US Expat Tax: What You Need to Know as an American Living Abroad

US expat tax doesn’t have to be confusing. Feel secure as an American living abroad with these exclusive excerpts from my book “Expat Tax Overview”.

Here I share exclusive excerpts of my book, Expat Tax Overview, to show you how to handle US expat tax, the problems that can arise, and how to get good tax advice when you need it.

There is a lot of confusion for American expats when it comes to reporting US taxes while living abroad.  

Most Americans living abroad aren’t aware that they must file US tax returns on their worldwide income and that they must report their foreign financial accounts and assets.

And it’s not their fault because even most domestic tax preparers are unaware of the requirements for US expat tax. 

So, where should Americans living abroad turn when filing their tax returns? We at Donnelly Tax Law are here to help.

I wrote the book Expat Tax Overview to help Americans living abroad understand how they are taxed, to understand US expat tax preparation risks, and to explain how to benefit from credits and exclusions. It comes from the years of experience I have filing complex tax returns for Americans living abroad.  

The following extractions came from the book “Expat Tax Overview”, by Clinton Donnelly of Donnelly Tax Law. It’s the handy overview that every American living abroad should have to understand how they are taxed.

Do I have to file my US tax return while living abroad?

backup withholding

Yes, The US is unique in this way from other countries.  

All US citizens and permanent residents are subject to taxation on their worldwide income regardless of where they live in the world, and even though they may be filing another tax return in a foreign country. 

It’s possible to have a foreign country tax your worldwide income if you are a resident or present for six months or more.  

However, tax havens do exist with special incentives.  

But each foreign country or US territory does it differently.

Puerto Rico is technically a territory of the US, but it has unique tax incentives that have been luring back American expats and crypto traders.

READ MORE: Why Crypto Traders Should Move to Puerto Rico by 2020

How can an American abroad survive paying US expat tax?

retirement

Congress implemented a couple of substantial tax breaks to offset the obligation of filing taxes when living abroad. 

The first one is the Foreign Tax Credit (FTC). 

The second one is the foreign earned income exclusion (FEIE). 

What is the Foreign Tax Credit?

The foreign tax credit provides a dollar for dollar credit on your US taxes for income taxes paid in a foreign country. 

What is the Foreign Earned Income Exclusion?

One of the most significant tax breaks in the tax code is the foreign earned income exclusion. 

For 2020, the first $107,2002 of earned income overseas can be excluded from income taxes. 

This exclusion can be used in any foreign country, whether or not you pay income taxes in that country. 

There are a lot of rules regarding qualifying for this exclusion, so they must be followed closely. 

I have written a 320-page book, Foreign Earned Income Exclusion, specifically on this exclusion.

If you think you might be eligible for the Foreign Earned Income Exclusion, you will find this book to be a real asset for you.

Your US Expat Tax Won’t File Itself

tax planning

It would be best if you were proactive in making sure your tax returns get done correctly with all the foreign elements reported. 

You cannot wait until the last minute to find a tax preparer. 

It is better to find a trustworthy and experienced tax preparer who can provide you with advice as you make financial decisions and help you document your tax return at the end of the year. 

Is your domestic tax preparer or CPA experienced with foreign information returns?

According to the IRS, less than 1% of all individual tax returns are international. 

Thus, domestic tax preparers and CPAs are unfamiliar with the filing requirements and penalty risks.

Does Consumer Tax Software Support US Expat Tax?

anti-money laundering

Because the US expat tax marketplace is so small, no commercial tax software adequately supports the requirements of Americans living abroad. 

We know that US expat tax filing requirements and the difficulty of finding qualified preparers may be overwhelming. 

But don’t panic. 

All you need is a plan and a qualified tax preparer to be on your team.

To get more information about US expat tax returns and the Foreign Earned Income Exclusion purchase my books below.

You can also schedule a consultation with me to discuss your particular situation and get a quote for services.

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How are Cryptos Reported on Anti-Money Laundering Forms?

Here I share exclusive excerpts of my book, ‘Basics of Crypto Taxes’ to show you how cryptos are reported on anti-money laundering forms.

I’ve been getting so many questions lately related to the reporting of cryptos on  anti-money laundering forms. There’s a lot out there about the anti-money laundering forms, but when it comes to reporting your cryptos on them… Well, that’s new territory for most traders and tax professionals.

I wrote the book Basics of Crypto Taxes, to address this exact topic. It comes from the years of experience I have in filing anti-money laundering forms and crypto taxes. Here’s a sneak peek into it so that you can better understand how cryptos are reported on anti-money laundering forms.

The following was extracted from the book “Basics of Crypto Taxes” by Clinton Donnelly. Some additional comments have been added.

What are the two anti-money laundering forms required of individuals?

International financial regulations require each country to take significant steps to prevent the laundering of the proceeds of crime and terrorism funding also called money laundering. A large part of the US anti-money laundering (AML) enforcement is the requiring of forms to be filed related to foreign transactions. These forms are used after-the-fact to scare people who have misreported or not reported when they should have.

For the individual, two forms must be filed to comply with AML regulations. The first form is called the Report of Foreign Bank Accounts and Financial Accounts. The second form is the Statement of Specified Foreign Assets.

What is the FBAR form?

crypto audit defense

The FBAR form is the short name for the Report of Foreign Bank Accounts and Financial Accounts. This form is also called FinCEN Form 114.

The FBAR form has been a requirement for individuals to complete since 2004. On this form, the taxpayer lists the maximum balances of his foreign financial accounts during the year. Foreign crypto exchanges are considered foreign financial accounts by FinCEN.

Does everyone have to file an FBAR form?

No. Filing this form is not required if the sum of the maximum balances of all foreign financial accounts added together is less than $10,000. If the sum of all balances is more than $10,000, then all foreign financial accounts regardless of the balance must be reported. Many people mistakenly think that they have to report only specific accounts with a balance of over $10,000. This is wrong. It is the sum that is compared to $10,000.

If you are required to filed an FBAR, then you must report all foreign accounts regardless of the account balance. This means if you had a foreign exchange account that you never formally closed, then you must report that account even if the maximum balance all year was zero.

What is the penalty for not filing the FBAR form on time?

If the IRS decides that you should have filed an FBAR when you hadn’t, then there is an immediate $10,000 assessed the moment the IRS issues you the notification letter. This penalty increase to $50,000 if you don’t file an FBAR within six months.

Once you give an FBAR to the IRS after receiving the notification letter, an additional penalty is assessed. This penalty depends on whether the IRS decides that you were willful in your negligence or not.

The non-willful penalty for not filing this form is $10,000 per account that should have been reported. For example, if you traded on five foreign exchanges and the sum of your maximum balances on these exchanges was $150,000, and you’d never filed the FBAR form, the penalty that could be assessed would be $50,000 or $10,000 times the number of accounts not reported.

The willful penalty is 50% of the account balance of each account. This penalty used to have a maximum of $100,000, but this limit has been removed.

Are you serious? A $10,000 penalty?

tax trouble

Dead serious. Congress has chosen to use a harsh penalty to motivate honest people to be diligent to complete this form. Several times this penalty has been challenged in the courts as a violation of the eighth amendment protection against “excessive fines imposed.” The Supreme Court has sided with the government because of the AML argument. The presumption is that the funds in the account are only the tip of the iceberg of the amount of dirty money that was being laundered.

When is the FBAR form due?

This form is filed at the same time as your individual income tax return or April 15. If you file for an extension on filing your income tax return, you automatically get an extension on your FBAR filing.

Filing the FBAR form after the deadline is an automatic $10,000 penalty. This is Congress’s way of getting your attention to comply with the regulations. Criminals and money launderers, of course, do not want to file these forms because it is incriminating to them. So, don’t behave like a criminal. File your FBAR on time.

How to file the FBAR form?

If you use a professional tax preparer, their tax software might enable them to file your FBAR form for you. However, self-filers are not as fortunate. TaxACT, TurboTax and all the other tax software packages have chosen to not offer electronic filing of the FBAR form for you. (There must be a fear of legal liability.)

As a result, the self-filer must use the government website to file his FBAR. It is easy to do. I recommend preparing an FBAR form 114 using the PDF form method rather than the online method. The form is uploaded onto this website https://bsaefiling1.fincen.treas.gov. By using the PDF version, you can re-use the PDF form in subsequent years by just updating the maximum balances. Considering it is a government website, it is reasonably easy to use.

Should you file an FBAR form if the due date has passed?

paying taxes

Yes, however, you need to claim tax amnesty on any late-filed FBAR form. Failure to do so will result in an automatic $10,000 penalty (footnote 1). To request this amnesty, when filing the FBAR there is an opportunity to select an explanation code for late filing. I recommend selecting option ”Z” other. A box will open to allow entering a custom explanation like, “I did not know I had to file. This form is submitted under the Delinquent FBAR procedure”.

What is Form 8938 - the other anti-money laundering form?

In 2010, Congress passed a sweeping law called the Foreign Account Tax Compliance Act (FATCA) which significantly increased the reporting requirements of Americans with foreign financial accounts including crypto exchanges. This law obliges taxpayers to report their foreign financial accounts and financial assets each year with their tax return. To be clear, this is an IRS form that is considered part of your tax return.

In addition to reporting your foreign accounts similar to the FBAR form, you must report all “all financial transactions and contracts for investment purposes where the counterparty is other than US person” (footnote 2). By this definition, the sum of all purchases and sales of all crypto assets during a tax year must be reported. Since the other party of an exchange is anonymous, you must assume they are not a US person, even using a US exchange. Depending upon the volume of trades you make, this number could be orders of magnitude higher than the value of your assets. This calculation of all purchases and sales would include even those on US exchanges (footnote 3).

The FATCA law and Form 8938 were written with very broad terms such that assets may be counted multiple times. The penalties for underreporting are so high, $10,000, that there is no incentive to underreport or under-characterize these foreign assets (footnote 4). Basically, the bigger a number you report, the safer you are.

Are there penalties for not reporting or reporting after the due date?

Yes. The penalty for not filing Form 8938 with your tax return is $10,000.

Consequently, if you need to fix past tax returns because you didn’t include an accurate Form 8938, you must do it under a tax amnesty program (footnote 5).

How to file Form 8938?

tax planning

Form 8938 is filed with your 1040 tax return. If you e-file your tax return, then the 8938 gets e-filed with it.

See My Book: 10 Steps to a Great Crypto Tax Return

Does everyone have to file a Form 8938?

My answer is Yes and No.

Yes. Form 8938 is one of those rare times where it is safer to over-report than under-report. The bigger the amount reported, the safer you are. Some people get fixated about not filing if under the threshold. I believe not filing actually draws more attention to you by the IRS data mining computers, than if you file.

No. Form 8938 is not required if the sum of the balances of your foreign accounts plus the sum of the buy and sell transactions is under $50,000 if single or $100,000 if married (footnote 6). Minimum filing thresholds are increased if you live overseas (footnote 7). Because of the broad description of foreign assets under the FATCA law, it is easy for a trader with no more than $10,000 invested in the crypto marketplace to exceed the minimum filing thresholds by doing frequent trades. There is nothing to gain by not reporting.

That being said, I recommend that all crypto traders file both forms regardless of the minimum filing thresholds. Why? The IRS is using data mining computers to catch crypto traders not reporting correctly. Data mining looks for logical relationships and flags taxpayers when the relationships are missing. So given that they know you traded on foreign exchanges, you should have filed an FBAR and a Form 8938. They can’t tell if you are excepted by being under the filing threshold. By filing, you satisfy the logical condition and avoid putting yourself on the list of taxpayers to be examined.

Footnotes:

1) For FBAR self-filers, see our Crypto Tax Fixer Package, which includes my book Tax Amnesty Made Easy (not sold separately).

2) 26 USC 6038D(c)(2)(B)

3) Even if you do crypto to crypto trades on the US exchange like Coinbase Pro, the other party to your trade is not the exchange, but the other person they have found to take your trade. Since you can not assume that an anonymous person is an American, you must assume that the other persons to all your exchanges are foreigners.

4) GAO ‘Foreign Asset Reporting: Actions Needed to Enhance Compliance Efforts, Eliminate Overlapping Requirements, and Mitigate Burdens on U.S. Persons Abroad’ <2019> GAO-19-180 https://www.gao.gov/products/GAO-19-180, p17.

5) When you file for tax amnesty, you have one chance to do it right. I recommend using a professional to prepare your amnesty paperwork. The stakes are very high not to consider this. Still, if that is not an option, tax amnesty self-filers can use our do-it-yourself Crypto Tax Fixer Package, which includes my book Tax Amnesty Made Easy (not sold separately).

6) There are actually several tests for determining the minimum filing threshold on Form 8938, which makes it confusing to determine. The numbers listed here are the most conservative threshold levels.

7) See the instructions for Form 8938 about a complete description of the minimum threshold amounts.

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Why Crypto Traders Should Move to Puerto Rico by July 2020

Learn why crypto traders should move to Puerto Rico to cash in on special tax incentives and how to take action now to take advantage of these tax benefits.

You are an American crypto trader who is currently sitting on a ton of cryptocurrency. You've been at this long enough to see your potential to cash in on millions is right around the corner if you play your cards right by 2021.  

You have big and very realistic dreams of being a millionaire sitting at your fingertips as many crypto analysts anticipate the next potentially epic bull run is on its way. 

At the same time, you have been terrified by all of the hype regarding the IRS crackdown on cryptocurrency.  

You are being advised not to take this crackdown lightly, and you have enough wits to know you must take these warnings very seriously by educating and preparing yourself for what's to come. 

But, knowing that you may not have reported your past earnings correctly is sending you into a full-blown panic most days. 

You are worried about the IRS coming after your crypto earnings. And, you're looking to save money on your 2020 tax bill.  

However, your biggest concern is making it big when the time comes to cash in your crypto.   

If you expect to sell crypto and avoid taxes on your earnings in 2021, you cannot wait until the year 2021. You need to act now in 2020.   

We are going to explain why crypto traders should move to Puerto Rico to cash in on special tax incentives and why you need to take action now to take advantage of these tax benefits. 

Our goal is to help get you in front of this problem/opportunity, not to be the last one behind it. Read on to find out what you need to understand about Puerto Rico's tax opportunity and how to prepare for it as of today.

Tell me more about why crypto traders should move to Puerto Rico.

crypto traders should move to puerto rico
Photo by Wei Zeng on Unsplash

The chances are high that you've heard about the fantastic opportunity for U.S. citizens relocating to Puerto Rico to reduce their corporate tax to 4% and to reduce their personal income tax on capital gains to 0%. 

You have a general understanding that Puerto Rico could be your golden ticket to savings on your 2020 tax bill. 

And you are beginning to see that the tax-free benefits of that big crypto cashout everyone is anticipating could lead to early retirement if you are living in Puerto Rico when the next bull run hits. 

Still, you are not exactly sure how you qualify for this tax saving act.

You are also unclear about the severe lifestyle changes that will need to be considered.

And most importantly, you have no idea how to prepare.  

Read on to find out how you can qualify, the lifestyle changes that you will need to consider, and how to start preparing now to make it a reality.

I want to understand how I qualify to save money on my crypto taxes in 2020 and beyond.

crypto traders should move to puerto rico
Photo by Tatiana Rodriguez on Unsplash

How do I save money on my 2020 crypto tax bill?

If you're looking to save money on your 2020 tax bill, you might want to consider relocating to Puerto Rico no later than July 2, 2020, to qualify for the year.  

Because while you may not be unable to change how government regulators will decide to tax cryptocurrencies, you can change your tax future!  

Moving to Puerto Rico will allow you to take advantage of Chapter 2 of the Puerto Rico Incentives Code (Act 60-2019), formerly known as Act 22, to pay no federal income tax from here out. 

And, we know that saving money on your taxes is about one of the most substantial risk-adjusted returns there is.

Can I move to Puerto Rico to avoid taxes?

You can avoid tax by moving to Puerto Rico through one of the tax programs, formerly named Act 22 (now referenced as Chapter 2 of the Puerto Rico Incentives Code (Act 60-2019). This Act requires that you have NOT lived in Puerto Rico during the previous 15 years. And, therefore, allowing you to take advantage of a 4% income tax rate, 0% dividend rate, and 0% capital gains tax rate.

Please be aware that BOTH YOU and YOUR BUSINESS need to make a literal move to Puerto Rico. It has to become your "tax home." More on this later, when we talk about making closer connections to Puerto Rico than the United States.

Why should crypto traders move to Puerto Rico?

Act 22 was born as the Resident Individual Investor Act. It was enacted in Puerto Rico in 2012 to promote the relocation of high-net-worth individuals to Puerto Rico. The law's goal was to provide attractive incentives to encourage investors to relocate to Puerto Rico. 

It has since been updated and bundled with other popular tax incentives and now called Act 60-2019, replacing the name Act 22 into law on July 1, 2019 with an effective date of January 1, 2020. 

*Please also note that new applicants will be subject to the most recent requirements from January 1, 2020.  

Puerto Rico has a very unique tax status.   

It is a territory of the U.S. but it is viewed as a "foreign country" for U.S. federal income tax purposes. 

Therefore an individual tax applies to its residents along with tax incentives geared to promote its economic development that may be very luring for U.S. Crypto Traders.

If both you (as a bona fide resident) and your business (as your tax home) move to Puerto Rico, then all your future capital gains on stocks, bonds, and other assets (as defined to include commodities, currencies, and any other digital asset or blockchain technology, a.k.a. crypto) become tax-free. In short, all your dividends, interest, and royalties you may receive from Puerto Rican sources become tax-free. (1)

What was Puerto Rico's Act 22, and what is it called now?

Puerto Rico's Act 22 was the Act to Promote the Relocation of Individual Investors to Puerto Rico. It has since been updated and bundled with other popular tax incentives and now called the Puerto Rico Incentives Code (Act 60-2019) referenced in Chapter two. Replacing the name Act 22 with Act 60-2019 as the law on July 1, 2019, with an Effective Date of January 1, 2020.  

*You will be obliged to follow the most recent requirements applying as a new bona fide resident.

Its intention was to attract new residents to Puerto Rico by providing a total exemption from Puerto Rico income taxes on all interest and dividends earned after the individual becomes both a bona fide resident of Puerto Rico. Along with filing their business in Puerto Rico, as their tax home.

What are the benefits of chapter two of Act 60-2019 (formerly known as Act 22)?

  • 100% tax exemption on interest and dividends derived, AFTER becoming a resident of Puerto Rico and through December 31, 2035. (2)
  • 100% tax exemption from Puerto Rico income taxes on all capital gains accrued, AFTER establishing residency. (2)
  • 100% tax exemption concerning gains from the sale of property acquired AFTER the individual becomes a bona fide resident of Puerto Rico if the sale takes place before January 1, 2036. (2)
  • Investment income accrued before becoming a bona fide resident of Puerto Rico will be taxed at 10% if realized within ten years after residency is established. If the gain is achieved after the ten years, but on or before December 31, 2035, the tax is 5%. (2)
  • Capital gains appreciation on investments that occur after becoming a bona fide Puerto Rico resident can allocate to Puerto Rico.

Special rules apply to the gain from the sale of securities acquired before the establishment of residence in Puerto Rico.

We asked Juan Robles of Etrends Group about these special rules.

Any appreciated property acquired in the US and later sold while a resident in PR will still have US tax implications. For US tax purposes, virtual currency is treated as property and US Regulation Section 1.937-2(f) provides that any gain may be subject to an allocation based on holding period (bifurcation rule).

Juan Robles, CPA Partner, Etrends Group

What is Act 60-2019?

"The Governor of Puerto Rico signed into law the Puerto Rico Incentives Code as Act 60‐2019 (the "Incentives Code"). In general, the Incentives Code compiles into a single code many of the Puerto Rico tax incentives laws used to promote the island's economic development, with some modifications, in order to establish a new transparent and efficient process for granting and overseeing all the incentives afforded under the Puerto Rico's incentives laws. The Incentives Code consolidates various tax decrees, incentives, subsidies, and benefits, including Act 20, the Promotion of Export Services Act, and Act 22, the Act to Promote the Relocation of Individual Investors to Puerto Rico." (3)

I want to understand the lifestyle changes that I need to consider by moving to Puerto Rico.

crypto traders should move to puerto rico
Photo by Jessica D. Vega on Unsplash

I'm not a crypto billionaire. Do Puerto Rico's tax incentives still make sense for me?

Yes! You may not be a crypto billionaire yet, but plenty of you are sitting on a lot of crypto that you want to sell when it's worth it. Many crypto traders are going to Puerto Rico with the anticipation of becoming a crypto billionaire. 

Cryptocurrencies and other crypto assets are explicitly included as eligible for tax exemption.

And, there is no better risk-adjusted return than saving money on taxes. Gain an extra 30% return on investment without the risk by saving on your taxes. Compounded over your lifetime, that is a considerable amount of savings for changing nothing but the place you legitimately call home. (4)

Do you have to file taxes if you live in Puerto Rico?

Yes, residents of Puerto Rico pay federal payroll taxes, such as Social Security and Medicare taxes.  

PR (Puerto Rico) source income earned by US citizen or resident alien is excluded from US taxes (US Code Section 933 exclusion).

Any PR resident that has US source income must file federal taxes.

Juan Robles, CPA Partner, Etrends Group

I want to start preparing now to make saving taxes from Puerto Rico a reality in 2020.

What is the first action step to take?

The first and most critical step, however, is wrapping your head around how fast you have to make this happen if Puerto Rico is the right move for you.  

You want to be a bona fide resident of Puerto Rico by June 2, 2020, in order to save on your 2020 tax bill.

Crypto traders need to understand what rules they need to comply with to take tax advantage of this opportunity legally.

They must understand that they will be selling and rebuying their crypto. For more information, schedule a consultation at Donnelly Tax Law.

They must thoroughly understand residency compliance and how to form a closer connection to Puerto Rico than to the U.S. For more information, consult the Etrends Group in Puerto Rico. Here at Donnelly Tax Law, we partner them by providing the crypto calculations for them to file a crypto trader's taxes in Puerto Rico.

How can you prepare for this move?

  • You must become a bona fide resident of Puerto Rico.
  • You must prepare to unload your crypto (You have to turn it over.) Meaning, you will sell it and immediately repurchase it as a bona fide resident of Puerto Rico.
  • You must create closer connections. Meaning, you must create "closer connections" to Puerto Rico than the United States.

Does a trader have to rebuy his inventory of coins upon becoming a bona fide resident?

Bitcoin
Photo by Jürg Kradolfer on Unsplash

The short answer is YES if he wants to enjoy PR's 0% capital gains rate. Under Act 22, the 0% cap gain tax rate only applies to assets bought AFTER becoming a bona fide resident of PR. Assets acquired before to receive a 15% tax rate.

What does this mean to the potential crypto trader considering moving to Puerto Rico?

The 0% rate only applies to assets purchased after becoming a bona fide resident. That is the date that you receive the official designation from Puerto Rico of long term residence status and after the 183 days of residence have been completed.

If, after that date, the trader sells his inventory of coins and repurchases them promptly, he will incur the Puerto Rico 15% tax on any capital gains realized in this sale. It is possible that the trader might pay some hefty capital gains taxes this first year in Puerto Rico.

Hey, the US long term capital gains tax is 15% (for everyone except those in the highest tax bracket). You don't need to move to Puerto Rico to get that rate. Of course, there is a 3.8% Net Investment Income Tax (NIIT).

This repurchase is NOT a requirement of US tax law. Under US law 26 CFR 1.862-1. Personal property sold in Puerto Rico is considered Puerto Rico income as far as the US is concerned.

Why do crypto traders have to move to Puerto Rico by June 2, 2020, to take advantage of the particular Act 22 treatment?

If you expect to sell crypto and avoid taxes in 2021, you need to act in 2020 because you must establish yourself as a bona fide resident of Puerto Rico to qualify yourself for the 2020 tax year.

You will need the time (and a good amount of money) to apply to become a bona fide resident.  Prepare to give yourself about six months.

Give yourself a week's time, in order to complete the basic information on your application and get your criminal record issued from the state.

Give yourself an additional five months for the government portion (but please be rest assured that your residency status is back-dated to the original filing date).

How long do you have to live in Puerto Rico to be a bona fide resident?

crypto traders should move to puerto rico
Photo by jordi pujadas on Unsplash

Generally, you must reside there for at least 183 days a year.  There are many grey areas and nuances that you want to be clear on if you are going to take this step, so be sure to position yourself with a team of crypto and Puerto Rico tax experts from the start.  You also have to do the paperwork, applying with the tax authority there.

The application for an Act 22 Decree must include the payment of a $750 filing fee, but do expect to invest thousands more into applying and relocating yourself here.

What is a bonafide resident of Puerto Rico?

A bona fide resident of Puerto Rico can exclude their Puerto Rico source income from U.S. federal tax. Generally, under IRS §937 and the regulations thereunder a bonafide resident of Puerto Rico is an individual who:

You must qualify as a bona fide resident of Puerto Rico FOR THE ENTIRE TAXABLE YEAR for purposes of the US IRC and (2) the income must constitute Puerto Rico source income under the US IRC.

Please note the wording to qualify for the exclusion for a taxable year. You must be a bona fide resident of Puerto Rico for the "Entire Taxable Year." 

This text is why you must be living in Puerto Rico no later than July 2, 2020, if you want to cash in on the next epic Bull run predicted for 2021.   

You will have to have been in Puerto Rico one full taxable year. 

Again generally, you must be physically present and living in Puerto Rico for AT LEAST 183 days during the taxable year.

You must not have a tax home outside of Puerto Rico during the taxable year.

You must pay an annual charitable contribution for a non-profit entity of $10,000. It must be paid annually under the new Act 60-2019.

You must purchase property in Puerto Rico within two years of obtaining the decree under the new Act 60-2019.   

This property must be your primary residence throughout the validity of the decree. You must hold exclusive and complete ownership of the residential property for the duration of the decree. Joint ownership with your spouse qualifies. 

You cannot rent the property out to someone else. 

The determination of whether or not an individual is a bona fide resident of Puerto Rico for a taxable year is made according to rules outlined in the regulations issued under Section 937(a) of the US IRC.

You must not have a closer connection to the United States or a foreign country than to Puerto Rico.  

How do I create closer connections to Puerto Rico?

  • Where is your bank account?  
  • Where is your driver's license?  
  • Where are your relevant documents located?   
  • Where is your high school diploma? Your college degree?  
  • Where are your wife/husband and children living?  
  • Where does your mail go?
  • Where are your investments?  
  • Where do you own your house?

If you have answered the U.S., you have not created closer connections to Puerto Rico than the U.S. Make sure that you are moving your real life to Puerto Rico.  

There are various factors, all of which must be met by the individual to qualify as a "bona fide resident of Puerto Rico." 

They can be extremely intensive and a variety of factors will be considered. Therefore, individuals seeking to take advantage of these benefits should schedule a consultation with us and Puerto Rico Tax Experts Etrends for clarity and guidance through the process.

Schedule a Consultation Today

What does $97 a year do to protect you from the IRS in Puerto Rico and on the mainland?

Puerto Rico beach
Photo by Wei Zeng on Unsplash

Just because you are in Puerto Rico doesn't mean you are exempt from U.S. audits. As long as you are a U.S. citizen, you do not escape the eye of the IRS.

Regardless of where you live in the world, you need to file an income tax return with the U.S. as a citizen of the United States. So, going to Puerto Rico doesn't mean you don't have to file a U.S. income tax.

If you make less than 12,000, you don't have to file a tax return. But, if you are still making an income above 12,000 worldwide after subtracting Puerto Rican income, you will have to file a tax return in the U.S. 

Therefore you want assurance that you have crypto representation should you get the dreaded letter from the IRS.  

Our goal is to help get you in front of this problem/opportunity by using annual tools like CryptoTaxAudit to provide you with representation year-round should you need representation with the IRS.

Protect yourself today with crypto tax audit defense for only $97 for the year! 

Learn More at CryptoTaxAudit.com

The time to take action is now!

Well done! By reading this post, you have already taken the first step toward understanding an excellent solution to protect your crypto earnings in light of the current IRS crackdown on virtual currency. Now you know plenty of reasons why crypto traders should move to Puerto Rico and how.  

You have also come one step closer to having an action plan to realize your dreams of becoming a crypto millionaire when the next potential epic bull run hits.

You are ready to play your cards right. And, clearly see your potential to cash in on millions is right around the corner if you play your cards right by 2021.  

Remember, if you expect to sell crypto and avoid taxes on your earnings in 2021, you cannot wait until the year 2021. You need to act now in 2020.       

Our goal is to help get you in front of this problem/opportunity by using tools like CryptoTaxAudit to provide you with representation should you need it with the IRS.  

Donnelly Tax Law is the leading US tax firm for preparing complex U.S. tax returns for Americans, including crypto traders and people with foreign assets. 

We are currently partnering with the Puerto Rican tax and accounting firm Etrends Group for Act 22 clients. 

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Footnotes

  1. https://www.sovereignman.com/tax/how-you-can-move-to-puerto-rico-and-pay-almost-zero-tax-free-guide-16368/
  2. https://www.dlapiper.com/en/us/insights/publications/2016/08/puerto-ricos-act-20-and-act-22/ 
  3. https://puertorico.etrendsgroup.com/puerto-rico-incentives-code-act-60-2019-signed-into-law/ 
  4. https://www.sovereignman.com/tax/how-you-can-move-to-puerto-rico-and-pay-almost-zero-tax-free-guide-16368/

Child Tax Credit Offers $2000 Per Child

The child tax credit is temporarily increased. Find out for how long and what qualifies you to benefit from this provision of the Tax Cuts and Jobs Act.

The enhanced child tax credit is one of the provisions of the Tax Cuts and Jobs Act of 2017 designed to lower overall tax liability for middle-class families.

Increases in the Child Tax Credit

child tax credit

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The child tax credit is temporarily increased from $1,000 to $2,000 per qualifying child for tax years 2018 through 2025. As much as $1,400 of that amount is refundable. The child tax credit now includes a new $500 nonrefundable credit for qualifying dependents other than qualifying children. In addition, more families will be able to take advantage of the credit due to an increase in the adjusted gross income phaseout thresholds.

Although the deduction for personal and dependency exemptions is temporarily repealed for tax years 2018 through 2025, the definition of a dependent is still applicable for the child tax credit and other tax benefits. A qualifying child for purposes of claiming the $2,000 child tax credit is the same as that for claiming a dependency exemption, except that the child must not have attained the age of 17 by the end of the year and must be a U.S. citizen, national, or resident.

How to Claim the Child Tax Credit

tax planning

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A taxpayer must include on his or her return a qualifying child’s Social Security number (SSN) to receive either the refundable or nonrefundable portion of the credit with respect to that child. A SSN issued by the Social Security Administration (SSA) to the qualifying child is valid for purpose of the refundable portion only if the child is a U.S. citizen or the SSN authorizes the individual to work in the United States. In addition, the SSN must be issued to the qualifying child on or before the due date of the taxpayer’s return.

The $2,000 child tax credit per qualifying child phases out once the taxpayer’s modified adjusted gross income (MAGI) exceeds $400,000 if married filing jointly, or $200,000 for all others. The new phaseout threshold is more than double the old phaseout threshold and will allow more taxpayers to benefit from the child tax credit. The credit is reduced by $50 for $1,000 (or fraction thereof) that a taxpayer’s modified adjusted gross income (MAGI) exceeds the threshold amount. The threshold amounts are not indexed for inflation.

Non-Qualified Children

child tax credit

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For each dependent who is not a qualifying child for purposes of the child tax credit, the Tax Cuts and Jobs Act provides a new nonrefundable credit of $500, if the dependent is a qualifying relative (and not a qualifying child) for purposes of claiming a dependency exemption; or a qualifying child over the age of 16. In addition, a taxpayer who cannot claim the child tax credit because a qualifying child does not have a SSN may nonetheless qualify for the nonrefundable $500 credit for the child. To claim the $500 credit, the taxpayer must include the dependent’s SSN, taxpayer identification number (TIN), or adoption taxpayer identification number (ATIN) on his or her return.

Let Us Help You With The Child Tax Credit

If you have any questions related to your eligibility or the available amount of the tax credits, please schedule a consultation with us today. We are here to help you understand how you may benefit.

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Crypto Taxes 2020 – Interview Video with Ivan on Tech

In my interview video with Ivan on Tech, we discuss crypto taxes in 2020. From regulation changes to foreign filing and more, tune in crypto owners.

Taxes in general are a serious topic that is important to handle correctly. Now for crypto traders, it’s become even more serious. Cryptocurrency is becoming a larger presence in our world and with that, more clarity is coming about regarding regulations and especially cryptocurrency taxation. I talk about this and more in my interview video with Ivan on Tech. 

Crypto Taxes 2020 Overview

In this recent interview video with Ivan on Tech, we talk about:

  • the latest regulation changes for US crypto tax reporting
  • foreign filing obligations
  • how the IRS thinks and will go after crypto traders
  • crypto reporting tools
  • crypto audit protection
  • true-life stories and examples
  • and more

A Sneak Peek of Crypto Taxes 2020 Interview Video

crypto tax return

IVAN: What kind of news is the latest when it comes to US crypto tax reporting?

CLINTON: There is now a question about cryptocurrency on the US tax form 1040 that every tax payer has to answer. It ask, “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?“.

Everybody has to answer that, which is significant because when you sign a tax return, it’s signed with an oath that is under penalty of perjury. Answer that incorrectly and you’re committing a felony. 

IVAN: Should everyone with crypto be concerned with the tax authorities? 

CLINTON: Yes. The IRS considers crypto traders to be low-hanging fruit. It’s a branch of the government that wants to make money. 

GET MY EBOOK: Why Crypto Traders Are Low-Hanging Fruit For The IRS

Watch Crypto Taxes 2020 Interview With Ivan On Tech

For help with your crypto taxes, schedule a consultation today.

To learn more about our latest crypto tax service visit

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The SECURE Act: Major Last-Minute Retirement Plan Changes

The SECURE Act has ended 2019 with Congress planning to enact a number of changes that will significantly affect your retirement plan. Learn more here.

Despite all the gridlock in Washington, as well as an impeachment, the SECURE Act is poised for imminent passage and signing into law. It changes a number of important retirement plan rules. The act runs over 120 pages, so the experts will be poring over it for some time. Meanwhile, a number of sources have weighed in on what they think are the key provisions. (Note that last-minute alterations and more detailed analysis may lead to additional changes in the coming weeks.)

What Will The SECURE Act Allow?

SECURE Act

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The Society for Human Resource Management listed several changes as particularly noteworthy. The act will allow:

  • An increase in the business tax credit to make setting up 401(k) plans more affordable for small businesses.
  • Unrelated small employers to organize themselves for an “open” 401(k) multiple-employer plan (MEP). This would presumably reduce the costs and administrative work each company would otherwise bear alone.
  • Delay of the 401(k) required distribution from the current age of 70 1/2 to 72. Critics have pointed out that only the well-off are really affected by this, people who can put substantial assets into a 401(k) and don’t need money from the fund immediately.
  • Automatic enrollment of safe-harbor 401(k) plans to increase the cap on automatically raising payroll contributions.
  • A 401(k) safe harbor for in-plan annuities. This provision has also faced criticism, as many industry experts do not believe annuities are a good value in these situations.

The Major Changes Caused by The SECURE Act

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Kiplinger also put together a list of major changes, noting that the act:

  • Removes the age restriction for IRAs. If you work into your 70s and beyond, you can still contribute.
  • Makes it easier for part-time workers to join their employer’s 401(k) plan.
  • Allows a parent to take out up to $5,000 penalty-free from a 401(k) plan for costs connected to a birth or adoption. Kiplinger noted that this may encourage younger workers to start funding retirement plans earlier, as parenthood is on the horizon much sooner than retirement.
  • Eliminates the “stretch” provision. Until now, nonspouse IRA beneficiaries could stretch the required distribution of the IRAs over their own lifetimes. Going forward, with a few exceptions, beneficiaries will have to take full disbursement by the end of 10 years. This could mean a lot more of the inheritance going to the government.

Finally, the government will be repealing the controversial Cadillac tax on high-end health plans. This repeal is part of a year-end spending bill.

Applying The SECURE Act

All these changes will be phased in at different times. There are also exceptions and other subtleties. Whether you’re concerned about your own family’s issues or plans that your company runs, it’s best to keep in close touch with financial professionals to make sure you make a smooth transition to the new rules.

© 2020

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IRS Releases Radically New Form W-4

The IRS has just released the new Form W-4. Learn about the new changes involved, what it means for your tax filing, and benefit helpful resources.

The IRS has been promising a new version of Form W-4, Employee’s Withholding Certificate, for some months, and it recently published it, with a brief announcement in its e-News service. The form is very similar to a draft version published earlier in 2019. Although the IRS has not yet published extensive new guidance, it did outline the changes in a FAQ list last updated in August 2019.

What's New in Form W-4

At that time, the IRS noted, “Allowances are no longer used for the redesigned Form W-4 to increase transparency, simplicity and accuracy. In the past, the value of a withholding allowance was tied to the amount of the personal exemption. Due to changes in law, currently you cannot claim personal exemptions or dependency exemptions.”

Visual Changes in Form W-4

form W-4

According to the IRS, a few of the visual changes that were made in the last draft shared include:

  • It is now a full page.
  • There are no withholding allowances (which is why the title of the form changed to “Employee’s Withholding Certificate”).
  • Steps 1 through 5 to guide employees through the form.
  • Instructions, worksheets, and tables follow the first page.

Probably the biggest question for both companies and employees is “Does everyone have to fill out the new form?” The answer, according to the August guidance, is no. The IRS says, “Employees who have submitted Form W-4 in any year before 2020 are not required to submit a new form merely because of the redesign. Employers will continue to compute withholding based on the information from the employee’s most recently submitted Form W-4.”

Form W-4 Resources

We will have further updates when the IRS provides additional guidance.

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