We understand that it’s too easy to become a victim of double taxation. It doesn’t matter if you’re a U.S citizen or if you’re from a foreign country with completely different tax laws.
More often than not, we’ve got people coming to us saying that they’ve fallen into the tax trap and want to avoid double taxation.
So, how do you legally avoid paying income tax on foreign income?
If you want to not pay foreign income tax, there are several ways around it not restricted to the Foreign Earned Income Exclusion which is capped at a $112,000 taxes exclusion per person on worldwide income in 2022.
If you didn’t pass the bona fide residence test and didn’t qualify for Foreign Earned Income Exclusion, or if your self-employment tax is still too high, then the Foreign Tax Credit will work well for you.
Luckily for you, there are several options available. All you need is the right team to help you.
At Nomad Capitalist, we’re dedicated to providing tax optimization strategies amongst others to high-net-worth individuals. Part of our expertise lies in legally lowering your taxes, and over the years, we have found several ways to do so.
Can I Lower Taxes on Earned Income at Home and Abroad?
From federal income tax return to capital gains to taxes on earned income, unearned income, and other foreign sources, there are many ways in which a foreign country and your own can tax you. So, what do you do about it?
Well, one of the ways you can lower your taxes is by moving to a country where income taxes are either non-existent or completely minuscule compared to your total income.
However, not everyone wants to move abroad.
After all, sometimes countries that offer zero foreign earned income tax just aren’t suited for you. What do you do in such a situation?
Well, you have two options: either you accept the tax policies of the country you currently live in, or you travel as a nomadic traveler with no permanent address. Unfortunately, neither of these two options works anymore.
To start with, countries have really started to crack down on individuals with no permanent address, so in the long run, it’s a very bad idea not to have a permanent residence. You need an address. There is no way around it.
The other option is paying your resident country’s tax, which may not work for you. If you’re a westerner, you probably don’t agree with the tax policy in your country, so that is out of the equation as well.
There is an alternative for you though, but you have to be smart about it.
The Nomad “Tax Trap” & What to Do About It
The most commonly used alternative to legally lowering your taxes is to have an offshore bank account. If done correctly, offshore banking has great results, but people make two mistakes while doing this.
Either they think that it is too difficult and, therefore, do not proceed with it or they think it’s too easy. One of the most common mistakes associated with offshore banking is that some people think that all you need to do is shift your assets to an offshore account somewhere, and that’s it.
Well, unfortunately, that’s not it. There is more to taxes than just simply moving your money to a foreign bank. The best way to do so is by being more careful about it; implementing strategies. The last thing you want is an encounter with the Internal Revenue Service.
You cannot possibly spend your time always traveling around the world, hoping that you don’t fall under a specific country’s tax policies by spending, say, less than a few months there at a time.
As we have mentioned, being a nomadic traveler is not a viable option anymore.
So, you need another alternative. But what can you do?
How to Avoid Paying Taxes On Offshore Income
It is simply too easy to fall under the tax trap if you don’t do your research. As a U.S citizen, in particular, you will find that you will have to pay income taxes or self-employment taxes anyway. So there has got to be something that can help you, right?
Well, yes. There are options available as long as you’re willing to go the extra mile to protect your local and foreign income.
Tax-Free Countries: Are They Right for You?
Now, we all know that countries such as the UAE and Monaco do not tax you. These countries make their money through oil and gambling for example.
So, there’s no such thing as an income tax, real estate tax, taxable income, and all the other taxes and associated jargon required there whatsoever.
No taxes might sound great, especially if you’re a U.S citizen and tired of being taxed heavily every year.
But are these countries right for you?. First of all, they require you to move. Not many people want to move to the Middle East or any other foreign country for that matter.
Of course, every luxury is available in the Middle East. But it may be too far from friends and family. And, in recent years, its cost of living has increased.
But if you are willing to do this then it is a simple process. Moving to Monaco, for example, is quite simple. All you need to do is leave the place you live in right now and move to Monaco.
Do You Need to be in a “Tax-Free” Country to Pay Zero Tax on Foreign Earned Income?
There is a lot of misinformation online about countries where you can live and pay zero taxes in. For instance, there are a lot of misconceptions about territorial taxes.
Before we move any further, let’s try to understand what territorial taxes are.
What are Territorial Taxes?
Territorial taxes are quite different from what we’re used to. Basically, in a country like the United States, you are taxed on a multitude of things. It ranges from property to income taxes to many, many other things, including foreign income.
If you own a business, you may have to pay self-employment taxes. Moreover, if your income crosses into a different margin in a year, you may be subject to completely different tax rates than the year before.
Luckily, certain countries in the world do not tax foreign earned income at all. They have a territorial tax system. This means that you are obliged to pay taxes in that country as long as you make money there.
Why Are Territorial Taxes Important to Know About?
Basically, if you have a job in such a country, you will be paying a salary tax. If you buy property, you will have to pay taxes on that. If you do not have any income coming from within the country, there are no taxes for you.
These countries don’t have any foreign earned income taxes. So, if you plan on moving to a country with territorial taxes, you are essentially exempt from paying any taxes.
However, once again, we’d like to remind any U.S citizen reading this post that even if you’re not paying taxes in a said foreign country, you will probably still have to pay back home depending on your income type.
How to Get the Best of Both Worlds?
Territorial taxes can be a great source of reducing your foreign income taxes and others too. You just need to plan your taxes properly.
This is where Nomad Capitalist comes in. We offer tax solutions to individuals interested in getting the most out of places they already live or would like to live in. And if the investment opportunity there isn’t the best, we provide offshore solutions in foreign banks too.
An excellent example of this is Malaysia.
What You Need to Know About Malaysia’s Tax Policies
Now, Malaysia has territorial taxes, so if you have foreign earned income, you don’t need to worry about taxes too much. But what if you are interested in buying real estate?
If you decide to buy real estate in Malaysia, you will have to pay real estate tax because they have territorial taxes. Instead, you could buy property in Georgia, for example, where the tax is low. You will get a better return on your investment as well.
But if you’re buying property to live in, you can develop a strategy so that when you’re paying taxes back home (again, applicable for U.S citizens only), you can get a foreign housing exclusion. It’s just a matter of doing your taxes properly.
Similarly, if you reside in a country that has US tax treaties, you can even take out housing expenses, thus reducing your tax bill.
As you can see, if you set it up properly, you can save quite a bit of money. But that is not all. Depending on the kind of business and income you have, depending on your net earnings, it would be beneficial for you to settle your affairs across three, four, or even ten different places, as long as they benefit you.
You do not need to have all your eggs in one basket. You could have assets split internationally so that your net earnings are in a reasonable tax bracket.
Of course, this will open up many opportunities for you. Especially if the option to gain a temporary or permanent resident visa or a second passport appeals to you.
You simply need to play your cards right.
Places with Zero Foreign Income Taxes
There are plenty of countries that have territorial taxes around the world. If you’re a passport holder or a tax resident of these countries, you can easily avoid paying taxes on foreign investments, foreign real estate, and more.
To make things easier for you, here is a list of countries with zero foreign earned income tax based on each continent.
Asia has quite a few territorial tax countries which have zero foreign income taxes. As you can imagine, at the top of our list is Malaysia.
If you are a resident in Malaysia and stay there long enough to qualify for taxes, you can easily pay zero foreign earned income tax, despite the country’s earlier proposal made in the 2022 budget to tax Malaysian residents on their income sourced from abroad except a few industries.
You have to be smart about your investment.
Singapore, Thailand, The Philippines
Following Malaysia, you have countries like Singapore, Thailand, and The Philippines. All of these countries have territorial taxes. However, you cannot simply take the example of Malaysia to decide to move to these countries.
Every country on this list has its own set of requirements which will allow you to become eligible based on your locally sourced or foreign income, your role in your offshore business amongst other factors.
2. Eastern Europe
The first country we think of with territorial taxes is Georgia. It is arguably one of the most tax-friendly countries in Europe. It offers great rates for residents and non-residents in almost every venture you could think of.
This option is great if you want to live in Europe for a long time. The tax system in Europe isn’t the greatest, so Georgia is the next best option.
3. The Americas
The Americas, particularly the Caribbean Islands, are renowned for having several tax-friendly countries. However, even though the foreign income tax is significantly lower than in western countries, the foreign earned income tax is not zero.
Panama, Nicaragua, Costa Rica
You will still have to pay unless you count places like Panama, for example. There is also Nicaragua and Costa Rica. The common denominator between these three countries is that, unlike their neighboring countries, they all impose territorial taxes.
Tax Mistakes to Watch out for
When it comes to taxes, most people make incredibly unbelievable mistakes. This is usually because they were not aware of certain policies. It can be tough to keep track of various countries’ tax policies. But there are several things that you can do to ensure that you are on the good side of these things.
The most common mistake that people make is assuming that because they live in a country, they are exempt from paying foreign income tax.
Yes, there are countries where you do not have to pay taxes whatsoever. Sometimes, the only way to avoid paying taxes completely is by ensuring that all your assets in one country.
But, as we’ve mentioned, it is not a good idea to keep all your assets in one place. Diversifying your portfolio is a better way to go about things. Besides, if you are interested in international real estate, for example, you won’t be too happy with investing in one particular country.
Diversify Your Income
These things require you to explore your options globally. Monaco and the UAE are not bad places to move. They have some of the highest standards of living globally, but not everyone wants to live there.
So, if you don’t want to live there, and you decide not to diversify your assets and investments, then you are stuck paying for the entire tax year.
If you’re one of the millions of U.S citizens with a seven-figure net worth, you know for a fact that you’ll have to pay gross income, self-employment income and so many other types of taxes.
U.S citizens have to pay for their social security benefits and so many other things as well. It’s almost comical. Americans spend a lot of time on their taxes and if you get even the slightest thing wrong, the Internal Revenue Service will be at your door.
This is the time to take your tax situation seriously.
You need to make sure that you’re following the right rules. You need to ensure that you set up your properties and business in the correct way.
Sometimes some countries will have you pay for hiring a civilian employee, for rental property, for foreign housing amounts, and other commodities. This especially happens if your company is based abroad. They argue that since you’re the one running it from said country, you have to pay taxes.
It can be a bit frustrating, but you need to work these things out in advance. We’re all about legality when it comes to taxes because once you get caught by the Internal Revenue Service, you put everything you’ve worked for in jeopardy.
So, get that IRS form and get your taxes sorted out today.
Nomad Capitalist Has the Solution for You
At Nomad Capitalist, we look forward to helping seven and eight-figure entrepreneurs go where they’re treated best. If you are interested in learning more about our services, such as offshore banking, tax reductions, and obtaining a second citizenship and passport, you should contact our team for more information.
We are confident that we will be able to assist and provide you with the right information and guidance you need to legally lower your taxes, expand your wealth and become a global economic citizen.
So, reach out to us today. Learn more about making the most of your resources and elevating yourself to a higher, better level of financial freedom.
Nomad Capitalist is here to help you go where you’re treated best.