The American tax man can be a bully. The US is one of the few advanced countries that taxes its citizens no matter where they are in the world. The US has gone to great lengths to push other countries to comply with handing over information on its citizens so that they can make sure each and every one has paid their taxes. Since the US dollar is the reserve currency of the world, many banks all over the world begrudgingly have to comply. They have spent the past few years racing to comply with FATCA –the Foreign Account Tax Compliance Act. This act essentially means if a foreign bank does not participate in the US’s information sharing program, with the aim of seeing if that bank harbors US citizen tax cheats, then they will assume all payments from that bank to the US are someone’s untaxed income and will tax them at the highest income rate of 35%.So it seems that no matter where you go as a US citizen, you are destined to be haunted by the IRS.
The US is one of the few advanced countries that have this policy. Many countries make it easy by just taxing everyone who earns income in their country. This is what many countries in Europe do. The US is different though, if you are a US citizen the US wants you to report your income no matter where in the world you are or how you made your money, no exceptions. But maybe there is an exception, and it is a legal loophole concerning income earned overseas.
I am not advocating hiding money from the IRS, the key is to use knowledge of the system to beat the system with its rules. Now if you are a talented and lucky person who can snag an international job overseas than you may be able to take advantage of one of these loopholes. This loophole is called the foreign earned income exclusion; the IRS’s website describes this exclusion:
If you are a U.S. citizen or a resident of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to an amount of your foreign earnings that is adjusted annually for inflation ($92,900 for 2011, $95,100 for 2012, $97,600 for 2013, $99,200 for 2014 and $100,800 for 2015). In addition, you can exclude or deduct certain foreign housing amounts.
There it is, yes you can actually legally make $100,500 without paying any taxes at all! Hold on though, you are not out of the woods yet. In most countries you will have to pay the local taxes, this is where things start to get limited, other countries range from taxing almost nothing to taxing more than half of what you get at the highest income levels.
The sum of all the taxes you pay on income (the equivalents of local federal and city in the US) is called the marginal tax rate. This is the rate you need to worry about. So I decided to take a look at the marginal tax rates of various countries around the world which you can see here.
I picked these countries because they are the most interesting for the fact that they have no personal income tax. So now we have narrowed down all the choices you have for working in other countries with no personal income tax where if you earn income in that country you can avoid taxes in the US. If you can manage to get a job in one of these countries that makes at least $100,500 a year, you could save a ton on taxes. But how much could you save if you lived in a high tax state like New York? Well I took a look at what you would be your take home pay for receiving the same in come living in New York City and this is what I found:
I am assuming here you filed as single, have no exemptions and live in NYC. That is a serious chunk of change that you can avoid by earning at least $100,500 in one of those countries. If you look at this another way, and assume the rate is the same, you would have to make the equivalent of $160,287 in New York to take home the equivalent of what you could if you just made $100,500 in one of these countries. In addition as described by the IRS above, you may be able to manage some deductions for housing as well.
The next logical question is what type of jobs can you get in these places? I know of a few people that work in insurance and are domiciled in the Bahamas and I am sure there may be some people who can manage to be the “our man on the ground” for companies that have subsidiaries for tax purposes in places like Bermuda and the Cayman Islands. Outside of accounting and finance the other countries are mostly oil rich countries in the Middle East. So what types of high paying jobs can you get in these places?
Let’s take the United Arab Emirates for example. There is a huge expat community there and English is spoken heavily among that community. As can be seen in the chart of UAE’s exports, the country as a whole is still very dependent on oil. So if you already work the oil industry there may be opportunities there for you (or not depending on what the price of oil is doing at any given time). In addition if you are in the diamond business or in the wholesale gold business it looks like this may be a place where you can come to find well-paying work. However most of the people I have met that have gone to the UAE for work don’t necessarily work in these industries, they work doing something else and it is usually in Dubai.
Dubai decided to diversify away from oil many years ago and has become a regional hub for finance, media and real estate. If you are in one of these industries or an industry that supports these industries, you may have lucrative opportunities available for you. I have been to Dubai a few times and the last time I was there I recall meeting a friend of a friend who sold yachts to wealthy people. She didn’t sell a ton but when she did the commission was huge and she was able to live a comfortable life there with a 2 bedroom apartment, a car and a maid. Another person I knew was a hotel manager and there are some REALLY nice hotels in Dubai and getting a chance to manage one of the 4 or 5 star hotels there I imagine would be good experience for a career in that field.
Because of the way the media portrays the Middle East in the US we have a tendency to think it is all like current day Syria. But the region is as diverse as the Western Hemisphere. You wouldn’t confuse the way people live in the US with the way they do in Cuba would you? That is how stark the differences are. Places like Qatar, UAE and Kuwait are very rich countries and have a track record of being relatively safe and stable places (even safer than the US in fact). So if you do decide to go to one of these places for work strictly on a monetary basis, do your research and know what you are getting into before you decide to take the leap.
There are other options too
Even if a country were to tax you at a much lower rate and the local is attractive, it may still be enticing to move overseas to work so let’s take a look at some other countries that fall into the next bracket of low individual taxes.
Hmmm. Not many attractive options here in terms of high paying jobs, but who knew Guatemala had a top tax rate of just 7%? Of course if you have some family or personal connection to one of these places and can land a high paying job there kudos to you. The one glaring exception to that is Hong Kong, despite extremely high living costs, Hong Kong is a huge financial hub with a stable currency linked to the USD. They have a tradition of speaking English thanks to British Colonial rule. This may be a good option for you depending on your skill set.
Now for the downside
So even if you do go through all the trouble of applying for a job in one of these countries, get hired and you fly out to start your new job there is another important factor you have to take into account. Because the IRS is aware that this is a potentially lucrative loophole, they strictly enforce a rule about what is called the physical presence test. You can read more about the details here
Basically, you have to prove that you have been outside of the US for at least 330 days out of the year in order to be excluded from paying US taxes on foreign income. In addition if you make above the $100,500 threshold your earnings will start to be again taxed at the normal rate for earnings above $100,500. In other words if you make $200,000 the government can still take around 1/3 of the extra $100,000 but hey, considering you saved so much on that first $100,000, it might be worth it.
Besides money there are other headaches you will have to think about, you will likely have to hire an accountant who specializes in this type of tax accounting to make sure you cross all your t’s and dot all your I’s in order to make sure the IRS doesn’t come back late saying you owe a ton of taxes or just makes your life difficult with endless questions or even worse an audit. Also, as mentioned above, some of these countries are not as culturally compatible with life here in the US. If you are the type of person that can’t give up American football and learning or even listening to foreign languages, maybe you are better off just staying home.
It’s More Than Money
But besides being a potential blessing for your pocket, living and working overseas can be a once in a lifetime learning experience and really open your eyes to all the ways we are different but also ways we are the same. There may be things about other countries over time you find make much more sense than the way you do it at home and some things you just find absolutely crazy, the fun is in discovering it for yourself. I find that everyone’s experience overseas is unique and it is what you make it. If you can embrace change and throw yourself fully into another lifestyle and culture you may find after coming out of it that you have grown as a person and as a human being. So don’t forget, in the end it isn’t always about the money!
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