When It Comes To Assets, Moving Isn't Hiding
Some recent reader emails have me scratching my head.
Some readers are railing against me for writing about ways both to save taxes and to protect assets by moving them offshore. These readers seem fully to believe that these activities are either unpatriotic or illegal or both.
Hiding assets offshore to avoid taxes, yes, that’s illegal. Do that, and, in the current climate, with the IRS on a mission to uncover every U.S. asset held offshore it can, you’re going to get caught.
The cost of getting caught is going to be multiples of whatever you might temporarily save in taxes.
For the record, I’ve never recommended moving assets offshore to hide them. I recommend (always have… always will) disclosing everything you’re meant to disclose to whatever government or tax authority it’s meant to be disclosed.
Hiding assets does not work.
However, hiding assets is not the same thing as moving assets. Hiding assets offshore is illegal. Moving assets offshore is not.
Don’t believe anyone (any media, any accountant, any attorney) who tries to tell you that moving assets to another country (by placing them in a bank account there, for example, or in a foreign trust) is illegal or a tax dodge. It’s not.
The truth of the matter is that moving assets offshore is a protection move, not a tax move. At best, putting your assets in another jurisdiction outside the United States is tax-neutral. You’ll continue to be liable for taxes in the United States at normal tax rates for any income and profits you earn from any investment you make offshore.
Offshore trusts come with their own reporting requirements if they have U.S. beneficiaries, as well as their own tax liabilities. Again, a trust isn’t about tax savings. It’s about improved asset protection. Most attorneys won’t attempt a frivolous lawsuit when the assets of the prospective plaintiff are in another jurisdiction.
One more time: Protecting your assets isn’t illegal. As a man with a family, I’d say it’s an obligation. Using offshore entities is one way to accomplish that protection.
The only real tax benefit an American can take advantage of by going offshore is the Foreign Earned Income Exclusion (FEIE). The FEIE allows a U.S. person to exclude up to US$107,600 in earned income per taxpayer (that’s the figure for 2020) if you live and work outside the United States.
This isn’t a tax dodge. It’s following the U.S. tax code.
Note, too, on this point, that the United States and Eritrea are the only countries in the world to tax citizens on their worldwide income no matter where they live. Other countries tax their citizens only if they reside or earn money in that country.
Taxation Without Representation
Back in 1764, they referred to this as taxation without representation.
Americans living abroad have no representation in government… no congressmen, no senators representing their interests. Nevertheless, we Americans abroad have to file a tax return to the IRS every year, even if it’s only to tell them we don’t owe them any money.
The cost of this—both of time plus, in many cases, of paying a tax preparer—is an unnecessary burden that, Eritrea aside, no other country puts its citizens through when they move to another country.
I don’t recommend making life decisions based on taxes alone. That can translate into miserable living. Several U.S. states, including Florida, Texas, and Nevada, impose no personal income tax, but I wouldn’t move to any of those places because, frankly, I don’t find them appealing places to live. No amount of tax savings is going to change that.
The same holds when going offshore. Don’t restructure or reinvent your life just to be able to take advantage of the Foreign Earned Income Exclusion… and don’t choose a country to move to based solely on its approach to taxation.
Go offshore for diversification and a better lifestyle. When you do, arrange your affairs to take advantage of every (legal) tax benefit available to you in the place where you’ve decided you want to be.
And ignore anyone who tells you that you shouldn’t or can’t.