Tax Hacks: How to Legally Avoid Paying US Taxes While Living Abroad
As an American living abroad, you may have to pay taxes in both the US and the country you reside in. However, there are several legal ways to reduce or eliminate your US tax liability while still maintaining compliance with the law. In this article, we’ll discuss various tax hacks that you can use to legally avoid paying US taxes while living abroad.
1. Take Advantage of the Foreign Earned Income Exclusion (FEIE)
The FEIE allows you to exclude up to $108,700 of your foreign-earned income from US taxation in 2021. To qualify, you must pass either the Physical Presence Test or the Bona Fide Residence Test. The Physical Presence Test requires you to be physically present in a foreign country for at least 330 days in 12 months. The Bona Fide Residence Test requires you to establish a tax home in a foreign country and have no intention of returning to the US.
2. Use Foreign Tax Credits (FTCs) to Offset US Taxes
If you pay foreign taxes on income that is also subject to US tax, you can use the foreign tax credit to offset your US tax liability. The amount of the credit is generally limited to the amount of US tax that would be due on the same income. If your foreign tax credit exceeds your US tax liability, you can carry the excess forward for up to 10 years or back for up to one year.
3. Establish a Foreign Corporation or LLC
By establishing a foreign corporation or LLC, you can take advantage of more favorable tax treatment in some countries. For example, some countries have lower corporate tax rates or don’t tax income earned outside of the country. Additionally, income earned by a foreign corporation or LLC is not subject to US self-employment tax.
4. Invest in Tax-Advantaged Retirement Accounts
If you’re living abroad and earning income, you may be eligible to contribute to a tax-advantaged retirement account such as an Individual Retirement Account (IRA) or 401(k). Contributions to traditional IRAs and 401(k)s are tax-deductible, reducing your US tax liability. Additionally, earnings on the account grow tax-free until withdrawn in retirement.
5. Consider Renouncing Your US Citizenship
Renouncing your US citizenship is a drastic step, but it can eliminate your US tax liability, it’s important to note that the process can be time-consuming and expensive, and you may be subject to an exit tax on your assets. Additionally, renouncing your citizenship may have other consequences, such as limiting your ability to travel or work in the US.
Conclusion
In conclusion, as we have seen throughout this blog post, their various tax hacks that can help you avoid paying US taxes while living abroad. These hacks include taking advantage of foreign-earned income exclusion, foreign tax credits, tax treaties, and forming a non-US business entity.
However, it is essential to consult with a tax professional to ensure that you are following all the necessary regulations and requirements.
We hope that this article has provided you with valuable insights and tips on legally minimizing your US tax liability while living abroad. With these hacks, you can save a significant amount of money and ensure that you comply with the law.
