Want to lower taxes? DON’T move to Florida, Nevada, or Texas

Written by Andrew Henderson
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Dateline: Phnom Penh, Cambodia

We all know someone who has done it.

Here at Nomad Capitalist, I talk about the idea that you should “go where you’re treated best”. One of the key tenets of going where you’re treated best is lowering your taxes in any legal way possible.

In a world where governments are increasingly competing for business with lower and lower tax rates, it’s simply dumb to stay in one place and pay high taxes just because you were born there.

However, one method of legal tax reduction falls far short in my opinion: moving from a high-tax state to a low-tax or no-tax state. The concept of eliminating state tax is a fool’s errand in my opinion.

No doubt you have a friend or colleague who has vowed to never pay high taxes in California ever again, packing their bags for sunny, tax-free Nevada.

Or perhaps you know someone from high-tax New York City who relocated to Miami to avail themselves of Florida’s zero income tax laws.

There are currently seven US states with no state income tax; nine if you include those that only tax dividends. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming allow income to be earned tax-free.

Don’t settle for the typical response

In my opinion, moving to another state in the United States – or another province in Canada – is not an effective way to reduce your taxes. Allow me to explain.

I recently helped an online business owner named Marcus save a lot of money. Marcus grew up outside of Los Angeles and eventually started his business in California, which was happy to pick his pocket for tens of thousands of dollars every year.

Finally, Marcus had enough. He was earning about $400,000 a year and paying $140,000 in federal taxes, and another $30,000 in state taxes payable to California.

Even after a slew of business tax deductions, he was paying more than 40% of his small businesses’ income to the IRS and California’s Franchise Tax Board.

So Marcus did what so many US citizens fed up with high state taxes do: he moved to Las Vegas. He even got an apartment right on the Las Vegas Strip.

While living in Las Vegas was fun for a while, Marcus missed California, but decided to stay in Nevada in order to save that $30,000 every year. After all, his business was growing and moving back to California would only cost him more and more in state taxes.

That’s when he called me.

Applying the Pareto principle

Like many successful entrepreneurs, Marcus tries to apply the Pareto principle to focus on what his business needs to grow. The Pareto principle is more commonly known as the 80/20 Rule and states that “roughly 80% of the effects come from 20% of the causes”.

In other words, 80% of your sales come from 20% of your clients, or conversely that 80% of complaints come from 20% of bad customers. The idea is that focusing on the most important aspects of business – or any other area of life – will yield the biggest gains, while focusing on any other areas will yield little.

Here Marcus was paying $170,000 in taxes every year, and his solution – like so many other Americans fed up with high taxes – was to uproot himself in order to save $30,000… a mere 18% of his tax burden.

If you’re considering moving from a high-tax state to a tax-free state, you’re likely missing out on a similar percentage of potential tax savings, because merely moving from one state to another does not reduce your obligations to pay federal tax to the IRS.

Nor does it relieve you of paying Social Security or Medicare tax, which for entrepreneurs totals 15.3% on the first $120,000 or so of income.

So how can you apply the 80/20 Rule to lower your taxes even further? Quite simply, by moving overseas.

Moving anywhere is a frustrating process that involves change. Growing up, my family moved between several suburbs of Cleveland, Ohio, and each time I lost contact with certain friends and had to get used to a new place.

If you’re going to deal with the frustration of moving in order to reduce your tax bill, why not really go for it? In many respects, moving is moving, whether it’s down the street or halfway around the world. You might as well pocket an extra million over the next few years for your trouble.

By moving outside of the United States for the majority of the year, you can exclude the first $102,100 in earnings from a job or business. If you’re married, your spouse can do the same.

If you’re running a business as Marcus was, you may be able to establish an offshore structure that allows you to also legally avoid Social Security tax and Medicare tax, as well as exempt even more income from tax.

Location, location, location

I’m simplifying concepts that can be rather complicated, and which can vary depending on a number of factors. People like Marcus come to me because I’ve done this myself and can work with my expat tax advisors to create a custom plan for them.

So while I can’t speak to your specific situation, I can say that in general, living outside of the United States can help you greatly reduce, if not even eliminate the taxes you owe.

Rather than reducing your tax bracket from 43% to 38%, you can reduce it from 43% to 1% as I did. It’s all legal and based on US tax code that offers tax relief to American expats.

If you can move to Miami, you can move to Panama.

If you can move to Seattle, you can move to Dublin.

If you can move to Alaska, perhaps Siberia would appeal to you.

Of course, moving to another country involves immigration matters that moving to another state doesn’t. However, US passport holders can visit some 167 countries without a visa, meaning you can leave the United States and claim tax benefits now, and figure out where you want to live later.

While you can choose to establish a new permanent home overseas, you can also choose to travel from country to country as a tourist and pay taxes nowhere.

I like to think of this as the US government paying for you to travel. Even with only $100,000 in annual earnings, the average US citizen would save about $29,000 a year by moving overseas. That’s far more than the few grand you’d save crossing into Nevada or Florida.

When you get into higher six- and seven-figure earnings, the savings become even more substantial. If you’re in business for yourself, imagine what you could do with all of that extra money every year by merely re-investing it back into the business.

In Marcus’ case, he decided to set up homes in both Panama and Thailand. By doing so, he was able to reduce his taxes to almost zero, giving him a six-figure sum to re-invest and double his money on.

Lower taxes and enjoy the good life

Before you move to another state, consider moving overseas. Having not spent so much as one day in the United States in several years, I can tell you that I don’t miss much, nor do I lack for anything.

You may miss the beaches, or skiing, or surfing, or California Gurls, but I promise you that plenty of other countries have beaches, slopes, waves, and hot girls.

In fact, not only can you keep a lot more of your own money by moving overseas, but you may be able to reduce your cost of living as well. While moving to Dublin might not yield much in the way of savings, moving to Bangkok will.

Heck, I know people who have gone from barely scraping by after taxes and living expenses, to pocketing 75% of their income after moving overseas.

Becoming an expat is a legal way to save on taxes and live an adventurous life of freedom, and it sure beats fighting tourists on the Strip.

Andrew Henderson
Last updated: Dec 26, 2019 at 7:12PM

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13 Comments

  1. South Texas

    It would have to make business sense and economics. As a lifelong Texas Resident, the personal real estate property tax is a burden in many places. However, for now, we still only pay around a $70/vehicle registration fee each year regardless of the year of the vehicle unlike other states. Sadly, the legislature has chosen to slowly nickel and dime us to death as well. For example, up until a few years ago, prepared foods at a grocery store were not taxed. Governor Perry chose to arm twist Amazon into collecting a sales tax. If you a buy a vehicle from a private party, you pay a sales tax on the book value of the vehicle where as 20 years ago you could fudge a bit with the numbers. So yes, we have some soft communism here to in some ways and we not as free either.

    Property is still cheaper here in many places relative to CA and NY, but that does not do you any good if you are already in the mid-range of average income for a family. I’ve lived in a mid west state with an income tax and other taxes, and I actually came out ahead living in Texas. Again though, depends on circumstances.

    Reply
  2. JR

    I think you might have missed Tennessee in that list of (basically) no income tax states. I live here and I’m glad to not have to file state forms, but higher sales taxes do eliminate part of the benefit, and of course living here does nothing about the real elephant in the room … the IRS.

    Reply
    • Irina Loncar

      Hi there! Thank you for your comment 🙂

      Reply
  3. Dan

    We’ve been doing this same thing, too. My wife and I earn north of $200K and nearly all of it (after deductions) is earned tax free. And we work for our own company, incorporated in Belize. So no SS taxes either. We just travel, with our two kids, all over the world. Been doing it now for 3+ years. It’s the most amazing experience. The freedom and the education the kids are getting… it’s priceless. Although, thanks to Uncle Sam’s FEIE, I CAN put a price on it. haha!

    One thing I will say is, and I guess this depends on your circumstances, but the bank we have to deal with in Belize is a ROYAL PAIN IN THE ASS!!!!!!!!!!!!!!! It’s like trying to pull teeth each and every time we want to move money into and out of the account. I really wish we had a better solution with that. But thanks to the US wanting to know when US citizens so much as fart and why they’re farting, foreign banks have to be ruthless in their paperwork with us. Anyway, thanks for the great article Andrew. More people should be aware of this amazing opportunity.

    Oh, and you should probably close with the fact that moving to a no tax state BEFORE you go overseas is a wise choice because you distance yourself from the original state and if they want to try to come after you because you’re still considered a citizen of that state (even though you’re “traveling” at the moment) they have less of a case for collecting on you.

    Cheers!

    Reply
  4. Greg H.

    If you stop paying into SS, that must mean you’ll be collecting a smaller amount later in life. What’s the strategy here? Use your money for investment/savings, don’t depend on SS later?

    Reply
    • S I

      Greg, social security payments aren’t collected by the individual paying them. It’s not like you’re paying into your own SS account. In all likelihood, I (28 years old) will not see any SS money because it’s an unsustainable program.

      Reply
      • JD

        Greg’s question is a solid, legit inquiry for those of us dealing with high end income while also implementing tax minimization strategies (such as minimizing SS/Medicare taxes below the caps). I too have wondered about this.

        SI, your answer is not helpful in this context.

        Reply
        • Jonathan

          I’m not sure how anyone who isn’t incredibly poor gives a crap about social security lol. My dad says he can buy a decent bottle of wine if he wanted but it’s completely pointless in general. You should have WAY more money saved by that point and it shouldn’t make any difference to you. I never even think twice about it. Whatever is taken away in SS taxes is a completely sunken cost as far as I’m concerned.

          Reply
  5. Jay

    Can you exclude the $102,100 from your retirement?

    Reply
    • Linda Howell

      No, you can only exclude $104,100 (2018) per year in EARNED income (if you meet the qualification of residency or physical presence). Retirement income is not Earned income (as in W-2, self-employment, etc. earnings). You can also exclude much of your housing costs (rental, not purchased), but the exclusion is tied to your Earned income. For example, you can’t simply move overseas, collect SS/retirement funds, and exclude your housing costs. Still, comparing the cost of living of various places in the world, you are still ahead by moving abroad.

      Reply
  6. Disappointed

    Hey Andrew, just so you’re aware: Men aren’t the only people who earn enough money and are smart enough to understand these subjects. Women occupy this space as well. Remember that the next time you think mentioning “California Gurls” & “Hot Gurls” is necessary, or even appropriate in this conversation.

    Reply
  7. Alexander Hart

    Moving to from California to Nevada may not make much sense for an entrepreneur, but it’s not a bad option for one of those sad and timid souls forever destined to work as an employee.

    Reply
  8. Me too

    I agree. there are some things you can think and not say.

    That said, Andrew, I did appreciate your perspective on the issue. Thanks for your thoughts.

    Reply

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