But it might end up costing you way more in business structure and maintenance and tax preparation than it’s worth to you. you may blow the whole plan by taking the money when you aren’t supposed to.
Let’s start with the most common way to get a tax break.
When you qualify for the foreign earned income exclusion, you can avoid paying tax on over $100K (double if your spouse qualifies too) and take a housing exclusion for $30,000 or so.
There are a couple of steps.
First, Qualify as a foreign resident.
There are a couple of ways to do that.
You could pass the physical presence test. That means that you live out of the country for 330 out of 365 days.
The other possible way is as a bonafide resident. That means your real home is outside the US. You can go back to the US for more than 35 days but you need real legal status in another country and a foreign home that is clearly your residence.
Make foreign earned income.
This is the step that we get a lot of questions about.
First of all, you need to make sure the nexus is really outside the US. If you have real estate in the US, for example, that’s a US nexus. It’s not foreign income. You pay US tax on it. If you have a clearly US based company with US nexus, it’s not foreign income. You pay US tax on the income.
But if you have a company that provides goods and/or services that clearly operates outside the US, you have foreign income.
The second part of the confusion comes about with the question of “earned”. In the US system, earned income is subject to 15.3% self-employment tax. If you have a foreign company and pay yourself a salary, you will probably have to pay the equivalent of that foreign company’s social security tax.
One solution is to make sure you’re operating through a foreign company that doesn’t have much tax (if any).
Depending on the type of company and the rules in your resident foreign country, you may be able to set up in a tax friendly country like Anguilla. That would mean you pay no foreign taxes and take big income exclusion on your US tax return.
Recently, we talked to a new client who had set up a Costa Rican company for his online business. He was excited that he’d taken the step to have a foreign company and was ready to talk about all the tax savings.
The problem was that CR has taxes, a lot of taxes. And in his case, he might even end up paying more taxes to Costa Rican than he would have if he’d kept the company in the US
Make sure you have good advisors before you start any big tax strategy plan, if you would like more information on how to be prepared. Or you are in need of a consultation regarding a Federal or State Tax issue. We would welcome the opportunity to evaluate your situation. For your convenience you may reach us by either emailing us: [email protected] or phoning toll free 1-800-278-2614. As always, the evaluation is Free and Confidential.