Department of Finance, and still others with both. Despite this, Puerto Rico is hoping to attract Americans from the mainland with a low-income tax of only 4%. Legally avoiding the federal rate of 37 percent and the California (or other state) rate of 13.3 percent sounds pretty nice. Furthermore, dividends and capital gains are not taxed in Puerto Rico.
However, there are a few important caveats to be aware of. First and foremost, forget about easy avoiding U.S. tax on asset appreciation before you relocate. If you move with appreciated stock, bitcoin, or other property and subsequently sell, all of the pre-move appreciation will be taxed in the United States. Only your post-move appreciation will be subject to Puerto Rico’s specific tax restrictions.
In fact, you must wait a full ten years after you relocate to avoid paying US taxes on all of the pre-move appreciation. That isn’t going to be a quick remedy. What about selling your property in the United States? That income will always come from the United States. That implies it will be fully taxed in the United States, even if you relocate to Puerto Rico and wait ten years to sell.
There are also certain principles to the rules. First and foremost, like with any action, you must move! Your tax residence, as well as your primary residence, must be in Puerto Rico. Remember that, like any transition from one condition to another, it must be genuine. Try to stay away from messed-up truths that don’t appear to be permanent. If at all possible, sell your house, relocate your family, and cut ties with your previous neighborhood clubs, among other things. After all, if you’re subsequently found to be a non-resident of Puerto Rico, the IRS will come after you for unpaid taxes, penalties, and interest.
Eligibility Criteria For Puerto Rico Tax Residency
To be eligible, an individual must not have lived in Puerto Rico for the previous 15 years. You must become a Puerto Rican resident before December 31, 2035, and stay for at least 183 days per year. You must also complete the necessary paperwork, including filing an application with the local tax office. It’s a legally binding contract after that’s been approved, and you’ll receive the following:
1) After you become a resident, you can earn tax-free interest and dividends.
2) After you become a resident, there is no long-term capital gains tax on appreciation.
3) A 5% tax on long-term capital gains before you move for any transactions made within your first ten years as a resident.
For company owners, Puerto Rico offers enticing benefits. But, once again, you’ll have to relocate the company, staff, and so on.