Categories
Taxes

Moving To Puerto Rico

We will discuss the recent trend of wealthy investors moving to Puerto Rico. For example, why so many billionaires and so many businesses are moving to Puerto Rico. We will also talk about the tax benefits of moving to Puerto Rico, the American real estate bubble, the COVID-19 crisis and predictions for real estate prices in 2021.

Many experts are predicting the real estate market in 2021 will be in decline. However, after the COVID-19 lock down in the United States in 2020, things seemed to calm down. In 2020, the Wall Street stock market prices were higher, real estate prices were going up in many places and things seemed to be improving.

Why are People and Businesses Moving to Puerto Rico?

Debt, Mortgages and Home Foreclosures in the United States

First, let’s look at some statistics and information to help explain shifting populations:

  • Total Debt to GDP for the United states is over 150%
  • The Federal Reserve currently owns approximately 30% of all mortgages in the U.S. today (over $2 Trillion)
  • US National Debt is now over $26 Trillion
  • Home foreclosures are beginning to increase

Alarming Trends at the Federal Reserve and Debt-to-GDP Ratio

Two alarming trends are that the debt-to-GDP ratio is at 150% and that the Federal Reserve Bank owns 30% of US mortgage securities. First, most experts agree that when the debt-to-GDP ratio climbs higher than 100%, you are in the economic danger zone. Historically, high debt-to-GDP ratios have ended badly.

Second, everyone should be concerned that the Federal Reserve Bank owns more than 30% of mortgages in the US. Although the Federal Reserve is not a government agency, it acts similar to a government organization and as a central bank. The question remains as to why a central bank should hold such a large amount of debt on its books.

Home Foreclosures on the Rise with National Debt

Finally, home foreclosures on unpaid mortgages are beginning to increase. Many people are currently in mortgage forbearance. As a result, owners are not making payments and not being punished for no payments (avoiding bank foreclosure). And, national debt is always a big concern for nations. Eventually, all our debt must be repaid.

In contrast, it’s important to note that home sales are up. In addition, prices on homes throughout the United States are up as well. Moreover, many people would say that we are in a real estate boom. As a result, there has been a trend up for prices and actual sales in real estate for numerous years.

Experts on Real Estate Market Predictions

The Perfect Storm of Low Interest Rates, High Demand and Low Supply Has Arrived; People are Emigrating from Larger Cities to Smaller Ones

According to real estate analyst Neil McCoy-Ward, this boom will not last. Momentum in the real estate market has caused houses to sell at record high prices. In addition, houses are selling quicker than normal. Mr. McCoy-Ward is anticipating a slowdown in home sales beginning in the fall and winter of 2020. Furthermore, he anticipates that in 2021, prices will come down and the bubble in home prices will begin a decline.

Mr. McCoy-ward stated that this is “the perfect storm,” creating higher home prices. For example, he credits the market frenzy of buying and selling of homes to low interest rates, high demand for homes and low supply. He recommends staying out of the market as a buyer unless you intend to stay in the home for many years and you want to take advantage to low interest rates for mortgages.

The last time that home prices peaked in the United States was in the Summer of 2006. Sometime later, real estate prices began a decline in price. Finally, a crisis soon followed and the decline ensued. But the housing market crash 2021 may be more severe.

The Subprime Mortgage Crisis

“The United States subprime mortgage crisis was a nationwide financial crisis that occurred between 2007 and 2010, and contributed to the U.S. financial crisis. It was triggered by a large decline in home prices after the collapse of a housing bubble, leading to mortgage delinquencies, foreclosures, and the devaluation of housing-related securities.” -Wikipedia.com

The subprime mortgage crisis led to the Great Recession of 2007-2009.

Real Estate Bubble

Unemployment, Low Interest Rates and Coronavirus Had a Big Impact on the Economy

The United States real estate market has been growing at a very past pace for years. Some would call this growth a bubble. In this case, the bubble has formed because credit is easily accessible for most people who want to buy a home.

Interest rates for home mortgages are at historical lows. According to Bankrate, the interest rate on a 30-year mortgage averages around 3%. Some people would argue that interest rates are lower now than at any time in history. This is a pretty big deal and things can’t remain this way forever.

According to the Bureau of Labor Statistics, 13% of Americans were unemployed in May 2020. In addition, 30 Million Americans filed for unemployment benefits in June 2020, approximately 10% of the entire US population (Source: CNBC News).

The COVID-19 outbreak of 2020 has had big impacts on the US economy. Big layoffs and job losses have occurred continuously in 2020. For example, Disney and MGM have laid off thousands of workers. These layoffs mean that these former employees will be struggling to make ends meet and won’t be buying new homes.

A Tale of Two Cities: Real Estate Market Predictions

Americans are Moving away from States Like New York and California in Large Numbers

It’s important to understand that real estate prices are decreasing in many markets. However, each market is different between states and cities in the US. For example, it appears that in the short term, a divided real estate market may present itself.

Current data being reported in the media shows people leaving larger coastal cities and going to smaller inland cities. For example, Californians have been moving out of California to places like Washington, Arizona and Texas in record numbers. This is not a new phenomenon and the trend appears to be gaining speed.

People are Fleeing West Coast and East Coast Cities for Less Populated, Low Tax, Low-Regulation Places

As a result, larger coastal cities like Los Angeles and New York City are seeing reductions in demand for real estate as residents leave the cities permanently. In turn, smaller cities like Phoenix and Las Vegas are experiencing higher demand for real estate as residents move in from the coastal cities. These areas are where the housing market crash 2021 will likely hit hardest.

It appears that in the short term, cities where people are moving to (like Las Vegas) may see higher prices during the coming real estate bubble deflation. The worst-case scenario for cities receiving the influx of those moving from elsewhere would be that property values would remain steady.

Finally, it is clear that many individuals are leaving higher-tax, higher-regulation states like New York and California. In turn, they are moving to Puerto Rico, as well as other states such as Florida, Arizona, Idaho and Tennessee.

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, which is part of the reason it is known as the Moving to Puerto Rico. Instead, Puerto Rico has its own taxing agency like the IRS that collects taxes from citizens.

Moving to 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.

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.

Why are people moving to Puerto Rico? Well, 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. Thus, the moving to Puerto Rico began as a tax savings solution.

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%. Poof!

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. This is one example of how you have to spend some money to take advantage of moving to Puerto Rico and the associated tax benefits.

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. Moving to Puerto Rico can help you take advantage of the tax savings opportunity.

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. Clearly, moving to Puerto Rico is not always a paradise.

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. As a result, the moving to Puerto Rico for tax benefit may only exist for a limited time.

Find More Help on Moving to Puerto Rico

One fantastic resource for getting more answers on moving to Puerto Rico related to 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.

In summary, moving to Puerto Rico may not be for everyone. There are clear examples of how certain businesses and individuals can benefit from the low tax laws. Puerto Rico’s Act 20 and 22 have created a great opportunity for people to pay limited taxes while enjoying the island life.

2021 Housing Market Predictions

As a Mass Exodus from Big Cities Occurs, Unemployment is High and the COVID Black Swan Hits, the Real Estate Bubble Begins Deflating

Here’s what our real estate market predictions look like for 2021. It’s impossible to predict the future, especially with so many unknowns at play. What we know is that real estate has been in a bubble for years because of low interest rate mortgages. Prices have gone too high, too fast. As a result, what goes up, must come down. Prices will be reduced in our real estate market predictions. The question is how long it will last.

Second, we know that people are leaving big cities and going to smaller cities. This mass exodus will have positive results for the cities where people move to. The cities that the emigration leaves behind will suffer with lower demand, lower prices and deflation of markets. How long it lasts is unknown.

Third, we know that unemployment in the United States right now is around 10%. This is a conservative number and the real unemployment rate is probably much higher. As a result, people who don’t have jobs don’t buy houses. In addition, demand for real estate is weakened. This causes prices to fall.

Finally, a great Black Swan event occurred in 2020, which threw a wrench into the worldwide economy. COVID-19, and the reaction by governments worldwide is unprecedented. It will have lasting economic results for years to come. Real estate prices will suffer for several years during the housing market decline of 2021-2022. However, keep in mind that if you are located in a place where people are moving to, prices may not go down.

Moving to Puerto Rico Wrap Up

Hopefully we have provided valuable information and some explanation as to why people are moving to Puerto Rico. Billionaires, businesses and individuals alike are moving to Puerto Rico for financial reasons. In Puerto Rico, taxes are lower and government regulation is lower, which promotes job growth and personal freedom. As a result, Puerto Rico should continue to grow and prosper in the coming decade.

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Disclaimer: It is important to note that Piggy Bank Coins does not provide financial advice. We do not 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.

In addition, The Federal Trade Commission (FTC) requires that Piggy Bank Coins disclose to readers that we may receive commissions when you click our links and make purchases. However, this does not impact our reviews and comparisons. Moreover, we try our best to keep things fair and balanced, to help you make the best choice for you.

Categories
Money Taxes

Inflation Tax

We will discuss what the inflation tax is and the three different types of inflation. We will also talk about how inflation affects you personally and review some ways you can fight back against inflation by looking at deflationary assets.

The Inflation Tax

The inflation tax is not an official tax levied by the government. Many governments levy taxes on income, property, sales and other transactions. However, the inflation tax is very different. It is when the currency in your wallet or in your savings account loses value over time through inflation.

What is inflation?

Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage means that a unit of currency effectively buys less than it did in prior periods. –Investopedia

In order to simplify understanding inflation, we will discuss three types of inflation:

  • Demand-Pull Inflation
  • Cost-Push Inflation and
  • Built-in Inflation

Understanding Inflation and the Inflation Tax

There will be more detail given about the three types of inflation later in the article. For now, we will discuss how the inflation tax can affect you. There are many simple ways to understand the inflation tax. But here is one true story that may help you understand how inflation affects you on a personal level.

In the Piggy Bank Coins article entitled, “How Much Was a Dollar Worth in 1960?”, we discussed the purchasing power of the dollar. The purchasing power of a Dollar in 1960 was compared to that of 2020. We shared the story of Mike Maloney’s father who bought a home in the late 1950s at a price that was equivalent to his annual salary.

As an example, Mr. Maloney displays his father’s 1955 tax return. His father was an auto parts store manager in Salem, Oregon during this time. He earned approximately $9,600 per year.

-Consumer Price Comparison, 1960 vs. 2020, -Piggy Bank Coins article entitled, “How Much Was a Dollar Worth in 1960?”

Home Prices In 1960 vs. 2020

What’s interesting is the average home cost during this time period in comparison with his [Maloney’s Father’s] salary. According to US Census Bureau data, the median price for a single-family home in Oregon ranged between $6,800 in 1950 and $10,500 in 1960. Moreover, his father’s annual salary was almost equal to the median home price during this time. Now, consider the average salary today and the price of homes. In contrast, could you purchase a home with your annual salary? Clearly things have changed and Americans are becoming poorer.

Basically, in 1960 the cost of a simple home was equal to a manager’s salary. We all know that you can’t buy a home today on a manager’s salary! This is the power of inflation. In some ways inflation can benefit you or be negligible if you own assets; however, if you hold currency like the US Dollar, the inflation tax is in effect and your currency is losing its value.

Currency Inflation

One thing that significantly affects inflation and leads to the inflation tax is money printing. When the US Treasury and the Federal Reserve Bank coordinate to print large amounts of money, it causes inflation. Inflation is simply an increase in the money supply. The bigger the money supply, the less the money in your wallet is worth. Moreover, inflation is a hidden tax. As a result, money you have in your bank account loses purchasing power when money is printed by the government and further exacerbates the inflation tax situation.

On March 23, 2020, it was announced that the US Government would be giving out stimulus checks to Americans. In addition, they planned to give money and loans to businesses hurt by the COVID-19 epidemic. Almost overnight, approximately $2 Trillion in loans and grants were printed out of thin air. As a result, the internet went viral in creating money printing memes. One of those memes was the now infamous “money printer go brrrr” meme.

Consumer Price Index

According to the US Bureau of Labor Statistics, the consumer price index has increased 1.3% in the past 12 months (before seasonal adjustment).

“The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available.” -The US Bureau of Labor Statistics, Definition of Consumer Price Index (CPI)

A consumer price index value of 1.3% seems reasonable for 2019-2020. If inflation or the CPI were only 1% per year, that means that in 100 years one US Dollar would lose about half its purchasing power. For example, $100 in 1920 would only purchase $50 worth of goods in 2020. However, real inflation for items we buy every day is much higher. In addition, we’ll soon see what the real inflation values are, and they are not pretty.

The United States Federal Reserve Bank Aims For 2% Inflation

The Federal Reserve Bank believes that we must have inflation to promote stability and predictability in the economy. Their goal is to have 2% inflation each year.

The Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s mandate for maximum employment and price stability. When households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing, and investment, which contributes to a well-functioning economy. – Federal Reserve Website

The Federal Reserve’s Tools of Inflation: Money Printing and Interest Rates

The Federal Reserve Bank’s most powerful tool for creating inflation is a two-pronged approach. First, they have the power to raise and lower interest rates. Increasing or decreasing interest rates has the effect of accelerating or decelerating the American economy. If they raise interest rates, people tend to borrow less and it becomes more expensive to do business. As a result, there is a chilling effect on the economy; however, if the Federal Reserve lowers interest rates, individuals (and businesses) find it easier to get capital to do business, and the economic machine is powered up, so to speak.

The other powerful tool that the Federal Reserve has is to print money. Typically, when they print more money, there is more money in the economy. The velocity of money increases and people tend to have more money. With more money in the system, the economy is stimulated.

Inflation Calculator

The US Dollar Has Declined in Purchasing Power since 1913; the Stated CPI Does Not Reflect Real Price Increases

In addition, the US Bureau of Labor Statistics provides a handy Inflation Calculator. Using their calculator, you can estimate what purchasing power (based upon inflation) is today compared with years past. For example, $10 in 1960 is equal to $88.71 today. That means that in the 60 years prior to 2020, the dollar has suffered 887% inflation over time.

Since the Federal Reserve Bank was formed in 1913, the dollar has been in steady decline. The dollar’s purchasing power has decreased dramatically since 1913. Using the US Bureau of Labor Statistics CPI calculator, the US Dollar has lost approximately 96% of its purchasing power since 1913. This is an alarming statistic.

https://piggybankcoins.com/wp-content/uploads/2020/11/1960-2020-PRICE-Comparison-1-494x1024.jpg?d526e1&d526e1

How You May Experience Inflation Tax

Sometimes when we think about inflation, we think of what can be purchased directly with our national currency. For example, we might notice that last week fuel cost only $3/gallon, whereas, this week a gallon of fuel increased to $3.50. This is how consumers most often notice inflation. However, don’t get too caught up in measuring inflation by just using currency.

Three Types of Inflation

As stated earlier in the article, there are three types of inflation: demand-pull inflation, cost-push inflation and built-in inflation. These types of inflation are provided as a generalized example so that you can better understand the types of inflation. However, economists and financial experts have other names for types of inflation. Let’s talk about these three types of inflation.

Demand-Pull Inflation

One of the types of inflation is called Demand-Pull Inflation. When this kind of inflation happens, demand for goods and services outpace the production capacity. In effect, a gap is created between supply and demand in the economy, which puts stress on the price. As a result, prices go higher following the demand from people or businesses who want a good or service. This leads to price inflation.

Cost-Push Inflation

Another one of the types of inflation is called cost-push inflation. When prices increase in the production process, it forces people to spend more and leads to inflation of money. For example, imagine a bakery that uses sugar to make cookies. If the price of sugar doubled in a short period, it would cause the bake to have to increase the price of the cookies she sold dramatically to maintain profitability. This is one of the most common types of inflation.

Built-In Inflation

Finally, one of the last types of inflation is called built-in inflation. When the price of products or services increases, workers want to increase their wages. For example, if it cost a worker more to drive to work because of high gas prices, and it cost more to buy clothing for work, then a worker will want to earn more money at his job.

How Do You Win Against the Inflation Tax?

Seek Shelter in Deflationary Assets Such as Gold, Silver, Bitcoin and Real Estate.

There are some investments and things that you can own that weather inflation better than currency. For example, for hundreds of years, owning gold and silver has been a way to avoid currency inflation. Gold and silver both have a long history of maintaining their value when currencies became inflated.

Bitcoin

Another alternative to gold and silver that many consider inflation-proof is Bitcoin. In the past few years, many have begun to use bitcoin like gold – a store of value. In fact, Bitcoin has many of the positive properties that gold has. It is a store of value, it can be a medium of exchange, it can be a unit of account, there’s a limited supply, it is uniform, acceptable, divisible and portable, etc.

Both Bitcoin and gold have a finite, limited supply. As a result, this means that they cannot be subject to inflation. If there is only so much gold, silver and bitcoin, it is by definition, deflationary. Being deflationary means that as the supply of the commodity dwindles, the value and demand for each increase. This is not true of currencies like the US Dollar.

Real Estate

Even something like real estate can have a deflationary affect when compared to US Dollars. Real estate has a long history of maintaining its value over time as compared to the Dollar. However, choose wisely; many believe that there is currently a bubble in the United States real estate market. Prices for real estate in many cities today are considered to be over-priced and inflated.

Final Thoughts on the Inflation Tax

As you can see, the inflation tax is a real phenomenon that can affect your personal finances. There are three types of inflation that can occur. Each of these scenarios can quietly steal money from your savings. As a result, it is important to have a plan to address inflation and a place to invest to fight back against the types of inflation.

Read More:

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Disclaimer: It is important to note that Piggy Bank Coins does not provide financial 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.

In addition, The Federal Trade Commission (FTC) requires that Piggy Bank Coins disclose to readers that we may receive commissions when you click our links and make purchases. However, this does not impact our reviews and comparisons. Moreover, we try our best to keep things fair and balanced, to help you make the best choice for you.

Categories
Taxes

Puerto Rico Tax Haven

In this article we will learn about the Puerto Rico tax haven. Also, we will discuss Act 20 and Act 22 and how the U.S. Territory of Puerto Rico has become a tax shelter 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, which is part of the reason it is known as the Puerto Rico tax haven. Instead, Puerto Rico has its own taxing agency like the IRS that collects taxes from citizens.

About the Puerto Rico Tax Haven

The Puerto Rico tax haven 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.

What created the Puerto Rico tax haven? Well, 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. Thus, the Puerto Rico tax haven was created and people began migrating to Puerto Rico to save money on their taxes.

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%. Poof! You are not in the Puerto Rico tax haven!

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. This is one example of how you have to spend some money to take advantage of the Puerto Rico tax haven status.

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. Retiring to the island territory can help you take advantage of the Puerto Rico tax haven opportunity.

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. Clearly, the Puerto Rico tax haven is not always a paradise.

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. As a result, the Puerto Rico tax haven may only exist for a limited time.

Find More Help on the Puerto Rico Tax Haven

One fantastic resource for getting more answers regarding the Puerto Rico tax haven relating to 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.

In summary, the Puerto Rico tax haven may not be for everyone. There are clear examples of how certain businesses and individuals can benefit from the low tax laws. Puerto Rico’s Act 20 and 22 have created a great opportunity for people to pay limited taxes while enjoying the island life.

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