A Road Less Traveled (photo credit)

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

The View in Silicon Valley (Wikipedia)

The View at Lake Tahoe

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

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 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.

For more exciting details, check out IRS Publication 54 and Form 2555.


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).


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.

(*) 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