| Tax Myth: PTs Are Tax Free
Dear A-Letter Reader:
You may have heard of a group of nomadic people who call themselves "PTs" and wander around the globe. These letters stand for, among other things, "permanent tourist" or "perpetual traveler."
The idea for PTs came form a reclusive writer who calls himself W.G. Hill. As the story goes, Hill read an article by Charles Schultze, an international newsletter writer, who advocated the concept of becoming a "permanent tourist" or "perpetual traveler" thus not having a permanent residence in any one nation or place. Hill expounded on this seductive idea with a series of books that lead many of his readers to believe falsely that they could somehow free themselves of paying US taxes by roaming the world and joining the PT movement.
The PT theory might have some validity if a person is a citizen of a country that imposes taxes on the basis of residence, such as Canada or the United Kingdom. Those lucky persons may be able to reduce their national taxes significantly by taking up residence in an offshore tax haven and returning to their original nations only for a limited time each year.
But the falsely attractive PT theory isn't valid for US persons (either US citizens or resident aliens) who, under American law, are taxed on the basis of their citizenship or alien status. The US person is subject to US taxes on his or her worldwide income, regardless of where on earth he or she lives. There is a modest exception to US income taxes for up to $80,000 each year for income earned outside the US, if the US person also lives and works outside the US for at least 330 days in any 12 consecutive months and meets certain other requirements.
There is a way by which a US person legally can become a PT of sorts -- but it takes careful, long range planning and a degree of courage and determination, as well as expert tax and legal advice. One leading offshore attorney, Marshall Langer, calls it "the ultimate estate plan" -- and that's expatriation. gally to benefit from the PT idea, he or she, first, must acquire a second citizenship from another country, preferably one that taxes only on the basis of actual residence, such as Canada. The second step is to cease to be a resident of the US and establish residence in another nation, hopefully a tax haven. Lastly, the US person must formally end US citizenship by signing a formal declaration at a US embassy or consulate in a foreign country, as prescribed by law.
And ending US citizenship doesn't always result in total freedom from the US tax laws and the IRS. The IRS claims tax jurisdiction over ex-citizens for a period of 10 years, but if you and your assets are long gone, they may have trouble collecting.
But becoming a PT candidate still has hurdles before reaching that tax free Nirvana. That's because most nations, even ones that are tax havens for foreigners, will tax residents on the income earned within their borders. Panama, a leading tax haven, imposes taxes on a territorial basis, so a foreigner can retire or live there comfortably on any foreign source income and it will be tax free. But if you earn money from work within in Panama, it will be taxed. So, if you're going to be a PT (or just live offshore) it will be necessary to accumulate substantial assets previously or to be able to live off your investments and/or pension income. (US Social Security is paid to Americans who live offshore, but not Medicare).
All things considered, becoming a PT and living a romantic, tax-free life is not as simple as it's been made out to be.
Vernon K. Jacobs, CPA, CLU
E-mail: jacobs@offshorepress.com
Web site: http://www.vernonjacobs.com
COMMENT LINK:
* Vern Jacobs answers questions on asset protection and taxes in the FREE Jacobs Report on International Financial Planning.
LINK:http://finance.groups.yahoo.com/group/jacobsreport/ |