08 04 2019

What Is a Tax Haven?

A tax haven is typically a foreign country that charges low or minimal taxes.

WHEN YOU PICTURE A TAX haven, you might envision a sunny beach in a far-flung country where well-heeled executives and business owners stash their millions to avoid paying U.S. taxes.

Indeed, tax havens such as Guam and Belize have a reputation for allowing access to tax avoidance. But experts recommend that regular folks think twice before relocating their nest eggs to a low-tax locale. "For federal taxes, there isn't really much in the way of a tax haven because if you leave the United States, you are going to pay tax on worldwide income anyway," says Eva Rosenberg, a Los Angeles-based enrolled agent and founder of TaxMama.com. "It doesn't matter where you live."

Still daydreaming about the expatriate lifestyle and rock-bottom tax rates? Here's what to know about tax havens.

What's a Tax Haven?
A tax haven is typically a country that charges minimal taxes to foreign companies and individuals and may offer assurances of secrecy, enticing foreigners and corporations to store money or do business on their soil. "When people talk about tax havens, they're usually talking about countries where there's very low tax rates and sometimes even zero percent corporate tax rates," says Logan Allec, a certified public accountant and creator of the finance website Money Done Right.

The use of tax havens is something the U.S. Internal Revenue Service monitors closely. "It is estimated that several trillion dollars in assets worldwide are held in offshore tax havens," according to information from the IRS. "Presumably, transfers from the U.S. represent a large share of this wealth. One authority has estimated the annual revenue loss to the U.S. at a minimum of $100 billion."

Perhaps the most famous tax havens is Switzerland, but tax havens run the gamut. Tax havens identified on the European Union's list of non-cooperative tax jurisdictions include American Samoa, Aruba, Belize, Bermuda, Dominica Fiji, Guam, Oman, Samoa, Trinidad and Tobago, the U.S. Virgin Islands and Vanuatu.

For taxpayers, using a tax haven can seem like a tempting way to avoid paying U.S. taxes. But experts warn that it's not that easy to avoid paying your fair share to Uncle Sam.

Can I Use a Tax Haven?
Of course, there can be legitimate reasons to buy a property or open an account in another country. Many individuals plan to retire overseas, buy a vacation home abroad or conduct financial business in a country to which they travel often. But opening an offshore account solely to avoid paying U.S. taxes is a different strategy altogether.

Experts caution that entering a foreign financial system solely for tax savings isn't typically something a regular filer can – or ought to – do. "For an individual, there are places in the world where they have you set up trusts and things like that, and if you don't have a really, really good international tax attorney, who will cost you more than the taxes you would potentially save, don't go there," Rosenberg says. "Live wherever you want to, but know you're going to pay U.S. taxes."

For small-business owners, the same holds true. "For a small-business owner, it probably doesn't make a whole lot of sense," Allec says. "Administrative costs would probably outweigh tax benefits by hundreds of thousands if not millions of dollars."

To more aggressively dodge U.S. taxes, you may have to gain citizenship to a new country and move your life abroad, a fairly intense and potentially pricey move that shouldn't be taken lightly. "It's expensive, and you're giving up your U.S. citizenship permanently," Rosenberg says. Plus, you may be liable for exit or expatriation taxes. Bottom line for regular folks: When it comes to this tax strategy, the risks and costs associated tax havens typically outweigh the rewards, experts say.

What Are Some Other Ways to Shield Income From Taxation?
You don't need to open a secret trust in Barbados to capture tax savings, experts say. There are savvy ways to shield money from taxation that don't require an international tax attorney.

For example, "tax shelters" are different than tax havens and can help you save money. Tax shelters that individual taxpayers can use to avoid paying taxes on qualified income include the savvy use of retirement contributions, health savings accounts and education savings accounts. One example: Homeowners can shield up to $250,000 for single filers ($500,000 for married filing jointly) from taxable gains on the sale of a home that they've lived in for at least two of the five preceding years, Allec says.

Smart use of above-the-line tax deductions, available tax credits and workplace benefits can also shield income from taxes. Allec recommends that filers, especially retirees, consider how they can use the 0% long-term capital gains rate on earnings below a certain threshold ($38,600 for single filers in 2018) to reduce their overall tax bill.

Taxpayers can also score savings on state taxes by moving within the U.S. Those who want to relocate for the best tax savings may consider the savings achieved by moving to a no-income tax state. States that didn't charge 2018 state income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee don't charge state income tax, but do tax dividends and interest. Or consider moving to a state that doesn't tax pensions or Social Security. Of course, while this may reduce your overall tax bill, it won't save you from paying federal taxes.

Says Allec: "For most folks, the important thing is to assume you're going to be working with the U.S. tax system, so strategize to split up income over years to minimize your taxes."