A Road Less Traveled (photo credit)
A few months ago the story of a Google employee who lived in a truck(*) in the company’s parking lot went viral. Rather than pay $2,000/month to share a 2 bedroom apartment with 3 other people, he chose to sleep in a 16-foot box truck.
I love it! Great choice! A few years of following the road less traveled will ensure a strong financial future. By not paying rent, an additional $24,000/year can be applied to debt and investments.
But what if there was a way to double that savings with one easy change? And in fact there is. (Hint: taxes.)
Income & Taxes
Assuming a salary of $119,300 per year and a maximum 401k contribution of $18,000 in 2016, our young Google employee will have a taxable income of ~$101,300.
California would want their share of $6,514.14 (~$543/month.)
And of course the IRS would want even more; $18,521.25, to be specific ($1,543/month.)
But a young software developer with talent and creativity, who now happens to be looking for a new place to park his truck, has many options.
Move out of State
4 Hours east of Mountain View, California is the beautiful State of Nevada. Lake Tahoe and Yosemite National Park would provide unlimited recreation options, and a cheap internet connection and a laptop can form the 24/7 umbilical cord to the Googleplex.
Simply driving across the border eliminates the California income tax, and replaces it with nothing. The scenery improve as well.
The View in Silicon Valley (Wikipedia)
The View at Lake Tahoe (circa 2011)
Move out of the Country
But why stop there? 8 hours south of Mountain View, California is the incredibly friendly country of Mexico, with abundant sun, surf, and high speed internet. (And don’t even get me started on the guacamole.)
Although the United States is one of the few countries that taxes its citizens on worldwide income, living abroad allows replacing a fairly small Standard Deduction and Personal Exemption with a sizable exemption known as the Foreign Earned Income Exclusion (FEIE.)
How sizable? $101,300 per person in 2016.
Additionally, it may be possible to exclude even more income through use of the Foreign Housing Exclusion or Deduction (not applicable when living in a truck.)
By driving across a national border, we can eliminate Federal and State tax burden to the tune of $25k/year. As an added bonus, all of life’s essentials cost less (e.g. guacamole and health care.)
Cobblestone Street in San Miguel de Allende, Mexico
But… my employer wouldn’t allow it
No? Most employers need you more than you need them. If the needs and expectations of a current boss/employer aren’t aligned with yours, it may be best for all parties to part ways.
Twice in my relatively short career I negotiated special work arrangements. The first time I created an expat assignment to Taiwan, where I lived for 1.5 years (I plead the 5th on whether or not this was influenced by a certain someone.) A few years later I negotiated a 12 month remote work agreement, which allowed me the freedom to work from coffee shops or in my boxers (never both simultaneously.)
Neither job was offered to me. “If you don’t ask, the answer is always NO.”
(A strong financial situation certainly makes it easier to ask.)
The Details of the FEIE
The Foreign Earned Income Exclusion allows a US Citizen to exempt employment and self-employed income from US Taxation, even on income sourced from the United States and deposited into US bank accounts, as long as the Citizen is outside US borders.
Qualifying
Qualifying for the Foreign Earned Income Exclusion requires moving your Tax Home overseas and passing either the Bona Fide Residency Test or the Physical Presence Test.
Bona Fide Residency Test – this requires establishing permanent residency in another country, accomplished by legally moving to a new country for an extended period. The Bona Fide Residency Test is somewhat subject to interpretation, but a key factor is that you pay taxes in your new home country.
This is great if your goal is to live in one specific country. If your goal is tax minimization… not so much.
Physical Presence Test – If you are present in a foreign country (or countries) for at least 330 days in a 12-month period, you are considered to live abroad and can claim the FEIE. Sailors and Explorers take note: International Waters and Antarctica don’t count. If during the course of those 12 months you aren’t in any one country long enough to be a resident for tax purposes (generally < 183 days, but varies by country), total tax is zero. This still allows 35 days of US travel per year to visit family, attend to the needs of an employer, etc…
See full details on Passing the Physical Presence Test.
Neither of these foreign residency requirements must be permanent (just indefinite and more than 1 year.)
Social Security & Medicare
While claiming the FEIE eliminates Income tax, Social Security and Medicare taxes must still be paid. These FICA tax rates are 7.65% for an employee and 15.3% for the self-employed. (There are some exceptions for permanent residents who pay into a foreign Social Security system if the US has a bilateral Social Security agreement with that country. While this eliminates double taxation/coverage, it is still taxation.)
I will write a future post that details how FICA taxes may be eliminated under specific circumstances, but in the mean time we can rest assured that (at least a portion of) these funds will be returned to us at a future date when we start collecting Social Security.
Non-Earned & Passive Income
The Foreign Earned Income Exclusion only excludes earned or self-employment income.
Income from investments, rental properties, IRA withdrawals, Social Security, pensions, etc… are all subject to taxation. (Although subject to taxation isn’t necessarily the same as paying taxes.)
Income Exceeding the FEIE
Any income exceeding the FEIE is still subject to US taxation.
If earned or self-employment income exceeds the FEIE, additional income is taxed at the marginal rate that would apply if the FEIE didn’t exist. In the example presented here with single filer with $120,000 income and $18,000 401k contribution, an additional dollar would be taxed at 28%.
Tax-deferred Investments
Income excluded from taxation by the FEIE cannot also be contributed to a tax-deferred investment such as a Traditional or Roth IRA. Income that exceeds the FEIE can still be contributed to an IRA, subject to Income and contribution limits.
The exception is contributions can still be made to a US employer’s 401k. If income exceeds the FEIE, these contributions would best be made to a Traditional 401k else they be taxed at the highest possible marginal rate.
If income is less than the FEIE, there is a great opportunity to contribute to a Roth 401k at a 0% tax rate. Tax free in / tax free out is as good as it gets.
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For more exciting details, check out IRS Publication 54 and Form 2555.
Examples
Young Google Employee
A young Google employee negotiates with his employer the option to work abroad while earning a US salary of $119,300 and an employer sponsored 401k.
He spends 5 months in Mexico, 3 months in Ecuador, and 3 months in Argentina, all in convenient time zones for communicating with the United States. Another 4-5 weeks are spent in the United States to visit family and for business purposes. Of course the seasons are taken into account, providing for a perpetual summer.
At tax time, with an 18k deduction for a 401k contribution and the Foreign Earned Income Exclusion, total taxable income is zero.
Web Entrepreneur Takes Time Off to Travel
An entrepreneur with a successful website wants to take some time off to travel for a year or two. After some effort, work responsibilities are reduced to just a few hours a week that can be done from any location with an internet connection.
With a Round the World ticket in hand (purchased with miles, naturally) our intrepid adventurer sets off on a long journey across 5 continents and 20 countries.
As the journey unfolds, it becomes apparent that the tax savings will pay for the entire trip. The question must be asked, “With tax advantages such as these, why return to the US?”
Online Family Roams the Globe
A husband and wife team have an online business that earns over $220,000 per year. Interested in providing a more International experience for their 3 children, they begin a life of slow travel.
As equal partners in the business, income is split between the two adults who can each claim the FEIE ($101,300 tax free each.) Because they have a larger family, they rent multi-bedroom homes in each location they visit. With somewhat large rental expenses, they can also claim the Foreign Housing Deduction.
At tax time the family is delighted to learn that all of their income is tax free, a savings of more than $50,000.
Also, by incorporating their online business overseas, they could also eliminate the self-employment tax (which is about $30,000).
Conclusions
By qualifying for the Foreign Earned Income Exclusion and living semi-nomadic, it is possible to earn over $100,000 annually per person and be completely free of Income Tax. This is especially exciting for those who already work online and are in the US solely due to history and momentum.
For a single filer in 2016, that amounts to more than $18,000 in Federal Tax (plus State taxes.) Anybody who can arrange to perform their work duties from any location with an Internet connection has the potential to substantially accelerate retirement savings.
With the increasing availability of remote work options and relative ease of creating online businesses, more and more Americans can design their lives to take advantage of this opportunity.
Not only is it possible to pay no taxes once you stop working, it is possible to pay no taxes ever. Or at least starting today.
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(*) The same journalist also wrote about us, but a story about retiring in your 30s generates only 5% of the views. If only I had known :p
This is awesome- thank you! Follow up question- that 101.3k is the limit on *salary*, right? Not any expat benefits (living allowance, tax balancing, etc.)? Also, once you get over that limit, if you’re maxing out a Roth, is my understanding correct that your salary can get up to 119.3k before you start getting taxed (and that you get to benefit from that tax free in, tax free out bonus in the roth)?
hmm wait correcting myself- if you’re contributing to a roth 401k it doesn’t lower your taxable income (duh). I guess you would need to run the math for your salary to see if you’d be better off using a trad 401k to get your taxable income below the limit or if it’s better to continue using the roth 401k and pay the taxes for the amount over the 101.3k limit knowing that its (almost) tax free in tax free out.
All of the income from traditional expat packages is still income, and with some exceptions for housing and meals provided at the employer’s convenience, are taxed. Often those packages tax equalize, which means you would just pay the US tax bill and the employer would pay the rest, if applicable (rounded up for taxes.)
The standard comparison for Traditional vs Roth still applies. If the marginal tax rate is 0% (due to income being less than the FEIE) than Roth is best. If income is more than the FEIE, than you are looking at marginal rates of 25% plus and Traditional would be best.
Wow! I really need to brush up on income tax laws. This was a real eye-opener! And, surprisingly, I haven’t heard of said Google employee. I definitely need to read up on this guy. I can’t say I’m thrilled about traveling or living abroad the majority of each year to save on taxes, but, for people who want to retire early and travel it’s a perfect plan. Almost inexcusable to NOT implement it. Thanks for this enlightening and succinct post!
Mrs. Mad Money Monster
I’ve been enjoying your comments on several of the blogs I enjoy, Monster, so I googled and saw that you have your own website. Cool, thanks, I already enjoy the post on owning cars in pre-frugality days.
Welcome! I’m so glad you found us. Please visit again. We’re always trying to inform, enlighten, and entertain along the way :)
Hi Mrs M M M
It’s also a good short term option for anybody who wants to accelerate savings for any purpose: buy a house, pay off student loans, build F-you money…
If living in the US is preferred, then it is just life as usual and there is still a whole arsenal available for tax minimization.
F-you money is right exactly why I am considering this!
When I lived in Germany, I dated an American dental hygienist in Zurich, Switzerland. There was a decent-sized community of American hygienists living there because a) Switzerland didn’t train enough of them, and b) the Americans could earn most, if not all, of their wages income tax-free.
Of course, it’s not as easy as picking out a country and taking the FEIE. You have to make sure that the country you live in doesn’t tax you for U.S. based income (https://www.irs.gov/Businesses/International-Businesses/United-States-Income-Tax-Treaties—A-to-Z), or, if you earn income in the local currency, that there are tax reciprocity laws or that you’re not required to pay taxes on your locally earned income.
The U.S. is one of 3(?) countries that taxes its citizens on worldwide income, in company with the Philippines and Eritrea (http://hodgen.com/does-the-united-states-stand-alone/).
Also, if you live overseas and have overseas accounts, make sure you’re compliant with FATCA and FBAR.
Great points on the foreign countries taxing your US based income. I’m sure if the US isn’t getting a piece of the pie, some other country will definitely be trying to :)
If you are in country temporarily and short term, you won’t be subject to tax. This is often less than 183 days, and would be the case if you were on tourist visas.
See the left side bar in this tax site (also linked in the main post) for details on each country (easier to read than the IRS tax treaties which are written in legalese.)
Note that it isn’t required that you actually move abroad to get taxed by a foreign government. On my last work project, one engineer spent so much time in China that we had to keep him in the US the whole month of December else he be required to pay Chinese income tax.
Wait a second… you lived in Europe and dated an American?
I want to highlight the tax reciprocity point you made:
As presented here, a nomadic lifestyle is required. If you pick a (single) country and live there for an extended period, you should assume paying taxes will be required (in most, not all cases. Some countries won’t tax income earned from foreign sources.)
Is that a fair statement?
Yup. I lived in Germany and did weekend trips to see an American living in Switzerland.
And, yes, as you’ve stated it, I concur. Merry Christmas!
This is something we talk about a lot. We’re planning to keep our income pretty darn low in early retirement, both to stretch our funds longer and to maximize our Obamacare subsidy, so we think we’ll keep our tax burden super low as well. But if we suddenly found that our investments were going gangbusters and we could increase what we live on? Then moving abroad would get mighty tempting mighty fast! We’re just such home base people that we want to have a permanent residence in a place we love, with friends nearby, and we have that right now in our western US mountain town. If we didn’t care about that, we’d definitely consider the full-time traveler or RVer or expat lifestyle… but maybe we’ll still get there one day.
As always, thanks for the super detailed and helpful info!
Just to be clear the FEIE exemption when living overseas only applies to earned income and not investment income
Helpful to know — we do have a chunk of rental income and are considering freelancing, so it’s all in play.
Very interesting! Are you planning on taking advantage of the FEIE yourself for blog income? Or are you in a low enough tax bracket (ie ZERO!! ha ha) where you don’t need to.
I guess it could get pretty complicated working in multiple different countries and trying to coordinate taxation across all those countries if you had to file in each one.
I haven’t finished our taxes yet, so I’m not sure if we will use the FEIE this year.
Any thoughts about maxing out the 401K to $53,000 first? A company can give a total contribution of $53,000.
I recently formed an S-Corp since I’m self employed, and put $53,000 into my 401K!
In order to max out the 401k’s $53,000 limit you would need to earn $140,000 in salary through your s-corp since there is a 25% cap on employer contributions:
$18,000 employee + $35,000 employer = $53,000
To make the $35,000 employer contribution you would need to pay yourself a wage of $35,000 x 4 (25%) = $140,000.
Then there is the trade-off of paying SS/Medicare taxes of 15.3% on the first $118,500 salary vs. taking part of it as K1 income and paying income taxes instead. If you are planning to do a Roth ladder to get some tax-free conversions, you could be money ahead, otherwise it might be better to pay the income taxes now.
Anyway, you probably knew this since you have your 401k set up already, but I just figured I would let others know that it’s not like they can have a business that makes $60,000 and then tax-defer $53,000 of it. Sadly, it doesn’t work that way.
Hi Travis. I don’t think what you said is accurate. I have set up an S-corp and my salary is $35,000. My 401K is $53,000.
Are you saying the S-corp has to make $140,000 to give me $53,000 for my 401K?
Another benefit is I only pay Self-employment tax on the $35,000 salary, and not on the rest of my income which comes as a distribution.
That saves a lot of money on the Self employment tax (15.3 percent) that I would usually have to pay on my total income if I didn’t set up an S-corp.
Any thoughts?
Travis is correct, you can’t contribute $53k to a solo-401k on $35k income.
https://www.irs.gov/Retirement-Plans/One-Participant-401%28k%29-Plans
Go Curry Cracker, I read the link, but I don’t that applies to me. I’m having the S-Corp making a MATCHING Contribution.
An S-Corp can do a company match of 100% of Salary or $53,000, whichever is less.
Since my Salary is $35,000, the S-Corp will do a match of $35,000.
As an Employee, I am allowed to contribute the maximum of $18,000 to the 401K. That gives me a total of $53,000 into the 401K plan.
This is what my accountant told me, am I missing something here?
Anyone else have an S-Corp?
An S-corp can match up to 25% of salary, with total contributions not exceeding 100% of salary. This is not the same as doing a 100% match.
Your example:
$35k salary, $18k elective contribution, 25% employer match = $26,750 max contribution
Example with low salary:
$20k salary, $18k elective contribution, 25% employer match = $20k max contribution
(employer match is limited to 100% of salary, $2k instead of $5k)
Example with high salary:
$140k salary, $18k elective contribution, 25% employer match = $53k max contribution
Go Curry, I checked with my Accountant and you are right, he gave me the wrong advice and made a big mistake! THANK YOU, THANK YOU!! THANK YOU!!
Last month I already deposited $26,500 into my 401K, and THANK GOODNESS you and Travis warned me right before I was going to deposit another $26,500 into my 401K! (I know right now I’m only allowed to contribute $250 more since my max is $26,750)
Do you think I can still contribute another $26,250 as an After-Tax Contribution to hit that $53,000 number? Mad Fientist wrote about this in his Blog, and converting it to a Roth IRA later, but I don’t know if I qualify.
I figured if I’m going to put $26,250 into a Vanguard Brokerage account, I might as well put it into After-Tax contribution 401K right?
Anyone else with experience with After Tax Contributions for 401K?
You’re welcome.
If your Plan allows it, you can make after-tax non-Roth contributions.
The standard Plans of most (all?) mainstream solo-401k providers don’t allow it, Vanguard included.
It still has to be earned income, so you would need to increase your salary and pay SE Tax and Income Tax on the additional funds. That is what is meant by “after-tax.”
It might be time to find a new accountant.
Hey Andy and GCC
I ran into this same issue. I realized it after several months of planning and setting up my 401k. I’m also an S-Corp. Turns out the s-Corp is more to save some payroll taxes and possibly better at liability protection(that’s my understanding so please correct me if I’m wrong).
If your ultimate goal is FI(IMO) the LLC is better bc you “show” all your income. That way you are more likely to be able to reach the bigger limit. You need to show 250k (I’ve heard there are interesting ways to “show” this even if you can’t reach that number) I believe to get the 53k. I wish I would have set up as an LLC 10 years ago.
Also just FYIwhen I tried to do the after tax nonRoth contribution,which I made sure my plan allowed, it was going to cause a compliance testing issue because my wife worked for the company and she was also designated as an HCE even though she doesn’t get paid much. All I can figure out to do is to max my wife and I’s 401k with match,HSA, and then after tax investing. Also probably back door Roth too but haven’t taken the time to get all my pretax investment moved to my 401k.
Any suggestions GCC?
Also Andy you might want to check that your not paying an extra fee to your 401k administrator for profit sharing because it’s probably never going to make financial sense as an S-Corp. The reason is you would have to raise your income so much you would lose the tax benefit to the S-Corp. I personally found that it was smarter for me to pay taxes on it and invest on my own. Not great for my employees because I really wanted to do profit sharing for them but it was better to just give the money as bonuses. Hopefully they put some of that away but it doesn’t sound like it. They all drive new cars and are building or buying new houses.
Just so you know my accountant would probably have an aneurism if he knew I was giving advice so double check with other sources. Also please correct me if I’m wrong.
Tim, I don’t have any suggestions. I think often people form an LLC or S-corp without really understanding why, and sole proprietor would work just as well at lower expense.
This is amazing inspiration. And definitely my goal in life! I’m not entirely sure the husband is on board for only being the the U.S. for that many days per year… but maybe the tax advantages would convince him… :)
I need to take a serious look on the Canadian tax system. I’m sure the CRA has something similar to what you outline.
On a completely unrelated note…
Coffee shops OR in my boxers… I’m glad that you used OR and not AND haha. ;) :p
In Canada, its quite different because the country taxes individuals based on their residency (not citizenship like in the US). So, let’s say you moved to a country where there is no income taxes, you could conceivable pay no income tax on your employment income. However, any investments or properties in Canada would still incur income taxes because they are Canadian-sourced. The trick to becoming a “non-resident” is breaking all residential ties (such as renting out your home, or selling it) – I’d suggest talking to your tax accountant on this matter as it can be a little complicated.
However, let’s just say for the sake of argument that you were from Alberta – and all your income was eligible dividends (a specific tax term you might want to look up – but for sake of argument most Canadian public companies pay these types of dividends) – you could earn around $40K without having to pay any personal income taxes. Take a look at the marginal tax rate table for Alberta / Federal (http://taxtips.ca/taxrates/ab.htm).
I hope that helps.
Thanks Jared, will definitely need to consult tax accountants on this later.
Fantastic article, thanks for writing!
You were lucky. Some of my colleagues attempted exactly that, and sometimes for much better personal reasons than “I want to reduce my tax”. Try “my father is dying, can I work from his state for the next 6 months?”. The company refused. There are heavy tax and legal implications for the company, and sometimes, believe it or not, you’re not *that* important to them.
I mean, you’re right, if you don’t ask the answer is always NO, but I’ve seen several examples where this just didn’t work out.
That’s a very good point Stockbeard. Back when I was working, companies were actually tightening up the ‘remote work’. Apparently there’s a forced movement *back* to the office by companies. I was actually a part of this. Rather than let me continue working remotely, the last company I worked for eliminated my remote position (and then rehired someone else to work in the office 1 month later). *sigh*
I believe this also happened en-mass at Yahoo recently. I believe the theory is that working in a office amounts to tighter interaction and higher overall productivity. I’ve seen it most commonly in tech companies.
For those not self-employed or on assignment overseas, this may not be a less likely scenario than it may have been in the past.
I think the same arguments of why remote work is unlikely mirror the arguments against financial independence. It’s hard, requires doing unconventional things with persistence, etc…
But it is mind boggling just how many people have arranged this lifestyle.
Chiang Mai is a major hub for digital nomads and formal expats. In the past two months here, I’ve met so many people who are remote workers for major US companies, some full-time and some contract (including Yahoo.)
There is an incredible infrastructure here for it, such as community work space with all of the typical office needs (high speed internet, printers, copiers, etc…) and it seems to be growing.
I could have been an example of how asking to work remotely / abroad didn’t work out.
When I asked, the answer was a resounding no. I asked why.
I then proposed a plan that addressed the main concerns. The answer was still no.
I proposed another option. The answer was again no.
At this point, I applied to positions at a few different companies and arranged an interview.
I even met face to face with the person whose job I would be taking over, based in Taiwan.
A condition of the interview was that they contact my employer as a courtesy, since our two companies worked closely and they didn’t want to upset anyone. I agreed.
I’m sure at least one meeting took place where my management discussed the trade offs of a remote work option or receiving my two week notice. They concluded the remote work option was preferred.
I also preferred that option, but Plan B would have been equally as rewarding.
It was at least 6 months from when I first broached the topic until I had a formal remote assignment. Was it luck? I’m not so sure.
The beauty of being a knowledge worker. Need nothing but a wifi signal and a laptop…
Beauty is a great word for it
It’s worth noting that qualifying for FEIE (either via bona fide residence test or physical presence test) would also exempt you from the ACA requirements.
Yes, exactly. The ACA exemptions are based on the same FEIE qualification rules.
If you are able to use the FEIE, you are also not required to buy insurance in the US.
But wait a second….. to qualify for the exemption you’ve got to be a bonafied resident of another country. To be a bonafied resident you’ve got to pay taxes in the other country. My brother-in-law has done this for years but his company paid the local taxes because that’s part of the normal custom and standards of employment of that country.
There is another way. Take a look at the Physical Presence Test detailed above.
This was really helpful, thank you. I am one of those Americans who has lived abroad quite a bit (awhile ago), and would consider it again. This was a really useful primer to US expat taxes! Especially since clearly you guys are making it work for you. I’m definitely taking notes!
That said… I’m curious though that it’s all upsides, and no downsides. From my expat friends, I generally hear lots of angst about how antiquated and difficult the US tax system is for expats. Here’s my understanding of the down sides of taxes for US expats:
*Only the US and Eritrea charge taxes based on nationality, not country of residence (the US made this rule to punish Civil War tax dodgers), despite the fact that expats get none of the benefits of taxation – roads, schools, health care, etc. (The FEIE exemption does go a long way toward helping that though!)
*Expats file both US and local country(1) taxes every year – if local taxes are lower, they have to pay the difference in US taxes (beyond the foreign residence exemption). VAT taxes (like sales tax, 20-30% in many European countries!) don’t count toward the local taxes estimate!
*Expats get screwed at the banks. The US now requires expats to file FBAR paperwork on all of their non-US bank accounts (again to try to catch tax dodgers), with expats getting huge fines (a full 50% – 100% of the money in foreign bank accounts!!!) for failure to file (2). A lot of foreign banks have actually fired their US customers because the US government laws are such a hassle, and a major privacy/sovereignty concern. Many expats report that they can’t even open a local bank account.
*If you are an expat, good luck getting help from US politicians. Most don’t let you even contact them if you are not living in their state. If you use a friend/relative’s address in that state, they won’t write you back (reportedly) – which makes sense because most expats can only vote in Federal elections, and anyway absentee ballots are subject to much higher rates of fraud and being arbitrarily rejected.
(1) Not all countries charge US expats taxes. https://www.irs.gov/Businesses/International-Businesses/United-States-Income-Tax-Treaties—A-to-Z
(2) http://money.cnn.com/2015/04/01/pf/taxes/irs-penalties/
Interesting that both US Residents and Expats like to complain about taxes ;)
I don’t have problems with any of the 4 negatives you highlighted:
– US taxes citizens on worldwide income – It is what it is.
– Dual filing – it is just paperwork (not necessary if you are nomadic)
– Banking – we have no overseas bank accounts with more than $10k. Again, it is just paperwork
– Lack of help from US politicians – this is another things Americans and Expats have in common
Things could always be improved, but I don’t spend much energy worrying or complaining about things I’m not willing to put in the effort to change.
Thanks for the response on how these concerns actually impact you. Since the rules change since I was an expat, I wasn’t sure how difficult they were (and frankly the 50%-100% fines for nondisclosure of foreign bank accounts freaked me out!). Good to know that you make it work just fine.
Jeremy and Winnie – could you explain how dividend income rolls into this? (I’M LOVING THIS POST, in case you can’t tell!!!)
I have previously read your 2014 taxes post about how US dividend income is only taxed above a certain point ($70k + $20k standard deduction), and so you guys essentially don’t pay taxes. In this post, you’re discussing the foreign earned income deduction of ~$100k (which is not applicable to you due to most of your money being in dividends). 3 questions for you:
1) How do those two go together – dividend tax exemptions, and foreign income exemptions? For this purpose, let’s use a couple that gets $70k in dividend income and $70k income while living abroad for over 330 days in a tax year (and has filed the IRS paperwork for living abroad). What does the tax calculation look like?
2) I know some countries charge their own taxes instead of/on top of US taxes. Can other countries charge you for dividend earnings like income?
3) How do you choose a country to live in? I saw, and posted (currently stuck in moderation) that IRS list of countries with tax treaties with the US, but it’s a long list and each country links to a giant document. Is there a short list that explains countries that don’t tax expats?
The FEIE will eliminate tax on the earned income up to ~$100k, but tax on other income is levied as if the FEIE didn’t exist.
With $70k earned and $70k qualified dividends for Married Filing Jointly (no dependents, 2015), tax would be $6,750
– $70k earned overseas: $0
– $25k qualified dividends: $0 (15% marginal tax rate ends at ~$95k)
– $45k qualified dividends: $6,750 tax @ 15%
effective tax rate: 4.8%
If you are a legal resident of a foreign country or are present in a country long enough such that they think you are a resident, some countries will tax you investment income.
This is often less than 183 days. See the left side bar in this tax site (also linked in the main post) for details on each country (easier to read than the IRS tax treaties which are written in legalese.)
BTW, that left bar on the aforementioned site is not visible on mobile devices. You must request the desktop site to have access to the country list.
Ah, thank you. So the FEIE means no income tax below ~$100k, but with dividend income, you pay taxes based on the whole $140k shebang (even though the first $70k of income was not taxed). That’s non-intuitive, so good to know!
Once again, a very helpful tax minimization post! Thank you.
You have a knack for taking typically dry content and making it sizzle! Who would’ve thought some of m favorite posts would be about Obamacare, capital gains, tax deductions, and FEIE!
My wife and I plan to live abroad for a year in 2017, and there will likely be earned income from back home. So, I’m excited to add this to my knowledge toolbox!
Thanks Chad! You have excellent taste in blog posts, haha
Where are you headed in 2017?
We’re planning to settle for a year in either Argentina or Spain. We’re still comparing and contrasting right now. One of the most important considerations is school (and preschool) for our 2 girls who will be 4 and 6 at the time. We both speak Spanish and want them to speak as well. Should be fun!
When you decide, I would love to hear which you chose. We will be in Spain in spring ’16 and most likely in Argentina in the fall/winter ’16.
If you haven’t already, check out the blog Bucking the Trend about Americans now living in Grenada, Spain. Looks like a great life!
I will let you know. Yeah, I’ve been reading Bucking the Trend. Great site. They are certainly an inspiration. I think we can’t go wrong either way! School year has been one big consideration since it begins in March for Argentina (would have to take our girls out of school in middle of year). But cost of living there is enticing!
Really interesting article. I worked abroad in Europe and Latin America for almost 20 years, and didn’t pay much less tax than I would have owed if I’d stayed in the U.S. I took the FEIE, but since I was living in countries with similar tax rates to the U.S., what I owed in local taxes on my earned income was comparable to what I would have paid in the U.S. It was practically a wash.
I’m planning to retire somewhere in Latin America in a few years, but since my income then will be from Social Security, a small pension and taxable withdrawals from my 401(k), I’ll owe U.S. income tax on all of it, and not be eligible for the FEIE since I won’t have earned income. I’ll sell my U.S. home, so might be able to avoid state income tax if I’m no longer a resident of a U.S. state. And of course I’d be moving to a country with a lower cost of living, which will be the biggest savings.
Such an amazing insight! I do admire how well this article was written. Nice work on using the the Google guy as the perfect example.
I never knew that you can actually save tax when travelling abroad. But I guess it makes perfect sense to have your taxes less when not in your home country. I liked the idea of crossing borders to avoid state taxes and other relevant taxes. FEIE is such an amazing help especially to those who can barely afford the current US taxation, and for those who are planning to live and work abroad.
Wow, thanks so much for this post! I have a few question.
If you’re hopping around from country to country and aren’t in any country long enough to be considered a resident, do you need to file taxes or any paperwork in those countries, or only back in the US?
So what amount do you need to make to max out a solo 401k then? You can contribute the 5.5k to the backdoor roth IRA with an income of $106,800 correct?
Also, what about health insurance? Am i still required to have a plan back home?
Thanks again for all your help!
I can’t answer to all countries about health insurance, but around 2000, I wasn’t allowed to stay in Switzerland without proof of having health insurance (and $2k savings in the bank – that was a nasty surprise for my broke self at the time!). I don’t know what the rules are now.
I just asked this question of an expat friend living in Sweden, and she said that as a permanent resident, her health care is taken care of in Sweden. Same with a US friend in Holland. Mind you, those are all high cost of living European countries.
You only need to file taxes in the US, just like all of the other tourists. If you need a tourist visa for a particular country, that may come with requirements for insurance, sufficient assets, etc…
If you qualify for the FEIE, you are also exempt from having US based health insurance.
As long as income is more than the FEIE, you could contribute to an IRA if you meet the other income and contribution limits. I’m not sure how that would play out for the Solo 401k.
We have plans for Nicaragua after FI, we have talked about having a permanent home, but at that point our income should be from real estate and investments only, so based on your article it would not be a tax benefit. Unless you would structure your real estate as self employment income, which I don’t even know is possible. Either way really enjoyed the article, we are going to stick with an attempted move to FL and work remotely, can’t wait for those fun conversations in the future. Merry Christmas and Happy Holidays to the family!
With rental income the FEIE won’t be of use, but you still get all of the tax advantages of owning rental real estate.
Florida sounds a lot better than Chicago. Good luck! And Happy Holidays!
Great post! I loved reading the ideas on the comments as well. Regarding rental income, is it possible to use the FEIE if the profits of rental are in a business like an LLC? Would the LLC profits due to rental income be covered by FEIE?
The nature of income doesn’t change just because it is earned by an LLC.
Passive rental income is still passive rental income.
If you are a Real Estate Professional (a giant rabbit hole) then rental income can be earned income. But now you have to pay Self Employment taxes in addition to Income taxes. I’m an amateur on this topic, but I think it would be hard to claim you were a RE Pro if outside the US 330+ days. Also probably hard to claim the Foreign part on property owned in the US.
Instead of taking the income as passive income, could you take it as a “salary” from the LLC? …or would that just require the payment of pay roll taxes or whatever, defeating the purpose?
You don’t get to make this distinction. You could try, but I don’t think you would enjoy the audit.
Since the Roth conversion is treated like earned income you could potentially convert $200k-ish in a single year as a married couple if you didn’t earn any other income as opposed to the normal $20k-ish as a married couple, correct?
This would be awesome, but alas…
Only Wage (W2) and Self-employment income are Earned.
Roth IRA Conversions are IRA distributions. Although they are taxed similarly to earned income, they are neither earned nor foreign. As such, the FEIE doesn’t apply.
Pretty funny observation. Your last post about food took roughly a month to get 40+ comments while this post about saving taxes needed a day to get the same number of comments. Shows where people’s priorities are :)
Ha! Shocking! :)
This is great! And came at the perfect time, as I am about to leave my current job and spend some time abroad as an online entrepreneur. I will need to look into these tax breaks a bit more. But, another thing I’ve noticed is health insurance savings. Living in Ecuador you can get great insurance for around $100/month (from what I’ve heard). Meanwhile, similar coverage in the US would be $450/month. And that adds up!
Congrats on the change to online entrepreneur!
Health insurance, rents, food, transportation… I think everything costs less in Ecuador. It is a great example of Geographic Arbitrage. And with the FEIE, you get tax savings to boot.
Good post. I wish I could take advantage of this right now seeing that I’ve lived in Germany for the past four years. But since I’m a federal employee the FEIE can’t apply to me. I’m not subject to any German taxes, but I pay normal federal taxes as if I were living in the U.S. What’s worse, I have to pay Virginia income taxes even though I get no benefit from them. Changing state residencies to Florida or another income tax-free state was not doable for me.
I will say that a lot of the American contractors who work for the government here in Germany use the FEIE and they’re not subject to German taxes because they’re also under the Status of Forces Agreement that government civilians and service members also fall under. Although I think a lot of them contributed to ROTH IRA/ROTH 401Ks which according to your article might not be allowed.
One question so I’m clear. The only way to use the FEIE and still avoid the host country’s taxes is to reside in two or more countries during the year?
And would traditional 401K/IRA withdrawals always be subject to federal taxes since the withdrawals would not be earned income?
Generally, yes, you want to limit duration in any countries which tax foreign income.
This would mean 2 or more countries per year.
401k/IRA withdrawals will always be subject to tax in the US.
Hi Jeremy,
Thanks for this article! I am currently working in Switzerland but am a U.S. citizen and I’m trying to figure out the mechanics of getting money into my Vanguard 401k as an expat. I asked my MegaCorp benefits person and they said they only allow payroll deductions for 401k (implication: U.S. payroll deductions.) This is surprising, since I’d think I’d be able to contribute from a bank account.
So even though the U.S. tax law allows me to contribute and deduct up to 18k, I can’t actually get the money into my 401k! Very frustrating.
So I’m curious, how were you able to do this? Did your employer allow non-payroll contributions?
If your MegaCorp has put you on non-US payroll, you probably won’t be able to contribute to their 401k.
When I was on expat assignment, I had the same situation and just saved in my brokerage account. Depending on income level, you can do a Traditional IRA contribution or a non-deductible Traditional IRA contribution and then convert to a Roth (Backdoor Roth.)
Ah. Yep – guess I’m stuck with a traditional IRA (bummer, 5.5k instead of 18k) and contribution to an HSA then. Thanks for your reply!
You still have a US based HDHP that allows an HSA contribution?
Thanks for the great post. May I ask that during the 1.5 year in Taiwan, did you have the proper visa to allow you to stay that long (if so how to get it), or you had to fly out of the country every six months? We’d love to live in Taiwan for a while, but the visa situation is discouraging.
My employer sponsored a work visa.
Residency visas are available for students (study Chinese?) or you can do Visa runs every 90 days. I did this a couple times in 2014.
If I was single, I’d be traveling around the world right now. The missus likes the stability of home, though. I also want Jr to have stability while he’s growing up. Once he’s done with high school, I’ll probably live abroad for at least a few years. Mrs. RB40 can join me whenever she feels like it. Nice post.
You are welcome to stop by for a visit whenever you like.
We are still discussing the proper stability vs mobility balance for Jr.
Can you deduct still your business expenses for all income exceeding the $101,300?
It would be Schedule C income, so biz expenses are deducted.
If total earned income exceeds the FEIE, personal deductions still apply. But I believe the personal deductions are allowed proportionally to total income.
See Deductions section of this page for an example: http://thismatter.com/money/tax/foreign-earned-income-exclusion.htm
I wish to work remotely from Taiwan (or China) for my current company which is in the US. Do you know if it is legal if I work for a US company in Taiwan, on a tourist visa? It’s not likely that my company would support my visa there; but my work does allow me to work through the internet. I couldn’t find information in this regard… would greatly appreciate your opinion.
I don’t think you will find a definitive answer.
You can look at Digital Nomads or Perpetual Travelers as a reference point. Millions of people are currently doing what your propose, but it is a gray area.
By definition, a tourist visa is for travel only. No work allowed. But these rules were created before it was possible to earn an income from anywhere.
My non-legal non-binding opinion is a host country wouldn’t be interested in taxing you or care if you worked online, if and only if:
– Your work presence is entirely virtual – no local vendors, employees, or office space.
– You are in a host country less than X days on a tourist visa. X varies by country, but typically between 90 and 183 days.
Individual Immigration Officers may have different opinions.
Thank you so much for letting me now about this! Truly appreciate it.
I’m a US expat who lives in Taiwan. I’d like to generate some US-based income (from Spanish-to-English translation for US clients, maybe from writing & other Internet-based work), use it to feed my traditional IRA, and hence pay $0 in US taxes while still using the Earned Income Exclusion to cover money I earn in Taiwan.
Any reason that plan’s not workable? What might I be missing?
Thanks!
Dan Villarreal
Taipei
Hi Dan
You could earn US sourced income while in Taiwan and use the FEIE to eliminate US tax burden. But…
– you can’t use the FEIE to exclude only some income (e.g. only the Taiwan income.)
– you can’t contribute excluded funds to an IRA
– if you are a Taiwan resident, Taiwan may consider this income as Taiwan-sourced income and thus subject to taxation. (Although there is no possibility of Taiwan being aware of this income, unless you chose to disclose it. As required by law.)
Cheers
Jeremy
Hi Jeremy, thanks! What I had in mind (probably not written as clearly as I wanted to) was to: 1.) exclude my Taiwan income from US taxes, using the exclusion; 2.) NOT exclude my US income from US taxes at all–subject myself to the US tax laws, but at the end of the day, pay $0 USD in US taxes because I’ve paid all that income into my traditional IRA.
If I’m understanding your response, what I want to do is not OK with Uncle Sam & maybe not even OK with Taiwan, & I need to lump all of my US-based income under foreign income exclusion. Is that right?
I’m wondering if there are other US expats reading this who have income from diverse sources–US and Taiwan/foreign–and have been through this a time or 2 at tax time in both countries.
Thanks again,
Dan V
Taipei
Right. The US-based income is still “foreign earned” because of your location, and must be lumped in with your Taiwan income.
For Taiwan specifically, the marginal tax rates are higher than the US, so you would potentially fare better with the Foreign Tax Credit. This would allow you to still contribute to an IRA and pay zero or minimal US tax. In that case, a Roth IRA would be a good choice.
You could reach out to other expats on Forumosa or even consult with a tax firm that processes tax returns for US citizens in Taiwan. When I was an expat, KPMG did my taxes, although I’m not sure if they work with individuals (I was on a corporate account.)
Daniel would also have to watch for self employment taxes. Unless you are lucky to have an employer (which won’t likely pay you what you are worth), translation/ writing work usually falls under the SE category and is thus taxed twice (33% tax rate). If you plan it well, though, you could make quite a few deductions on your schedule C, to compensate.
SE tax is 15.3%, half of which is deductible.
Am absolutely fascinated by this article post the more I read it the more I thought how would I have missed this idea it’s absolutely genius. Am even more shocked I haven’t heard of that Google employee but am definitely going to check him out. I still can’t believe how easy it is to save up money by reducing amount of taxes deducted from the income. However I can’t imagine what would happen if a lot of people were to do this! Great article!
Hey GCC! Sorta new to investing and trying to wrap my head around TL Harvesting and TG Harvesting. How does one use Tax Loss Harvesting and Tax Gain Harvesting to their benefit when using the FEIE? If you’re under the FEIE max limit (but over the 15% bracket) it seems like tax loss harvesting isn’t as beneficial because you can’t use it to lower your income each year, if you don’t harvest any gains. Also, lets say you harvest some losses in a given year. Can you carry those losses forward year after year until you decide to harvest a gain to offset it, or when you harvest the loss does it automatically reduce your income for that year, if you haven’t harvest any gains to offset it?
Thanks for all your posts. You shorten the learning curves for newbies like me and this article specifically was very beneficial. Cheers!
The FEIE only applies to Earned income. Investment income is still taxed.
If you are over the 15% limit, you’ll pay tax on capital gains at a 15%+ rate.
To determine tax due, you calculate total tax as if the FEIE didn’t exist, and then apply the exclusion.
If you harvest losses they are first used to offset gains. If you have no gains, then up to $3k per year can be used to offset earned income. If you have no earned income, the losses carry forward to future tax years.
I know I am a little late finding this blog–which by the way is AWESOME–but I was wondering about the move out of the country option. My husband and I have started our world travel journey and have been thinking about our tax situation. Do you keep a mailing address in the USA? If so, do you use that for your taxes even though you are not based in the USA? If not, what address do you use (not the actual one I mean what country) for tax purposes or general paperwork. We just want to make sure that if we use a USA mailing address (even though we are not based there) that we can still claim the FEIE.
You don’t need a US address, but would be fine if you used one.
Traveling Mailbox is a great solution for keeping a US address while abroad.
To follow on, I get that you don’t need a US address to file your taxes while abroad (I did it for five years!) but what about things like US bank accounts, credit cards, etc?
When we moved abroad, I “moved” to my parents address, which came with its own set of hassles. Aside from just having to move everything over, then back when we returned, a certain state suddenly thought I was going to start turning up for jury duty, and things like that.
How do you handle those kinds of practicalities? Does something like Traveling Mailbox actually address these kinds of items?
Great post GCC… Hope all is well! I’ve been busy with the little one past few months.
Do you know if it’s too late to claim this for last year? My relative lived in Taiwan for most of last year and runs a S-Corp. I was wondering if there’s some form to fill-out before starting the FEIE period?
Also, does having a secondary home in the USA affect the FEIE status ?
It isn’t too late. You claim it when you file your tax return. You could even amend an older return.
A secondary home shouldn’t be an issue, as long as it is truly secondary.
How does this work if you hold international stocks where 15% tax of dividends is withheld? Can you still get the foreign tax credit for those investments?
You can claim the FEIE or get the Foreign Tax Credit, but not both.
I have claimed both. See my example elsewhere in these comments.
Me too.
In the same tax return?
https://www.gocurrycracker.com/go-curry-cracker-2017-taxes-feie/
I’m glad that you’ve seen the light. :)
at what point do you have to pay taxes to the foreign country you are living in?
Never. The key is you aren’t living in any country, but are visiting several every year.
If you spend too much time in any one country, they will want to tax you. “Too much” is uniquely defined by each country, but in many cases starts at 183 days in a year.
I have been doing a lot of research into money matters, taxation, and so on after moving to Japan a couple of years ago from the U.S. and your posts have been really informative. I’m wondering if you might have some advice on my specific situation. I apologize if this is not the right place to ask such a question.
I am a self-employed artist and U.S. citizen now with permanent residency in Japan. When I file my U.S. taxes, I am able to claim the FEIE as I am well below the threshold. Additionally, I am exempt from self-employment tax because I pay into the Japanese system and have the required Certificate of Coverage I send in with my U.S. return.
Since all of my income is exempt, I’m wondering if there is any point in bothering with the hassle of listing my business deductions (materials, supplies, home office, etc) on Schedule C. Isn’t it irrelevant? It lowers my “taxable income”, but that doesn’t matter because I’m not paying any tax to begin with, no?
So, is it a waste of time to bother with claiming self-employed business deductions on U.S. taxes if I am already exempt?
Any advice would be greatly appreciated!
I am an international teacher, teaching on 1-2 year contracts, tax free. I make less than the 102,000 threshold for FEIE. May I contribute legally to a Roth IRA or not? You state that tax free in and tax free out is best at the end your article but it doesn’t correspond to my understanding of a Roth IRA. Thank you!
So I’ve been thinking about this. I am a systems engineer with a large US IT service provider. I work from home remotely. Since I work remotely, I can work from anywhere. We’ve been considering moving to Scotland or Ireland for a couple of years and so have been wondering about doing this…moving to another country for most of the year and working from there. As long as I have internet access I can work. Does this qualify me for this exemption (provided, of course, my employer agrees to me working abroad)? If so, what a deal….I’ve known of friends who worked in the middle east during the war(s) as civilian contractors got this tax break but that is a little different.
You could qualify for the FEIE, but would most likely be subject to Income Tax in Scotland or Ireland…
If you spent 3 month in Ireland, 3 months in Scotland, 3 months in Thailand, and 3 months in Argentina (for example) you would presumably be in a no tax situation. Be sure to check the tax requirements of each potential country to determine exact time in country before they consider you subject to taxation.
Alright, so tell me this – let’s say you’re working for a US company remotely in Europe & you decide to live for MORE than 3 months in Germany. You’re supposed to report taxes to Germany, but what’s stopping you from doing it? I.E. if I took FEIE in the US, and you’re “supposed” to report your income from abroad while living in Germany, but you don’t, does the US IRS give copies to Germany? Something tells me they don’t. The only place in Europe it seems that doesn’t charge is Montenegro.
There is a name for what you are describing: tax fraud.
Actually, it would be tax evasion – but it looks like you don’t know the answer or are ‘holier than thou.’ kek.
Great article. It might be worth clarifying under the “Income Exceeding the FEIE” section that “subject to taxation” doesn’t necessarily mean that you have to pay tax on it. If you are in a foreign country as an actual tax resident (e.g. generally more than 180 days, as you said) and the country you are in charges you tax on your income at or above what it would be in the US (in Europe it will most likely be above), and there is a dual taxation treaty in place with that country, then you don’t actually pay taxes on the income that exceeds the FEIE to the US.
You would use the Foreign Tax Credit instead of the FEIE in this case.
Sorry, my first example wasn’t a good one. What I should have said is that it might be clearer to say “Any income exceeding the FEIE is still subject to US taxation, although you can get a Foreign Tax Credit for any foreign taxes you paid on the exceeding amount.”
At least I’m pretty sure that is true. :)
You can claim the FEIE or the Foreign Tax Credit, not both.
I believe the rule is that you can’t claim both on the same chunk of money. In this case it would be two chunks.
From https://www.irs.gov/individuals/international-taxpayers/choosing-the-foreign-earned-income-exclusion
“However, you can choose to take the foreign tax credit on any amount of foreign income which has not been excluded under the foreign earned income exclusion or the foreign housing exclusion.”
Ok here is a real world example from my 2016 taxes, where I took BOTH the FEIE and the Foreign Tax Credit.
1) Form 2555 used to calculate FEIE. This goes on line 45 of this form as $X.
2) On the 1040 line 21, -$X is entered in. Continue with 1040 until line 44.
3) Form 1116 is used to calculate Foreign Tax Credit. Line 44 is taken from the 1040 (where the FEIE has already been applied) and used to calculate additional Foreign Tax Credit $Y.
4) Back on the 1040, $Y is entered as a credit on line 48.
If a single filing high earner is claiming the FEIE, do they still get to use the standard deduction of $6,300 and personal exemption of $4,050 on the income excess the $101,300? Or does the FEIE replace these exemptions and deductions?
Thanks.
I am not 100% certain, but I believe you can also claim those deductions, so in addition to.
Not sure, but you *can* do the foreign tax credit in addition to the FEIE. See my example above.
Ok I just checked mine, and yes, 1040 line 40 standard deduction is there (for me it is the married deduction of $12,600).
Thank you so much for this! Very very helpful but a lot to take in, haha. I am planning on moving abroad(place to place- nowhere long term) for over 330 days in 2017 so that I am exempt from income tax & health insurance in the USA. Just to make it clear, I still will need to pay FICA 15.3% tax if self employed, but am exempt from everything else? My salary will be between $35,000- $45,000 pending how much I choose to work :p Am I able to pay into any form of retirement savings in this situation?
Also, I love your story and will continue to follow your journey. Very inspiring and glad to see you and your family living the dream!!!
Thank you, Jennifer.
There is another factor. Besides being outside the US for 330 days, you need to show that your intention is to remain abroad indefinitely and for more than one year. If you were to make a public statement (Facebook, perhaps) that you were going to return in exactly one year, or you purchased an around the world ticket with a return date 1 year from now, technically you would not meet the requirements.
So instead post on Facebook: “I’m leaving for more than a year and I don’t know when I will return.”
Thank you for the great post. I have an LLC as a US citizen and I am also a Canadian citizen. This is a virtual business and I work from a home office (rental in the US) just on my computer. The entire business in done virtually. If I want to go back to Canada. What is best Scenario for tax saving?
– To keep the LLC, go to Canada and stay the entire year As dual citizen, Still the LLC will remain in the Us but the actual presence of the owner (me) will be in Canada. I have a resident agent in the US and can use that address as business address. I guess I have to use foreign tax credit in this case.
– To change LLC to S-Corp and then go back to Canada as dual citizen, stay the entire year and use foreign tax credit.
– Either with LLC or S-Corp go back to Canada but as a non-resident (I guess this way I can stay only less than 6 month per year in Canada)? Then spend one month in the Us and the rets of the year in anoteht 1 or 2 countries and can use the FEIE exemption.
On the other side, can I own properties in Canada and rent them out and declare non-resident and for the time I am there just rent a place? or stay with family?
Thanks in advance,
Eva
I don’t know anything about Canada, so probably best to consult with a tax person who specializes in US/Canada taxes.
As long as you are a US citizen, the US will tax you on worldwide income. The FEIE allows you to pay no tax on earned income only, not rental, investment, or S-corp distributions.
As far as taxes go, the LLC doesn’t exist. It is a passthrough entity. An S-corp may increase taxes for a nomad, since those distributions aren’t earned income and thus excludable with the FEIE.
I’m a little late on the reply… but thanks for the info! Good to know. Definitely no end date in sight for my time abroad!
I am a dual US/Italian citizen who grew up in the US. I’m looking at living in Spain, but am now considering a nomadic approach with half the year in Italy. Does any of this differ by whether you are a citizen of the place in question (in my case, being an EU citizen)? And I’m wondering about getting access to the health system in Spain and Italy. I believe I’d need to apply for residency in each of those countries when there. If you apply for residency do you automatically need to pay taxes for the country you’re a resident of?
US taxes its citizens abroad but most other countries do not. Hence, no Italy tax for you. If you lived there, your work would be in Italy as a tax base so you’d pay taxes there and either apply the Foreign Tax Credit or FEIE to your earned income.
Look up the tax treaty with Italy here:
https://www.irs.gov/businesses/international-businesses/italy-tax-treaty-documents
Thank you for this. I’m not far from the Google example so as of 2018, I am leaving California and USA indefinitely to travel the world and telecommute as an itinerant. The tax savings alone will likely exceed my expenses. How can I turn that down?
I’ve been binging on Publication 54 and Form 2555 and I think I noticed an error in your gorgeous body of text above.
“living abroad allows replacing a fairly small Standard Deduction and Personal Exemption with a sizable exemption known as the Foreign Earned Income Exclusion (FEIE.)”
I didn’t see anything about the Standard Deduction and Personal Exemption being affected by the FEIE. Isn’t the FEIE in addition to the Standard Deduction and Personal Exemption?
Here is a real world example from my 2016 taxes, where I took BOTH the FEIE and the Foreign Tax Credit, and also had Standard Deduction and Personal Exemption.
1) Form 2555 used to calculate FEIE. This goes on line 45 of this form as $X.
2) 1040 line 21, -$X (FEIE) is entered in. Continue with 1040 until line 40.
3) 1040 line 40 Standard Deduction is there (for me it is the married deduction of $12,600).
4) 1040 line 42 Personal Exemption, yes I have this too
5) Form 1116 is used to calculate Foreign Tax Credit. Line 44 is taken from the 1040 (where the FEIE has already been applied) and used to calculate additional Foreign Tax Credit $Y.
6) 1040 line 48, enter $Y (Foreign Tax Credit).
My taxes were prepared by a professional who has been doing taxes for more than 60 years.
That is awesome. Thank you.
No problem! I see a lot of misinterpretation out there about not being able to use both FEIE and Foreign Tax Credit together, so thought I would try and balance it out a bit. ;)
I’m a little hung up on one thing here, GCC. When you say “Qualifying for the Foreign Earned Income Exclusion requires moving your Tax Home”, are you really establishing a new tax home in your scenarios? That seems to be a requirement for FEIE.
I think I get it now:
https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-tax-home-in-foreign-country
“If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live. If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work.”
Very interesting article & comments!
My family of 6 might very well be relocating to the Philippines for 1-2 years to be with elderly parents. Since my income would come from trading cryptocurrencies, I would still be subject to capital gains tax in the U.S..
Do you know if I would be subject to double taxation on the capital gain tax in the Philippines also? Try as I might, I have not been able to find an answer to this question.
(I’d love to take advantage of the 330 day rule and limit my capital gain tax to just the U.S., but staying in multiple countries in S.E Asia would get quite expensive with a rather large family.)
If you are a resident of the Philippines, you are subject to their tax law. They appear to be a territorial tax country for non-citizen residents, which suggests they don’t tax income sourced from outside the Philippines.
thank you so much…. the information on this page… its really helpful… so maybe i have questions on my situation..as i chanced upon ur page while searching for answers
I am about to get a contract to work overseas in China.. where i will be paid a basic(bank into a china account) and allowance ( the allowance is paid in cash) which is very typical… my spouse n family will still be living in upstate NY. I will have a rental accommodation at my work location and most probably i will be there for more than 330 days… and back only to visit my family as such.
1) do i qualify for FEIE in this situation? i am thinking yes ?cause of the 330 days i stay out of the US..
2) Allowances.. do i need to declare in my tax filing as such as there is no formal documentation i can provide.
Possibly. The contract should state an open ended contract of more than one year.
All income is taxable and needs to be reported, regardless of how it is paid.
Quote from the article: “If income is less than the FEIE, there is a great opportunity to contribute to a Roth 401k at a 0% tax rate. Tax free in / tax free out is as good as it gets.”
Really? I have been asking around about this for years and all I get are negative answers. No, you may not contribute to an IRA if all of your income is subject to the FEIE. I need something I can show to my accountant.
You can’t contribute excluded income to an IRA.
You can contribute excluded income to a 401k.
See IRC Section 415(c)(3) Limitations on benefits and contribution under qualified plans
(a) Participant’s compensation = compensation from the employer
(b) special rules for self-employed individuals: income = participant’s earned income but determined without regard to any exclusion under section 911. (Section 911 is the portion of the IRC related to the FEIE.)
So an employee can contribute up to their full compensation from the employer or $18,500, and the self employed can contribute earned income fully ignoring the FEIE.
Please do consult with your CPA and let us know what they say?!
“You can’t contribute excluded income to an IRA.”
“….the self employed can contribute earned income fully ignoring the FEIE.”
Those two statements taken together confuse me.
The self-employed can contribute to what exactly, while fully ignoring the FEIE?
For the self-employed there is no 401(k). So to what do the self-employed contribute?
Solo 401k
In what circumstance would a self-employed person have a 401k?
I was really curious about your statement in the original article: “If income is less than the FEIE, there is a great opportunity to contribute to a Roth 401k at a 0% tax rate.”
I thought you were talking about a Roth IRA. But now that I read it more closely I see that you refer to a “Roth 401k.” I had never heard of a Roth 401k, so sorry for wasting your time.
I am a self-employed expat now 10 years and, in terms of tax/money/cost of living, the only substantial negative is the inability to use these tax-deferred accounts.
Fine article.
Pretty much all circumstances. If a person is self-employed, they should probably have a solo 401k.
Just a reminder: I have zero credentials and am just a random guy on the Internet. Definitely check with your own CPA.
I confirmed with my CPA that a person with all earnings excluded by the FEIE can indeed make Roth 401(k) contributions. So, Mr. Go Curry Cracker, I owe you a debt of gratitude for bringing this to my attention and giving me another tool in my financial arsenal. Thank you.
Unfortunately the idiot CPA never recommended it to me before, even after various inquiries about how to set up tax-advantaged accounts in light of the FEIE. Time for a new CPA.
This is my question – How the heck am I supposed to file state taxes if I don’t live in a state…
I qualify for the FEIE, and I’ve learned that I am allowed to contribute to a Roth 401(k). But according to you Mr. GCC, you are just a random guy on the internet. That’s the best online comment I’ve seen in a while! But according to Mr. GOFU’s CPA too, Roth 401k’s are allowed! I’ve been searching forever to find this info. Thank you!
If you are a US citizen living abroad, earning 100k USD working for a US company, you can claim the FEIE given the residency tests. My question is, throughout the year, are you still paying taxes on your paycheck like normal, and when it comes time to file taxes in q1 of the following yea, you will just receive a large tax refund after claiming the FEIE?
I may be moving to Germany for full tiem work at a Germany entity so I will do the FEIE+tax credit on my own. My GF, the person in question, has a remote job and pretty sure she could get away with living in Germany full time which I think would be amazing if she could actually claim the FEIE.
You can change your withholding.
“Any income exceeding the FEIE is still subject to US taxation.”
Yes but you won’t be paying tax on it if you use the Foreign Tax Credit on that money.
From https://www.irs.gov/individuals/international-taxpayers/choosing-the-foreign-earned-income-exclusion
“However, you can choose to take the foreign tax credit on any amount of foreign income which has not been excluded under the foreign earned income exclusion or the foreign housing exclusion.”
I’ve done this.