“Kathleen, in reading your information, I am most struck by the fact that I may be able to avoid paying U.S. income tax altogether by moving out of the country. I am leaning toward Central America and was hoping you could tell me how and where to go to avoid Uncle Sam’s long arm. I own property in the United States. If I were living outside the States, would my rental income generated by this U.S. real estate, for example, be taxed?”
— Brent B., United States
Yes, there can be big tax advantages for the American living abroad. Unfortunately, these don’t include exemption from tax on rental income. Income from a rental in the United States or anywhere is taxable in the United States if you’re a U.S. citizen. Your rental income can be mitigated, as you can take all the standard deductions against it, no matter where you’re residing.
The tax benefits for an American living and working outside the United States come in large part from the Foreign Earned Income Exclusion (FEIE), which allows you to exclude up to US$91,500 of earned income–that is, income from a job or a business (including your own business).
The FEIE, however, does not apply to passive income (including rental income).
“Kathleen, I don’t want to pay taxes after years paying them in America. Where can I go to avoid taxes?”
–Candyce B., United States
If you’re a U.S. citizen, the answer is: Nowhere. You’ll always have your U.S. tax obligation. If you’re earning income (that is, working), you can take advantage of the Foreign Earned Income Exclusion to mitigate U.S. tax on that income, but you’ll maybe also have a tax obligation on that earned income in the new country where you’re residing. Exceptions include Panama, Belize, Uruguay, and Malaysia (among others), where, even as a resident, you are taxed only on income earned in the country.
Non-earned income is less straightforward. Business, investment, capital gain, and other passive income is taxed differently jurisdiction to jurisdiction. If you’ll have these forms of income while living in another country, the tax consequences are one important thing to research before making the move.