- 1 Legal Offshore Tax Reduction Myths & Fairytales
- 2 Primer: Worldwide Income & US Tax
- 3 A Second Passport Reduces US Tax
- 4 The IRS Does not Tax Foreign Income
- 5 Living Abroad Means Reduced US Taxes
- 6 Inverting a Business Abroad Eliminates US Tax
- 7 Foreign Trusts & Foundations Avoid the IRS
- 8 Golding & Golding: About Our International Tax Law Firm
Legal Offshore Tax Reduction Myths & Fairytales
Legal Offshore Tax Reduction Myths & Fairytales: When something tax-related sounds too good to be true…it is almost always too good to be true. These days, the internet is littered with false promises about whisking away offshore to a haven (or two or three different havens), setting up shop — and forgetting your US tax responsibilities. The problem is that these online websites are selling a tax dream — which either does not exist; is no longer valid (if it was ever valid in the first place); or requires relocation and investments into countries in which many people would not want to place their money (for safety and accessibility reasons). Let’s walk through 5 offshore tax reduction myths:
Primer: Worldwide Income & US Tax
Briefly, the US tax system is based on a worldwide income model. That means that the US taxes US Persons (US Citizens, Lawful Permanent Residents and Foreign National non-Permanent Residents who meet the Substantial Presence Test) on their worldwide income. While Taxpayers may qualify for Foreign Earned Income Exclusion (FEIE) and/or Foreign Tax Credits (FTC)– they are still subject to US Tax on worldwide income). This is true unless the US person formally expatriates from the United States.
A Second Passport Reduces US Tax
While a second passport may make it easier to travel the world either visa-free or VOD (Visa on Demand), it does no reduce US tax liability. In fact, it may increase tax liability because some countries have specific wealth and other estate taxes that would be in addition to US taxes.
The IRS Does not Tax Foreign Income
As explained above, the US taxes individuals on their worldwide income. Therefore, just earning income from abroad does not eliminate US tax liability – although FEIE and FTC may work to reduce the net-effective US tax rate.
Living Abroad Means Reduced US Taxes
False. The US worldwide income model is not limited to US borders. Rather, the US taxes on worldwide income. Therefore, all those wonderful pictures and imagery you find online about reclining back in your beach-side villa will not eliminate your US tax liability — unless you have formally expatriated and have no US income.
Inverting a Business Abroad Eliminates US Tax
The IRS is way ahead of you. The IRS has very specific rules involving corporate inversions. So, while a corporate inversion could reduce your tax liability, it depends on whether or not the Taxpayer qualifies for an inversion AND the US person is no longer a US person. That is because if the company is owned by more than 50% by US persons, then it is referred to as a CFC (Controlled Foreign Corporation) — subject to GILTI, Subpart F, etc.
Foreign Trusts & Foundations Avoid the IRS
The IRS hates foreign trusts. The tax rules in place severely limit the ability of US owners of foreign trusts and foundations to shift or assign income — and as with corporate inversions, the US has very strict rules against this type of activity. And, while having no direct ownership of the trust (but beneficial interest) may seem like a workaround — usually it is not, and the US owner is imputed ownership and income tax liability.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance with getting compliant.