One of the members of the SociedadSouthron.net forum was shocked when he realized that the new Uruguay personal income tax, due the middle of next year, will create a tax conundrum for US persons:
- Uruguay will not levy income tax on any foreign “unearned income” such as dividends, pensions, annuities, and other income from investments, however
- the United States only excludes foreign earned income from US taxation of its non resident citizens, and then only the first US$80,000 per year per person–all other earned income and all unearned income is taxable, EVEN IF YOU NEVER LIVE IN THE US AGAIN!
The upshot as “Seasons” noted is:
Of course, if you take income as earnings…the USA will give you an exemption but then UY will require payment. If you take it as a dividend, UY will give you a break but then the USA will want their cut.Fortunately, there is a way around this problem.
If you set up a limited liability company (LLC) and you are the sole owner, you can file IRS form 8832 and elect to have it considered a “disregarded entity” for US tax purposes. Have that company “earn” the money (and take advantage of the US earned income exclusion), and then have that same company pay you a dividend from outside UY so that it is tax-free investment income here.
There are other solutions, depending upon size, but this is the simplest.
Complete IRS rules for Non Resident Citizens can be found at: http://www.irs.gov/publications/p54/index.html
Back on the original topic:
If I currently run an LLC can it become a “disregarded entity” when I leave the US or must I form a new one just for such a purpose?
>>It depends on how it is taxed now–changing can sometimes can tax issues, and if carrying it outside the US might adversely affect issues like “effectively connected income”. Since you can get a new LLC, either in Delaware or the Marshall Islands for about US$1,000, it is rarely worth continuing an existing working US LLC.
Left by Seasons on November 4th, 2006
Ok, thanks. Maybe I missed something obvious but when the LLC pays me dividends…won’t that become taxable by the US again?
>>You missed the first main point. If the LLC is considered a “disregarded entity” for US tax purposes, you will have paid personal US taxes on all of its income already, and if all of that income was earned income while you were a non-resident, it will be subject to the US$80,000 exclusion. In other words, when an entity is disregarded for tax purposes, it is as if you earned that money directly, at least as far as the IRS is concerned.
So when the LLC pays you dividends, it will be non taxable income in UY, and from the IRS point of view it will simply be a nontaxable transfer of funds from one account to another.
Got it now?
Left by Seasons on November 5th, 2006
*phew* Yes, makes sense now.
Forgive me for all the questions- I’m a writer/designer, wrapping my mind around mathematical things is sometimes like trying to squeeze a square peg in a round hole…repeatedly.
>>Don’t feel badly about it–I am almost ashamed that I understand this stuff; seems like it ought to be prima facia evidence of a disturbed mind…
Left by Seasons on November 5th, 2006