This link needs to be here. If you're an American abroad suffering similar treatment, you can find support with these people who are in the same situation. They are trying to help end the US's unfair CBT citizenship based taxation and switch to RBT residency based taxation like the rest of the world already uses.
The US needs to adopt a residency based tax system like the rest of the world.
This would solve so many problems.
The main issue why this remains a problem is that Congress doesn't care about American citizens who live abroad. Congress knows they can abuse Americans who will never comprise a large enough portion of any district for their votes to really matter. This is why people are actually renouncing. They have no other practical solution or representation.
PR is a US Territory. Technically, you never left the country.
"In general, United States citizens and resident aliens who are bona fide residents of Puerto Rico during the entire tax year, which for most individuals is January 1 to December 31, are not required to file a U.S. federal income tax return if they have income only from sources within Puerto Rico." www.irs.gov/taxtopics/tc901.html
There are caveats. One that I know for sure is that if you are self-employed, you still must file & pay FICA taxes to the US federal government.
This is inaccurate. The 4% number is a figure that applies to businesses that are export related and that apply and receive approval for Act 20. It's a 4% tax on the inc's business income and is unrelated to capital gains.
Yes, the flaw in the above scenario is that for capital gains that have a cost basis that began prior to becoming resident in Puerto Rico ("built in gains"), you will owe taxes at both the US federal and Puerto Rican levels.
3 scenarios:
If the business was started and sold prior to becoming a Puerto Rican resident, then taxes would be owed at US federal and state levels like normal.
If the business was started while resident on US mainland and then you moved and became resident in Puerto Rico (the OP's scenario), it gets a lot more complicated. Just considering capital gains from a sale of the business to keep it easier, you will owe taxes to both the US and Puerto Rico. These are called "built in" capital gains. You can look up details on this, but taxes are owed to the US and to Puerto Rico at rates that change over time depending on how many years you are resident in Puerto Rico before selling the business. This is the most complicated scenario.
If you start a qualifying Puerto Rican business after becoming resident in Puerto Rico and after having been accepted into Act 22, then you would start with a zero cost basis. This is the best case scenario. When you sell this business, you could owe 0% capital gains. However, during the lifetime of this business, you will still pay FICA taxes (15.3%) on earned income to the US Federal government up to the regular cut off levels, personal Puerto Rican earned income taxes on a portion of your income, and 4% corporate tax on business income. This is the easiest scenario since it starts with a zero cost basis.
Btw, IANAL.
TLDR 1.) Started & sold business in Cali, no capital gains tax benefit. 2.) Started business in Cali and sold after becoming resident in PR, crazy complicated, but taxes do apply at both federal and puerto rican level. 3.) Built and sold business in PR after acceptance into Act 22, and after becoming resident in PR, 0% capital gains tax, but other taxes apply during the lifetime of the business.
For those interested, residency is 183 days per year.
This link needs to be here. If you're an American abroad suffering similar treatment, you can find support with these people who are in the same situation. They are trying to help end the US's unfair CBT citizenship based taxation and switch to RBT residency based taxation like the rest of the world already uses.