April 1, 2020 – Despite the postponement of the deadline this year, April is still tax season for us! Oh, how much I dread this part of the year! And it’s not even the paperwork! If I could do twice the paperwork to cut my taxes in half, I’d gladly do so. So, certainly, for me, the problem is not the filing of my taxes! The discomfort of tax season is 100% due to paying income taxes. Sure, we moved to Washington State to eliminate the state income tax – a big plus compared to California – but that still leaves that pesky federal tax. Last year, we still ended up in the 22% federal tax bracket for ordinary income and 15% for long-term capital gains and qualified dividends. I still don’t the final, final tally yet but it looks like our total federal tax bill will be about $23,000. That hurts! And it hurts more having to pay taxes for the blockbuster year 2019, right around the time the market is melting down this year!
So, we developed the ultimate tax hack! Move to a location without any(!!!) income taxes! At all! That location is Monaco, a tiny sovereign nation on the Mediterranean coast surrounded by Southern France. It has no income tax, no capital gains tax and no property tax, how awesome is that?
We did a reconnaissance visit to the Cote d’Azur last year, including Monaco, and we absolutely fell in love with the place! I mean, where else in the world can you watch a Formula One race looking out of your apartment window?
It’s sunny and warm year-round and the food and wine are outstanding.
Let’s look at the numbers in more detail…
The tax arbitrage doesn’t come cheap, though. But I did look at the numbers and it’s looking really good. Our home here in Washington will be on the market soon for $375,000 and we plan to spend about $2,200,000 for a nice condo in a quiet street in Monte Carlo. That’s quite a large difference ($1,825,000) but we’re going to make that back in no time. At $23,000 tax savings a year it will take only just under 8 years. That’s not so bad!
Oh, wait a second did I get that right? OK, let me get the calculator again: 1,825,000/23,000=79.3 years. Uuhhhmmm, I think I messed that up. I’m off by a factor of ten. Whhaaatttt? I’ll be over 120 years old when we recover the extra housing cost!
What is going on here? What is this? An April Fools joke? Wait, it is April 1 today. Ahhh, that explains it.
Hey, at least I was off by only one 0, by a factor of 10. Brian “Helicopter Crash” Williams and a guest on his show messed up the math by a factor of 1,000,000.
Change of plans!
Oh, well, it looks like we’re not moving to Monaco after all. If we ever add one or two more zeros to our net worth we might reconsider a move to the place of the rich and famous. Until then, we wouldn’t fit in so well in Monaco anyway. They seemed a bit snobbish there. If you’re not driving at least a Rolls Royce they’d think you’re just the riff-raff from Nice.
And you want to know another reason I couldn’t live there? I always hated Monte Carlo simulations! 🙂
Moreover, Southern Washington State is actually quite beautiful!
The lesson here is that tax optimization is nice but don’t put the cart before the horse. Taxes can be really low in retirement as I pointed out in a post last year. Ours will be low as well eventually. Most retirees should first get their safe withdrawal math in order, and then the tax situation is likely just an afterthought unless you’re planning a really, really large retirement budget.
This makes a lot of sense, but have you also factored in the impact of sea rises of 6 metres or so during the next 20-25 years ?
Excellent point! You can actually see our condo on the title picture. If that get flooded we’re just move into the big $200m yacht anchored (see picture). Only 8,000 years until we recover the annual tax savings! 🙂
Wow, if only, Monaco, a place of dreams I’m sure
Yeah, only on April Fools Day can you dream about that! 🙂
Hi Ern,
Assuming the move you would need to convert to EUR and knowing EU bonds yield curve mostly under water – what would be your asset allocations? Still 60/40?
As for passive investment, would you still write put options and take currency risk?
Fellow European.
Yeah, another reason not to move there. Even though our $-based bonds might go underwater soon as well. Ugh!
But, but… move to Monaco. Even with the correct figures for deficit from sale/purchase of home, a visit or 2 to one of its casinos and, surely, you will make it back in no time (and be able to afford the Rolls Royce)! 😂
From rolling high to Rolling Royce, that might the answer. 🙂
Yes. As a wise man I know once wrote,
“We are so skewed!” 😂
Umm, there’s a pandemic going on right now. This is not funny. Please work on your emotional intelligence, Are you very socially awkward in real life?
Life and living does not stop, even in a pandemic. Very important that we keep our spirits and our sense of humor up. I, for one, I’m grateful for this, and all the other posts that Ern is doing these days.
@Bryan
I get that this is stressful and the pandemic is affecting many of us very personally – but it’s okay to laugh and live and write about something other than the pandemic, especially in a finance blog.
It’s understandable to take things personally when you or loved ones are at risk or sick – but it’s okay for other people’s worlds not to revolve around our fears and our pain all the time.
Peace and good wishes.
Peace and good wishes also from the ERN family. 🙂
We got the retirement police. Now the humor police. Let me tell you, I’ll stop making jokes here when the late-night comedians stop broadcasting from their bathtubs. God help us all if we get to that point.
And yes: I am most definitely socially awkward in real life. But you know what’s the nice thing? I’m not the one feeling awkward. I’m having fun! It’s the other people that feel awkward with me around! 🙂
Even with April Fools. Taxes are no joke! Moving to Monaco you still owe US taxes unless you plan on renouncing your citizenship.
Yeah, that makes the plan so ridiculous. Hence the April Fools joke.
Even though, as a US citizen expat, you do get a generous exemption before you owe any taxes.
Hey ERN. Loved the article. Could you expand on this commentary though? I’m familiar with US expats getting a generous exemption for real estate (if meeting certain conditions) capital gains, but I’m not familiar with any for the sale of ETFs and the like. What am I missing here?
As an expat you have to file taxes in your new location and in the U.S. If your U.S. tax liability is higher than abroad then you pay the difference (but you don’t get the difference back if it’s smaller).
But as an expat you get a large deduction in your U.S. tax valuation. I believe ~$100k are not taxed at all.
There’s always St Pete, FL for watching Indy cars race throughout the city streets from your condo… no state income tax, too! Trade the snow skiing for water skiing and write options from a boat instead of a ski lift.
https://en.m.wikipedia.org/wiki/Firestone_Grand_Prix_of_St._Petersburg
That will be on our radar screen in 15-20 years when we may not want to endure the winter here anymore (though the winter here is mild. Not much snow here in Camas this winter)
Knew from the subject line that your latest post was an April Fool’s joke Prof. ERN. Nonetheless, I will play along because there is nothing to do in my city of quarantine. From my Tampa condo balcony I see four empty massive cruise ships. Within view there are repair yards where last year the world’s largest yacht was under repair and maintenance. Who needs Monaco when you got Florida! Spintwig has the Indy cars, I got your yachts! Thanks for your humor in these challenging times.
Thanks!
Yes, and we certainly remember Tampa very fondly. It was the destination of our 2018 Transatlantic cruise (Amsterdam-Tampa) and the starting point of our 2019 cruise (Tampa-Barcelona). I can only hope that all the tourism industry will get back to business soon!
Loved it! You had me going. Great post, ERN.
Glad you liked it! 🙂
Sounds awesome! I’m moving on board a cruise ship immediately and plan on living there indefinitely. I’ll have the captain toot the horn next time we swing around Monaco.
Happy April 1st!
Nice! Just make sure you don’t touch any metal surfaces! 🙂
Happy April 1!
As I started reading I thought: “Oh, one of “-those people-” Almost started to look for the “unsubscribe” button. Then I thought this guy can’t be that effing bad at math. And he must know what “Cost of living” means. Then I thought of the date.
Yeah, the cost of living will kill you there. Also, even for $2.2m you’re not going to get much more than a studio apartment with 30 or 40 square meters. 🙂
Dear ERN,
Nice one!
Though in all seriousness Portugal is still offering a tax hack through it’s NHR scheme (for 10 years).
All the best!
Yeah, we liked Portugal a lot. Still affordable and very relaxed and nice people! 🙂
Hi ERN,
I suspect your tax bite won’t be too bad until you have RMDs. For example, my mom’s tax hit in 2019 due to RMDs was about as high (inflation adjusted) as the working years. But I guess that’s a good problem since your assets would have appreciated a lot.
Not too much of a problem for us because we have only a small fraction in 401k/IRA accounts.
But RMDs and planning for RMD through Roth conversions before you hit that cliff is quite important! But as you say: it’s a good problem to have if your RMD push you into the 22% bracket! You’re not going to starve! 🙂
| I always hated Monte Carlo simulations!
Wow I didn’t realize you were such a Frequentist
I did dabble with Bayesian Econometrics a little bit. Studied that under John Geweke, one of the great ones in that field. So, Markov Chain Monte Carlo and stuff like that is actually something I like. I just don’t like Monte Carlo sims in the context of life-cycle personal finance, though. 🙂
Thanks for the lighthearted read, ERN. But in all seriousness, you’d have to pay me to live there. I would not wish an existence among old-school European royality on anyone. And to paraphrase Vonnegut: we have something they’ll never have: Enough.
Cheers.
What about puerto rico, I heard you don’t pay federal tax if you move to PR.
Sounds intriguing. Seems to be the best of all worlds. Not sure though how the local taxes stack up there. I also don’t like the hurricane risk and the, let’s call it “mismanagement” to be diplomatic.
If you had to move somewhere outside the U.S. where would it be, Vancouver? Pretty similar climate and culture to Washington. Besides buying real estate everything else is reasonably priced for the most part and you could rent your house instead of buying at decent prices for a major city. Taxes aren’t terrible compared to most “developed” countries, I’m guessing health care is much cheaper for an expat than here.
Vancouver Canada? Not enough of a difference make it worthwhile to move abroad.
I’m getting the impression that there is NO foreign location AT ALL where I would want to relocate to. I’d first explore different U.S. locations.
But what if you HAD to move outside the US for some odd reason where would you move
If I had to move? Probably Malta. EU country with a good tax climate.
But it’s quite expensive!
I was thinking little Cayman. Only 2200 people At that population size you can do case level tracking and quarantine and easily maintain a linear growth curve. The thing I don’t like is an island needs to be refueled, but maybe solar? Also no cap gain or income tax but duty or consumption tax
Nice tax haven! I’d also like Malta: it doesn’t tax capital income from your foreign holdings. You’d still be subject to US tax (but with high expat exemption)
In Monaco you are going to spend that $23,000 on rent.
Great part of the world to live though. Can take a quick jaunt to the French Riviera.
Oh, yes. It’s noce there indeed. But you might pay $23,000 in rent, per MONTH, for a nice place. 🙂