No matter how you budget and save, the government will take away a huge chunk of your foreign income. Setting up an offshore company, investing time, money and labour into its business operations and then letting the government profit from all YOUR hard work isn’t a viable plan.
Qualify for FEIE
You can exclude your income from federal taxes by qualifying for Foreign Earned Income Exclusion. However, FEIE has a lengthy qualification process,
- The US citizen needs to be a bona fide resident of a foreign country for an uninterrupted tax year
- The US citizen needs to be residing in a country that has signed an income tax treaty with the US
- And the US citizen must remain in outside the USA for a period of 330-days, without interruptions
Take advantage of Foreign Housing Exclusion or Deduction
Use form 2555 to calculate your exclusion and deduction.
Exclusion includes the amount of housing expense offered by your foreign employer; on the other hand, deductions is the amount of housing expense incurred by a self-employed individual earning abroad.
Foreign Tax Credit OR FEIE
You can either claim a foreign tax credit or FEIE. Check to see which policy is most effective for you and your business. Foreign tax credit helps reduce your tax liability, by accounting for the amount of dollars you pay in taxes. It takes a dollar-for-dollar approach, rewarding taxpayer with credit/points.
For example, if you pay off an accrued income tax or taxes on salaries, wages, dividend or interest, you earn credit.
But you need to qualify for FTC first. The income excluded under FEIE can’t be used to claim a tax credit, however, your non-earned income e.g. dividends or interests can be covered under foreign tax credit.
On the other hand, FEIE reduces income to reduce your tax liability. You’re better off using the tax credit as federal tax rate used to calculate FEIE can be very high.
Did you start a business to make a profit for the government? Learn to protect your foreign earned income from taxes and duties with Mikkel Thorup. His weekly ‘The Expat Money Show’ helps many expats survive in the foreign land and make money for themselves and not the government. Register your company offshore now to lower your tax liability.