Many U.S expats live overseas because of work, not because they’re actively trying to Avoid Paying U.S Income Tax. Unfortunately, this means that such American expats pay both U.S and foreign taxes.
Enter Foreign Earned Income Exclusion (FEIE). It prevents double taxation by excluding expats from U.S taxation.
Here are 4 legal ways to avoid paying U.S income tax via FEIE.
Move Outside Of the United States
Moving outside the U.S is one of the fastest ways to minimize your income tax. The Physical Presence Test of the Foreign Earned Income Exclusion is a commonly used tax strategy for expats.
As per Internal Revenue Service (IRS) regulations, a U.S citizen is required to stay in a foreign country for 330 days in a calendar year to qualify for annual income tax exemption of $101,300. It’s not, however, necessary to have a residency in any country. Note that this strategy applies to those who spend the required amount of time in a foreign country (s). This means that international waters don’t count.
Relocate to a U.S Territory
Another smart legal strategy to consider is moving to a U.S territory like Puerto Rico. One way to save on U.S income tax is levering Act 20 or the Expert Service Act. Service businesses can get an income tax exemption that’s as low as 4%.
The tax on earnings and profits can be 0% for businesses that export their services from the U.S territory. Another way is leveraging Act 22 or the Individual Investors Act. High net worth investors can have zero percent tax on capital gains, interest, and dividends if they spend 183 days in Puerto Rico.
Get a Second Residency
There are many benefits to obtaining a second residency. Fortunately, there are as many tax-free countries that you can consider such as Monaco, the Bahamas, Brunei, and low tax countries like Ireland.
The kind of residency that you qualify for depends on your situation. If you want to reduce your U.S income tax, a second residency is a feasible option.
Renounce Your U.S Citizenship
In terms of finance, renouncing your U.S citizenship doesn’t make a lot of sense to some people. Even with the income tax savings, you’ll have to pay an exit tax on all your business’ capital gains.
With that said, in case you have less than $2 million worth of wealth, there is no need to pay the exit tax. Simply ensure that all your income taxes before you renounce your citizenship are paid properly. You can still enjoy government benefits and use U.S banks in particular cases.
Tired of Paying Avoidable U.S Income Taxes?
Are you interested in learning how to legally eradicate your tax obligations? Join Mikkel Thorup on his weekly podcast at The Expat Money Show for conversations with successful business owners and expats on investing, offshore incorporation, entrepreneurship, finance, and best countries to set up an offshore company.
Check out his exclusive free training video on how American expats can save more than $100,000 per year in taxes via Foreign Earned Income Tax Exclusion.