How U.S. Expats Can Reduce Taxes on Foreign Income
U.S. Expats, in addition to the requirement to file income tax if they have income other than Social Security, may face an additional tax liability if they receive a different source of income such as self-employment at the expatriate country. Depending on where you reside as an Expat, there are some remedies you have.
1) Foreign Earned Income Credit (FEIC) is only applicable to payroll income.
You cannot claim the FEIC against dividends, rental income or any other type of passive income you received in the foreign country.
2) If your income is over the FEIC, the difference pays the higher tax rate.
Recently we have a case of a client who reported $200K of income minus $100K of FEIC. Minus deductions the taxable income was close to $27K. The tax rate for that portion was 28% instead of the typical 15% because the income reported before FEIC was $200K.
3) Duplicate tax on self-employment income.
If the country you reside signed a Social Security Totalization Agreement with the USA, then you pay self-employment tax only in that country. Below the list of countries that signed such an agreement with the USA:
- Czech Republic
- Slovak Republic
- South Korea
- United Kingdom
If you live in a country other than the above ones, you can still incorporate your business and post a salary so the self-employment tax in the USA doesn’t kick in.
4) Tax-exempt income in foreign country is taxable in the USA.
If you receive dividends or any other type of passive income that is tax free in some countries, such as Switzerland, Malaysia and Hong Kong or an offshore jurisdiction, you owe taxes in the USA. Note that the FEIC cannot be used to reduce your tax liability and that if your income is larger than the FEIC, you pay the higher tax rate as explained before.
5) Income contributed to Foreign Retirement Income Plans may be taxable.
If your employer in the Expat country offers a retirement plan, the IRS considers it as deferred income and pay no taxes same as in the foreign country only if you live in:
- United Kingdom
Income contributed to these employer-sponsored plans in any other country is taxable in the USA even though is tax-exempt in the foreign country.
6) If you have offshore holdings, think about offshore tax planning.
Offshore holdings are an efficient source of income if they are organized and managed efficiently. There are many vehicles available such as trusts, companies, and foundations. Read here a typical case where the wealthy organized but made serious mistakes.
7) If you have offshore income not reported, you can apply for Offshore Voluntary Disclosure Program OVDP.
Tax avoidance may work for some time but not for all time. With FATCA the IRS is getting more and more information about accounts not declared. So better to kiss and tell the IRS. Read here a detailed explanation of this program.
8) If you have not filed your FBARs or tax returns, you can apply for the Streamlined program.
The IRS is still offering relief to Expats who have not filed their tax returns and/or FBARs reporting their foreign account holdings. Read here a detailed explanation of the program.
Before your move, give us a call. We can design a strategy fit your needs to reduce or defer legally your taxes.
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