How To Cut Your Tax Bill In Half
Still, no question, controlling your tax liability can make a big difference in your standard of living. Reduce your tax bill from, say, 40% a year to, say, 20% a year and it’s like giving yourself a raise and super-charging your investment portfolios. You’re earning no more, but you’ve got a whole lot more disposable income.
So, again, we haven’t made any of our international moves with the primary agenda of reducing our tax burden, and neither should you. You don’t want to organize your life according to tax code. But you don’t want to ignore it either.
We Americans have it double tough. No matter where we go, our obligations to Uncle Sam follow. When we take up residence in a foreign jurisdiction, we’re at risk of acquiring double the tax masters, with obligations to both the IRS and the local tax collector.
We must understand the tax requirements on both sides, and we must file annual tax returns in both jurisdictions…but that is not to say we must pay double the taxes.
This is a critical point. As an American abroad, you retain your IRS obligation, but, strictly speaking, that obligation is to do with reporting…not, necessarily, with owing tax.
This is where things can get interesting…and complicated.
Don’t worry. You don’t have to become an international tax guru to manage this part of your new life in paradise. After more than 27 years researching this stuff and more than 14 years as an American abroad, paying taxes in multiple jurisdictions, I’m still no expert. But I’ve been fortunate enough to get to know people who are.
Which leads to my first and probably most important piece of advice on this subject: When planning to move, retire, invest, or do business overseas, don’t try to become a global tax authority. Hire one.
In fact, hire two. One in the jurisdiction where you’re planning to live or invest…and another in your home country.
During one of our scouting trips to Ireland before our move years ago, we met with Ernst & Young in Dublin. We didn’t know what we didn’t know, but we knew enough to ask for help.
At the time, Ireland taxed its residents on a remittance basis. That is, living in Ireland, you paid tax only on whatever money you earned or brought into the country. You could earn hundreds of thousands of dollars a year. But if you brought (remitted) only US$50,000 per year into the Emerald Isle…the Irish tax authorities expected their cut of that US$50,000 only. Maybe you owed other tax authorities in other countries other tax on other pieces of your total income…but Ireland cared only about the piece of your income that flowed into Ireland.
The Ernst & Young tax guy we met with explained this to us and then he made a critical recommendation. He told us to organize ourselves so that all assets held prior to our move to Ireland were lodged in separate accounts from any assets we might ever bring into Ireland. This way, there could be no confusion. The Irish tax collectors could never lay claim to any assets clearly separate from other assets that might ever be remitted to Ireland.
And, then, he said, as long as you’re living in Ireland, make sure that money you don’t intend to remit to Ireland goes into those other accounts. Make sure everything is clearly separate from the start…and keep it that way.
We followed his advice.
In addition, as Americans residing abroad, Lief and I both were able to take advantage of the Foreign Earned Income Exemption, meaning that our first US$80,000 to US$85,000 of income each year apiece (the amount of the exemption is increased annually and stands today for 2012 at US$95,100) was free from U.S. tax.
Plus, Ireland and the U.S. have a double-taxation agreement, meaning we didn’t owe tax in the States on any income taxed in Ireland.
Bottom line, by organizing ourselves carefully, as Irish residents, we were able to reduce our effective rate of tax to less than 20% per year.
The tax laws in the Emerald Isle have changed significantly since we were full-time residents, and Ireland no longer taxes its residents on a remittance basis. Today, Ireland taxes residents on their worldwide income…just as the United States does (with some complicated exceptions).
As I said, we’re not resident today in Panama because of its tax laws…but it hasn’t escaped our notice that this country’s position on taxing its foreign residents is about as good as it gets. As a foreign resident in Panama, you pay tax only on the money you earn in Panama. You gotta’ love that.
Panama is not the only tax-advantaged jurisdiction worth a close look right now. Belize is another place where, as a resident, you pay tax locally only on the money you earn locally. This is the case, as well, in Uruguay and Malaysia.
It’s not always straightforward, and, again, you’ll want an expert to help you organize yourself properly and compliantly. But the idea of becoming a full-time resident of a foreign jurisdiction for tax purposes is not only possible, it’s also legal and safe…and it can cut your overall annual tax burden dramatically, even in half.
Don’t Google “foreign tax specialist” or “international tax advisor.” You’ll find lots of resources that way…but none you should trust. The Internet is awash with guys who’ll set you up with offshore structures for a fee and who’ll be glad to help you get one over on the IRS.
You don’t want to get one over on the IRS. You just don’t want to pay that U.S. government agency US$1 more of your income than you have to each year.
You don’t necessarily want offshore structures either.
I have no idea what you do want…or need. And, maybe, neither do you. But I can tell you this: Take the advice of some offshore expert you find with the help of Google, and your chances of ending up someplace you don’t want to be (engaged in a one-on-one conversation with a representative of the IRS, for example) are probably increased.
Neither should you dash off an e-mail to your U.S. accountant or attorney asking for help managing the tax consequences of your new life or investments abroad. He won’t have answers for you, and your questions will make him nervous.
My U.S. tax advisor at the time I made my initial move overseas, to Ireland, told me not to mess around with the Foreign Earned Income Exclusion for Americans living abroad. “It’s too risky,” he counseled me. “Better just to pay what you owe in full and not to try to get away with anything.”
I understood almost nothing about any of this at the time, but I knew enough to know he didn’t know enough. He’s no longer my tax advisor.
I didn’t replace him immediately or easily, though not for lack of trying. I began looking for a competent, experienced, and open-minded U.S. tax advisor as soon as I realized my advisor of many years was none of those things when it came to the issues faced by Americans living and investing abroad.
I did, though, over time, replace him, with a team of advisors with, together, decades of experience counseling Americans abroad in how best to manage and mitigate their U.S. tax burdens. It’s this team that will be joining us in Panama City next week to help us host our Emergency Offshore Summit.
I’m looking forward to spending time with them during what has turned out to be, given continued developments in the United States and elsewhere, a very timely event.
P.S. I made the point that you need not one, but two global tax authorities, one to manage tax, reporting, and structure issues for you in the States…and one to manage those things in your jurisdiction of residency.
We’ve invited our legal and tax advisors from these key offshore jurisdictions, too, including Panama, Belize, Colombia, and Uruguay.
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