Money Method: The Great Tax Escape to Puerto Rico

Did you know there are tax loopholes for Americans living in Puerto Rico? Well, at least that's what I learned from PolicyGenius.com's contributor, Alex Webb. 

But don't pack your bags just yet. There are several barriers to entry for you to consider before you make a run from Uncle Sam. 

Guest Post: Alex Webb, PolicyGenius Contributor

It has been said that the only things you can’t escape in life are death and taxes. While moving to Puerto Rico won’t help you live forever, it’s one of the few places on earth where Americans can legally escape many forms of taxation. Intrigued? You should be.

Global Taxation

Most countries tax their citizens on a residency basis. For example, if you are a Swedish citizen living in Thailand, you will owe taxes to Thailand, but not to Sweden. But the U.S. has a system of global taxation, meaning that if you are an American living in Thailand, you’ll still have to pay U.S. taxes. While there are deductions and exceptions, it’s nearly impossible to escape the IRS — unless you live in Puerto Rico.

That’s because Puerto Rico falls in an interesting legal grey area. It’s part of the United States, but it’s a territory, not a state. Puerto Rico doesn’t receive voting representation in Congress and Puerto Ricans—while being American citizens—can’t vote in federal elections. But they also don’t pay many federal taxes. Puerto Rico has the power to tax their residents, but, in an attempt to lure investment, they slashed the rates for new residents to next to nothing. And, since Puerto Rico is part of the United States, any American can move there and become a resident. All of this creates an unusual and fascinating tax loophole:

Americans who live in America pay U.S. federal taxes. Americans who live in foreign countries pay U.S. federal taxes. But Americans who move to Puerto Rico often don’t have to. With the correct tax planning, new Puerto Rico residents could legally pay a tax rate close to 0%.

How to Move to Puerto Rico

To gain and maintain your residency you’ll need to move your primary address to Puerto Rico, but you’ll only need to spend a minimum of 183 days in Puerto Rico per year. The rest of the time you can travel to other parts of the United States, or the world.

Beyond physically moving you’ll need to fill out some important paperwork. Act 22, also known as the “Individual Investors Act” is behind many of the tax advantages, and to receive the benefits you’ll need to apply for a tax exemption decree. If your application is approved, your individual tax exemption decree will have the full details of your exact tax treatment, which may vary from person to person.

If you control a corporation, you’ll need to look at Act 20, which provides for a 4% corporate tax rate — far below the 35% tax rate on the mainland United States. If you are an entrepreneur with, say, an online business, you may be able to relocate to Puerto Rico and attain large tax savings. 

Of course, your exact situation will vary and tax law is very complicated, so don’t use this article as legal advice.

This article first appeared on PolicyGenius.com, which is a financial protection planning startup educating consumers on common monetary pitfalls of life. 

Alex Webb, founder of Take Risks Be Happy, is a freelance writer and author. 

Webb co-authored and contributed to books published by National Geographic, the Financial Times, and Skyhorse. 

Tax Scams You Should Steer Clear From

It's tax season again, and scammers are on the actively searching for their next victim. 

Illegal tax scams, can cost you your life savings, harsh penalties, accruing interest and possible jail time. 

The IRS pulled together its annual "Dirty Dozen" for tax payers, which warns them what consumers should be aware of. 

The following 12 points are pulled directly from IRS.gov

1. Identity Theft
 The IRS continues to aggressively pursue criminals who file fraudulent returns using someone else’s Social Security number. The IRS is making progress on this front. Remain vigilant to avoid becoming a victim and be sure to protect your Social Security number.

Tip: Memorize your nine digit number and do not, I repeat, do not carry your social security card around with you in your wallet.

2. Telephone Scams

Threatening phone calls by criminals impersonating IRS agents remain an ongoing threat. The IRS has seen a surge of these phone scams in recent years as scam artists threaten taxpayers with police arrest, deportation, license revocation and more. These con artists often demand payment of back taxes on a prepaid debit card or by immediate wire transfer. Be alert to con artists impersonating IRS agents and demanding payment.

FYI: The IRS will never call your home, cell, or your workplace to collect back taxes. EVER! They will send a letter to your home. The IRS knows where you live.

3. Phishing

Phishing scams typically use unsolicited emails or fake websites that appear legitimate but are attempting to steal your personal information. The IRS will not send you an email about a bill or tax refund out of the blue. Don’t click on strange emails and websites that may be scams to steal your personal information.

4. Return Preparer Fraud

About 60 percent of taxpayers use tax professionals to prepare their returns. While most tax professionals provide honest, high-quality service, there are some dishonest ones who set up shop each filing season to perpetrate refund fraud, identity theft and other scams. Be on the lookout for unscrupulous tax return preparers. Choose your preparer wisely.

5. Offshore Tax Avoidance

Hiding money and income offshore is a bad bet. If you have money in offshore banks, it’s best to contact the IRS to get your taxes in order. The IRS offers the Offshore Voluntary Disclosure Program to help you do that.

6. Inflated Refund Claims

Be on the lookout for anyone promising inflated tax refunds. Also be wary of anyone who asks you to sign a blank return, promises a big refund before looking at your tax records or charges fees based on a percentage of the refund. Scam artists use flyers, advertisements, phony store fronts and word of mouth via trusted community groups to find victims.

7. Fake Charities

Be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. If you are making a charitable contribution, you should take a few extra minutes to ensure your hard-earned money goes to legitimate and currently eligible charities. IRS.gov has the tools you need to check out the status of charitable organizations. Be wary of charities with names that are similar to familiar or nationally-known organizations.

8. Falsely Padding Deductions on Returns

Don’t give in to the temptation to inflate deductions or expenses on your tax return. Think twice before overstating deductions such as charitable contributions, inflating claimed business expenses or including credits that you are not entitled to receive, such as the Earned Income Tax Credit or Child Tax Credit. Complete an accurate return.

9. Excessive Claims for Business Credits

Don’t make improper claims for fuel tax credits. The credit is generally limited to off-highway business use, including use in farming. It is generally not available to most taxpayers. Also avoid misuse of the research credit. If it doesn’t apply to your business and you don’t meet the criteria, don’t make the claim.

10. Falsifying Income to Claim Credits

Don’t invent income to erroneously claim tax credits. A scam artist may try to talk you into doing this. You should file the most accurate tax return possible because you are legally responsible for what is on your return. Falling prey to this scam may mean you have to pay back taxes, interest and penalties. In some cases, you may even face criminal prosecution.

11. Abusive Tax Shelters

Avoid using abusive tax structures to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. Be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, seek an independent opinion regarding these complex situations or offers. Most taxpayers pay their fair share, and so should you.

12. Frivolous Tax Arguments

Using frivolous tax arguments to avoid paying taxes can have serious financial consequences. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying taxes. The law is crystal clear that people must pay their taxes. For decades, the federal courts have consistently upheld the tax laws. The penalty for filing a frivolous tax return is $5,000.

The IRS notes that tax scams can take many forms beyond its “Dirty Dozen” list. The best defense is to remain alert and trust your gut instincts. 

Money Method: Tips to Buying More Time to File Your Taxes

The April 15 tax deadline is less than 72 hours away. But did you know that if you need more time to file your taxes the Internal Revenue Services grants an automatic six month extension? Well, now you know ... and here are five things you need to know about filing an extension:

Money Method: Eight Tax Tips to Deduct Charitable Contributions

(Clothes Donation Bin in Montclair, NJ
Image taken by T.C.)

Remember that donation you gave to that charity a few months ago? What about the clothes you donated in the donation bin, or the Salvation Army and Goodwill? Well, if you saved your receipts they may help you this tax season.  Depending on how much you donated in 2014, you can claim the gift as a deduction which may lower your tax. The IRS provided eight tax tips you should know about when it comes to deducting your gifts to charity:

Money Method: Seven Tips to Determine if Your Gift is Taxable

As you hustle through your W-2s you will need to fill out your taxes by April 15th, don’t forget the monetary gifts you gave in 2014. If you gave money or property to someone as a gift, you may be thinking about the federal gift tax. According to the Internal Revenue Service, many gifts are not subject to the gift tax. Here are seven tax tips the IRS provides about gifts and the gift tax.

Money Method: 8 Common Tax Mistakes to Avoid

The deadline to file your taxes is quickly approaching. And many of you have placed yourself under enormous amounts of pressure to get those 1040 Forms filled out by April 15. Try not to rush through filing out those forms, because if you make a mistake on your tax return, it will likely take the Internal Revenue Service longer to process it. Which means, your refund will be delayed. The best way to avoid tax filing mishaps is to use IRS e-file. According to IRS.gov, paper filers are about 20 times more likely to make a mistake than e-filers. IRS e-file is the most accurate way to file your tax return.

The IRS found eight common tax-filing mistakes that cross their desks every year. As you try to beat the April 15th deadline try to avoid the following hiccups:

Money Method: Last Minute Tax Tips

Every other day an e-mail comes in reminding me that I need to hurry up and file my taxes. But guess what? I took my own advice and filed my taxes in the beginning of the year. (see: 6 Reasons to File Your Taxes Early) 

The rest of you now have a little more than a week to fill out those 1040 forms. For whatever the reason, nearly 28 percent of Americans wait until the very last minute to get their W-2’s in order. This sometimes leads procrastinators at financial risk because they didn't give themselves enough time to get their tax documents organized.

Now, I am not a tax expert but I am a taxpayer and a consumer… so I’m just passing along the information that has helped me over my tax filing years. Personal finance websites WalletHub and CardHub recently sent along a list of last-minute tax tips from more than 15 experts and provided a guide to avoiding tax scams during this risky time of year.

If you've taken a break from shuffling through your tax paperwork, here are several tips that WalletHub suggest which may help motivate you to get those 1040s signed, sealed and in the post by April 15.

Money Method: 5 Things to Think About When Filing a Tax Extension

Tax Day is nearly two weeks away. And if you’re reading this post, you probably haven’t filed your 1040 yet. Well, thank goodness for tax extensions. Actually, let me retract that last statement. It’s not a good idea to opt out for a tax extension because there probably will be a price to pay.

John Gregory, a tax practitioner and founder of 1040Return.com, which provides tax solutions for small business owners and individuals, suggests five things you should take into account if you plan to file a tax extension with the IRS.

No. 1 - The Purpose of the Extension. Filing a tax extension gives you a grace period of six months, which pushes your deadline to October 15. However, there is a catch. The IRS allows you the extension for the sole purpose of arranging for and organizing your documents. Do not assume that you are getting an extension for paying off you tax liabilities. You still have to pay at least 90 percent of your taxes by April 15. If you are trying to buy time to put off your tax payment for six months, it won’t be a wise thing to do. The IRS will charge interest on the unpaid tax obligation. This means, you will have to shell out more money.

Money Method: 6 Reasons to File Your Taxes Early

If you haven’t noticed, tax season is upon us. Again. 

H&R Block, Jackson Hewitt and Turbo Tax commercials have already started appearing during primetime shows. And in a few more months reminders will start popping up in our social media news feeds reminding us to get our refunds, or in some peoples case, pay Uncle Sam. 

One of the lessons I’ve learned in my adult life is not to procrastinate when it comes to filing my taxes. Yes, the Internal Revenue Services gives us until April 15th to get all of our documents in order but we don’t have to wait until the very last minute.

Money Method: End of Year Tax Tips

As another year winds down, I couldn't help but notice the money-saving preparation tips trending in the news, social media and my financial journalism inbox. One piece of advice that jumped out at me was from Patrice Washington, aka the Money Maven. 

Washington shared three last minute, time sensitive tax tips that every tax payer, in any tax bracket, can benefit from.  

Washington suggests the following:

• Make More Donations: According to the IRS, you may deduct contributions in the year they are made. Even if it is December 31st, charge your charitable gift to a credit card or get your envelope postmarked. While you may not pay the credit card bill until 2015 or the check doesn't clear until then, you are still covered. “Don’t forget that if your gift is over $250, you must obtain a written receipt or record of the transaction from a qualified charity,” Washington stated. “If you plan on donating clothing or household goods, look forward to deducting the fair market value as long as everything is in good condition.”