Articles Related to Taxes

You reap the benefits of the FEIE if you're self-employed, as well, operating a small business outside the States, say, or working as an independent contractor for a U.S. or foreign corporation but performing your work, again, outside the United States.

Remember, though, that the FEIE applies only to federal income tax. If you're using it as the beginning and the end of your international tax management strategy, you're still liable for Medicare, Social Security, and FICA...which amount to about 7.5% a year. And your employer is required to match your Medicare, Social Security, and FICA contributions, so your situation is costing him about 7.5% as well.

Plus, if you're self-employed abroad but operating without a corporation, you're liable for 100% of FICA and Social Security...and you can suffer a reduction of your FEIE based on business expenses you claim.

In other words, the FEIE is a great start. But, again, you can do more.

To maximize the tax benefits of residing abroad and (legally) minimize your total tax obligation in the United States, here's what you want to do:

First, form an offshore corporation in a zero-tax jurisdiction, register that company with the IRS, and open a foreign bank account in its name.

Second, draw a salary of up to US$99,200 from that foreign corporation. As long as you qualify for the FEIE, and the company's income is derived from active, not passive, business, you will have no U.S. federal income tax liability on this income.

Voliá. The properly registered and domiciled foreign corporation is not responsible for Medicare, Social Security, or FICA.

Furthermore, you are now not self-employed; you are an employee of your offshore corporation, and therefore not subject to self-employment taxes either (that is, no Social Security, no Medicare, no FICA).

Plus, all the expenses of the offshore corporation are now additional deductions and do not reduce your FEIE.

And operating this way, you might be able to retain some or all of the offshore corporation's earnings in excess of the FEIE. Careful planning in this area can allow the deferral of U.S. income tax on active business income inside the corporation.

Piece of cake, right?

In fact, this international tax stuff can get complicated. Long ago, Lief and I searched for competent, reliable, and, critically, affordable guidance. One guy wrote five- and six-page memos in response to every (we thought simple) question we asked. Then he sent a bill for thousands of dollars per page.

We couldn't understand the advice...which was beside the point, because we couldn't afford it anyway.

These days, after a decade of searching, we've compiled a team of friends and contacts that I'd argue represent the best minds in the offshore world. We ask them a direct question...they give a direct reply.

The good news for you is that our entire team of offshore tax, asset protection, and wealth experts will be joining us this October in Belize for Lief Simon's first-ever Global Asset Protection And Wealth Summit.

This is a unique opportunity to work closely with these experts in order to develop a personal, diversified, state-of-the-art global wealth plan of your order to manage your tax burden, to protect your assets, to diversify your life and your investments, and to grow your next egg. You can read more about the unique program we've put together here.

Kathleen Peddicord

Continue reading:


Most countries tax their corporate and individual clients based on "residence," not citizenship. This means that, if you live somewhere (or, in the case of a company, are domiciled there), you pay local taxes. Frequently, however, the tax applies only to income generated in the jurisdiction. Income generated outside the jurisdiction is not subject to local taxation. 

The United States, on the other hand, taxes its citizens and corporations based on citizenship, not residence, meaning that finding ways to legally defer tax is much more difficult for an American than, say, a German (who pays no tax on his income from sources outside Germany). 

There are basically three types of tax systems in the world, as follows:

1) Developed-world, high taxes. I would put the United States, Japan, Korea, most European countries, Australia, and New Zealand into this category. While the taxes in these jurisdictions are high, they also have what are called "double-taxation treaties" designed to make sure you don't pay taxes twice on the same money. So, if, for example, you set up shop in Korea and pay a Korean tax of 30%, that amount could be taken as a credit against your U.S. tax. If your U.S. rate were 35%, you'd pay Korea 30% and then 5% more to the U.S. IRS. You'd be in basically the same position as if you were working solely in the United States. 

2) “No-tax" or "low-tax" jurisdictions. These include Belize, Panama, the Caymans, Hong Kong, the Cook Islands, Singapore, and Malta. These are typically the best places for an entrepreneur to focus on when deciding where to base his business. It is possible, even for an American, depending on many variables, to operate from one of these jurisdictions completely tax-free.

3) High-tax countries that can be used like tax havens because of their tax-sourcing rules that make nearly all tax earned outside the jurisdiction non-taxable. Costa Rica is an example. This country taxes only income generated inside the country, and the way they interpret “income generated inside the country” excludes most international types of income. As a result, much of the offshore internet gambling industry has been established in this country, because, even though the servers are based in Costa Rica, the government deems the income as being earned somewhere else. 

Say you based an international diving business in Costa Rica. You'd pay taxes when someone walked into your shop and paid you to take them out on a dive. All other income from outside Costa Rica (say charters to Belize or Panama) would not be subject to Costa Rican taxation. You could end up with a very low overall tax rate (even zero if no business were done inside Costa Rica). 

It has become and is becoming increasingly difficult to move funds out of (not so much into) the United States. Legislation starting with the Patriot Act, and most recently FATCA (the Foreign Account Tax Compliance Act), now forces banks and individuals into more and more reporting to ensure that tax is paid on income. 

My advice on doing international business is first to minimize superfluous transactions by having a good corporate structure and bank account in the region where you are doing business so not every US$100 transaction needs to go through the United States. Next, you need to use a good accountant familiar with the various reports that are required. The forms are not rocket science, but failure to file (even when you don't owe any tax) can bring about large fines and penalties. 

Required reporting for individuals includes the FBAR (Foreign Bank Account Report), Form 8938 (detailing U.S.-owned assets abroad), Form 5471 (corporate information return on foreign activities), and Form 3520 (for assets held in a foreign trust). These forms are not significantly more difficult that domestic tax forms, but, because they are different, it is important that you work with someone familiar with their preparation. 

International business can be exciting, fun, and certainly profitable. However, knowing how to structure your business and personal affairs so as to protect your assets while minimizing and deferring taxation can truly make the difference in any project's overall financial success. 

Joel Nagel 

Editor’s Note: U.S. tax and asset-protection attorney Joel Nagel will be key among the expert advisers participating in our upcoming Offshore Summit,taking place in Panama City Nov. 20-22. This event is nearly sold out.Inquire here now to reserve your place.

Note that the Early Bird Discount for this conference remains in effect through tomorrow, Friday, Oct. 25, only. Contunue reading:


The typical investor in offshore real estate is able to deduct his losses against other passive income. If you do not have any other passive income, losses are carried forward until you can use them. 

However, an exception to this rule applies to a) active participants and b) material participants in the management of offshore real estate. 

As an active participant in offshore real estate, you can deduct up to US$25,000 of passive losses against other income (such as wages, self-employment, interest, and dividends) on your U.S. tax return. How do you qualify as an “active participant”? You must share in the management, financial, and operational decisions of the property and be knowledgeable in the day-to-day issues (by reviewing financial statements and other documents produced by the manager, say). This means you should be responsible for arranging for others to provide services such as repairs, collecting rents, etc. You may have a paid manager for the property and still be considered an active participant, so long as you manage that manager. 

In addition to qualifying as an active participant, you must also meet these additional requirements:
  • You must own more than 10% of the property…
  • You cannot be a limited partner…you must be a general partner…
  • You must be an active participant in the year of the loss and the year that the loss is deducted.

As I said, you can take advantage of this very interesting tax opportunity if you are either an active participant in offshore real estate or what’s termed a “material participant.” As a material participant, you are much more involved and in control than an active participant. As a material participant (sometimes referred to as a “real estate professional”), you are in the active business of real estate and can deduct your expenses against any and all of your other income without limitation.

It is relatively easy to qualify as an active participant in offshore real estate but more challenging to be classified as a material participant. However, if you qualify, you’ll find that you’re eligible for bigger international tax breaks and loopholes, especially if you’re also living overseas.

Specifically, as a material participant/real estate professional, you can draw a salary from an offshore corporation and qualify for the Foreign Earned Income Exclusion (FEIE). Note, again, that this tax break is available only to material participants offshore and not anyone living or working in the United States. It would be near impossible to qualify as materially involved in properties in Colombia while living in Texas.

Qualifying for the FEIE means that you can take out up to US$97,600 (for 2013; the amount is increased each year) in salary from that enterprise free of federal income tax. And, as a material participant in offshore real estate, you could make use of a number of other tax mitigation strategies, as well.

To be classified as a material participant or real estate professional you must be active year-round in the operation of your offshore real estate business. You must work on a regular, continuous, and substantial basis, and offshore real estate should be your primary occupation. If you work a full-time job and do real estate on the side, you are probably not a real estate professional. 

In other words, a qualified offshore real estate professional can deduct his or her expenses against all other income, regardless of source and without limitation and draw out up to US$97,600 in profits free of federal income tax. If a husband and wife both qualify as material participants and for the FEIE, they can each take out an annual salary of US$97,600, for a total of US$195,200 of tax-free money. 

Chris Rusch

Editor’s Note: Chris’ complete guide to tax strategies and opportunities related to owning real estate overseas is featured in this month’s issue of the Simon Letter, in production now and due in subscribers’ e-mailboxes next week.

Also note that Chris will be among the offshore experts participating in our Offshore Seminar taking place in Panama City Nov. 20-22. More details on this program are here.

Continue Reading:


As we're American citizens living abroad (that is, Americans legally resident elsewhere), our taxes needn't be postmarked by April 15 each year. We have an additional 60 days (until June 15) to get our returns to Uncle Sam. Nevertheless, Lief applied for a six-month extension for our U.S. tax filing this year. Meaning that, for these past two weeks, our pillow talk has had a lot more to do with foreign-earned-income analysis, foreign tax credits, investment rental write-offs, and mortgage expense than...well, than with anything else. 

Lief is holed up in his office today with our Panama accountant finalizing our returns. From behind his Do Not Disturb sign he offers the following tips for other Americans abroad keen to keep compliant but eager, as well, to pay no more in U.S. tax each year than absolutely necessary. 

This is our list of six things we wish someone had told us about international tax planning and asset protection before we set off on our living and investing overseas adventures some 16 years ago: 

Tax Tip #1:

First, maybe you don't need to do anything. Asset protection isn't an issue until you've got assets enough to warrant the investment of time and money to figure out how to protect them, and many retirees overseas don’t need to invest in tax planning either. A move overseas is often a tax-neutral event for someone with only retirement (that is, pension or Social Security) income. 

Tax Tip #2:

Second, whatever you do, it shouldn't cost you tens of thousands of dollars. OK, maybe if you're Bill Gates or Warren Buffet, a big investment in managing your tax and asset issues is warranted. For you and me, it's not. 

Tax Tip #3:

Third, the Foreign Earned Income Exclusion (FEIE) may be the beginning and the end of the tax planning you require. (This is discussed in detail here.) As an American citizen living and working abroad who qualifies for the FEIE, your first US$97,600 (for 2013) of earned income is tax-free in the States. 

Note, though, that the FEIE applies to earned income only. It’s no help when it comes to investment, dividend, interest, or capital gain income. 

Tax Tip #4:

Fourth, when it comes to purchasing and holding real estate overseas, remember two things: First, the jurisdiction is the key; second, as a result, no attorney in your home country is going to be able to help you figure out what to do. You need a local attorney experienced at working with foreign buyers to help you determine how to purchase and how to hold (in a local corporation, in a foreign corporation, in your own name, in a trust, etc.). 

In some jurisdictions, you're wise to hold property in a local or an offshore corporation...but not all. Before you do anything, make sure you understand why you're doing it and the real benefit. 

Tax Tip #5:

Fifth, when it comes to addressing the tax issues in any new jurisdiction where you’re considering taking up residence, the key is to research, plan, and take action before taking up residence. Certain options for mitigating your local tax bill can be taken off the table once you've taken a local address. Get local legal advice as early on in your planning as you can. 

Tax Tip #6:

Sixth, you can avoid any local tax issues by being only part-time resident overseas. The particulars differ jurisdiction to jurisdiction, but, generally, spend fewer than six months in a place and you can't be considered full-time resident for tax purposes. This can mean no tax obligation in the country where you’re part-time residing, but it also means that you will need to use the 330 Day Test, and not the Residency Test, to qualify for the FEIE. This means you can spend only up to 35 days per year in the United States (as I said, not an issue if you don’t have earned income). 

I'm lucky. I happen to be married to the most international tax-savvy guy I know. 

Well, one of the two. The other is Chris Rusch, who has an MBA and a U.S. law degree with an emphasis on international taxation. Lief and I met Chris about eight years ago. We've met a lot of international tax advisors in our careers. Most of them are the reason Lief has become as expert in this area as he is. The "experts" we’ve found typically haven’t been worth the fees they’ve charged. International tax experts tend to over-complicate, to miss simple but important strategies, then to bill by the hour or the page. 

Chris, on the other hand, seeks out the most straightforward approach, issue by issue. You explain to him what you want to do. He lets you know if, in fact, what you think you want to do makes any sense. Maybe you don't need to do anything... 

But, if you do, Chris quotes you not an hourly or a per-page rate but a flat fee for the project. You can send him as many e-mails as you like, ask him as many questions as you want. 

In nearly 30 years covering this beat and 16 years of filing tax returns as an American abroad, I've not met another tax advisor who compares. 

Well, other than my husband. If I didn't have Lief, Chris'd be the guy I'd turn to for help. You can contact him here

Kathleen Peddicord 

P.S. Chris Rusch will be among the team of advisors joining us for ourOffshore Summit in November. 

If you’re grappling with global tax, asset, banking, residency, citizenship, investment, or business questions, this is the place to come to get them all answered by the pros. More information on this unique going-offshore program are here.

Continue Reading:


Business income and expense from your new endeavor is reported to the IRS on your personal tax return, Schedule C, with no complex corporate forms required. Then, once the business gets going, you can seek professional advice, incorporate, and get your ducks in a row. 

If you are living and working abroad, and plan on qualifying for the Foreign Earned Income Exclusion (FEIE)
, then this easy road is fraught with trouble and simply does not work. Here's why:

In most cases, it is not possible to open an offshore bank account under a business name without forming a corporation or LLC. While you could run your business with a U.S. bank account or a personal account offshore, doing so will create a problem when tax day rolls around. This is because, as in the example above, your offshore business will land on your Schedule C and get sliced apart by the tax man faster than you can blink.

An offshore business without a corporate structure is reported on Schedule C, while an offshore corporation is reported on Form 5471. When an offshore business is reported on Schedule C, it reduces your FEIE proportion to your business expenses, drastically increasing your U.S. tax bill. 

For example, if your business expenses are 50% of your gross sales, then your FEIE will be cut in half. So, if gross income is US$200,000, and expenses are US$100,000, then net taxable income is US$100,000. If you were operating through an offshore corporation, you would deduct US$97,600 (the maximum amount of the FEIE) from this income and pay tax on only US$2,400. Without a corporation, your FEIE is cut down to US$48,800 (US$97,600 divided by 2) and you get the joy of paying U.S. taxes on the remaining US$51,200 (US$100,000 minus US$48,800). 

But it gets worse. 

The Foreign Earned Income Exclusion applies only to Federal Income tax. It does not reduce social taxes, such as Self Employment (SE) tax. When you report net profits on Schedule C, they are subject to SE tax, which is about 15%. Taking a salary from an offshore corporation eliminates this expense. 

So, if you have a net profit of US$100,000, Self Employment tax will be around US$15,000, regardless of whether you qualify for the FEIE. If a husband and wife are joint operators of a business, and the profits are US$200,000, you could be paying US$30,000 in combined SE tax. 

What if your business is a resounding success and you earn more than the FEIE? What if, say, you and your spouse net US$400,000 in a year? Without an offshore structure, you will pay U.S. tax on the net profits in excess of the FEIE. You will be unable to retain earnings in a corporation, meaning all net profits will be taxable in the year earned. 

Let's assume your business has zero expenses (which would be awesome, right?), and you get to take the full FEIE. Your net profit is US$400,000, reduced by the FEIE for both husband and wife, or US$195,200. This leaves US$204,800 available to the IRS. 

If you were using a corporation, however, these earnings could qualify to be retained by the company and not be taxed until distributed. This is a big deal.

Finally, to add insult to injury, that US$204,800 would be taxed at the highest rate available. Since Jan. 1, 2006, when the Tax Increase Prevention and Reconciliation Act of 2005 came into effect, those claiming the Foreign Earned Income Exclusion have been paying at the tax rates that would have applied had they not claimed the exclusion. That means that, instead of having your income taxed starting at the lowest rate (around 10%), most expatriates are taxed starting at the 25%+ tax bracket.

Christian Reeves

Editor's Note: Strategies and opportunities for minimizing your tax burden as an entrepreneur overseas will be one important topic of discussion at theOffshore Summit we're planning to take place in Panama City in November

We'll begin taking registration for this important event tomorrow. However, you have 24 hours remaining to get your name on the pre-registration list for special discounts and VIP attendee status. Do that here now.

Continue Reading:

Powered by Tags for Joomla
Enter Your E-Mail:

Readers Say

"I wish to congratulate you for the quality of your reports. The plain, matter of fact, but essential and wise information we all need to take vital decisions, especially in these extremely difficult times."

Peter L., United States


"Just great. Very welcoming and supplied answers to all questions very well. I'll see you again soon."

Charles M., United States

Kathleen Peddicord

Kathleen Peddicord is the founder of the Live and Invest Overseas publishing group. With more than 25 years experience covering this beat, Kathleen reports daily on current opportunities for living, retiring, and investing overseas in her free e-letter.

Her book, How To Retire Overseas—Everything You Need To Know To Live Well Abroad For Less, was recently released by Penguin Books.

Read more here.


Sign up for Overseas Opportunity Letter

Receive our editor's latest research reports...absolutely FREE!

letters The Best Places For Living And
Investing in the World for 2015