Puerto Rico’s Stunning New Tax Advantages

By Nick Giambruno, Senior Editor, International Man

Chances are that you have heard something about the stunning new laws in Puerto Rico that give unbelievable tax benefits for mainland Americans who move to the island. Benefits that are so incredible that many at first thought they were simply too good to be true…...but they most certainly are not.


With strategies that purport to legally allow US citizens to avoid having to pay taxes, the first thing that usually comes to mind is some sort of cockamamie scheme. This is because the US government is no slouch when it comes to shaking down its citizens. It’s mind boggling expenditures necessitate this. It would be dangerously foolish in the extreme to think you could slip one past them.

However, the tax benefits of becoming a resident of Puerto Rico are not an illusion, nor some type of scam. They are very real, 100% legal, and could change your life. That is not hyperbole. They have already changed the lives of many. These benefits are why scores of mainland Americans have already made the move—including two members of Casey Research. Many more have seriously considered it. To spur job growth and economic activity in general, the Commonwealth of Puerto Rico introduced extraordinary tax incentives for incoming residents and service businesses.

Specifically, for Puerto Rican residents and businesses that qualify—mostly expatriates from the U.S. mainland or their enterprises—the recently enacted Act 22 and Act 20 provide for a zero tax rate on capital gains and certain interest and dividends earned by individuals, and for low single digit tax rates on qualifying service income earned by corporations operating in Puerto Rico.

Puerto Rico is no novice at sculpting tax rules to attract foreign investors and expatriates. For decades the country has offered tax incentives to many types of businesses, especially manufacturers, which is why today you’ll find plants belonging to Praxair, Merck, Pfizer, and other big names dotting the island’s lush interior.
Due to the ever-increasing extra-territorial regulations they are forced to comply with, many countries and foreign financial institutions are showing American citizens the “unwelcome mat.” Puerto Rico, on the other hand, is a newly tax-friendly jurisdiction that is—and will continue to be—open to Americans.

One accountant who specializes in offshore structures remarked, “This is the biggest opportunity I’ve seen in 25 years.”

He’s right: this is truly an astounding and unique opportunity for individual Americans; there is no other way to legally escape the suffocating grip of these taxes besides death or renunciation of U.S. citizenship. This is because the US is the only country in the world that taxes its nonresident citizens on all of their income regardless of where they live and earn their money. For this reason, an American who moves to a zero tax jurisdiction like Dubai, for example, still pays a full U.S. tax bill. A Canadian expat working in Dubai would have no income tax bill at all.

Note: The US does exclude up to $99,200 of foreign earned income (salary, wages, etc.) from taxation if certain conditions are met, but there is no break for an overseas American’s investment income.

American are in the uniquely unfavorable position of having arguably the worst tax policies and a government that can effectively enforce them. For many, it is a tight and suffocating tax leash. It is no wonder, then, why record numbers of Americans are giving up their citizenship to escape these onerous requirements. Even if you do decide to take the plunge and renounce your US citizenship, there’s a good chance you’ll get stung with the costly exit tax and also may have trouble reentering the US.

There is, however, another way, thanks to the new options in Puerto Rico. American citizens can effectively gain many of the tax benefits of renunciation without actually having to do so. Due to Puerto Rico’s situation as a commonwealth of the U.S., its residents are not subject to US federal income taxes from income generated in Puerto Rico.

Previously this did not make any practical difference, because although Puerto Rican residents are not subject to U.S. federal taxes, they are subject to Puerto Rican taxes, which are often at similar levels to those on the U.S. mainland. However the situation has changed immensely, with the two powerful, new laws that exempt new Puerto Rican residents from certain key taxes from the Puerto Rican government.
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Anyone who relocates to Puerto Rico can apply for these tax incentives—including mainland U.S. citizens, who can find similar benefits nowhere else in the world, thanks to the island’s unique legal situation.

Casey Research has done a thorough boots on the ground investigation and found that the tax advantages are real and that for many Americans, including individuals operating on a modest scale, they are a huge opportunity that could truly be life changing. The findings were recently published in a comprehensive A-Z guide on the Puerto Rico option. Click Here to Learn More.

The article Puerto Rico’s Stunning New Tax Advantages was originally published at Casey Research

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Barbers and Taxi Cab Drivers are Talking Coffee...Is that the Top? JO JVA

One of the oldest trading cliches in the book. "When the TV pundits are talking about it, and the barbers and taxi cab drivers are talking about it...the top is in". But not in coffee this year. We think we are just getting started. And when we talk coffee we always check in with our favorite coffee trader Mike Seery. Here's what Mike is saying....

Coffee futures have been the big story in recent weeks due to the fact of a huge rally in the last 2 weeks caused by hot & dry conditions in central Brazil which is causing prices to move much higher as we have not seen a drought since 1989 and there are no rains forecast in the next 7 days which could push prices up even higher.

Coffee is trading above its 20 and 100 day moving average settling at 137.85 a pound in the May contract up about 1000 points this week with extreme volatility as Brazil's crop is estimated between 54 – 55 million bags and that could be lowered if this drought continues in the month of February and as I talked about in previous blogs the volatility is extremely high.

So I would look at bull call option spreads for the month of July limiting your risk to what the premium costs also allowing you to stay in the market without getting stopped out because there are days like Thursday when prices were down 700 points which is around $3,000 a futures contract as the volatility is here to stay and I do think higher prices are coming.

The 50% retracement from the recent high to the low is right around 130 so if you’re looking to get into a futures contract I would look to buy that level placing my stop at the 10 day low which currently is at 115 risking around $5,500 per contract.

Coffee is a very large contract and if you're right it will pay you off tremendously as I've gone through similar events in this market especially in 1994 when prices went from $.75 to 2.70 in a matter of months due to a frost and if this drought does continue expect coffee possibly getting up to the $2 a pound level as prices could really explode just like what happened in the grain market in 2012.

Current coffee trend: HIGHER
Current chart structure: TERRIBLE

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Understanding The Basic Language of Option Trading

The peculiar vocabulary and concepts inhabiting an options trader’s thoughts are often the source of confusion to visitors to my world. I have often pondered that learning to understand options is a lot like learning a foreign language. When you arrive in the country whose language you seek to learn, you need a functional vocabulary immediately.

In order to be able to understand my world, I thought it would be helpful to discuss a bit of my language since it is helpful to grasp a few basics. I want to touch on some of the basic concepts necessary to form the basis for a functional language we can use to communicate concepts underlying a rational (hopefully) thought process leading to trade design and management.

In ruminations to come we will return to these fundamental concepts and begin to understand their function in the dynamic world of an options trader. The nuances of their specific structures are beyond the scope of this blog.  We will return to consider these factors in virtually every trade because they re-appear each and every day in my world. For today, just shake their hands and remember their names.

One point not often discussed is the way in which options are priced. The quoted option price is in reality the sum of two separate components. These are referred to as the intrinsic and the extrinsic portions of the premium. I think of these as steak and sizzle respectively.

As I type, AAPL has closed at around $395. The January 390 call has 41 days to expiration and could have been bought for $18.90. Of this sum, $5 represents intrinsic premium and $13.90 represents extrinsic or time premium.

This is an important distinction because it is the extrinsic premium which is subject to time decay and change due to variations in implied volatility. We will get to a discussion of implied volatility in next week’s missive.

The intrinsic premium is subject to change solely due to changes in the price of the underlying security. There is no sizzle in the intrinsic premium; you can buy the option today, exercise it to buy stock, sell the stock, and pocket the $5. Of course, your trading career will not last long with that sort of trade, but my point is that the intrinsic premium has an easily calculable true value.

The situation with the extrinsic premium is quite different. The value changes not only with time to expiration but also with the constantly changing implied volatility. It is for this reason that an option trader must be very careful with this extrinsic component. Depending on the specific option under consideration, extrinsic premium may represent all, a portion, or a trivial amount of the entirety of the option premium.

Another important concept is that of the “moneyness” of an option. An individual option can be classified in one of three categories of “moneyness:”

• At the money
• In the money
• Out of the money

At the money options by definition consist of a single strike price. Both in the money and out of the money strikes usually contain several individual strikes within their groups.

In our example of AAPL, the at the money strike is the 395 strike. The in the money strikes consist of all calls with strike prices below 395 and all puts with strike prices above 395. The out of the money strikes consist of all calls above the 395 strike and all puts below the 395 strike.

Obviously since the price of the underlying defines the category into which an option is classified, the category into which an individual option fits is fluid and changes dynamically with the price of the underlying asset.

The reason for taking the time to discuss in some detail this classification of “moneyness” is that there are important reliable characteristics of each type of option.

At the money options characteristically contain the absolute greatest dollar amount of extrinsic premium. In the money options have the least amount of extrinsic premium. Out of the money options consist entirely of extrinsic premium, and therefore only contain sizzle......no steak can be found there.

Because the functional characteristics of these three categories of options differ, it is a basic strategy to combine options of different “moneyness” to achieve trades with the best probability of success and the highest risk/reward scenarios.

For example, buying an in the money call and selling an at the money call gives birth to a call debit spread, a high probability trade structure for the trader who is bullish in the underlying.

Next week we will cover the stealth concept of option trading, implied volatility. Failure to understand the impact of this variable is the most common cause of beginning options traders’ failure to succeed.

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