A tax freight train is bearing down on your retirement. To protect yourself, you'll have to harness The Power of Zero.
Hi there. David McKnight, host of The Power of Zero show, author of best-selling books The Power of Zero, Look Before You LIRP, and now The Volatility Shield, all of which can be purchased on Amazon or in bulk at powerofzero.com.
Today, we are going to talk about something that you may find interesting, I certainly find it interesting and it's something that I've been able to take advantage of in my own life. I've had lots of people say, “Dave, you lived in Wisconsin for 15 years but now you live in Puerto Rico. What's that all about?” Today I'm going to talk about the interesting and peculiar tax benefits of living in Puerto Rico. In 2012, there was an act that came out called Act 20 and Act 22. Puerto Rico is not a state but it's not a foreign country, it's a territory of the United States, and as such can make deals with the United States government that no other countries in the world can make. What Act 20 and Act 22 do is they provide massive tax incentives for people who want to move their businesses down to Puerto Rico.
Let's talk about Act 20 real quick. Act 20 basically says that if you own a qualified business and you get accepted by the Act 20 program there in Puerto Rico, you can actually move your business down there and they will waive your federal tax, they will waive your state tax, and they will charge you a flat 4% tax. If let's say, you make $1 million, you're accustomed to paying $400,000 of tax, you will only pay $40,000 of tax. It's like doubling your income or knocking a zero off of your tax bill. There are a couple of qualifications, there are a couple of stipulations that you have to adhere to. Number one, you can't try to mess with the system in the sense that you try to live in the United States but take advantage of the Puerto Rican tax benefits, you actually have to move to Puerto Rico, you have to become a Puerto Rican citizen, and you have to be on the island at least 183 days out of the year. There's a lot of other, what they call “close connection tests” which basically say, “The IRS wants to figure out if you really are in Puerto Rico. Have you really moved to Puerto Rico? Are you really a resident of Puerto Rico?” They're going to want to know, “Do you have a Puerto Rico driver's license? Have you sold your home in the United States? How many days are you spending in the United States per year? Where are you paying your charitable donations? Where do you vote? Where are you registered to vote?” It's really, really tough to say, “I'm going to try to keep my life in the United States, not pay the US tax rates and pay the Act 20 tax rates,” it’s just tough to do, they're pretty good at sniffing these things out. But if you're willing to move yourself, your family, and your business to Puerto Rico, there are some pretty amazing tax benefits that it can accrue to you for having done so.
That's Act 20. There's its compadre, Act 22, which is even better. This is one of the reasons why the Harry Dents of the world, the Peter Schiffs of the world, a lot of hedge-fund managers, and real-estate tycoons have moved down to Puerto Rico is because they waive all of your capital gains tax. If you are an investor and you are normally paying lots of tax on your investment growth, you come to Puerto Rico and they waive all of that for you. Where you might normally pay 15% or 20% capital gains tax, you don't pay any of that in Puerto Rico. That's one of the reasons why a lot of these hedge-fund managers are moving down there because they don't want to pay the tax. They used to have a lot of stipulations that say, “Hey, you've got to have so many employees that you have to hire from Puerto Rico, while you're down here, you have to buy a house, you have to do all of these different things to help stimulate the economy.” What they found was that their requirements were so stringent that people were not taking advantage of Act 20 and Act 22 as if the tax benefits themselves weren't enough benefit. They have relaxed those restrictions and now really, the main requirements are that you need to live in Puerto Rico 183 days out of the year. Now there are some other interesting things that say that, for example, you can go live in Europe for six to eight months out of the year, still maintain your Puerto Rico tax status as long as you're not actually living on the mainland. The minute you spend more than 182 days on the US mainland, then you can forfeit all those tax benefits, but if you happen to be spending it in Switzerland, Italy, Spain, or what-have-you, that doesn't affect your tax status, you just can't be living in the United States.
You may be thinking, “Does this really pertain to me? Is this something that I would be even interested in?” If you own a business, it may be something you want to think about. If you do a lot of investing and most of your income is derived from your investments, it may be something that you want to think about. But you also have to remember that it's Puerto Rico and there are some downsides of Puerto Rico which I experienced about two years ago. We moved to Puerto Rico the first time in early August of 2017. As you recall, Hurricane Maria hit on September 20th of 2017, so we had literally been there for 5 weeks when Hurricane Maria hit. By the time you realize it's going to be a direct hit, there are no plane tickets left, it's impossible to get off the island, you just have to hunker down and batten down the hatches, and that's exactly what we did. We lived through a Category 5 hurricane. We had a house on the coast, the southeast coast of Puerto Rico so we were among the first people that got hit. That was a harrowing experience, the before and after pictures, it’s like a bomb went off, it's absolutely harrowing. They say the rim of the eye of the hurricane had 230 mile-per-hour winds that stripped all the shingles off the top of our houses. Fortunately, most of the houses in Puerto Rico are made of concrete so the house didn't blow away and we were able to sequester ourselves in the one room in the house that we felt like was the safest. Me, my seven children, and my wife spent the evening in that well-barricaded room in the bottom level of our house. Consequently, we had to come home because we didn't want our children to miss the school year. We came home—fortunately, we hadn't sold our house in Wisconsin yet—spent the school year in Wisconsin, and now have been back in Puerto Rico since about the end of July of 2018. It's coming up on a year here that we've been in Puerto Rico. You have to deal with the hurricanes, you have to deal with the fact that it's a tropical island, and everything seems they'll move a little bit more slowly. The people are very loving, friendly, and accepting, however, they're not in any hurry to get anything done. About 10% of the island speaks English so usually, at a given establishment, you can find someone on the staff that speaks English. My wife is accustomed to saying, the first thing she says on the phone or at the counter is “Hablas ingles?” and if someone in the vicinity does, then she's usually able to talk to them.
Our plan is to stay in Puerto Rico, people will say, “When are you coming back?” I'll say, “I'm coming back when I get tired of not paying taxes.” There is a trade-off, you give up a lot of the amenities of living the United States, a lot of times when you go to the doctor's appointment, they won't even accept appointments, you just have to show up and get in line and hope that they call your name soon. The power grid has been unexpectedly reliable since the hurricane. We have what we call brownouts every month or so, they last about 30 minutes and then your power comes back on. Most people have generators so they don't even really miss a beat. Occasionally, you'll come to a stoplight that is flashing so you just treat it as a four-way stop. But for the most part, the power has been incredibly reliable.
Are you a candidate for moving to Puerto Rico? I don't know. If you own a business and want to build up a nest egg, you don't want to pay taxes, you're willing to deal with moving your family and your company down to Puerto Rico, and adopting a Puerto Rican lifestyle for a couple of years, it may be worth looking into. But one of the reasons I wanted to record this podcast is because I have a lot of people that say, “Dave, you're in Puerto Rico, tell me why you would want to move to Puerto Rico?” I will tell you this, I live 15 years in Wisconsin and every day I asked myself, “Am I going to be cold for the rest of my life?” Now, every day I wake up and I ask myself, “Am I going to be warm for the rest of my life?”
The one lesson I have learned is that when you pay taxes in the United States, you're actually getting something in exchange for that, you're getting an infrastructure that's highly reliable, you're getting roads that don't have potholes, and you're getting the ability to go to doctors and actually set appointments and have people return your calls. I'll give you an example. The other day, we had a leak in our dishwasher and I looked up online six different plumbers, this is on a Saturday, all of which said that they had 24-hour service, all of which said that they were certified and standing by ready to receive my phone call, I was not able to get anyone to pick up the phone, not only that, but they didn't have message machines so there's no way I could leave a message asking them to return my call. That is fairly emblematic of what it can be like in Puerto Rico. The way around that is you learn to temper expectations, you say, “Okay, I'm not going to have the expectation that they're going to return my phone call right away, if at all,” so you just have to understand what the nature of living on an island is all about. If you can temper your expectations, that actually works out just fine.
Act 20, Act 22, you can go online and you can research it. Harry Dent who famously wrote The Roaring 2000s. He’s a demographic investor who basically says that you can look at what baby boomers are buying at various stages throughout their lives and figure out which companies to invest in, very, very famous in the late 90s and early 2000s, and he made a lot of accurate predictions. He's actually in Puerto Rico. Peter Schiff, who was the economic advisor for Ron Paul during his failed presidential run, is here. More and more people are looking at Puerto Rico. One of the reasons that's interesting, in the movie The Power of Zero: The Tax Train Is Coming, we interviewed Tom McClintock. Tom McClintock talked about how Puerto Rico's in such bad shape financially, and that's one of the reasons why Act 20 and Act 22 were established was to try to get successful businesses to come down to Puerto Rico so that they could stimulate the economy. One of the things that Tom McClintock said was, “The economic circumstances have gotten so bad in Puerto Rico that native Puerto Ricans are starting to move to America, to the mainland to escape a lot of the economic malaise of Puerto Rico,” and then he said, “In another 10 years, we're going to be economically just like Puerto Rico. If that's the case, where are we all going to go? Where are Americans going to go if those types of economic circumstances come to pass?” That's something to think about, Puerto Ricans are fleeing to the mainland and Americans are beginning to flee to Puerto Rico in a great stroke of irony.
Anyway, that's Act 20, Act 22, that’s a tax-incentive based in Puerto Rico, you obviously have to be willing to turn your life upside down and make major, major changes that your wife and your children would have to be okay with to be able to pull it off. But it's an interesting little tax paradise that myself, my family, as well as quite a few other people, have taken advantage of.
Again, if you are interested in learning more about how to get to the 0% tax bracket, certainly reach out to us at davidmcknight.com, we're happy to consult with you and give you ideas on how you can minimize the impact of rising taxes over time. Of course, if you are interested in learning more about Puerto Rico, you can go to that same page and contact us as well.
Thanks for being on the show today. Again, if you want to get copies of The Power of Zero, Look Before You LIRP, or The Volatility Shield, go to powerofzero.com, and of course, the movie is now available to stream on YouTube, which is really Google when you get right down to it, or iTunes, or Amazon, or if you go to reelhouse.org, you can actually gift a copy to a friend if you want them to be able to watch it as well.
Thanks for being on the show today. You may have felt that this podcast was more interesting than anything and not necessarily germane to your situation, but if you're one of those people who has the type of business who could benefit from moving to Puerto Rico, then certainly this podcast was useful and helpful to you. I'm happy to provide any insights or answer any questions, you can do that at the contact sheet at davidmcknight.com, thanks for being on the show today and we will look forward to coming to you again same time next week. Thanks. Talk to you soon.