Tax system in the USA

If you are traveling to the USA you will certainly notice that the trend of socialism or social democracy that’s on the rise. Bernie Sanders is gaining popularity, there’s lots of pressure to raise taxes for the rich, there’s lots of talk about income inequality.

The interesting thing is that the American revolution started because of taxes.

American tax system affects lots of people: the population of the US is very large, GDP is the largest in the world, GDP per capita is very high, and the tax system is very unique.

It’s unique because it is citizenship-based taxation. What does it mean?

This means that as long as you are an American citizen, no matter where you live you’ll have to pay American taxes.

If you live outside of the US for a certain period of time, you will be able to get foreign income tax exclusion if you are making less than 100 000$ per year. You are still obligated to do the tax filing, as long as you have American citizenship.

When it comes to companies, they’ve just had the big tax reform. Corporate tax rates are lowered to be more competitive. They went from 40% to 21%. However, they also removed some of the exemptions.

They introduced some big changes to the tax system.

They added something that’s called the Gilti tax.

Before, you could form a foreign company and treat it as a big 401k. This is what all these big companies such as Apple, Facebook, Google, and Amazon did.

Corporate tax here is based on registration, not on management and control. Apple was registered in Ireland while being managed from California. Because of this, it wasn’t considered an American company. On the other hand, because it was managed and controlled outside of Ireland the company didn’t have to pay taxes in Ireland either. This resulted in them not having to pay taxes anywhere for some time.

All this is now changed, with the introduction of the Gilti tax. CFC rules changed. They brought in participation exemption (if you are not familiar with this term we have a video about it), so this potentially helps you to bring money back into the parent company more or less tax-free. One big disadvantage of this is that it’s not very easy to qualify for it.

Gilti tax (Global Intangible low-tax income) isn’t just intangible and low tax. In most cases, Controlled foreign company will be subject to this tax.

That means you can’t just set up a company in Puerto Rico and live in the US and pay 4% tax and leave the money there. You can’t just form a company in BVI and leave the money there.

If you are an American you have 3 strategies that will work for you in terms of better tax situation:

-You can relocate to Puerto Rico. Here they have their own rules, you can have a company there that will pay 4% taxes and you can receive dividend income for free.

-You can use some sort of trust structure.

-There are some interesting domestic tax structures, that can help you.

If you are an American citizen, it will probably not be possible for you to pay zero taxes. However, there are still a couple of things that can be done to help reduce your taxes.

If you need any help feel free to reach out to us and we will do our best to help you.

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