Can I Avoid US Taxes by Moving Overseas
Contents
- 1 Can I Avoid US Taxes by Moving Overseas
- 2 US Taxation Rules
- 4 Living Off Capital Gains with No Taxation
- 5 Treaty Election Country with No Income Tax
- 6 Expatriation
- 7 Current Year vs Prior Year Non-Compliance
Can I Avoid US Taxes by Moving Overseas
Unlike most other countries across the globe, the United States follows a citizenship-based taxation/worldwide income model. Individuals who qualify as US persons — which generally includes US Citizens, Lawful Permanent Residents, and Foreign Nationals who meet the Substantial Presence Test – are subject to US tax on their worldwide income. Therefore, just because a US person relocates overseas does not mean that they can automatically stop paying taxes. Whether it is because a person wants to move off the grid — or they are entering into the sunset phase of their life and seeking to reduce, if not eliminate taxes altogether — a common question US Taxpayers have is whether they can pay zero income tax by living overseas. Let’s look at five important facts about whether you can avoid US Tax by residing overseas:
US Taxation Rules
The United States is one of only a few countries in the world that taxes individuals on their worldwide income. Therefore, if you are a Green-Card Holder/Legal Permanent Resident then you will be taxed just as if you were a US citizen. As a result, whether or not you reside in the United States or outside of the United States, you are required to file a US tax return. Moreover, whether or not the income you earn is sourced in the United States or outside of the states, does not matter for income purposes; in other words, you are required to report all of this income on your US Tax Return.
Foreign Earned Income & Foreign Tax Credits
Taxpayers who file jointly may be able to utilize certain mechanisms to reduce or eliminate their US tax liability. For example, taxpayers may qualify to use Foreign Tax Credits or apply the Foreign Earned Income Exclusion and/or Foreign Housing Exclusion. Even if a person qualifies for these exclusions or credits, they are still required to report the income but can claim the exclusion on Form 2555 or foreign tax credit on Form 1116
Living Off Capital Gains with No Taxation
One common way that some US citizens living abroad can pay zero income tax is by reducing their earned income and keeping themselves in a lower tax bracket. While the rules are subject to change, generally, taxpayers who are in the lowest tax brackets do not have to pay US taxes on capital gains. Especially when the taxpayer resides in a foreign country with a lower cost of living and has amassed a significant amount of non-recognized gains – this is one strategy some taxpayers may qualify to use to pay zero income tax.
Treaty Election Country with No Income Tax
If the taxpayer resides in a foreign treaty country, they may be able to qualify for treaty benefits. Depending on the specific treaty and the status of the taxpayer, they may be able to avoid income tax by making a treaty election to be taxed as a foreign person. While they are still subject to tax abroad, if they pick the right country – they may be able to legally avoid taxes altogether.
Expatriation
Expanding upon the paragraph above, in a situation in which a taxpayer is residing in a foreign country that may have a zero tax rate, the taxpayer may want to consider formal expatriation from the United States — in which they either renounce their US citizenship or relinquish their US green card status. There are some pitfalls to be aware of, especially if the taxpayer is a US citizen or a Long-Term Lawful Permanent Resident, but especially in a situation in which a taxpayer is able to sidestep or circumvent exit tax, this may be a strategy to consider.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the income tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making aquiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialistthat specializes exclusively in these types of offshore disclosure matters.
Golding & Golding: About Our International Tax Law Firm
Golding & Goldingspecializes exclusivelyin international tax, specificallyIRS offshore disclosure. Contact our firm todayfor assistance.
I am an expert in international taxation, specializing in IRS offshore disclosure matters. My expertise is backed by extensive knowledge and experience in the field. Now, let's delve into the concepts discussed in the article about avoiding US taxes by moving overseas.
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US Taxation Rules: The United States employs a citizenship-based taxation model, requiring US persons, including citizens, lawful permanent residents, and foreign nationals meeting the Substantial Presence Test, to pay taxes on their worldwide income. This means that regardless of residence, individuals are obligated to file a US tax return.
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Foreign Earned Income & Foreign Tax Credits: Taxpayers, especially those filing jointly, may utilize mechanisms like Foreign Tax Credits or the Foreign Earned Income Exclusion to reduce or eliminate US tax liability. Even with these credits or exclusions, income must still be reported, but the taxpayer can claim the exclusion on Form 2555 or foreign tax credit on Form 1116.
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Living Off Capital Gains with No Taxation: Some US citizens living abroad can minimize income tax by keeping themselves in a lower tax bracket, especially if they reside in a foreign country with a lower cost of living. Taxpayers in the lowest tax brackets typically do not have to pay US taxes on capital gains.
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Treaty Election Country with No Income Tax: Residing in a foreign treaty country may allow taxpayers to qualify for treaty benefits, potentially enabling them to avoid income tax by making a treaty election to be taxed as a foreign person. Choosing the right country is crucial to legally avoiding taxes.
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Expatriation: In certain situations, taxpayers residing in a foreign country with a zero tax rate might consider formal expatriation from the United States. This involves renouncing US citizenship or relinquishing green card status. While there are pitfalls, this strategy may help in avoiding taxes, particularly exit tax.
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Current Year vs Prior Year Non-Compliance: Taxpayers who missed income tax and reporting requirements for prior years should be cautious before submitting information to the IRS in the current year. Filing without following approved IRS offshore submission procedures may result in making a quiet disclosure. Consultation with a Board-Certified Tax Law Specialist is advisable in such cases.
It's important to note that tax laws and regulations can change, and individual circ*mstances vary, so seeking professional advice tailored to specific situations is crucial.
