This is actually several questions in one. Me and a coworker got into a discussion about how much money it would take to not have to work the rest of our lives.
He said 300,000 dollars was good for him. I said that 500,000 probably would not be good enough for me. (I.e I would still have to work)
I said that even at 10% interest, and 46% taxation on interest earned (I might be wrong on the 46% part though) it would still only equate to around 25k a year. He said he could do it off of 7% if he got a bank account in Jamacia, since you don’t have to pay taxes on interest earned there.
My few objections were:
-Not insured by FDIC
-Can only import/export so much money
-Imported/exported money might be taxed.
-Doubtful that the goverment would allow you to import 30-40k a year.
Am I right on my objections? Or is he correct in thinking that it is ok to do this. Personally it sounds like just a bit too much work for my tastes, and I really don’t mind paying taxes.
And the second question I have is something he stated also. He claims that W-2s are voluntary, and paying taxes is not enforced by law. (my response was “tell that to the IRS”) Is there a germ of truth here?
Have you ever looked at a zero coupon bond? They use them for the lottery often. They pay like $470,000 for the bond & after 20 years, with interest payments each year, it’s worth a million bucks.
I believe that citizens of the U.S. have to report their worldwide income. They don’t pay U.S. taxes based on the regulations of the country in which the interest is earned, although that country may tax interest in addition. There is an exemption for a certain amount of foreign Earned income.
As far as bringing money into or taking it out of the country, I don’t believe that the limit is on the amount of money, but on the amount of cash you can import or export. Over $10,000 has to be reported under the Bank Secrecy Act, a money laundering regulation.
Employers are required to issue a W-2 to employees and a 1099 for money over $600.00 (I think) paid to contractors. It is not voluntary. Employees don’t have anything to say about this. He many be talking about withholding, which is mandatory unless you have reason to think you won’t owe any tax or you are a student, and a few other minor exemptions. Basically, you have to pay your tax as you earn the income, through withholding or paying estimated tax quarterly.
If you owe tax and don’t pay and the IRS finds out about it they have several means to collect the tax, interest, and penalities due: Liens, levies, seizure and sale of your property, taking part of your wages.
Some tax protestors feel that income tax is unconstitutional and point to some words in the constitution such as “may” instead of “shall” collect tax, and other BS like that. Whether or not they feel it is legal, unfortunately the authorities will enforce the tax regulations and people can go to jail and have their property taken.
I don’t like our tax system and wish we would go to a sales tax where I could control what I pay, but there isn’t a hope in hell that Congress will ever go for it.
If you are an American citizen anywhere in the world or an alien residing in the USA, then Uncle Sam wants your money and he don’t care where you have it.
If you have an offshore account and you are not paying taxes on the income it produces, you are brealking the law. Or, as they say about speeding: it’s only illegal if you get caught.
Regarding yield of investments: money devaluates over time so if you are not reinvesting part of what you are getting, then you are losing capital. If inflation is (say) 3%, then you should reinvest 3% of your capital just to remain as you were and you can spend whatever you earned above that 3%
So, suppose you have invested one million and you are getting 8% interest, inflation is 3% and taxes on that income 35%:
Your gross income would be 80K of which Uncle Sam gets 28K and you are left with 52K. Now, to compensate for inflation you add 30K to your capital and you are left with a net spendable income of 12K…
That’s with a million. With half that you cannot even begin to think of retirement. Not to mention just a house to live in would take a considerable part of that.
If you are thinking seriously of retirement you will need to think several million … or take the opposite route and go on welfare
Oh, his premise was that Jamacia does not charge interest in its banks. American banks according to him, residing in Jamacia.
So if he is correct in that, it is pretty safe to say that he can export all 500k to jamacia, and import 30-50k every year (or half that every 6 months)and live tax free? (other than property taxes and sales tax of course)
And thank you for the answer. I’m glad I didn’t argue the case further and make myself look the fool. (as I am so prone to do)
Why would he want to put his money in a account where he earns no interest? Why not just bury the cash in the back yard? Even paying taxes on the interest you end up with more cash then you started with.
To answer your question he would not have to pay taxes on the principle. Assuming of course that he paid taxes on it when he received it. You only pay income taxes on the principle once.
Well, I do not know what the rules are in “Jamacia” but in any case, it makes absolutely no difference whether the money is sitting in an account based in the US or outside the US. None whatsoever. So even if he sends the money to “Jamacia” he still has to pay exactly the same income tax (if not more, depending on local tax laws). I’d still like to visit “Jamacia” though. I hear the women are beautiful and very friendly…
Your numbers are really prety weak, but accidentally come out not too bad. Couple points:
Reiterating what has already been said, a US citizen is taxed on his/her worldwide income, regardless of where he/she resides, and regardless of where that income is earned.
Furthermore, if you are talking about $50,000 annual income, the tax rate won’t be anywhere near 46%. Assuming you’re not working (so no social security tax), you’d be at around a 28% top marginal tax rate. You’d actually pay less than that, since a bunch of your income would only be taxed at 15%.
Jamaica does, in fact, have its own taxes, pretty much a flat rate of 25% (once you earn above a certain ceiling.) You’re thinking of Bermuda, Bahamas, Cayman Islands, Channel Islands – those are the most common tax havens, where there is no tax. If you put your money in Jamaica, you’d actually be taxed twice – once by Jamaica, once by the U.S. If you want to escape tax altogether, renounce your U.S. citizenship and move to Bermuda, and take your assets with you.
You think you can earn 10% a year (on average) for the rest of your life? Lemme know how, brother. A far better assumption is something like 6%; even 8% would be pretty optimistic.
As already noted, you have assumed that a fixed income of $25,000 would do well for you; in reality, inflation would erode that away. If inflation was only 2% a year, you would lose around 50% of your purchasing power in 20 years.
So, you’ve got a lot of stuff screwed up in there. As a more reasonable figure:
If you think that you can live comfortably on $25,000 in the year 2000, and want to maintain that standard, then let’s assume:
– Annual investment return of 8%
– Annual inflation of 2%
– Tax rate at 25%
Then you need around $550,000 to live off $25,000 (increased by inflation annually) for 50 years. SO your number ain’t too far off. (And I hasten to add, I’ve done this calc very quickly, I’ll let one of the other actuaries confirm.)
Dex, you say “for fifty years” there. Are you planning on dipping into the capital? If not, and rates stay relatively constant, then that same amount of money should last indefinitely, shouldn’t it?
Chronos, you have a good point that ,unless you plan to live forever or want to leave the capital to your children you can dip into the principal. I have no children but I plan on living forever. So far, so good.
C K Dexter Haven, Your numbers do not work out for me. First, I think you are right that it is reasonable to expect a rate of return of about 8% but I also think such a low inflation is too optimistic over the very long term.
Here are numbers which I think are more reasonable:
Invest one million at 8%. At the end of the year you get 80K of which uncle Sam takes 20 right there. If inflation was 3.5%, then you take $35K and add them to your principla just to stay in place. And now you have 25K left for your living expenses. I think these numbers are more reasonable
More math fun. My handy TI calc. says that 1,000,000 today at a 3.5% cost of living increase yearly would only be worth the equivalent of $343,415.11 after 30 years. You’d definitely have to keep dumping a good percentage of your interest income back in to keep your spending power the same year after year. If I were you, I’d just bide my time and wait for that one really big score…
>> I would be very hesitant to dip into the principal what happens if you live five years longer than you estimate?
You now when it’s time to commit suicide
No, seriously, I did say you should reinvest part of your earnings to maintain the value of the principal, but at the same time lets be realistic. You can take part of the principal slowly and still have a good chunk. Unless you are like me and plan to live forever, this should give you a reasonably good plan. It’s not like the principal disappears overnight.
BTW, I love gazpacho. I can make it better than most restaurants which have spoiled it by making it into something fancy.
The Foreign Earned Income Exclusion limit is $78,000 so with the amounts you’re talking about you wouldn’t have a tax liability. But to get this exclusion you have to qualify as a bona fide resident or pass a physical presence abroad test. You have to be outside the US for 330 days during a 12 month consecutive period.
I’ve seen quite a few gringos come to Mexico with similar plans. Some sold their homes and liquidated all their assets in the States. Few of them lasted more than a few years before the money was gone. Currency devaluations, natural disasters,drugs,alcohol,swindles and just poor judgement ruined most.
You ever notice how the rich set up trust funds to keep their heirs from blowing it all? There’s a lot to be said for doing it this way.
“I would be very hesitant to dip into the principal what happens if you live five years longer than you estimate?”
You could get a job. But seriously, your best bet would be to overestimate. Even if you live a long time, you don’t need as much. Let’s say you get 8% a year, with 25% taxes, a 3.5% inflation rate, and you want the equivalent of 25K a year. As per sailor’s last example, if you planned to live forever, you’d need to start with $1,000,000. But, for shorter lifespans, here are the inital values necessary:
20 years - $364,588
30 years - $499,504
40 years - $605,774
60 years - $755,412
100 years - $905,851
1000 years - $999,999
You should probably be more worried about fluctuations in the interest rate, or increases in the tax rate or cost of living. In the long run, even a small change can do you in. Say you start with $1M, and you think you can live forever, but then next year your interest rate drops to 7% and because of medical breakthroughs that let everyone live for 200 years, the cost-of-living increase goes up to 4%, and they stay there. Now you only have enough for 59 years.
