Know your Tax Liabilities as a U.S. Citizen Living Abroad - David Kafka

Aug 08, 2023
 

Are you a U.S. citizen who owns property in another country or is planning to live or invest outside the U.S.? Have you been wondering whether you have to pay taxes, or even how to get your head around the whole foreign living/investment taxation code? 

The IRS requires U.S. citizens living, working or investing abroad to pay taxes on worldwide income. Find out how to stay right with the IRS as well as find the hidden money in the foreign investment tax code.

In this podcast episode, David Kafka, founder and director of Caribbean Capital Group LLC, shares his very honest, fascinating and myth-debunking learning journey of how he moved from South Carolina to Belize with his family, and figured out how to stay right with the IRS as a U.S. citizen now living abroad for over 12 years.

In this episode, we discuss

  • A misleading book’s information leading to tax evasion
  • How US citizens living abroad cannot avoid filing tax returns in the US
  • The streamlined process as a way with better options to true-up with the IRS on backlogs
  • The historical background to Erwin Schiff’s misleading book on not paying taxes
  • Belizean tax code and the way it works
  • US tax calculations taking into account Belizean tax paid
  • The complex tax code for US citizens living abroad and the wisdom of compliance
  • The practical checks and balances to living abroad
  • A comparison between owning foreign vs domestic properties
  • How foreign-earned income exclusions work to provide tax credit
  • Syndication as an investment opportunity in Belize

 

To Learn More

If you are interested in living abroad as a US citizen and would like to know more from David Kafka, you can visit his channel on YouTube Caribbean Capital Group - YouTube

You can also visit his website Caribbean Capital Group - Invest in Belize - Caribbean Capital Group to learn more about Belizean life and investment. 

If you are an accredited investor interested in investing in Belize, you can visit Placencia and Hopkins Belize Real Estate with RE/MAX 1st Choice (1stchoicebelize.com)

To access the bonus tax content mentioned in the episode, go to https://www.hiddenmoney.com/bonus

To start using the tax code as a tool to grow your wealth, schedule a call with Pine & Co. CPAs: https://www.pinecocpas.com/consultation 

TRANSCRIPT

Mike Pine: [00:00:00] Welcome to this episode of the Hidden Money podcast. Kevin and I are super excited to have our friend and client David Kafka join us. David, to make it short and brief, David is a guy that I envy his lifestyle. He grew up here in the U. S., I think South Carolina, and somehow he transitioned to running a real estate syndication and a realtor firm in Belize,

where I've never gone to scuba dive, but I've always dreamed of it because I've seen it in all the magazines as I was growing up, and used to scuba a lot, and I hope and pray to visit David one day and get to finally achieve my dream of scuba diving there. But you live there, and you're just a very fascinating guy.

So thank you very much for joining us, David. We're excited to have you 

on 

David Kafka: Thanks for having me - enjoyed it. I'm excited to be here and help educate your clients any way I can, and your listeners.

Mike Pine: Tell us a little bit about where you grew up, who you were 25, 30 years ago, and then walk us [00:01:00] through where you are today, please.

David Kafka: Sure, yeah. I grew up in Columbia, South Carolina, and after graduation moved to Charleston, South Carolina, where I went right into the fire service. 

I always liked to help people, and I always wanted to be a fireman, like every kid, and so I did that for many years, and of course, firemen, we don't make enough money, so we always had to have part time jobs.

And so, my part time job was at a fire station, and I just was paying a lot of tax, and so I wanted to do something different, and so I wanted to start my own business and I started a landscape company. And so we serviced second homes, commercial properties in the Charleston, Mount Pleasant, East of the Cooper, Kiawah, Seabrook Islands, and that's what we did.

And it just grew and grew, and then I kind of got tired of politics and the fire service, retired, and just did my landscaping full time, [00:02:00] and my wife and daughter, we like to travel a little bit, so we stumbled on a place called Belize, and I fell in love with it as soon as I got off the plane. It was just something that's hard for me to describe.

I just felt at home, at peace, and it was just awesome, and when I left, I got kind of depressed, and so, just went back to work running the business and six months later, we booked our trip again and came for another month this time, and then just again, got depressed, came back and had some things happen with the business and whatnot, and we can go into, if you want, and I decided to sell everything and see if we could just give it a try for a year,

and so that was.. February will be 14 years that I've been living here. 

Mike Pine: So let me get this straight. Just, you got depressed because you left this vacation spot that you've only been to [00:03:00] twice, and you say, 'Forget it. I'm selling everything and uprooting my family and moving to Belize.'

David Kafka: that's pretty much how it went. We, um,

 

One day, we were sitting at a campfire on Johns Island, and we were all talking about taxes and how much we pay, and unemployment tax, and social security, and workman's comp, and stuff like that. We were.. I was a landscaper, one was an electrician, one was a builder, and we all read the book by Erwin Schiff how not to pay any income tax.

And so we kind of believed that the Constitution was ratified illegally, and we all wanted to investigate it more and possibly move outside the U. S. So I thought when I moved outside the U. S., I didn't have to pay taxes, and so, we all decided we were going to pick different places to go and I was going to be Mexico [00:04:00] and a little known country called Belize.

Didn't know much about it, but I picked Belize first just because.. really because it was English speaking, and fell in love with it, and then we came back and they ended up not going nowhere and they're still- John's Island. But I.. we still believed that we'd have to pay taxes, and so I didn't pay taxes for 10 years until I got better educated by people like Pine & Company, that U.S.

 citizens legally have to pay taxes on worldwide income. And so I ended up going through a process called the streamlined process, where, I think what you said, Mike, about coming clean with the IRS before they find out and come after you? And so that's basically what I'm doing. I'm going through the IRS and telling them I didn't think I had to pay taxes.

Here's what I made for the last three, four [00:05:00] years- it's three years, I believe, is what the tax lawyer did, and then they did it, right? And then, we're good now. We're clean, we have a clean bill of health, we did the FBAR like Kevin talked about. We do that every year now.

We disclose all of our foreign earned income, all of our worldwide income, all of our worldwide companies, all of our bank accounts, things like that, so we stay current. So even though we pay little to no tax in the U.S., in the end, it's still a requirement that we have to pay it, or we have to file it at least.

Mike Pine: I'm glad you figured that out before the IRS figured you out. So now, you're on the up and up and legit with us. 

But that's an interesting historical tidbit I want to bring up. Just because I love it. Prior to 1913, It was unconstitutional to levy tax on anyone's income in the United States, but they passed the 16th [00:06:00] Amendment, I think somewhere in March of 1913, and it changed that, and it did amend the original constitution, and it says now they can levy tax.

The interesting part, though, I believe at that time it was only a tax of 1% income tax, and it was only supposed to hit the top 5% of income earners. That's how it was sold to the country. It was sold as- Hey, this is a small tax. It's going to impact very few people, just the ultra uber-wealthy and it's probably only going to be a temporary thing anyways.

It didn't take it very long before it hit almost the entire population, and it wasn't 1% for more than two or three years, I think, and then it got to 5%, and then 10%, and upwards of before the 1980s, we were at 90% income tax at some point. So, 16th Amendment gave Kevin and I incredible job security.

Don't know how good it is for our economy or our country, but it's there, it exists, and we are legally obligated to follow the law, and we do. But, thank you, 16th [00:07:00] Amendment, you gave me a job. 

David Kafka: Belize has a very small government with low, restrictions, and so it was just perfect for me to be left alone and do whatever I want to do, and so that's what intrigued me even more.

And I asked my wife and daughter, I'm like, you know, can like, 'Yeah, we'll do it for six months.' and I'm like, 'you know, we can't do this just six months. We got to give it a year.' and so they gave it a year. And after the year, I'm like, 'Are y'all ready to move back? I don't want to.'

And uh, sold everything in 2008, and I guess everybody knows what happened in 2008, Um, it, it worked out, you know, I feel like we put the plan in place, everything didn't work out perfectly, but it worked out great, and you know, never 

Mike Pine: So David, you say the Belizean tax system is really simple, so I guess [00:08:00] I can't move to Belize and earn a living as a tax chartered accountant in Belize.. but explain the basics of it, because it is foreign, literally.

David Kafka: So actually Mike, you could, because you can work from home, you know, unless you see in your shop every day, but I mean, you're, You know, you're in and I'm here, so it can be. My book-keeper is in um, Texas, so you can. Um, Belize Tax Code is very simple-

Uh, it's one there's no deductions. It's a flat tax on your gross, and it's a little less than 0.75% and it goes all the way to 15%. So, just for an example, I have a couple of gift shops and a ice cream shop. We pay 1.75% on our gross. My rental income- we pay 1.75% on our income. However, my real estate commissions, [00:09:00] I'm taxed the highest,

so that's 15%. So there's no deductions, it's just one form, and the big difference is we pay monthly. Uh, so on the of every month, I pay for the previous month, and why do we do that? It's because the government is so small, they can't wait a whole year to get their income.

Kevin Schneider: So there's no refunds. There's no such thing as a refund in Belize because you are not making estimated payments. You are making payments monthly and it's what you 

David Kafka: Correct. Correct. There instances for employees, depending on how much they make, to get a refund. Um, like a exclusion, so they get so much free, um, and if they so much, then they get you know, charged, taxes. So it's just, you're right Kevin, there's no, 

Kevin Schneider: That's great. We would not have a job, Mike, over

there. 

Mike Pine: We always have the U.S government that will always [00:10:00] impose a very complex tax. Unless, and I shouldn't get into politics, but unless any of the candidates I've ever supported in the past come up with a fair tax, which is a great idea- it sounds just like the Belizean tax, where it's a straight postcard sized form, it's a flat tax based on gross, you don't get deductions, you don't have to worry about deductions, one page form,

but that's not going to happen in the U.S. I'm.. pretty much can guarantee it. I can't predict politics in the U.S hardly at all these days, but a reasonable, common-sensical, easy, fair, simple tax is not going to happen here. I will predict that, and you can make that evergreen code.

So you read this book with your friends about how to avoid paying tax, and we try to stay away from the word tax avoidance because it has a really bad legal connotation with the IRS. 

Tax mitigation is a beautiful thing.. but tell us how this tax avoidance philosophy went with you when you moved down to Belize,[00:11:00] 

didn't realize your Belizean income was taxable to you in the US since you were a US citizen.. what happened through all that? Explain the process and what you've learned from that.

David Kafka: Yeah, sure, legally, the book is... fundamentally not right, but in my mind it was right that the amendments and things like that in the Constitution, were ratified illegally and we didn't have to pay taxes, and then I thought, well, I'm living outside the U.S., so I definitely don't have to pay taxes. I don't have to file or nothing. And then, the good old IRS wanted to impose some fines and stuff, and they ended up giving a window of people to get legal with the IRS, and it's called the streamlined process, and you all can go into that.. So I did that, got current with the IRS, and now we just file every year, starting I believe, last year.

Mike Pine: So, just a point of order for anyone listening here [00:12:00] that might be in the U.S. and U.S. citizens, and thinking about moving somewhere else - If you are a U. S. citizen, you owe tax on your worldwide income. There's a lot of credits, there's a lot of exclusions, you might not owe any tax, but you need to file a tax return,

and unfortunately, I think that book misled you in that area, but thankfully you've gotten through the streamlined process, and now you're on the up and up with the IRS, and you're probably still paying very little U.S. tax, but you're now filing tax returns, right?

David Kafka: Correct. Yeah, so we really just finished the streamlined process, and no fines, no penalties, but I had to pay about 10 grand per year, and then my book-keeper got sick.

So we're a little behind on 21 or 22, or 21 and 22, and so we'll file those. We've filed extensions, but we're going back and you're right. We didn't have to go through a tax attorney or anything like that, but we did to help us get legit, so there's some fees involved with going [00:13:00] through the streamlined process, and you're right, it's just I don't pay a lot of taxes in the U.S. because I can use, even though Belize is a flat tax, I can still use my deductions.

My receipts for eating out with clients, my mileage, whatever, I can use that, and then I do get credit for paying the Belize tax, so it is very little, but it's still kind of a pain to have to file. And I do own foreign jurisdiction companies and I do have foreign bank accounts.

I'm signers on several bank accounts for my business and for some non profits I volunteer for, and so you all have to make sure I stay compliant in that way as well.

Kevin Schneider: Once you start living across the borders of the United States and you're filing U.S. tax returns, you really are going to run into a lot of compliance, a [00:14:00] lot of paperwork. The IRS does not take lightly foreign income. The last thing they want to happen is you make money, and then them not get a cut of it because there's just so many forms.

Like you mentioned, David, you have foreign bank accounts- well, you have to follow the FBAR, if you own over.. if you have hold over $10,000 in any foreign bank account, you've got to tell the United States about it. You have to tell the IRS about it. You have to just disclose it, and if not, there could be hefty fees like $20-25,000 penalties,

not if you get busted and not reporting your foreign bank accounts. Same thing with your foreign income or whatever you're making. If you're moving money from a foreign country into the United States, there's specific tax forms that you have to file and let the IRS know on it. Not only that, but there could be withholding on it.

So if you're making money in Mexico or Canada, the United States probably has a treaty with those countries, but they have a specified tax rate that if you [00:15:00] move $10,000 of income from Mexico to the United States or vice versa, there's going to be some tax withholding on it. So if you are contemplating moving, taking the big jump like David did, or if you do already have foreign investments or foreign assets, and you're not in compliance, or think that you're even in compliance, I would reach out to a CPA as soon as possible and just see what kind of risks are out there for you, because if this is left unchecked for years, the IRS can come and claw back for a lot of that.. penalties, interests,

it could be a nightmare. So getting compliant is always Step One if you're not, and then making sure that you stay compliant in the future.

Mike Pine: And the general rule is if you haven't been compliant, and once you realize it, you're much better off going to the IRS before they've learned that you're not compliant, than waiting until they come after you, because you lose a lot of options at that point. So, as Kevin and I say [00:16:00] all the time, we believe, and under the law, you're legally obligated to pay every dollar of tax you legally owe, but you shouldn't pay a penny more.

And that's our philosophy and most of our clients' philosophies- we pay what we owe, but don't pay more.

David Kafka: Right, and I'd like to plug y'all for doing such a great job, not just in taxes, but educating, and not all CPAs are created equal. When I first moved to Belize, I really didn't need Pine & Company because I wasn't making any money.

I had nothing, I was starting over, but I outgrew who I had, and then I had the privilege of meeting y'all and just falling in love with your business and how great you take care of me and my clients.. help educating our clients and us, and so, it's very important that you learn everything and stay compliant, because I already know I made my mistakes. I know I have to legally pay [00:17:00] taxes. I know I have to legally, like you said, Mike, pay every dollar I owe, but not a penny more, and I believe in that.

Mike Pine: Very good. 

So on that education front, you just mentioned, David, you also are doing education, and it's called All Access Belize.

I've gotten to be a guest on it. It's pretty informative. Who's that speaking to? And if anyone's interested, who might want to listen to that or watch it?

David Kafka: Yeah, it's really kind of education for moving to Belize, but it does go into generics for any country that you might want to be interested in moving to- Costa Rica, Canada, Mexico, whatever. Belize doesn't have any real estate licensing, and so, when I came off the plane knowing nothing 14 years ago, [00:18:00] I was a real estate professional, and that's just not how it should be.

There's a lot of shady people. We call Belize a sunny place for shady people, and so you really have to pick somebody that is just not about the commission- they're interested in educating you. I just met some people that they just lost 15 grand because they went into signing something they shouldn't have, and bought something they shouldn't have,

and the people representing them were just shady people. And so we try to educate them with All Access Belize on what it takes to move here, live here, build here and invest here, whatever it has to do with Belize, but also how an American is affected by living here.

We've had Canadian CPAs, we've had builders come on, [00:19:00] things like that, so we're just trying to help collapse time frames for people, so they can come here, do it safely and not lose money.

Mike Pine: Very cool. So that's All Access Belize with David Kafka. If you're interested, I'm sure you can Google it and find it.

David Kafka: Yep, it's on YouTube, and we'd love to have you live and sign up at caribbeancapitalgroup.com, and then you can sign up and join, and we'd be happy to have you on there and answer your questions.

Kevin Schneider: Let's go into foreign real estate, because I have a lot of clients who are very interested in owning foreign properties, not only to diversify out of the U.S. market, but because the vacation market is so strong in Mexico and Belize, and all these other places, that you can get a huge ROI on it.

Now, the tax code is a little different with those foreign properties to where you can't utilize and enact the same tax strategies you do as a U.S. [00:20:00] property, as if you bought a foreign property. They're different depreciation models, and so the IRS isn't going to float the bill for you owning

foreign properties. They're just not going to allow that, but in your experience, David, outside.. there's still tax planning in the foreign.. but in your experience, how is owning foreign properties compared to your domestic U.S. properties? Is it easier to manage? Harder to manage?

How has your return on investment on those typically been, comparatively?

 

David Kafka: Yeah, it is very different, but very much the same, and of course, y'all are the professionals. So the way I understand it, you do get some tax benefits for coming to Belize and checking on your property every year or twice a year. If you're not staying at your place, if it's rented, then part of your hotel stay, part of your food..

y'all correct me if I'm wrong, is a portion of a deduction, and we do have the alternative depreciation schedule. The big [00:21:00] difference, Kevin, is we don't have a lot of good financing here, so people are paying cash for these properties, which is good because there's not a lot of counterparty risk,

but also it does lower the ROI a bit because you're paying cash for the whole property. And if it's managed correctly though, there's definitely people out there that I know, that are making 6-15%, but then I also know people that are making 2-3%, just depending on the property, and how it's managed, and the fees, and things like that.

You definitely need a good property manager. The good thing about Belize is it's full title ownership, so it's just like owning property in the U.S. or Canada, and Belize has strong land rights. are British common law, so our laws are very much like Canada, England, and much like the U.S., [00:22:00] whereas, if you go to Mexico and you want to buy on the beach, you're buying a property in a fideicomiso, which is a bank trust,

so it's always a lease. You're never owning the property in your name or in your entity, or something like that.

Mike Pine: 

So Belize is part of the British Commonwealth, right?

David Kafka: It is.

Mike Pine: So, it's not exactly the same as living in Britain, but the law system is very similar. It's not like going in some other Central American or South American countries that are quite different, and you can't always predict the law.

David Kafka: Correct. Exactly. It's a very strong government. We have the Supreme Court, our lawyers, our judges, they wear.. if you look at them, you're in England, right? So it's pretty very much like England. We don't have a president. We have a Prime Minister, but we still have two parties.

 They're a lot more closer together than what we would say in the [00:23:00] U.S. politics.

Mike Pine: Okay, when can I move, David?

David Kafka: Whenever you want.

Mike Pine: I'm coming.

Kevin Schneider: Let's talk about the foreign earned income credit. So let's say we move down and become bonafide- according to the tax law- residents of Belize, but we're still working. We're earning money from our clients up here.

Mike Pine: Walk us through the foreign earned income tax credit. What does that mean? Or foreign earned income exclusion, sorry. 

Kevin Schneider: Exclusion. Yeah, 

so for anyone who's a U.S. resident, or U.S. citizen who lives abroad.. so in this instance, if we move to Belize, I would still have to file a U.S. tax return, but the U.S. government- as long as I live over 330 days during any 12 consecutive month period, then I'm allowed to exclude for 2020, I think 2022 or 2023, it's $120,000 of income.

So the IRS is off the top going to say, if you live 330 days in a foreign country, you can exclude $120,000 [00:24:00] right off of your tax return, and it's almost as simple as if I paid myself $120,000 via W2- I would report that in my U.S. tax return, but then I would have a negative $120,000 for a foreign income exclusion to pay zero tax on that as long as I live 330 days and met the requirements of it. There's also foreign income tax credits which we got into a little bit, but foreign income tax credits are a little different that just says you're going to pay tax on your worldwide income. But you're going to pay tax in Belize, like David is paying his, what? 1.75% of tax in Belize, 

but then he has to also take that income and report it in the States. He's going to get the foreign income exclusion, but then he's going to get credit for the Belize tax he already paid, so he's not paying tax twice- he's just paying tax on the additional rate, because Belize is at 1.75, if he's [00:25:00] at a 15% in the United States, he's paying that difference- the 13.25. So it's really simple.. well, not simple, but it's fair, and I rarely say that in tax, but it seems to be fair because the government's allowing you to exclude off the top 120,000, and if you're married, it's even more, it's 240, right?

So you could exclude up to 240,000 if you're married, then you're going to get credit for the foreign taxes you paid, and you just true-up the IRS of the difference between the rates of the two countries.

Mike Pine: That is some hidden money right there. So, if we just set our salaries at 120,000 a year, move to Belize, we're no longer paying tax. Yeah, we'll pay something in Belize, but 1.75%

Kevin Schneider: Yeah.

David Kafka: Actually, you won't pay because you're not making money through your efforts in Belize. If you start hiring people to pay tax, or if you're a CPA for Belizean [00:26:00] companies, and working here, set up shop here, then yes, you would pay 1.75%, but if you're just helping people in the U.S. with their taxes, and you're not generating income in Belize, then there is no tax for.. it's a nomadic worker program that they have. Nobody pays taxes that are nomadic workers- if you're an engineer or whatever, working on the cloud at home, you don't have to pay taxes in Belize.

Mike Pine: 120K tax-free in paradise. I love it.

David, recently you started a new syndication. You're raising money from investors in a really cool operation. You call it cacao. I call it chocolate or cocoa, but it's a cacao farm in Belize that's operating, and it's got some pretty cool aspects to it. The one thing I liked from the hidden money tax aspect is an investor. Assuming you guys actually make the money that y'all are making now and continue to do it for the next 25 years, first 10 years of distributions are likely to be tax free to [00:27:00] any US investor, because of depreciation investment- you're buying new trees, planting new trees.. But tell us a little bit about the syndication and this opportunity because maybe that's a way to start getting my foot into Belize.

David Kafka: Yeah, it's a 515 acre cacao farm, and we are the largest cacao farm in the country at this time. We have about 85,000 trees. We're only about 50% planted out, so we still have quite a bit left to go, and every year we're adding trees, and as we start ramping up production, then we'll have to add more drying, more fermenting, and things like that.

We have a great team that do a great job at the fermenting process, and really turns our cacao into... a great bean, which then gets turned into chocolate. And so the investment is a 506C, so it is for accredited investors only. It's a [00:28:00] $20,000 entrance at this time. We'll raise it later on.

And basically that gets you around 12-14% return. Right now, it's not making a ton of money because we're not producing that much. We're producing, and I can't think off the top of my head how much tonnage we are, but we're selling everything we got, and we need more, and so we just have to wait a couple more years till some of the new trees start producing, and get the other trees in the ground,

and we're also doing things to take it from a bean to maybe cacao butter, cacao nibs, or couverture, where somebody like a chocolatier in the States would buy our chocolate or our couverture

and make bonbons or bars or something like that, and so it's a cool business. 

Mike Pine: Well, David, thank you for being such an inspiration to [00:29:00] anyone and listening, who wants to take that plunge and get out of the United States and start to expand their wealth and horizons to different countries,

Kevin Schneider: and your experience is in Belize, but you could take David's story and apply it to your own, no matter what country you go to. Just thank you so much for being here, David, and if anyone wants to get in contact with you, like you said, if you're going to be going to a foreign country for the first time, reach out to someone who knows,

and so, how does someone reach out to you?

David Kafka: Yeah, reach out to me at [email protected] and I have a bunch of free stuff to give you on there. I'm an Amazon best selling author through Kyle Wilson's compilation books and I have my chapter in there, and I have another one in one of the other books that I've written,

when you look at [email protected], so if you're interested in real estate and buying real estate, you would connect with me there. If you're interested in passively [00:30:00] investing, like in the cacao farm, then you can connect at caribbeancapitalgroup.com.

Kevin Schneider: Very cool. Thank you, David, for being on the podcast for today and hopefully, we can have you back in your next venture, and you'll have a new story to tell us. Thank You. Thank very much.

David Kafka: Thanks, guys.

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