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Old 09-30-2014, 01:45 PM   #41
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I'm not an expert in this at all, so maybe someone with more knowledge can help me understand. As far as I can see, OP is considering residing in Ecuador, Panama, or the Philippines in order to use the foreign earned income exclusion to avoid income taxes on 200K per year. But in order to do that, the taxpayer needs to be a bona fide resident, which includes being a taxpayer, of that foreign country. Look at line 13b of IRS form 2555:

http://www.irs.gov/pub/irs-pdf/f2555.pdf

The three countries under consideration seem to have tax rates at the top bracket (which is not that high) between 25% - 32%

List of countries by tax rates - Wikipedia, the free encyclopedia

How does this save any substantial amount of money? If the OP wants to live somewhere without personal income tax, then that might be a plan, but there don't seem to be a lot of desirable places fitting that criterion, which also are welcoming of new residents. Maybe I'm missing something here?
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Old 09-30-2014, 02:19 PM   #42
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Originally Posted by sunsnow View Post
I'm not an expert in this at all, so maybe someone with more knowledge can help me understand. As far as I can see, OP is considering residing in Ecuador, Panama, or the Philippines in order to use the foreign earned income exclusion to avoid income taxes on 200K per year. But in order to do that, the taxpayer needs to be a bona fide resident, which includes being a taxpayer, of that foreign country. Look at line 13b of IRS form 2555:

http://www.irs.gov/pub/irs-pdf/f2555.pdf

The three countries under consideration seem to have tax rates at the top bracket (which is not that high) between 25% - 32%

List of countries by tax rates - Wikipedia, the free encyclopedia

How does this save any substantial amount of money? If the OP wants to live somewhere without personal income tax, then that might be a plan, but there don't seem to be a lot of desirable places fitting that criterion, which also are welcoming of new residents. Maybe I'm missing something here?
I was the one who suggested that OP consult with an expert on tax law before implementing the tax dodge he is contemplating. The fact that he says he has done so and has been given a go-ahead does not make me any less skeptical of the merits of his scheme. But he did what I advised, and it's not for me to question the professional qualifications of his experts. So more power to him, and I hope the IRS doesn't hit him with a huge penalty and possible criminal charges several years down the road. I would only suggest that anyone reading this thread and feeling tempted to claim the same sort of foreign earned income exclusion should do their own due diligence and not rely on OP or his experts as the final word on the subject.
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Old 09-30-2014, 06:42 PM   #43
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But in order to do that, the taxpayer needs to be a bona fide resident, which includes being a taxpayer, of that foreign country.

Absolutely true, and I will definitely not be present in the US physically or otherwise, certainly not for more than 30 days.

The three countries under consideration seem to have tax rates at the top bracket (which is not that high) between 25% - 32%

Also true, but the work I do for that Bermuda or US corporation will probably qualify as foreign sourced income, which is not taxable in Panama. The US is the only country that taxes citizens on their worldwide income, so this is a bit of a new concept.

How does this save any substantial amount of money?

You are assuming I am taxed on my worldwide income, but like I said, the rest of the world doesn't operate like that. Only my Panama sourced income is taxable. To recap: My Panama sourced income is zero, so zero panama taxes, zero US taxes, up to 200k, which will but dutifully reported to the penny, and zero state income tax.

So, what is my tax bill on 200k? Probably somewhere around 5-10k, so lets say 7k. That corporation as an S-corp would pay a healthy distribution, which is 100% tax free as well as a "reasonable" salary that is subject to self-employment (SS/Medicare) taxes. Say I pay myself 50k on 90k in income and pay out the rest as a distribution, the Self employment taxable income is 50k, for which taxes come to about 7k. 14k or so on 200k in income or about 7%, net net net taxes paid, and I can live with that.

http://www.claytonmckervey.com/attach/worldwide-tax-guide-panama.pdf

Most of my reading came from IRS.gov and a few tax court cases on S-corps written by CPA's, and I had one consultation with a CPA that focuses on Expat taxes and another friend who actually claimed the FEIE and worked overseas for several years recently that is also a CPA. I felt pretty confident before talking with them, and I feel even more so now. Everyone is free to do their due diligence, but given the language on the IRS website, I would love to read some tax cases to the contrary.

I would note that I think statements about criminal charges are way, way, WAY overblown. People usually get hammered criminally for that when they are just not reporting large amounts of money like Wesley Snipes or "the situation" who was recently indicted. If you just don't file a return in a year where you make 2M, you are going to have problems. If you lie on your return, and these usually have to be huge lies you can't deny or explain away and not math errors, you are going to have problems.

Taking the FEIE when I am actually living in a foreign country for the entire year? I doubt they are going to bat an eye.

I doubt if challenged by the IRS and I lost in tax court that I would even have to pay penalties as I am relying on professional advice. I'm not worried about criminal penalties, at all.

If there are some notable FEIE tax cases I am missing, by all means someone please point them out to me.
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Old 10-01-2014, 05:00 PM   #44
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Also true, but the work I do for that Bermuda or US corporation will probably qualify as foreign sourced income, which is not taxable in Panama. The US is the only country that taxes citizens on their worldwide income, so this is a bit of a new concept.
I am aware of the uniquely wide reach of the IRS, so I wasn't thinking that the foreign country was going to go after your foreign sourced income. I wasn't thinking that the work you were doing in Panama, for instance, would be foreign sourced income in Panama. What allows it to be qualified as that? Wouldn't your presence in the country for the entire year make that a questionable position? Again, I'm not especially knowledgeable in this, but still hope I can understand how you are envisioning this working.
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Old 10-01-2014, 09:14 PM   #45
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Looking over what I could find on it, since you aren't working for a Panama corp, the income you generate would be considered not sourced from Panama.

Why is it qualified as such? It is work done for a non-Panamanian entity. It's the rules, man. I'm just trying to play by the rules. seriously, though, Panama exempts taxes on agricultural businesses up to 250k, for example. Non-Panama businesses/sourced income is exempt as well.

Physical presence/duration of stay generally isn't an issue in the countries I am looking at. Most people aren't knowledgeable about it. I am aware of it as I recalled several pay packages for contractors hiring ex military officers paying essentially the FEIE limit plus housing, food, laundry, 2 or 4 weeks paid vacation anywhere in the world, plus a return ticket anywhere in the world you want to go. Guys would rack up an easy 100k, cash, in a single year and walk completely from almost all taxes. There was little time/opportunity to spend the money (fancy a night out in the Korengal Valley anyone?)

I only started looking at it again seriously when I was reading international living magazine, and inbetween the ads for colored diamond investments, rare earth metal investments, gold, real estate, gold, and more real estate, I did find some nuggets of good info.

The Tax Break-Down: Foreign Earned Income Exclusion | Committee for a Responsible Federal Budget

Live Offshore and Earn Nearly $200,000 Annually, Tax-Free

Don't have an overseas job? You may still qualify for the FEIE if you have sizeable liquid assets that you can manage offshore in the appropriate foreign entity and pay yourself a salary as a portfolio manager out of the income those assets generate.

This guy has captured my thoughts well.

I haven't really found any info that suggests that I couldn't do exactly what I am planning on doing. I don't intend on getting an offshore bank account to hide money from taxes, and I plan on reporting everything I legally must report. No reason not to, as there isn't much in the way of taxes that I would owe. If I really wanted to get froggy with it, there are a lot more aggressive and probably legal things that you can do, but the benefits of having a pass through entity as well as a foreign corporation are helpful in the host country. As far as the US, like I said, I would report every single penny then claim the FEIE.

Here's the worldwide income tax guide all 1400 pages of it.

http://www.ey.com/Publication/vwLUAssets/Worldwide_Personal_Tax_Guide_2013-2014/$FILE/2013-2014%20Worldwide%20personal%20tax%20guide.pdf
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Old 10-02-2014, 10:30 AM   #46
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Looking over what I could find on it, since you aren't working for a Panama corp, the income you generate would be considered not sourced from Panama.
I tried to find a more authoritative source to get clear on the rules for Panamanian-source income, but had difficulty finding much about this. I did find a couple of publications that seem more thoroughly researched than the international living piece. Looking over them, it seems to me that their interpretation of Panamanian-sourced income doesn't fit with your interpretation. Here (p. 2) it says that where the person performs the work determines whether it is Panamanian-sourced income.

https://www.kpmg.com/Global/en/Issue...011-panama.pdf

and here (p. 7) it lists foreign-sourced income types, and what you are proposing is not on the list, and in fact seems to be implicitly disallowed by a couple of the items.

http://www.pwc.com/us/en/hr-internat...nama-folio.pdf

I think it's not enough to talk with U.S. CPA's -- someone seriously considering this would need also to consult with a Panamanian tax lawyer to get clear on these rules. I think your idea is interesting, and I hope it does work for you. But so far it doesn't look too promising to me. Please keep us updated as you learn more.
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Old 10-02-2014, 12:42 PM   #47
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For KPMG, be sure to consider on page 2 the tax trigger points about income being excluded if attributable to services performed in other countries not economically related to taxable activities performed in the host country.

Looking at "Other income" on the PWC document, seems to exclude gains on sale of securities, income not produced within panama territory.

I think we can agree that the LLC's income won't be taxable in the US or Panama, and any wages/salary paid to me won't be taxable in the US (Thank you FEIE), so only the questions remains about taxation in Panama or the host country.

On the Ernst and Young document, p 963, it states that dividends from a non-Panama company are tax free. Foreign source interest is also exempt from taxes. Just right there, I am sure one could think of a few ways to structure things so that your Panama tax bill = zero.

Looking at Ecuador, p.332, ( I am leaning towards Ecuador, but I haven't been to Panama yet, and I want to return to Ecuador at least one more time before making any life changing events), according to the EY document, self-employment income is exempt from taxes unless the goods/assets/activities are occurring in Ecuador. Dividends also seem to be exempt if paid from a non-ecuadorian company. Stock options are non-taxable compensation as well. Capital gains on stock is exempt from taxes.
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Old 11-01-2014, 02:53 PM   #48
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Hedging The SPY ETF With Options: Pulling it Together | Seeking Alpha

Thought this was a very, very interesting concept as far as 100% portfolio hedging. It is a requirement when you are running a leveraged portfolio or really investing in general.

Buy puts to cover your portfolio's beta equivalent (ie. if your portfolio has a beta of .8, you need 80% coverage), and then sell puts (calendar spread) weekly to cover the cost of the puts divided by 52.

If you buy puts when the vix is low (ie under 15, like right now) and sell puts, you will essentially buy when options prices are lower and sell puts when options are more expensive, assuming VIX returns to historical norms, which should allow you to recoup the cost of the puts over time.
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Old 11-03-2014, 05:39 PM   #49
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So when the market drops 25% in a day like in 1987 and you are on margin don't you lose 50% - 75% of your principal? I don't like plans where everything can go up in smoke in a day. I can handle a 25% loss now because I am not in withdrawal phase, but I plan to ratchet down the risk as I get closer to it.

Seems the plan limits your upside, selling puts, forces you to use margin to reach for income, and is exposed to a wipeout when the market really goes to hell. You are gambling and maybe the odds are in your favor until they are not. Agree that you will have a great story to tell :-)
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Old 11-09-2014, 12:21 AM   #50
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So when the market drops 25% in a day like in 1987 and you are on margin don't you lose 50% - 75% of your principal?

Not quite. The long portion of my portfolio would decline by say 20% overall and the short portion of my portfolio would increase by 25% as I have a beta in the .75-.8 region.

Say, you are long 500k of various diversified CEF's and short SPY 400k. Play with the numbers, but I don't see a 75% loss in the cards. If the market drops 25%, the short position is worth 500k and the long position is worth 400k.

Short underlying + equivalent call = synthetic put, which should suggest how it will perform.

I don't like plans where everything can go up in smoke in a day.

Me neither, hence the short position.

I can handle a 25% loss now because I am not in withdrawal phase, but I plan to ratchet down the risk as I get closer to it.

Although I can handle a 25% loss, I figure there is no benefit to testing the theory, and I might as well just avoid the outcome just the same.

Seems the plan limits your upside, selling puts, forces you to use margin to reach for income, and is exposed to a wipeout when the market really goes to hell.

On the puts, yes, it is a limited gain income strategy, which for that portion of the portfolio. On the overall portfolio, no that is incorrect as capital gains are certainly possible, although not really necessary for success and are not really even targeted. I'd be just peachy if 5 years from now the SPY/DOW was exactly where it is right now. Most people can't say the same.

Selling puts doesn't really force you to use margin, btw. You can do it in a 100% cash IRA account, for example depending on the broker. How do I know? I've done it with options house. If there is a market wipeout, selling puts is always superior option to just holding the underlying over any meaningful period of time. PUT beat SPY 7 out of 10 years from 2001 to 2011 and missed by less than 1% in 2 out of the 3 years where it failed to beat the SPY. Most notably, in 2008, is beat the market by over 9%. You might want to look at the notional PUT index and its performance vs the SPY. The PUT index has been crushing it since 1986.

http://www.cboe.com/micro/buywrite/P...OE-Feb2012.pdf

You are gambling and maybe the odds are in your favor until they are not.

I only gamble in poker. I think the one thing a lot of people aren't grasping is that I'm not betting on stock price movements. I don't need anything to hit any target price to be successful. I'm investing for income.
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Old 02-08-2015, 12:48 PM   #51
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Interesting thread, I realize I'm a bit late to the party but FWIW I think you've got a plan and a vision and you should go for it, it makes sense to me to enjoy FI/ER overseas while you're young and where the COL is low, you can enjoy the finer things in life at half the cost, and perhaps move back to the US in your later years when other considerations take priority like medicare. I've lived a few years in SE Asia and been all over the region recently, some of the comments here on Philippines are mildly inflammatory and perhaps dated, I would seriously consider moving to any of those countries as soon as I'm ready to pull the trigger hopefully closer to 45-47.

The reason I actually replied to your post here is that you seemed focused on the tax advantages of the host nation you select, have you considered Malaysia? I'm considering MM2H visa there, one of the benefits is a zero tax liability as long as you reside under the MM2H visa, definitely a perk but for me it's more about the other benefits including a decent standard of living and healthcare, good schools (I have kids), everyone speaks English, low COL, and it's an excellent base from which to explore Asia ... cheap flights everywhere in the region! Also been to Philippines and I like it very much, but it's more like Jakarta in that it rates high for hospitality - wonderful people have lots of good will but the place can be a bit disorganized - the country still has lots of catching up to do. On the flip side you can live like a king for the equivalent of minimum wage back home. So in conclusion I would prefer the idea of using KL as a base to travel and explore from, there are some amazing places to see in Asia. Good luck!
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Old 02-08-2015, 01:09 PM   #52
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As far as moving back to the states, I don't know if that is in the cards. I would have a huge incentive to not come back to the states in the form of zero taxes. I realize I am speaking 20+ years in the future, so who knows how things will play out, but once I punch out, I am not really planning on coming back for more than 30 days at a time, unless there is some compelling reason to do so.

I have VA health care for life and they have a VA hospital in Manila and an overseas program, so it won't be health care or medicare that brings me back.

I lived in S. Korea for a year, so I am generally familiar with Asia, not as much as I would like to be. There are a lot of spots over there I need to see including Malaysia, singapore, Japan, and many more.

I have heard of the MM2H program, although I need to look into it more. I think it would easily take a year to hit all the Asian spots that I like, and Malaysia as a base of operations sounds like a good idea. Thanks!
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