For the tax year 2021, the FEIE amount is $108,700.
Currently, the income tax rate in the US caps out at 37%, so qualifying for the exclusion is key to helping you optimize your tax rates.
To claim it, you must fulfill a variety of criteria. For example, you must spend at least 330 days outside of the US in a single tax year.
While you can go just about anywhere but the US during this time, there are a few places that don’t count toward your 330 days.
For instance, any time spent in Cuba, North Korea, or Antarctica will not count toward the exclusion.
Qualifying for the FEIE is not about setting up a home somewhere else, it’s simply about staying out of the US (and this small list of other countries and territories).
There are also special rules about what you can exclude. For example, onlyactiveincome earned outside of the United States qualifies for the exclusion. Passive income from investments will receive no such relief.
For instance, people who invest in things like cryptocurrency or have trading profits or capital gains are going to have a harder time reducing their taxes – even if they go offshore. There are ways that they can mitigate their taxes, but it’s more difficult.
And the FEIE only applies to foreign-earnedincome. If you have invested in a US company or own US real estate, going overseas will not change your tax obligations on those investments. Even if you were a nonresident alien who lived outside the US, you would still be taxed by the US on that income because it is derived from investments on US soil.
For a deeper look at the Foreign Earned Income Exclusion and its various requirements, be sure to readour ultimate guide.
Another benefit that US citizens overseas can take advantage of is the foreign housing credit. If you rent or own a home overseas, you can qualify for even more tax relief.
Purchasing foreign real estate is something we commonly recommend here at Nomad Capitalist. Not only are their great investment opportunities overseas but in many instances, purchasing real estate in another country can also lead to a second residence or citizenship as well as other offshore opportunities and diversification strategies.
The added tax relief through the foreign housing credit is just a small cherry on top of all the benefits of foreign real estate.
(And as long as you don’t generate any income from it, you can use that home and won’t have to report it to the US government.) But back to the tax benefits of going offshore for US citizens…
US citizens can also benefit from foreign tax credits.
I’ve heard people say they’re going to live in Paris, but since they have really high taxes in France, they assume they’ll be paying around 89% of their income in taxes.
It doesn’t work like that.
There are treaties and credits in place so that you aren’t going to have to pay twice. Although there are some cases where double taxation does become a reality – whether it’s on actively earned income or on passive income – there are a lot of IRS rules that generally prevent this predicament.
However, there are countries and situations where the rules and treaties of the IRS do not match up with foreign systems. This is where you could really get stuck, so be aware of the tax situation you’re jumping into before you take the leap anywhere offshore.
Finally, depending on whether you own a business or how your income is structured, US citizens can potentially eliminate their Medicare and Social Security taxes by going offshore.
In most cases, you can also avoid state income tax depending on which state you come from. It just takes proper planning.
The bottom line is that you can earn some money tax-free by moving overseas.
In general, if you createa proper structure, you can use the FEIE and these other tax benefits of going offshore to reduce your US tax burden, possibly to zero.
And that’s exactly what you want to achieve by going offshore.
