Categories
Taxes

Does Puerto Rico Pay Taxes?

In this article we’ll learn the answer to the question, “does Puerto Rico pay taxes?” We’ll also discuss Act 20 and Act 22 and how the U.S. Territory of Puerto Rico has become a tax haven for some Americans. In addition, we’ll talk about the pros and cons of moving and retiring to Puerto Rico.

Puerto Rico Income Tax

In general, Puerto Rican citizens are taxed similarly to the US. In fact, many citizens pay a social security tax.  However, in Puerto Rico, citizens are exempt from paying taxes to the IRS in the United States. Instead, Puerto Rico has its own taxing agency like the IRS that collects taxes from citizens.

About Puerto Rico

Puerto Rico is not part of the 50 American states. Instead, Puerto Rico is a U.S. Territory. Its government is very similar to the United States. Like the US, it has 3 branches of government. Puerto Rico has executive, judicial and legislative branches. First, Puerto Rico has a government made up of a House of Representatives and a Senate. It has an elected Governor who governs the island as the executive power. Leaders in the House, Senate and Governor’s Office are elected every 4 years.

Spanish is the official language in Puerto Rico. And although Puerto Ricans share some commonalities with Americans, they have established their own culture and ethnicity.

Puerto Rico Taxes: Does Puerto Rico Pay Taxes?

As previously stated, since Puerto Rico is not one of the 50 states of the United States, its citizens are exempt from paying income tax to the U.S. IRS. In addition, corporations based in Puerto Rico are not generally subject to corporate taxes levied in the United States. Finally, if you are a US Citizen who becomes a permanent resident of Puerto Rico, you are exempt from paying US income taxes.

To further answer the question, “does Puerto Rico pay taxes?”, you should also know that in 2008 Puerto Rico passed legislation to encourage individuals and businesses to conduct business in Puerto Rico. As a result, Act 20: The Export Services Act and Act 22: The Individual Investor Act were passed into legislation. As of 2020, these acts have now been consolidated into Act 60.

Act 20: The Export Services Act

Pay Taxes of 0-4% for Service Industry Businesses

This act can be utilized by any citizen of any country. It allows businesses and individuals to reduce their corporate taxes to only 4%. In addition, the act allows dividends to be paid at 0%. Yes, you read that correctly – 0% tax rate!

Essentially how this works is quite simple. Let’s say you are an American business owner and you want to pay lower taxes. You simply incorporate a business in Puerto Rico which provides a service. The service can be provided to anyone, either inside or outside of Puerto Rico. Your tax rate then falls to 4%.

Examples of types of businesses that are considered “service” businesses may include consulting, internet services, software engineer, legal services, etc. In addition, by following the Puerto Rico tax rules, you do not pay any US taxes.

Act 22: The Individual Investor Act

Pay Taxes as Low as 0% for Investment Income

This act allows for US Investors who normally pay capital gains taxes on investments to take advantage of lower tax rates of 0%. For example, if you buy and sell equities such as stocks you can re-locate to Puerto Rico and be considered exempt from the capital gains taxes. In addition, cryptocurrency trading is also exempt from tax assessment.

One of the small requirements of Act 22 is that you donate $5,000 – $10,000 to official charities of Puerto Rico. In addition, you are required to purchase a residence in Puerto Rico.

In addition, both Act 20 and 22 require an annual filing fee that has recently increased from $300 to $5,000. However, it’s still considered a great deal for anyone with a significant income from the services industry or investments. The tax savings alone more than cover the expense in most cases.

Retiring in Puerto Rico

If you expect to have significant gains on investments during retirement, Puerto Rico may be a good fit for you. Resident retirees in Puerto Rico can enjoy potentially tax free benefits from investment income.

To become a resident, you must simply move to Puerto Rico and set up a permanent residence. You are required to live in Puerto Rico a minimum of 183 days per year (slightly more than half a year). Americans could potentially share time between Puerto Rico and still visit family and friends at home in the United States with no issues.

Traveling and Moving Puerto Rico

How Puerto Rico is Different from the United States: Cultural and Geographical Differences

In many ways, Puerto Rico is much like visiting another country if you are a native of the United States. You can expect to eat different foods, speak a different language and experience what it’s like to live on an island. Life is different from the United States in Puerto Rico. As a result, we recommend visiting the island several times first before making the permanent move.

Additionally, Puerto Rico has special concerns that should be considered. For example, as an island in the middle of the ocean, Puerto Rico experiences hurricanes and tropical storms regularly. For example, in September 2017, Hurricane Maria, a Category 5 storm struck Puerto Rico with deadly force, killing almost 3,000 people and shutting off power for weeks. Hurricane Maria was one of the worst storms to ever strike the islands, costing the island an estimated $91 Billion in damage.

Power outages and utility outages are a common problem in Puerto Rico. The island has an aging infrastructure that frequently has problems and needs upgrading. In addition, political corruption has been a problem for Puerto Rico for decades. As a result, much needed infrastructure repair and other improvements have not occurred.

Puerto Rico’s Financial Crisis

For years, Puerto Rico has struggled with mounting debt problems. In 2012, the territory suffered a credit downgrade, which makes it more difficult to borrow money to finance infrastructure improvements or even function as a government. Second, Puerto Rico has an aging population that requires government services such as medical care and retirement pensions. Finally, in 2016 the United States approved Puerto Rico’s request to move toward bankruptcy with the new “Promesa” law. The bankruptcy proceedings are an ongoing issue for Puerto Rico.

A Note About Tax Savings in Puerto Rico

Given the changing and volatile political climate in the United States, it is unclear for how long the tax savings of Act 20 and 22 will last. There is clearly a growing populist movement in the United States that wants to increase taxes on investors and business owners. This is not a big surprise to any student of history. Populism movements have played out many times in the past. Venezuelan politics under the Hugo Chavez was one example of this.

Even if you are not prepared to move to Puerto Rico, you may seriously consider beginning the application process for Act 20 and/or Act 22. Getting your “foot in the door” with an application may be a smart move if US legislators move to block US Citizens from these juicy tax incentives.

Find More Help Answering “Does Puerto Rico Pay Taxes?”

One fantastic resource for getting more answers to the question of “Does Puerto Rico Pay Taxes” and regarding Act 20 and 22 can be found at Sovereign Man. Simon Black, founder of Sovereign Man is an investor and entrepreneur who helps people make more money, keep more money and increase their freedom. He has a great weekly newsletter that provides smart, actionable intelligence on how to get ahead financially.

Read More:

10 Things to Know Before Starting a Budget

How Much Savings You Should Have at 40

Real Estate Market Predictions

Disclaimer: It is important to note that Piggy Bank Coins does not provide financial advice, including tax advice. We don’t endorse or recommend any financial investments. Instead, we provide information for educational purposes to those seeking knowledge regarding personal finance. However, in the spirit of transparency, note that the author is an investor in cryptocurrencies, precious metals and some equities.

Categories
Economy

4 Phases of the Business Cycle

There are 4 phases of the business cycle: expansion, peak, contraction and trough. We’ll look at these and other cycles and draw some conclusions about the economy and how you can plan for the future.

Experts Have Discovered That Economic Events Happen in Cycles. The Seasons, the Planets and Human Life Itself Are Cyclical

Before we get to the details of 4 phases of the business cycle, let’s discuss more about economic catastrophe. Unfortunately, the American Great Depression and the COVID-19 shutdown of 2020 were catastrophic events. Yet, some very intelligent researchers have determined that much of what we experience in our lives revolves around cycles.

The sun and the moon follow a cyclical pattern that is predictable. In addition, the earth’s movement through the universe and its relationship to other stars is part of a greater cycle. But here on earth, there are many more cycles.

The life of a human being is part of a cycle. You are born, you become a youth, then middle aged, followed by elderly life and death. Our season are cyclical: Fall, Winter, Spring and Summer. Researchers have discovered that our economy is cyclical as well. Oddly enough, the 4 phases of the business cycle are closely related.

According to Investopedia, the 4 phases of the business cycle are as follows:

“The four stages of the economic cycle are also referred to as the business cycle. These four stages are expansion, peak, contraction, and trough.”

-Investopedia

The 4 Phases of the Business Cycle: Expansion, Peak, Contraction and Trough

Expansion occurs when the economy is growing. Prices begin increasing, more people are working. Businesses grow and make more money, hire more workers and pay better salaries. The workers tend to spend more money, buying cars and houses, passing money along through the economy. Most participants in the economy benefit and see more money in their bank account.

The peak of the business cycle is the highest point. It occurs when expansion reaches its maximum. For example, employment in the economy is considered full, prices increases are beginning to look like inflation. Many people will have borrowed great deals of money for bigger houses or more things. The stock market is usually at an all-time high.

During a contraction economic growth begins to slow down. Inflation (price increases) begin to slow down as well. In addition, unemployment may begin to increase and more people find themselves out of the workforce. The stock market may level off or even begin a correction or retracement. New housing starts may decrease during this time period.

The trough is the low point and may also be called a “recession” or a “depression.” People begin to worry about personal finances. Unemployment is higher, borrowing money is more difficult and people struggle to make ends meet. The stock market may be in a bear market trend either going down or flat. Jobs are more scarce and the real estate market is tight.

Economist Ray Dalio and the Economic Machine

Ray Dalio, an economics expert from Bridgewater Associates, has created some really intelligent free videos on understanding economic cycles. He also is the author of the book, “Principles.” Dalio is really good at simplifying economic ideas and helping you understand why things happen as the do.

How the Economic Machine Works by Ray Dalio

Why You Need to Know About Cycles

During the up Cycle the Economy Flourishes; During the Down Cycle the Economy Suffers

It’s important to understand the basic concept of economic cycles because cycles go up and down. The economy bounces back and forth between growth and recession. In down cycles, money is tight, banks are reluctant to lend money, economic growth slows down and people don’t spend as much because they have less money. However, in up cycles, people spend more, banks lend more money, the economy grows and unemployment is low.

There are many investments in the economy that are affected by the economic cycles, such as the stock market, real estate prices and even commodities prices like gold and silver. As a result, financial planners and investors must be proactive in planning for changes during the 4 phases of the business cycle.

The American Economy is in a Down Cycle in 2020

In 2020, the economy is passing through a down cycle. We are probably somewhere between contraction and trough in the 4 phases of the business cycle. As a result, unemployment is high, it is becoming more difficult to borrow money and yet the stock market is at an all-time high. Money managers have to make tough decisions about re-balancing portfolios with stocks, bonds, precious metals and even cryptocurrencies.

What You Can Do to Thrive and Protect Yourself

The Secret to Winning in the Economic Cycle: Budget, Save Money & Invest

When life is cyclical, it simply means things go up and then they go back down. The pattern repeats itself in a cycle that goes on forever. Moreover, in the natural world, animals are aware of the cycle of the seasons. For example, squirrels have the natural instinct to bury acorns during the summer and build their nests to prepare for the bitter cold of winter.

Although humans no longer depend on instinct to survive, we can still use our higher brain function to make decisions. If we know that the economic cycle goes up and down, then sometimes we will have more money and other times we may have less money. Following this logic, it makes sense for us to save money during the times that we have more money. When we learn ways to save money on a tight budget, we are better prepared to weather the storm of bitter economic times.

Write Down Your Goals

If you want to be retired, living on a beach in Costa Rica in 20 years, then you need to write that down as part of your goals. We recommend creating a notebook, journal or even a spreadsheet where you list exactly what you have planned for the future. This serves two purposes. Writing down your goals makes what you want explicitly clear. It gives you a starting point and also provides you with the details that you will need to determine how you will reach your goals.

The second purpose of planning out your financial goals on paper (or electronically) is that you are signaling to the universe what you want. History has proven that the psychology of desire and intention is a powerful tool in accomplishing goals.

Review Your Goals Regularly

Once you’ve written down what you plan to accomplish through your goals, you should return to the goals frequently to review them. Some people even find it helpful to place a copy of the written goals in a location near them where they see the goals daily, like on your bathroom mirror or near your workspace. It can also be helpful to visualize your goals through imagery. Is one of your goals to own a beach house? Place a picture of the beach house that you want on your wall. Again, the power of intention is great and tends to help you focus your energy on exactly what you want.

Create a Budget

Now that you have established your goals, it’s time to create a budget. Budgeting requires a great deal of self-discipline, so if you don’t follow your budget, then it can wreck your plans! When you create a budget, start by writing down in detail what your expenses are each month. Spreadsheets are great for budgeting, but not required. There are also budgeting apps to choose from that can be helpful. For now, you need to know where you spend your money. Provide as much detail as possible when listing your expenses. You may find it helpful to review past bank statements and receipts.

Once you have an idea of where you spend your money each month, it’s time to take a hard look at your budget and cut some expenses. Many people find making cuts to spending a difficult task. But making cuts now will help you reach your financial goals quicker.

Living Below Your Means

After cutting your expenses down to the bear minimum, you should be living below your means (hopefully). Unfortunately, living below your means is a philosophy that most people don’t follow these days. Living below your means requires that you spend less than what you make. For example, if your take home pay is $1,500 per month, then living below your means is only spending $1,000 per month.

The extra money that you have from living below your means will serve two purposes. At first the extra money will be used to pay down debts quickly. Getting ahead requires that all debt be paid off first. Secondly, after the debt has been paid off, you will then use the positive cash flow to fund your emergency fund, savings and investments. Each of these is part of your net worth and the buffer between you and poverty. The more you can grow your savings and investment, the simpler and easier life gets.

Pay Off All Debts

Before you can start saving money, you must pay off all debts. Now that you’ve established your budget, cut personal spending to the bare minimum. You will take extra money that you have leftover in your budget and use it to pay down debts. Create a list or accounting of your debts, the corresponding balances and interest rates that you maintain. Use this information to help you keep track of your progress as you pay down debts.

If you are young and just starting out, hopefully your debts are minimal. Having minimal or no debt when you begin your journey toward wealth creation is a huge advantage. Paying off debt can take years and a great deal of sacrifice. So if you have little or no debt, congratulations! For the rest of us, it’s time to get to work paying off debt.  

The Shocking Truth About Saving Money

According to a December 2019 article by GoBankingRates, approximately 70% of Americans have less than $1,000 in savings!

This is a shocking statistic that shows how access to credit cards and lending have dominated our society. Unfortunately, Americans have adopted the idea that borrowing money for most things is normal. Yet, just a few generations ago in the early 20th century, people learned the hard way during the Great Depression that borrowing can lead to financial ruin. Having no savings puts you in a dangerous financial place.

Make Saving a Habit

Saving is a habit that can be learned over time and simply requires discipline. Become determined to reach your financial goals. Your personal determination to win at the money game will help you develop the discipline to save.

In addition, develop good habits of saving money. In the classic personal finance book, “The Richest Man in Babylon” by George Clason, the author implores the reader to set aside at least 10% of your earnings. This is a great rule of thumb for saving and investing because removing only a fraction of your income each month will likely not even be noticed or missed. Yet, this small amount of money is the seed needed to grow wealth.

Create an Emergency Fund

The first thing to do when you have paid off debt is to start saving for an emergency. Many people think that saving for an emergency is not necessary, until life proves them wrong and an unexpected event happens. Unfortunately, we all have emergencies during life: job loss, medical issues, natural disasters, home repairs, car problems, etc. Life is expensive and it pays to be prepared.

At a minimum, you want to have at least $1,000 in your emergency fund. In reality, your emergency fund should cover 3-6 months of expenses. For most people this number should probably be between $5,000 – $20,000. Keep in mind that in the worst case scenario you want to be able to pay all your bills and eat for 3-6 months, in the event that you lose your job.

Invest 10-15% of Income

Once you’ve fully funded your emergency fund, you can start investing. And if you have made it this far, then congratulations! You are ahead of the pack and well on your way to wealth building.

As stated previously, we recommend that you invest 10-15% of your income monthly. The earlier that you get started saving and investing, the better off you will be in the long run. In fact, the most powerful tool that will be working for you during investing is compounding interest, and it works like magic. How do you turn $1,000 into $62,000? The answer may be simpler than you think.

Read more:

Ways to Save Money on a Tight Budget

Real Estate Market Predictions

Options Trading for Dummies

Categories
Investing

Options Trading for Dummies

In Options Trading for Dummies we’ll discuss what options are, their purposes, how options are traded and the risks. We’ll also define some other terms like calls and puts and provide some real examples of trading options for dummies.

Options Definition

With no Requirement to Buy or Sell, Options are Derivative Contracts Traded on a Limited Time Basis

“Options are financial instruments that are derivatives based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they choose not to.”

Investopedia

Although the price of the option is based upon stock value, the option is a contract that is not directly linked to the stock value in the market. Additionally, options are considered derivative investments. Moreover, the option does not represent ownership of stocks or assets until the agreement is finalized.

Equally important, options are commonly traded in denominations of 100 shares of a company. The options contract will be written in a way that allows the buyer or seller to lock in a buy/sell price at some point in the future. However, it’s important to note that when the contract expires at the end of its expiration date, it is worthless.

Types of Options Contracts: Call and Put

First, there are two types of options: call options and put options. A call option, also known as an exercise price or strike price, is a contract that determines what price at which the buyer can purchase the option in the future. In contrast, a put option is a contract that determines what price at which the buyer can sell the option in the future.

In addition, call and put options contracts can expire along different time frames. The expiration time frames for contracts can vary from weekly, monthly or several months. Obviously, the longer the length of a contract, the more it costs per stock. Contracts are usually denominated in lots of 100 shares.

Call Option Example

A Call Option is Exercised for a $1,500 Profit

As an example, let’s assume that Tesla is trading at $400 per share. In some cases, the options price will be quoted per stock over a 30-day period. For example, call options might be priced at $5 per share of stock (premium). In this case, the options contract would be $500 (100 shares X $5 per share = $500 contract).

Let’s say that you anticipate the price of Tesla rising to $420. On day 21 of the contract, Tesla meets your expectations and rises to $420. You then exercise your contract and your profit from the trade is $1,500. The math is demonstrated below.

420-$400 = $20 per share increase in value

$420 – ($400 strike price + $5 premium) = $15 realized (nominal) per share profit

$15 per share profit X 100 shares = $1,500 profit

Note: this is a simplified example using estimates to help you easily understand options. There may be other fees/costs involved, such as brokerage fees.

Why Use Options Trading

Options trading has traditionally been used by Wall Street traders as a hedge against risk. Options contracts can be used as a kind of insurance to counter balance a trader’s portfolio.

History of Options

Options trading has not been around for very long, compared to the history of the New York Stock Exchange. According to Optiontradingpedia.com, options trading began at the Chicago Board of Options Exchange (CBOE) in 1973. Yet, the New York Stock Exchange was founded in 1792 in New York City.

With the continued movement for deregulation of the financial industry in the past 25 years, options trading has become more popular with retail traders.

Difference Between Options and Futures

Options Contracts Require no Action Upon Expiration; Futures Contracts Require Traders to Buy or Sell Upon Expiration

The primary difference between options contracts and futures contracts is that with options contracts the trader is not required to buy or sell at any time. The trader simply has the “option” to buy or sell shares in a stock. Whereas, futures contracts require the buyer to buy shares of a stock and the seller to sell shares of a stock upon expiration of the contract.

Both Options and Futures can be used to hedge against risk incurred in a portfolio of investments. For example, if you have a portfolio of tech stocks that are considered long investments, then you might purchase options to hedge against a price collapse of the holdings.

The Risks of Options Trading

Trading Options can be Highly Volatile and Is Not Recommended for New Investors  

It’s important to understand that trading options is inherently risky. Unlike purchasing assets like stocks or bonds, options contracts are short term derivative instruments that have no real value. In addition, the contract expires in a matter of weeks or months. If the options contract expires and is not exercised, it is worthless.

Legendary investor Peter Lynch of Fidelity Investments had this to say regarding options trading in Once Upon a Time on Wall Street,

“I know that the large potential return is attractive to many small investors who are dissatisfied with getting rich slow. Instead, they opt for getting poor quick. That’s because an option is a contract that’s only good for a month or two, and unlike most stocks, it regularly expires worthless – after which the options player must buy another option, only to lose 100 percent of his or her money once again.”

In case you didn’t follow that quote, Peter Lynch is not a fan of options trading.

Options Trading Tragedy

In June 2020, a 20-year-old student named Alexander Kearns who used the Robinhood mobile app to trade options committed suicide. Apparently after entering a trade, Mr. Kearns saw a -$730,000 balance displayed on his account and believed that he had lost a great deal of money. It is believed that he took his own life as a result of the confusion. As a result, Robinhood has allegedly made modifications to the trading app to prevent future confusion among traders.

Investment Wisdom

Thinking and planning for the future are noble activities that we encourage at Piggy Bank Coins. Every adult should learn to budget, save money and invest at some time in their life. If you have a family, it is critical that you begin planning your financial future.

Despite its growing popularity, options trading for dummies is not recommended for most investors. We recommend a more fiscally conservative approach of slow, incremental saving and wealth building. Read more about what Piggy Bank Coins recommends at the links below.

Learn More About Options Trading for Dummies

If you are truly determined to learn more about options trading for dummies, check out the book “Trading Options for Dummies.”

Read More:

How Does Robinhood Make Money?

Best Investing Books of All Time

How to Become a Millionaire from Nothing