Offshore Tax Reduction: Can US Citizens Legally Reduce Taxes?

Offshore Tax Reduction Myths & Outdated Strategies for US Citizens

Offshore Tax Reduction 

Online Tax Myths About Offshore Tax Planning & Dual-Citizenship: When it comes to US Tax, the common theme everyone has is quite simply — how can they pay less of it.  One common thought is that if the US Taxpayer relocates overseas, they can automatically reduce their tax liability and avoid the IRS — of course, that is incorrect. For some business savvy taxpayers who may already have dual-citizenship and/or are employed full-time overseas, making a permanent move abroad will reduce their tax liability — but the strategy is not for everyone.  Some people may have simply inherited some money or came into some crypto gains and want to avoid paying tax on their profits. They believe if they just relocate overseas, their tax woes will go away. Making matters worse, are the online scoundrels that make it seem that giving up US citizenship is equivalent to tax paradise — and by simply acquiring second citizenship and obtaining a Golden Visa or Plan B — it will make all of their tax problems disappear. In fact, oftentimes a US taxpayer will end up in a much worse tax situation then they would’ve already have been in by hightailing it overseas. Here are some reasons why moving offshore to reduce taxes is not always an easy or airtight strategy:

What are Common Offshore Tax Reduction Myths

Let’s take a look but some of the common offshore tax reduction myths that are simply more complicated than meets the eye, do not work — or are outdated and no longer valid.

Start a Foreign Corporation Abroad

Sure, it sounds great. You go off to another country and start your own foreign corporation to conduct business out of United States. Does that avoid US Tax?

No. In accordance with the Tax Cuts and Jobs Act (TCJA), US persons who owned controlled foreign corporations (CFC), are potentially subject to taxation on annual income generated from the foreign corporation even if it is not repatriated to the United States. It is referred to as GILTI (Global Intangible Low-Taxed Income).

Second Citizenship Reduces Tax (Most Common Offshore Tax Reduction Myth)

This is a very common offshore tax reduction myth: Just acquiring citizenship in another country in addition to US citizenship does nothing to minimize US tax liability. In fact, it may increase a US Taxpayer’ US tax liability because now they may be subject to additional foreign taxes for categories of income that are not the same or similar to taxes paid in the United States — and therefore no foreign tax credits would apply.

Golden Visa Programs 

The Golden Visa Programs are designed to help wealthy Taxpayers acquire residence or citizenship in a foreign country, depending on the specific type of golden visa applied for (CBI vs RBI).  If a Taxpayer still maintains their US citizenship and/or otherwise are a US Person — such as a Lawful Permanent Resident — they are still subject to US tax on your worldwide income (absent a successful 8833 treaty position, if applicable). While there are certain tax mechanisms available — such as applying foreign tax credits and/or the Foreign Earned Income Exclusion — the goal of moving overseas was to reduce your stress and headaches. Now, you will have two sets of tax returns — and  your US returns will be complicated, resulting in substantial out-of-pocket costs to have it prepared properly.

Born in the United States Carries FATCA Headaches

When you go abroad, several Foreign Financial Institutions will refuse to work with you if you are a US person. If you formally expatriate and then have another passport, it will become easier — but there is always the looming question of where you were born, and once you mention United States it tends to turn off some Foreign Financial Institutions due to the reporting requirements they have if they have US customers.

No FDIC Insured Abroad

One great benefit of the US banking system is that monies are FDIC insured when they are held in most types of bank accounts (excluding investment accounts). Most foreign countries do not have FDIC equivalent — and depending the foreign country’s economy and political system, turmoil and averral unrest — may impact your ability to obtain and access your money.

Multiple Citizenships & Residences (Very Common Offshore Tax Reduction Myth)

Another very common offshore tax reduction myth: Once you relinquish your US citizenship and become a foreign citizen you will have a whole new set of tax laws to contend with. And, most foreign countries tax their own residents on their worldwide income. If instead of using just one country to reside, you instead become a tourist/non-permanent resident of various countries (to avoid the worldwide income taint of the residence county) — you are entering a maze. As a result, you will inevitably have to still contend with several potential tax implications and limitations between those other foreign countries based on their own treaty laws. Depending on your level of wealth and category of income — this can become a significant tax consequence.

Moving Overseas May Lead to More Taxes

It is important, that if you are a US Citizen or Long-Term Lawful Permanent resident, that you carefully evaluate the tax implications of moving to a foreign country. It is typically nowhere near as easy as some online characters would like to make it seem. There are various tax traps and pitfalls to be aware of in your quest to reduce your tax liability to zero — and something to consider before you take the plunge. Speak with a Board-Certified Tax Law Specialist first.

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