Myth of the Offshore Tax Havens  By Vernon K. Jacobs, CPA  & J. Richard Duke, J.D., LLM

There are numerous books and web sites and seminars that discuss the advantages of tax havens as a way to save taxes. To the extent that this information is directed at U.S. taxpayers, it's a myth. Many years ago, there were some legal ways to defer taxes with offshore trusts or corporations located in tax haven countries. But in the U.S., the rules have changed. If you are citizen of any major country in the world, except one, you can leave your country, live in another and not have to pay taxes on any income you earn in that second country - even if it's tax free. Even the income on your investments is tax free if you are not residing in a country that imposes income taxes on your investments. If you are a U.S. citizen and live in a state with an income tax, it's easy to stop paying the state income tax. You can move to a state like Florida, Alaska, Wyoming or Texas, where there is no state income tax. And, the federal government has even told the high tax states (like California) that they can't pursue former citizens of their state to collect on pension benefits that were deducted while the person was still a resident. If you own some assets that have accumulated in value while a resident of New York, you can move to Florida, become a resident of that state and thumb your nose at New York when you sell your appreciated assets. (However, there is an exception for real estate because you can't take it with you.) The residents or citizens of a country other than the U.S. can invest their money in U.S. treasury bills, certain U.S. bank deposits and in U.S. growth (non-dividend paying) stocks without paying any taxes on the income or the gains. (Foreign investors are required to pay U.S. taxes on dividends from U.S. corporate stock.) The U.S. is a tax haven for investors in the rest of the world. Earlier, I said that every major country in the world - except one - taxes you on the income you receive while you are a resident. The exception is the United States, which taxes on the basis of residency or citizenship. Three other countries, the Philippines, Romania, and Eritrea (Eastern Africa) have adopted the U.S. approach. The U.S. taxes it's citizens on their worldwide income. You can leave the U.S. and reside in England, France, Canada or any other country for twenty or more years and you will still owe U.S. income taxes on all your earned income and investment income - unless some of that income is specifically exempted from tax. There is an exemption for up to $80,000 a year (for 2002) of income earned outside the U.S., if you don't live in the U.S. for 330 days out of any consecutive 12 months. But there is no exemption from tax for any investment income from assets held in a tax haven of any kind. Tax havens are not a legal way to save taxes for a U.S. citizen or permanent resident. Anyone who tells you otherwise is either seriously uninformed or a charlatan. Of course, you can evade some of your U.S. taxes by hiding some of your investments in secret bank accounts , but then you have to play "hide and seek" with the IRS for the rest of your life. The preceding comments are a very brief and non-technical summary of the key tax rules that apply to a person who is a citizen of another country and is not a permanent resident of the U.S.  Vernon Jacobs and Richard Duke are co-authors of  Offshore Tax Strategies.

About the authors: Vernon Jacobs is a CPA who provides tax accounting and consulting services for clients with international interests.  J. Richard Duke , JD, LLM is an attorney who specializes in international tax law and is an Adjunct  Professor of international tax law  Sponsored by Offshore Press, Inc .., Copyright, 2006, All rights reserved. Offshore Press, Inc., Box 8194, Prairie Village, KS 66208. Phone (913) 362-9667.Email to Offshore Press  Vernon K. Jacobs, Webauthor..