How to Not Pay Taxes: 4 Legal Ways to Not Pay US Income Tax

Why do people pay so much tax in the US? 

How do citizens and businesses stay in the game in the face of the government taking such a hefty slice of the pie?

The answer lies in finding legal ways to reduce their tax burden. 

Yet, US citizens still have to run around in circles to catch a tax break, which include all sorts of tax credits, from the child tax credit to the earned income tax credit, all to lower their federal income tax and to get breaks on capital gains tax, among others.

They contribute to health savings accounts, squirrel away money in retirement accounts, hope for tax-free growth, and eagerly accept flexible spending accounts offered by their employers.

This might or might not even apply to your adjusted gross income and you can’t necessarily deduct all your contributions from your federal income taxes. 

However, you can completely avoid paying not just your federal taxes but all sorts of taxes in the US system, and you can do so legally.

If you’re interested in finding out how to win more freedom and mitigate, if not completely eliminate, your tax burden, then read on because you’re in the right place. Nomad Capitalist has a team of experts located all over the globe who specialise in assisting individuals just like you. Explore our services page to see how we can help you achieve your goals.

How to Not Pay Taxes in the US

Ready to lower or eliminate your US tax burden? 

Here are the four ways you can legally avoid paying taxes on US income.

1. Live Outside the United States

One of the fastest and easiest ways to reduce your taxes is to live outside the US for the vast majority of your time. 

This strategy falls under the Physical Presence Test for Foreign Earned Income Exclusion (FEIE), a popular tax strategy for expats.

According to the Internal Revenue Service (IRS), if you reside outside the US at least 330 days out of 365, you can exempt US$130,000 of taxable income from your annual taxes in 2025.

The beauty of this strategy is that you can leave the US any time you want. Plus, even if you never live there again, you can visit the US for one month a year.  

One thing to be aware of is that the exemption specifically refers to time spent in a foreign country or countries. It’s not just about being out of the United States for 330 days. 

What difference does that make? It comes down to the fact that international waters and air spaces do not count.

For example, if you work on a yacht, this time outside the US, you may not qualify for the FEIE. International waters do not count, so once you pass 35 days in international waters, you lose the exemption – even if you never go to the US.

In most cases, though, meeting the Physical Presence Test is pretty straightforward.  Just be mindful of extended stays in the US and long international flights or cruises, as those could potentially disqualify you.

So, while the Physical Presence Test is a simple and effective strategy for reducing your taxes, some planning is needed to ensure it works.

2. Live Nomadically to Benefit from Offshore Tax Incentives

Acquiring a second residency has numerous benefits and can serve various purposes, such as minimising your US tax burden.

This strategy, like the first, involves living outside the US, but here’s the twist: you can become a tax resident of one country while actually living in another. 

As long as you spend 330 days a year outside the US, you can live in one place and be a tax resident of another. 

This allows you to leave the US and live in other countries to benefit from offshore tax incentives as you don’t trigger tax residence in more than one country.

To make this work, you’ll need to pass the Bona Fide Residence Test. This proves to the IRS that you’ve genuinely established residency in a foreign country. ‌It requires living there for an uninterrupted period that includes a full tax year.

This allows you to benefit from location flexibility, low taxes and an easy return to the United States.

3. Move to One of the US Territories

Another strategy to legally reduce your taxes is moving to a US territory like Puerto Rico, but make sure you do it correctly as the IRS closely monitors compliance with Puerto Rico’s tax laws.. 

There are two different ways you can save on US income taxes by moving your life and business to Puerto Rico.

First, there’s Act 60 (formerly Act 20), which targets service businesses that relocate to and export their services from the island. It offers attractive incentives like a low 4% export income tax and 0% tax on earnings and profits.

The second option, also part of Act 60 (formerly Act 22), focuses on high-net-worth investors. It features a tempting 0% tax on interest, dividends and capital gains. The main requirement is that you spend at least half the year (183 days) in Puerto Rico.

A lesser-known act is the International Financial Center Regulatory Act, or Act 273. Under this act, tax exemptions are made to businesses set up and engaged in eligible activities in Puerto Rico. 

To qualify, an International Financial Entity (IFE) must have an authorised capital stock of no less than US$5 million.

The entity must also employ at least four individuals, but be careful here. Many people think they can qualify under Act 273 by hiring chefs, maids and chauffeurs and be fine. However, you should hire real employees who are engaged in a business.

Puerto Rico isn’t the only US territory to offer tax incentives to businesses and investors that allow you to dramatically cut your taxes.  

The US Virgin Islands also has a program, but again, there’s a physical presence requirement and you must demonstrate a closer connection to the Virgin Islands than to the US.. 

That invariably means actually moving there, lock, stock and barrel. 

You can’t try to maintain your life in the US and must show evidence you have assimilated into your new country, albeit a US territory. 

Puerto Rico and the US Virgin Islands are attractive programs if you’re willing to actually live there. 

The potential benefits of these programs are best suited to those who don’t simply want to settle for the FEIE. 

The FEIE only allows you to exempt up to US$130,00 in 2025 and taxes everything else you make, so the opportunity of 0-4% tax rates is attractive if your earnings justify it.

4. Renounce Your Citizenship to Not Pay US Tax

As a US citizen, you are deemed to be a tax resident of the US wherever you live around the world, which means you have to report and pay your taxes to the IRS. 

However, renouncing your US citizenship eliminates all US taxes and IRS reporting obligations, leaving you free to explore the available low- and no-tax living options. 

Some people are required to pay an exit tax on all unrealised capital gains, like those from a business (which can be hard to value), real estate, investments and other assets.

The exit tax is a hypothetical sale of your assets on the day before your renunciation of US citizenship. 

It applies to individuals with a net worth exceeding US$2 million, those who are not tax-compliant, and those who have exceeded the set income threshold for the past five years (US$201,000 for 2024).

The exit tax rate can be as high as 23.8%, but you will not be taxed again on any income or gains that have already been subject to US tax. For property, it’s deemed to be sold at its fair market value. However, the value of this deemed sale is reduced by an exclusion amount of US$866,000 in 2024.

Many people will not pay an exit tax, and the good news is that they can still receive their government benefits and, in some cases, continue using US banks after renouncing.

The best news of all, however, is that if you renounce your citizenship, you’re done with US taxes forever. That means no more jumping through IRS hoops or handing over half your income to the government each year.

How to Stop Paying US Taxes: FAQs

Should You Keep Your US Citizenship?

So, with all that in mind, should you hold onto your US citizenship or renounce it? 

It really depends on your situation, but most of our clients at Nomad Capitalist benefit from expanding into the global market and lowering their taxes overseas.

It’s a huge move and it’s not for everyone, but there are definitely certain cases where it makes sense for an individual to renounce their citizenship to get out from under the crushing burden of US income tax.

There’s a lot to think about, and mistakes can be costly. If you’re planning on renouncing, you need a plan for what happens with your business, your banking, your investments and your taxes when you decide to leave. 

That’s where Nomad Capitalist comes in. 

We help seven- and eight-figure entrepreneurs and investors create a bespoke strategy using our uniquely successful methods. 

We’ll help you to keep more of your own money, create new wealth faster and be protected from whatever happens in just three steps. 

At Nomad Capitalist, we have a network of lawyers, estate agents, accountants and tax and company formation specialists based around the world. 

All that expertise and real-world experience come together when we create your holistic, bespoke action plan. Discover how we do things here.