# Expat tax question: US Citizen, perpetual traveler, with US earned income



## simon.b

Couple of questions.

1. It appears that if I am an American and I have US based clients (paying in USD) and a US based company (sole proprietor, S Corp, etc) but I work from abroad that I would be allowed the Foreign Earned Income Exclusion. (At this point I may need to keep my company in the USA to keep the Clients happy)

2.	If that is the case the question would be how to structure the company. In the beginning I would likely be traveling every 3-6 months and likely never having tax liability in any one foreign country (is this correct? maybe with some exceptions for a few countries? ) So, options would be.

a. As a sole proprietor I would be able to exclude the first around 90K (whatever the FEIE is these days) and then pay income tax on the excess (at the higher tax bands). The foreign tax credit would not be relevant because I’d have no foreign tax to offset against. Although, if there would be foreign tax I would be able to use the foreign tax paid (above and beyond the FEIE amount) against USA taxes (above and beyond the FEIE amount). So basically one could use both the FEIE and FTC together (it’s not one or the other)

b.	As an S Corp I could pay myself around 90K and then take the rest as a dividend. The benefit here would be the dividend would be taxed at a lower rate than the income. If I don’t take it as a dividend and instead keep it in the company, I believe I’d have to pay corporate tax on it instead which would likely be higher. Plus, ideally, I could employ my spouse and we’d each get 90K in exclusion although that would open up my non resident alien spouse to having to report her entire worldwide income which may or may not be in our best interest.

It wouldn’t appear that there would be any benefit/disadvantage to either of the setups above in regards to the 13.2% tax on social security and medicare. As a sole proprietor I’d pay all of it and as an S Corp the company would pay half and the employee would pay half. Although as an S Corp my basis for that tax would never exceed 90K (I think the social security portion is currently capped around 107K for me so as a sole proprietor so I could be looking at around 17K at 6.5% more in taxes than as a S Corp)

Is there anything I am completely missing or have gotten totally wrong?


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## Bevdeforges

I think there may be some bits missing in your plan. This is all off the top of my head (don't have the time right now to dig into the texts for details, but I may be able to point you in the right direction).

1. To take the Foreign Earned Income Exclusion, you need to meet either the "bona fide resident" test or the "physical presence" test. Either one of these require you to be outside of the US for a full 12 months (a calendar year for the bona fide resident test, 12 consecutive months with only limited return to the US during that time otherwise). If you take a look through publication 54 (for Overseas taxpayers), you'll see that under either test, you must have your "tax home" somewhere overseas in order to take the FEIE at all.

2. Be careful here. International treaties allow for determining your "tax home" based on wherever you spend the most time, even if you never hit the 183 days a year considered one key mark of a "resident."

a. To cut to the chase, yes, you can take both the FEIE and the FTC. The FTC will open you up to the AMT (Alternative Minimum Tax) calculation, however.

b. To be tax resident overseas, you normally would have to establish some sort of local business entity for your US corporation - a branch, a subsidiary, etc. Most countries I'm familiar with don't have an equivalent of the US S Corporation, but your local business entity would have to comply with all the local laws and taxes.

If your spouse is indeed a non-resident alien, she can't file a joint return with you (as a US citizen) unless you elect to treat her as a US resident - which means neither of you can take the FEIE. (Electing to treat a non-resident alien spouse as a resident means you cannot take benefit of any tax treaty items. See pub 54)

As for social security, it depends on which country you're tax resident in, and whether or not they have a social security treaty with the US.

Death and taxes - they're going to get you every time. :eyebrows:
Cheers,
Bev


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## simon.b

Alright, I’ve spent some time in Publication 54. This is the scenario I could be looking at:

- Self employed (although company address, business license, etc. is US based)
- Clients in USA paying for services in USD to US bank account
- Live and perform work abroad
- Spouse is not a US citizen
- No children

I could then:

- File as married separately (selecting my wife as an NRA)
- Claim exemption for spouse (she will have no US sourced income)
- Would have to pay for social security/medicare taxes unless my tax base is in a country with a Tax Treaty with the USA
- Could claim the FEIE (based on the physical presence test AND a foreign tax base)
- Could claim the Housing Deduction (since self-employed eligible for this instead of the Housing Exclusion)
- Could claim the FTC (but would only be allowed if I didn’t take the Housing Deduction above)

Does that sound correct?

Now, the other main issue that I am really not clear on goes back to tax base:

a. Bev, you mentioned that ”International treaties allow for determining your tax home based on wherever you spend the most time, even if you never hit the 183 days a year considered one key mark of a resident” (I have heard this before somewhere. Do you know where I might be able to find a source?) Now, if this is how it pans out than theoretically I could spend the most days in a year in either a tax free locale of low tax locale and minimize my taxation by utilizing that as my tax base.

or

b. I’ve also noticed that in Pub 54 “If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work”. Now, this reads to me that I would actually be obligated to pay tax in every country that I would work in and it would likely (or should I say hopefully) be proportional to the amount of money I’d earn while there.


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## NickZ

Don't US corps have a legal residence? Normally the idea behind corps is that they are legal persons with all that implies.


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## Bevdeforges

NickZ said:


> Don't US corps have a legal residence? Normally the idea behind corps is that they are legal persons with all that implies.


Being self-employed means you don't have a corporation structure and all revenues and expenses are declared on the personal income tax return of the individual. It's allowed to do it this way in the US, though it may not be recognized by some countries.
Cheers,
Bev


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## Bevdeforges

simon.b said:


> Alright, I’ve spent some time in Publication 54. This is the scenario I could be looking at:
> 
> - Self employed (although company address, business license, etc. is US based)
> - Clients in USA paying for services in USD to US bank account
> - Live and perform work abroad
> - Spouse is not a US citizen
> - No children


One difficulty I see is the "self-employment" angle. In the US, being self-employed means that you run all revenues and expenses of your business through your personal income tax returns. That isn't possible in some countries. To have a business you often must establish some form of business entity (not necessarily a corporation) in the country in which you reside.



> I could then:
> 
> - File as married separately (selecting my wife as an NRA)


Be real careful here. You lose a number of tax benefits filing as married filing separately. No Roth IRA, and when it comes to claiming US Social Security, it will be taxed at 100% no matter what. There may be other disadvantages, but those are the two main ones I've run into so far.



> - Claim exemption for spouse (she will have no US sourced income)


To do this you must get her either a social security number or an Individual Taxpayer Identification Number (ITIN). Actually, if you file separately, you can't take your wife's exemption. You can only claim her as a dependent (if you provide at least half her support). Until she turns 65 or goes blind, it doesn't make much difference, but as a dependent, you can't take the extra exemption for old age or blindness for her.



> - Would have to pay for social security/medicare taxes unless my tax base is in a country with a Tax Treaty with the USA


In which case you would have to pay the local social security contributions for health care, family allocation and retirement (usually). These can be fairly steep and normally require you to register your business there in some form or another (which means paying local taxes).



> - Could claim the FEIE (based on the physical presence test AND a foreign tax base)
> - Could claim the Housing Deduction (since self-employed eligible for this instead of the Housing Exclusion)
> - Could claim the FTC (but would only be allowed if I didn’t take the Housing Deduction above)


I'll take your word on it for these. It has been a while since I last bothered with the Housing Exclusion and I see there have been some changes in recent years. Just be aware that claiming the FTC will most likely require you to pay AMT (Alternative Minimum Tax) at least on the income related to any tax credits you take.




> Now, the other main issue that I am really not clear on goes back to tax base:
> 
> a. Bev, you mentioned that ”International treaties allow for determining your tax home based on wherever you spend the most time, even if you never hit the 183 days a year considered one key mark of a resident” (I have heard this before somewhere. Do you know where I might be able to find a source?) Now, if this is how it pans out than theoretically I could spend the most days in a year in either a tax free locale of low tax locale and minimize my taxation by utilizing that as my tax base.


This is a toughie. You need to refer to the tax laws of the country or countries you are planning on spending you time in. The 183 days is only a rule of thumb amongst the international taxing authorities. Every country I know of is careful to make the rules in this area very vague, and always dependent on "the facts and circumstances of the specific case." 

Other factors taken into consideration include "where one has ones primary centers of interest" - which usually means anything indicating you have a "home base" one place or another. It can include where your family (i.e. wife) lives while you're being itinerant. Where you have the bulk of your medical treatment, or where your business interests lie (i.e. the fact that all your clients, bank accounts and business assets are located in the US is a big argument for the US being your "tax residence" especially if the US is the only country you visit consistently).



> b. I’ve also noticed that in Pub 54 “If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work”. Now, this reads to me that I would actually be obligated to pay tax in every country that I would work in and it would likely (or should I say hopefully) be proportional to the amount of money I’d earn while there.


Depends on which countries and what their tax law is regarding the type of business you're doing. But don't underestimate the ability of the IRS to decide that your main business interests really are in the US, and since you're a US citizen anyhow, you might as well pay taxes to Uncle.

To pull off something this fancy, you probably really need to talk to a high powered tax attorney. And that could easily cost you more than any taxes you'd save. But hey, it's your money.
Cheers,
Bev


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## simon.b

> One difficulty I see is the "self-employment" angle. In the US, being self-employed means that you run all revenues and expenses of your business through your personal income tax returns. That isn't possible in some countries. To have a business you often must establish some form of business entity (not necessarily a corporation) in the country in which you reside.


Noted. I could also incorporate and set myself up as an employee but I wanted to explore the self-employed angle first. 



> Be real careful here. You lose a number of tax benefits filing as married filing separately. No Roth IRA, and when it comes to claiming US Social Security, it will be taxed at 100% no matter what. There may be other disadvantages, but those are the two main ones I've run into so far.


Our income and circumstances exclude us from Roths and pretty much every other benefit of filing jointly. I didn't know about the Social Security, though. However, when our combined earning careers are over I'd likely get my spouse an ITIN and we would change filing status from married separately to married jointly for the ensuing tax years. But, from the SS perspective it might not matter anyway, I think I am going to be fully taxed on Social Security anyhow provided I actually get any back.



> . Actually, if you file separately, you can't take your wife's exemption. You can only claim her as a dependent (if you provide at least half her support).


Must have misread something somewhere. Back to IRS publications.



> Depends on which countries and what their tax law is regarding the type of business you're doing. But don't underestimate the ability of the IRS to decide that your main business interests really are in the US, and since you're a US citizen anyhow, you might as well pay taxes to Uncle.


Yeah, I get the feeling that if I pay less taxes to a foreign country than I'd otherwise have to pay to Uncle, Uncle is going to ultimately come after me for the remainder and determine I am a US tax resident. 



> To pull off something this fancy, you probably really need to talk to a high powered tax attorney. And that could easily cost you more than any taxes you'd save. But hey, it's your money.


Yeah, I am definitely not doing that. I am not interested in getting into a game of semantics with the IRS nor do we have enough assets to justifying wasting the money on a high powered tax attorney. Although, I did figure with the growing group of location independent travel bloggers, etc. that this situation may have received some precedence. So, I figured it was worth having a look first. Plus, the more I know, the better. The last thing I want is a tax accountant doing this wrong.

Anyway, we're likely only going to have a non-permanent home for a few years and then eventually settle in my spouse's native country. Then I'll definitely be paying higher taxes there and I think "tax home" will be pretty well defined. Although, it'll probably be in my best interest to incorporate by then to save any headaches with the local tax authorities.

Thanks for all the advice Bev.


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## ars338

I would strongly suggest you spend a few hundred dollars and consult a good tax attorney.
The attorney will also be able to give advise on the advantages and disadvantages on setting up your business as a sole proprietorship or class S corporation.

My gut reaction tells me that the tax code will require you pay taxes on revenue earned in the US regardless of where you are actually performing the work because your business will be a
registered in US.


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## hasanbeigi

ars338 said:


> I would strongly suggest you spend a few hundred dollars and consult a good tax attorney.
> The attorney will also be able to give advise on the advantages and disadvantages on setting up your business as a sole proprietorship or class S corporation.
> 
> My gut reaction tells me that the tax code will require you pay taxes on revenue earned in the US regardless of where you are actually performing the work because your business will be a
> registered in US.


I have talked to 2 different Expats tax consultant and each saying different things and not that helpful.
I found out that Foreign Earned Income Exclusion only applies to salary and wages that expats have on their W-2. I have a LLC that's taxed as S Corp. So, to avoid 15% self employment, it's best I pay as low as possible salary to myself. But if I want to take advantage of FEIE to avoid 22% federal tax on my salary income, I better pay more salary to myself. 

That's a trade off. Looks like the difference is only around 7% (difference between 22% fed tax and 15% self employ tax). 

Of course, it may vary based on your fed tax bracket and income level. I am interested to hear your thoughts on this. Thanks!


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## Nononymous

Second attempt due to a form glitch.

I'll make some general comments here, but I'm not up on the details of how all of this works. I see what you're trying to do. Quite understandably, you want to keep your US-based business but live outside the US to reduce your taxes as much as possible. On the US side, I don't believe you need to prove that you have established another "tax home" to claim the FEIE - you just stay outside the country for as long as is required. Correct me if I'm wrong. I don't know if having a business and/or bank account in the US would make that more difficult, or if you should set up offshore somewhere.

As for where you live, the truly itinerant "digital nomads" seem to do this without paying local taxes because they are constantly moving, going from country to country on three- or six-month tourist visas. While technically they would not be allowed to work, doing so is neither preventable nor detectable, and paying local taxes isn't realistic when you've lived in multiple countries for short periods of a time - you couldn't easily file four tax returns in four different languages to four different tax authorities, while moving and changing your address. However, we all get old and lazy and the constant travel is probably not sustainable indefinitely. I think the danger arises when you settle in Costa Rica or Thailand or wherever and do regular border visa runs to maintain tourist status for years at a time while working. Though there is a bit of a Catch-22 here, if countries will let you be a "tourist" without granting you the right sort of residence permit to enter the tax and social insurance system, even if self-employed with remote work so not competing in the local labour market, then everyone is a bit screwed.

Anyway, those are my thoughts.


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