Dateline: Belgrade, Serbia
Gather any group of globally-minded people and ask the question “do you want to visit the United States?” and you’re bound to get a wide array of answers ranging from “heck yes” to “hell no”.
Some of my Polish friends, who despite being European Union citizens require US visitor visas, said that they could surely live without setting foot on Miami Beach or in New York City if that’s what it came down to. I’ve heard that perspective far more often than the average US citizen would imagine.
But forget visiting for a moment. What about living in the United States? Does the idea of living in “the Land of the Free” appeal to you?
Last week, I was speaking with two younger banker friends of mine, both of whom informed me that they have entered themselves in the US Green Card Lottery. One of them was approved, and is now undergoing the process of actually immigrating to the United States with the goal of taking a job in banking.
While I understand that different people have different needs, I was taken aback that two successful bankers moving up the corporate ladder would want to move to the United States and deal with the tax implications of being a permanent resident.
Considering that both gentlemen held investments around the world, such as stock trading accounts, that would stand be be taxed by the United States, I wondered what the benefit was. By the time you add in the high taxes and high cost of living in California or New York – their dream destinations – even a high earner can be left barely scraping by.
This is an interesting concept that is becoming more and more apparent in a global world. It is now possible to earn income all over the world and “go where you’re treated best” to pay far less in taxes than the 45% or 50% that the United States often extracts not only from citizens and Green Card holders, but from anyone who passes the “substantial presence” test by spending more than approximately four months on US soil.
But what if you want to live in the United States? After all, for as many people who have started to realize that it’s not worth the trouble, plenty of others seek to move to the USA.
I recently returned to the United States for a five-day visit after three years being away from my home country, and while I solidified that I don’t really care to live there at this point, it would be nice to have the option to roll in to the Miami Beach Edition or The Phoenician for a few weeks from time to time.
So I thought: how can someone live in the United States, but not pay US taxes? As it turns out, there are several ways to do so. None of these methods is perfect, and all involves an element of sacrifice, but if you could simply move to Los Angeles full-time and not be taxed, everyone would do it.
The two kinds of potential tax-free US residents
Let’s break those seeking tax-free US status into two groups:
US citizens and permanent residents
As we know, if you are born in the United States, you are automatically a US citizen. That means that you will pay taxes on your worldwide income regardless of where you live, subject to the exemptions that we often discuss here. However, it is possible to live in the United States part-time (or via one method, possibly even full-time). Otherwise, you could always renounce US citizenship (as many folks are doing) and return as a non-citizen.
Non-US citizens, including former US citizens
Non-US citizens have a leg up on native-born citizens when it comes to tax-free treatment. The United States is not only the world’s largest tax haven, but also a haven for many seeking higher education and other services. That means that there are certain exceptions that allow non-citizens to live full-time in the United States without paying US taxes.
In general, a former US citizen who has given up his or her passport is treated the same as any other non-citizen. The US does not discriminate so long as the Substantial Presence Test is not met and income earned by the non-citizen is not of a US source.
Now, let’s get to it…
Ways to live in the United States tax-free
1. Live there part-time
Is this tax-free strategy cheating? Perhaps. However, as a global citizen, you may well want to have numerous homes around the world.
In my article “Four ways to live as a Nomad”, I discuss the concept of multiple home bases. Even if you don’t like a lot of traveling, it’s possible to live a modern snowbird lifestyle where you spend four months in each of three countries you own or rent homes in, creating excellent tax efficiency.
The key ingredient here is staying on the right side of the “Substantial Presence Test”. The Substantial Presence Test is a somewhat tricky formula that calculates how much time you have physically spent in the United States and its territories over the last three years. This year’s days are counted at a rate of 1, while the two previous years’ days are counted at reduced rates.
On average, you can spend approximately 120 days per year in the United States without maintaining a “substantial presence”. However, you should avoid earning “effectively connected income”, meaning actively running a business, making sales, and signing contracts while on US soil is probably a bad idea. However, most international businesses should be able to accommodate this restriction.
For US citizens, you can qualify for the Foreign Earned Income Exclusion if you have a “bona fide residence” overseas. This test is harder to qualify, is subjective, and requires a number of ties to one particular foreign country, but with proper planning you can qualify and spend up to four months in the United States each year long-term. If you’ve been living in the United States recently, proper planning would need to be done to ensure you don’t qualify for substantial presence.
For non-US citizens, you must merely keep your time in the United States under the 120 day average. Generally speaking, non-Canadian visitors are allowed 90 days in the United States at any time, meaning you would need to take two trips to maximize your “living” allowance each year. Of course, you could easily maintain a home base in nearby Mexico or Panama, get a tourist visa good for up to 180 days, then return to the US.
Former US citizens who renounced their citizenship are subject to the same rules as other non-US citizens and are not treated differently, except recent US expatriates should ensure that their time in the United States in the last three years would not count against them for purposes of the Substantial Presence Test.
2. Become a student or scholar
As someone who dropped out of university, there was always a romance to walking around college campuses like that of Harvard and fantasizing about studying philosophy by a fire in the library now that an unproductive philosophy degree wouldn’t impact my earning prospects.
Studying in the United States does generally allow for a five-year exemption from the Substantial Presence Test. As difficult as the US can be to immigrate to, there are so many foreign students that the government would be crazy to allow the IRS to tax the worldwide income of students, especially wealthy students from China or the Middle East who may hold substantial investments in their name and would choose to study elsewhere.
International students on F, J, M, or Q visas are considered “exempt individuals”, which means they are excused from the Substantial Presence Test for the first five years; scholars get a two-year tax-free holiday. After this period, you will pay US taxes like anyone else, so perhaps take a light course of study to allow you to enjoy your five years living in the United States.
Again, just because any foreign source income is exempt from tax does not mean that US source income won’t be taxed. They key is to ensure you are not actively earning money in the United States, or having anyone else do it for you.
Just because you aren’t liable for taxation does not mean you don’t have to file a US tax return. Between filing requirements and potential tax treaty benefits for fifty countries, it’s best to consult an international tax expert to help you during your time in the States.
US citizens can not, by default, be foreign students nor receive an exception from the Substantial Presence Test, meaning this strategy is best for a former US citizen who wants to return for awhile.
3. Become a diplomat
Depending on which country you are a diplomat from, your salary may not be entirely tax-free considering that your host country may tax it themselves. Countries tax income based on its “source”, and working for a foreign government almost always means paying taxes at home.
That said, if your second citizenship is in a zero-tax or low-tax country, you may be able to live in the United States with very little if not no requirement to pay taxes.
In some cases, a diplomatic post may be a less than full-time position that would allow you to continue earning an income from a location independent business or investments and forego your diplomatic salary altogether. In this case, you would need to verify whether your non-government income is considered local source for tax purposes, as well as ensure your side projects didn’t run afoul of your home country’s rules.
Most countries have both diplomatic relations with and an embassy in the United States, almost always in Washington, DC. With nearly 200 countries, that’s a lot of embassies. Many larger and neighboring countries have consulates spread out across the country. Mexico, for instance, has nearly two dozens embassies and consulates everywhere from Los Angeles to Omaha. Meanwhile, nearly every country has a separate ambassador to the United Nations in New York.
Generally, becoming the Ambassador to the United States or the United Nations is a highly sought after post reserved for career diplomats, and wouldn’t just be handed over to anyone who asks. However, many countries would jump at the chance to have a current or former US citizen with business experience in the United States in a lesser post.
A friend of mine who obtained Colombian nationality through his wife was told that his business skills would be sought after for a so-called “business ambassador” post in an English-speaking country. In the “worst case scenario”, we imagine he could be posted to a secondary but still prestigious role in another high-tax country like the United Kingdom or Ireland.
I’m not suggesting that you engage in any of the sketchy procedures offered by nameless, faceless promoters on the internet. Offers to buy “diplomatic second passports” are scammy and not rooted in reality; even a small country isn’t going to offer a diplomatic post to a total stranger with no experience, money or not. I am not suggesting using some under-handed method to join the diplomatic corps, but rather considering the possibility of a legitimate position in a country and role where your experience adds real value.
Heck, if presidential donors and bundlers in the United States can become Ambassador to Norway by raising a scant six-figure sum, it only makes sense that a smaller country would be open to appointing someone who actually has a clue… and not this Obama appointee:
4. Move to Puerto Rico or the US Virgin Islands
Wait, is this method cheating, too? Perhaps, but technically Puerto Rico and the US Virgin Islands are part of the United States (which is why I imagine far more foreign tourists visit the British Virgin Islands with their far more relaxed visa policy).
For as long as Puerto Rico remains a territory (and solvent), US citizens can re-domicile themselves to the island under one of several laws – such as Act 22 – that allows US citizens to claim a substantial exemption from US tax and pay about 4% on all income. Sure, it’s not tax-free, but a 90% discount on your tax bill is close enough.
Similar incentives exist in USVI; the caveat is that you’re required to spend the majority of your time on the island you choose if you wish to spend the rest of your time in the US mainland. For US citizens, this is the most amount of time you’ll be able to spend in the 50 states and still pay very nominal taxes of about 4%.
There are some more complicated ways to reduce the physical presence requirement on the USVI, but they would not work for someone who plans to spend the balance of their time in the United States… which goes against the point of this article.
Do you still want to live in the United States?
Some people think that there is some magic wand you can wave and simply not pay US taxes. This simply isn’t true. If it was as easy as having your clients pay your invoices to a Belize company, everyone would do it.
The truth is, there is no foolproof, permanent, and easy way to live in the United States full-time or a majority of the time without paying US taxes. This is the trade-off that people accept when they want to live in what they call “the greatest country on earth”. Somehow Singapore can build gleaming roads without taxing foreign investors like Jim Rogers, but California’s pockmarked highways require those desiring to wake up to sunrises in Malibu to fork over a lot of cash.
I’m not suggesting that you take university courses or work for the government for no other reason than to live tax-free in the United States. In fact, I would often advise against it due to the high opportunity costs involved as well as the potentially icky feeling of doing all of that just to save on taxes. All of this is merely food for thought.
The reality is that almost anything you enjoy about the United States can be found overseas, from vineyards to beaches to fine dining to Taco Bell. At the end of the day, you may not have to live in the United States to get what you want. Once you realize that, you can easily create a tax-free Nomad Capitalist lifestyle using a legal blend of offshore companies, offshore bank accounts, second residencies, and tax-friendly travel plans.
In my opinion, being an expat or “digital nomad” is a much easier way to get the best lifestyle, whether you choose to remain a US citizen or not… or whether you never were one.
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