Over the years, we’ve talked about taxes a lot. In particular, we’ve talked about the US tax system and how unfair it is. While most people agree with what we have had to say about US expat taxes, there are still quite a few people who think that the US tax system is justified.
But our opinion on the matter is unchanged, and we have reason to believe that many of you think so too. After all, the United States is the only country in the world where you have to pay taxes no matter where you live.
In a way, it can feel like you’re being taxed for your citizenship. Which, if this is true (because no one is certainly admitting this), buys into the notion that the United States is the greatest country in the world, and that’s a completely different topic.
All we have to say is that if the United States truly were as great as it used to be, there wouldn’t be so many Americans living overseas. Indeed, that’s the case, and we’ve seen that many Americans overseas are also actively looking for ways to legally reduce their taxes.
That is where we come in.
We understand that you’re looking for ways to lower your taxes. Don’t feel as though you’re doing anything wrong by wanting that. After all, less than 10% of the population of the United States has to pay most of its tax bill. How is that fair?
So, at Nomad Capitalist, we’ve developed strategies you can implement to bring your tax percent down from more than 40% to as low as 1%. Yes, we can help with that, and it’s all completely legal. Get in touch with us to learn more about that.
Do Expats Pay Taxes?
Before we look at the numbers, let’s address something that a lot of people have questions about. First of all, the most common question we get from Americans living abroad is whether they have to pay taxes, even if none of their income is based in the United States.
As we’ve mentioned multiple times in the past, you have to pay taxes no matter where you are in the world. In addition to the tax you’re paying to the US government, depending on where you live, you may be subject to additional taxes in your resident country as well.
There are quite a few taxes that you may find yourself paying. From rental income to local taxes to state taxes and more, it’s quite common for expats to be paying taxes on a lot of things.
Especially American expats.
You’ll probably find yourself paying a lot more taxes on the same income compared to your non-US counterparts. It doesn’t matter if you’re an entrepreneur or if you have a foreign employer or work in a foreign corporation.
Because you have to. There’s no way around it if you have a net worth of more than $1 million.
That’s not all. If you live in a country with a high tax rate or stricter foreign income taxes, you might find yourself paying worldwide income tax as well.
Therefore, it’s highly recommended that you reach out to Nomad Capitalist so we can help you create a financial plan that will work best for you.
Why Does The US Tax Expats?
The US expat tax is something that only Americans have to deal with. It’s also something unique to the United States only. No other country in the world has a tax law where citizens who haven’t been in the country for decades are required to pay US expat taxes.
In fact, in most countries, you don’t have to pay taxes the moment you leave with no income left behind. Some countries go a step further and don’t care to tax income-based in that particular country because you’re not there.
Similarly, you’ll see plenty of examples of countries where there are many foreign earned income exclusion options. Of course, to be fair to the United States, there is a foreign earned income exclusion policy but it’s pretty nominal.
In general, as an American, you’ll see that a foreign country is nicer to you than your own country. Because of US taxes, you are likely to be a victim of double taxation.
But why are there such US expat taxes?
1. Paying for Services
According to the United States government itself, you’re essentially paying for the benefits of your citizenship. After all, there are many “free” utilities offered to you because of your status as an American citizen.
From the moment you’re born (even if you’re born to foreign parents), you’re costing the government something. A better way to imagine this is as social security payments.
You’re granted various social security benefits throughout your life as a US citizen. The government can’t pay for every 300-something-million American, so they’re taxing those who can afford it.
Even if you’re not using those services. Of course, this leads to another argument.
You’ve been abroad for many, many years. You’re not using any of the “services.” So, why do you have to pay a US expat tax when you’ve got nothing in the United States?
2. Paying for Your Privilege
By now, like almost every other US citizen abroad, you’ve started asking the question: why am I paying US expat tax when I have nothing to do with the United States?
If this is you, you’ll be happy to know the government has an answer for that. Mind you; you won’t be happy with the answer.
Their reasoning behind taxes for expats is that your citizenship is a privilege. If you ask us, it sounds a lot like you’re being asked to file taxes for your citizenship.
No one’s going to admit that, but if you read between the lines, that’s what’s happening here.
For, according to the US government, you have a tax obligation because what you do, who you are, and any greatness you might achieve is all due to the all-mighty US government.
Yes, as per the official reasoning, the only reason you go to where you are in life is because of the government and the services available to you since you were born an American.
3. Paying Other People’s Tax Returns
Another reason why you’re subjected to the US expat tax is that back home, other people aren’t paying enough taxes.
The US government likes to pretend to be very egalitarian. You have probably noticed that there’s been a surge of anti-rich sentiment in the United States in recent years.
Particularly since the election of Donald Trump, we’ve seen a rise in people wanting to increase tax filing obligations…but for the wealthier people only.
Similarly, there’s been an increase in the demand for social security taxes…for the wealthy only. We find this one to be outrageous because no one should pay social security taxes, to begin with, but the rich in particular?
That’s rather discriminatory. But what can you do about it?
It seems as though politicians are willing to do anything as long as it gets them re-elected. You could, in theory, pay a lobbyist to work with these politicians and make a “donation” to stop your people from having to pay taxes.
But that’s not right.
Not everyone wants to mess around with politics anyway.
If you’re reading our blog posts, chances are, you’re probably an entrepreneur or an investor looking for ways to build their wealth. Why should you waste your money on politics? Particularly since we know that politicians aren’t reliable.
They’re all corrupt, and it’s clear as day from their election funds. They’re corrupt, and they want you to pay for what they should be able to do on their own. So, no, it’s not your responsibility to pay social security taxes.
As the government, they should’ve come up with a better plan. But they’re not going to. So, being part of the “elite,” you have to pay for your and others’ federal tax return.
How Much Tax Do American Expats Pay?
Depending on your net worth and your occupation, you may have to pay the US expat tax as well as additional taxes on foreign financial assets, rental income, on top of any foreign taxes you have to pay in your country of residence (if it has foreign taxes at all, that is).
As you can see, this is double taxation at its finest. The cost adds up, and many Americans abroad are tired of it. After all, just think about it.
After you’ve had your foreign taxes paid (if the country you live in has such taxes), you’d like to rest. It’s not just about the money you’re paying. It’s the process too. There’s so much paperwork, especially with income taxes. If your income exceeds a certain tax bracket, you’ve got a lot to do as well.
And if you’re in a foreign country, you’ve got foreign financial institutions to deal with.
Some people would say that it’s a necessary evil, but it’s not.
So, you have to start paying taxes if taxable income is $12,000 at least, and the tax rate goes up depending on your net worth. If you’re married to another US citizen and you are filing together, you have to pay taxes if your minimum income is $25,000.
Please note, all of this information is subject to change depending on your net worth, your foreign assets, your foreign income, your income earned abroad, and more.
These are the minimum considered taxable income. If you and your spouse file separately, you have to pay $5.
Yes, all of this needs to be added when filing income. We recommend checking the Internal Revenue Service (IRS) website before making any payments. They will vary depending on you and your tax situation.
Are All US Citizens “Tax Residents”?
Unfortunately, yes. All US citizens and green card holders have to pay the US expat tax if they live abroad. No matter where you are, you have to file your US federal tax return. You might think that you can get away with paying taxes abroad, but you’re mistaken.
In addition to heavy penalties, there’s something called the physical presence test, which is done to ensure that you live in the United States. It’s not easy getting around the physical presence test. What’s more, if you get caught tampering with the physical presence test, you may find yourself facing charges.
And trust us, you don’t want that for yourself.
Similarly, there’s something called the bona fide residence test as well. These are all some examples of the measures the government takes to know your location.
Also, as a US citizen, you will have to pay the child tax credit if you have children. Yes, as the name suggests, the child tax credit needs to be filed when paying estimated tax too.
We know it sounds bad, and in truth, it’s a lot worse.
But the good news is that there are ways around this.
How to Avoid Paying US Expat Taxes Overseas
There are many options available to you to avoid paying taxes in the US if you live in a foreign country. There’s a way around avoiding tax on your foreign earned income as well, you just have to be proficient with your tax return.
Trust us, we strongly recommend getting a consultant or lawyer well-versed in filing taxes. If you don’t know where to start, get in touch with us.
1. Foreign Earned Income Exclusion
You can cut back on your taxes legally by getting foreign earned income exclusion. Basically, you will have foreign tax credit which you can use to exempt yourself from many things. For example, you can get a foreign housing exclusion based on housing expenses, foreign source income exclusion and more.
But, again, you’ll have to be careful with foreign tax credit because it’s easy to mess it up. Be sure that you have the correct and up-to-date information about the foreign tax credit and how to utilize it.
2. Transfer to Non-US Spouse
There’s a massive loophole when it comes to taxes for expats, and that is your non-US spouse. On the off chance that you have a spouse without a US green card or passport, you can transfer your property and your other investments in their name and not pay expat taxes at all.
Of course, you’re probably wondering if this is a good idea. We’ll admit that this falls in the gray area. If you’re thinking about it, the answer is yes. This is a strategy people use to avoid the US expat tax.
It’s completely legal, and honestly, it’s very hassle-free compared to the other methods on this list. Your income will just be considered excluded income because it’s in your spouse’s name, and you’ll probably end up paying the bare minimum we mentioned if your only income falls in the lowest tax bracket.
Many people do this to pay the least amount of tax. If your spouse is from a country that readily grants income tax treaties, you’ll probably be able to save far more than you’re spending on foreign tax, and that’s great.
3. Renunciation of US Citizenship
If none of the options mentioned above work, you can also choose to renounce your US citizenship. Of course, you will have to pay an exit tax to the US government which, depending on your net worth, can be well into the five- and six-figures.
But it’s better than worrying about your foreign tax credit, interest dividends on things, tax liability and all that. This is a drastic step, we’ll admit.
We also know from experience that the US government will not make things easier for you. In fact, you need to make sure that you have paid all your taxes, checked for tax liability, dollar for dollar credit, and everything before you go to give up your US citizenship.
How to Live Without Paying Taxes
If you’ve decided to take the leap and made the decision to renounce your US citizenship, here are some ways you can ensure that you never have to pay any sort of tax again.
Move to a Country with No Income Tax
The first thing you must do is move to a country with no taxes for expats. Places like Dubai have no taxes whatsoever. These countries will offer you a second residence permit for investing some amount into their economy or simply transferring your money into their banks.
Eliminate Your Personal Taxes By Getting a No-Tax Second Citizenship
Your next move will be to get a second passport which you can get quickly without even living in the country for a few months. If you’re into real estate investment, you’ll be happy to know that Caribbean countries and Turkey all have instant citizenship by investment program, which you can use to get citizenship in less than six months.
If you’re looking to spend a bit more and would like second European citizenship, you’ve got Malta’s citizenship by investment program.
These programs have their own pros and cons, and we encourage you to check them out.
Obtain Tax Residency in a No-Tax Country
After your citizenship applications have been approved, you can then begin the process of moving to a country where you don’t have to pay any tax on foreign income. There are many countries that want you and your money to be spent on their economy, so they’re going to be willing to accommodate you.
Of course, once you’ve gotten rid of any extra foreign tax you’d have to pay, you can then begin the process of getting rid of your US citizenship. After you’re done with that, you can refine your options and go after other convenient residence permit and passport programs in countries where you can expand your wealth and protect your freedom.
Develop Your Own Tax Reduction Strategy with Nomad Capitalist
Taxation can be complicated, especially if you’re a US citizen. It’s best to ensure that your tax affairs are in order so that the tax season isn’t too problematic. At Nomad Capitalist, we understand the importance of tax preparation and developing a strategy to combat it.
So, don’t wait another moment. Get in touch with us today to learn how to optimize your profits and pay as little tax as possible. We can also help you obtain a second citizenship, develop a custom Plan B to protect your freedom and assets, and also ways to grow your wealth too.
We believe in helping you go where you’re treated best. The only way you can ensure this is by connecting with us today. So, don’t miss out on this opportunity.
Nomad Capitalist is the world’s most sought-after financial planning and investment consultancy. We won’t always be available to help. So, hurry up and connect with us today to improve your quality of life immediately.