US Entrepreneurs Beware of Offshore Lifestyle Tax Myths

US Entrepreneurs Beware of Offshore Lifestyle Tax Myths

US Entrepreneurs Beware of Offshore Lifestyle Tax Myths

For many U.S. entrepreneurs, the success of their small business is the first time they have earned significant income and/or accumulated substantial wealth. You worked your butt off for 70+ hour work weeks for many years — and now you finally have the opportunity to reap the financial benefits of all your hard work. But who wants to pay all that tax, right? It feels like just yesterday you were drowning in school loans and choosing between groceries and gas. Now that you are earning big money, you also leap-frogged over several tax brackets — which is an unforeseen eye-opener. You consider how to reduce your tax liability when your internet search curiosity brings you to websites touting secret strategies that only work if you pay these non-legal, non-tax professionals gobbles of money.  It reminds us of those old infomercials about secret real estate get rich quick schemes. Remember how well those worked out? The real secret to those scams was the infomercial star got rick “quick,” thanks to all those people buying into the scam — not the supposed real estate secrets shrouded in mystery.

Offshore Tax Planning Complex

There are plenty of myths about exiting the United States and becoming a global nomad — moving from country to country without having permanent residence in any country — and therefore minimizing taxation as the person (believes) they will not be considered a permanent resident of any one specific country. For US persons, it is much more complicated than just picking up and moving outside of the United States  — that is because the US follows a worldwide income tax model which is based on US person status and not simply the country of residence. While expatriation will relieve you from worldwide income, it may be very costly and actually put you in a worse position than when you started. More often than not, when taxpayers approach our offshore specialist team with ideas they have received from non-legal tax professionals, the plan is doomed to fail from the outset. Let’s take a look at some of the key facts about why US global entrepreneurs must take caution about offshore lifestyle tax opportunities.

You are “Fresh Meat” For False Offshore Living Prophets

Many new entrepreneurs do not have experience earning significant sums of money. Unfortunately, this makes the newly successful entrepreneur fresh meat for false prophets who convince you taxes can all be avoided. Please keep your wits about you, because there are many, many people willing to sell you fictional tax strategies (for obscene prices) using tax and offshore strategies that are either outdated or imaginary — and never worked in the first place.

Avoid Impulsive Knee-Jerk Tax Reactions

Once a person starts making significant amounts of money and does not want to pay US tax, their (understandable) knee-jerk reaction is to simply expatriate. As in any aspect of your life, it is typically not the best plan to go full steam ahead based on a knee-jerk reaction. As the saying goes, “it’s ready…aim…fire; not ready…fire…aim.” You should carefully evaluate all of the different tax strategies you can use while remaining a US person. Often times, investing in real estate is a way to legally reduce your net effective income tax liability while investing in property that will presumably grow over the long run.

A US person includes US Citizens, LPR, and SPT

From the baseline perspective, the United States taxes US persons on their worldwide income, whether or not they reside in the United States or abroad –– and whether or not the income is sourced from the United States or abroad. The term US person is more than just US citizens — it also includes foreign nationals who meet the Substantial Presence Test and Green-Card Holders.

Living Overseas Still Subject to US Tax

Just moving overseas does not reduce your US tax rate; in fact, residing overseas may increase your overall tax liability because different foreign countries have other types of taxes in addition to taxes levied by the United States — and there would be no foreign tax credits to offset that non-income type of tax (e.g, wealth tax).

Exit Tax can be Significant and Have Post-Expatriation Impact

For many taxpayers, the exit tax can be significant. It is crucial to carefully assess what your exit tax would be if you were to formally relinquish your green card or renounce your US citizenship. And, the type of assets a person holds has an important impact on the exit tax. For example, a Taxpayer with $10 million in cash would be considered a covered expatriate but have no exit tax; conversely, a US person with stock that was purchased for $2 million that is now worth $10 million would have a significant exit tax implication at expatriation.

Potential PFIC, CFC, and GILTI Rules

Some taxpayers believe they can just invert their US corporation and avoid all US taxes. As you can imagine, United States government has various protocols and safeguards set up in the tax code to limit and prevent this type of offshore reorganization tax tactic. In addition, international business rules involving PFIC, CFC, Subpart F, and GILTI rules ensure the Unites States can still get their grubby little hands on your hard-earned money –– even if it was earned abroad, while you lived abroad from a foreign corporation.

Non-Vested RSUs and Related Investments

Just because an RSU has not fully vested does not mean that it will escape exit tax if the person is considered a Covered Expatriate. In other words, there is a common misconception that until the RSUs vest, they have a zero value –– but that is not the case.

Be Careful with Your Hard-Earned Money

All too often, taxpayers reach out to us after retaining non-legal personnel to assist them with some majestic offshore tax plan of moving overseas and not having to pay US tax — when in fact the plan doesn’t work and the taxpayers are then out tens of thousands of dollars — if not more. Worse yet, just trying to get this person back into US tax compliance when the plan did not work becomes a costly endeavor as well.

About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and expatriation.

Contact our firm today for assistance.