Of course, taxes aren’t everything, but some highly taxed U.S. citizens are relocating abroad.
Alert: Puerto Rico is fast becoming a popular tax haven for taxpayers. If you qualify, the tax rate on certain investment income is, believe it or not, 0%.
The trend to Puerto Rico residency is being fueled by recent changes in local law. Puerto Rico is a U.S. territory where residents are U.S. citizens (but can’t vote in federal elections).
Here’s the whole story: Generally, U.S. taxpayers are required to pay taxes on all income, regardless of where they live. However, under Section 933 of the tax code, Puerto Rico residents may be exempt from U.S. tax on Puerto Rico source income if they live in the “51st state” for more than half of the year. In that case, the tax laws for Puerto Rico apply.
In 2012, Puerto Rico enacted two key tax breaks that are good for 20 years (30 years if certain conditions are met).
1. Act 20 says that certain hedge funds and business entities pay tax on corporate income resulting from exported services at a flat rate of only 4%. Even better, the business owners are exempt from Puerto Rico income tax.
2. Under Act 22, new Puerto Rico expatriates pay 0% on all capital gains realized after moving in addition to dividends and interest from Puerto Rican sources. This is especially valuable to certain retirees.
In contrast, U.S. tax rates on ordinary income can run as high as 39.6% and 20% on long-term capital gains, not to mention sky-high statein places like California and New York.
But Puerto Rico residents still have to pay U.S. taxes on dividend and interest income from mainland sources as well as deferred compensation and pensions. Retirees may owe tax on Social Security benefits. And you might have to pay tax on any unrealized capital gain that accrued after moving to Puerto Rico for 10 years. Finally, Puerto Rico may impose a 10% tax on pre-move gains to be credited against federal income tax liability.
Tip: If you move to Puerto Rico, you can retain your U.S. citizenship, which isn’t an option in some other tax havens.