# Avoiding all US Taxes permanently and legally while living abroad as a US citizen



## stonelion3

Hello,
I am a dual citizen of the US and of an EU country. I have lived outside the US for many years, and have thought a lot about the impending doom for US citizens abroad due to FATCA among other things. In addition, if you didn't already know, US citizens must pay taxes on their worldwide income, even if they don't live in the US, simply because of the citizenship-based taxation with a few exceptions. I am just an ordinary teacher, not rich at all. I think of myself as a global citizen. I want to be able to invest, and do banking in any country of my choice, but these days I get hassled a lot just because of my US citizenship. A bank in Asia recently almost dropped me as a customer purely because of my US citizenship. I ideally would like to keep my US citizenship, and possibly pass it on to my kids if I ever have any. I would only renounce my US citizenship if I had no other choice. 

For me, avoiding paying taxes to the US when I am not living there is a moral issue, because to me, fundamentally, people pay taxes to governments because they can receive some sort of benefits using government services, like roads, the police, and so on. If one does not live in a certain country, then that person shouldn't have to pay any taxes to that country because no benefits would be received.

Anyway, to get to the point. I know about the Foreign Earned Income Exclusion, but that only applies to money earned from a salary from an employer. If you are living outside the US and are self-employed, or own your own business, I believe that you have to pay full US taxes on that income even if it means you are doubly taxed or even triply taxed. I want to start my own business soon in a foreign country, but wish to avoid all US taxes forever, and hassles with the US government. 

My girlfriend is not a US citizen, and she may become my wife soon. I have thought about making a business, and putting it 100% in her name, and running it 100% myself, which I have no problem with. I think this is a way to avoid hassles with the US government legally. I only think that this strategy is risky in that if I ever have money problems with my girlfriend, serious problems could occur for me.

In addition, I have thought about starting my own company in my name, and never repatriating profits to the US. Many US companies, for example, Google, Apple, and McDonald's can legally avoid all US taxes for money made in foreign countries by deferring paying US taxes infinitely long on profits by never repatriating that money back to the US, which effectively means that they pay no US taxes on their income earned abroad. The second that US companies that make profits abroad bring their money to the US, they must pay US taxes on them. I was curious if I start a company abroad, or even a company registered in the US, and make profits abroad but never bring that money back to the US, would I essentially be able to avoid paying taxes to the US on those profits? 

So, if any of you could give me some strategies for avoiding all US taxes legally while not living in the US, it would be greatly appreciated. Not interested in any scams. 

Any and all help is appreciated

Thanks


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## BBCWatcher

Maybe, but avoiding U.S. taxes should not be the end goal in itself even if you care about taxes. That's because the U.S. only ever taxes the _difference_ between the foreign tax paid on foreign source income and the U.S. tax rate. And if the foreign tax rate is higher you can actually get a "credit" that you can use to offset future U.S. taxes. You list yourself as a resident of China. China's income tax rate is comparable or higher than the U.S. rate (it appears), so you are unlikely to owe U.S. income taxes as a resident of China.

You also did not mention that the U.S. exempts all initial income (including unearned income) from U.S. income taxes through the personal exemption and standard deduction. That is, if you're among the vast majority of U.S. citizens living overseas that has earned income up to $97,600 and unearned income (e.g. interest on a bank account) within your personal exemption/standard deduction, you pay zero U.S. income tax even if the foreign tax rate is lower than the U.S. rate.

In some cases U.S. citizens living outside the U.S. can receive money from the IRS, i.e. have a negative tax rate. Just like some major corporations do.

In order to owe _any_ U.S. income tax as a U.S. citizen living overseas you must meet at least both the following conditions:

1. You must be relatively well-to-do (or better) -- not a schoolteacher, basically;
2. You must live in a comparatively low tax jurisdiction.

OK, now with that background out of the way, one potential issue with your small business idea is that you must pay U.S. gift tax (less foreign gift tax) if you give your nonresident alien spouse more than $143,000 per year (tax year 2013 limit). Payment of ordinary household expenses, medical expenses, and educational expenses generally does not count toward that annual limit. However, if the small business really is small then $143,000/year shouldn't be a problem.

If you do not want to participate in U.S. Social Security then you cannot be self-employed (and thus owe the self employment tax). Determining whether you are self-employed does not depend on what the foreign government calls the company structure you set up. It depends on the facts of the situation. If you're the only employee and your wife owns the company, it's hard to imagine you wouldn't be deemed self-employed. Of course being entitled to U.S. Social Security benefits (and increasing your future retirement benefits) most people would consider at least somewhat good.

Anyway, yes, a nonresident alien spouse can be "useful" from a U.S. tax point of view. So useful that Congress put a limit on wealth transfers from the U.S. citizen-spouse to the foreign spouse in order to prevent tax "leakage" among the very well-to-do. So your basic idea is correct, albeit it's an old idea that Congress knew about a couple decades ago when Congress introduced the special gift limit.

It didn't take me very long to figure out that complexity itself has significant cost. Let's suppose for sake of argument you could save a minor amount on U.S. taxes (since you're a resident of China) -- that China actually taxes your income at a lower effective rate than the U.S. does, and you're above the Foreign Earned Income Exclusion, Foreign Housing Exclusion, personal exemption, and standard (or itemized) deductions. Let's assume all that. Then it becomes a question of spending $XX to save $Y, because complexity itself has cost. You could get really, really fancy -- and some people do -- but if you're getting fancy to save $5, it just isn't worth it. So you have to weigh that factor, too.


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## Bevdeforges

OK, I fully understand your outrage at the notion of dual taxation. But practically speaking the "cure" can be worse than the disease.

Besides the FEIE, you can use the foreign tax credit to offset any US obligation with income tax paid to your country of residence. Having your own company does not automatically make you eligible for all the tax tricks that the big corporations use - it depends on how you are set up and what tax treaties exist between your country of residence (or the country of residence of your business) and the US. Same applies to US social security - you may or may not be subject to US social security contributions depending on how you set up your business and how you report your business results.

But basically, you play the game and you take your chances. Renunciation has its own costs, as does non-compliance. 
Cheers,
Bev


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## BBCWatcher

I was not precise in something I wrote above. _Everyone_ potentially owes U.S. tax on U.S. source income. (Actually U.S. citizens often get tax breaks on U.S. source income -- like avoidance of mandatory 30% withholding -- that non-U.S. citizens don't.) I should have wrote that in order to owe any U.S. income tax on _foreign_ source income two conditions both must be true.


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## BonjourFrance

Now, I hope this is true BBCWatcher: you mean that my deferred annuity distribution will not be taxed if it does not go over $97,000/year? Thanks

You also did not mention that the U.S. exempts all initial income (including unearned income) from U.S. income taxes through the personal exemption and standard deduction. That is, if you're among the vast majority of U.S. citizens living overseas that has earned income up to $97,600 and unearned income (e.g. interest on a bank account) within your personal exemption/standard deduction, you pay zero U.S. income tax even if the foreign tax rate is lower than the U.S. rate.


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## BonjourFrance

BBWatcher said: "That is, if you're among the vast majority of U.S. citizens living overseas that has earned income up to $97,600 and unearned income (e.g. interest on a bank account) within your personal exemption/standard deduction, you pay zero U.S. income tax even if the foreign tax rate is lower than the U.S. rate".

Does that mean, that interest on a bank account in US or deferred annuities are not taxed if the total is $97,600? Thanks


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## BBCWatcher

It means exactly what I wrote. The IRS has definitions of earned and unearned income, and you need to determine both. (And actually that ~$97K limit can be higher with the Foreign Housing Exclusion.)


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## BonjourFrance

That's what I was afraid of understanding BBCWatcher: living outside US I can't take advantage of this $97,000/year deduction unless it means earned income and not interest/annuities which is unearned. I thought that having those annuities considered as income I could apply it to that $97,000/year deduction, which now I understand is not the case. Thank you.


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## BBCWatcher

Aren't France's tax rates on unearned income (interest, dividends, and capital gains) substantially similar to or higher than the U.S. rates? It looks like it upon casual inspection.


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## Bevdeforges

BBCWatcher said:


> Aren't France's tax rates on unearned income (interest, dividends, and capital gains) substantially similar to or higher than the U.S. rates? It looks like it upon casual inspection.


It depends - on the source, on the potential deductions or allowances you have and on a couple other elements of your status. For a simple example, I currently pay no French income tax, but would have to pay US income tax if not for the FEIE. I'm currently looking into what my situation will be when I start drawing my pension (where the prospect of double taxation looks to be very real).

The other thing to consider is that there are "other" taxes in France (such as the CSG) that are not considered income taxes by the IRS (and thus are not eligible for the FTC), even if they are assessed as part of the income tax declaration. 
Cheers,
Bev


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## BonjourFrance

BBWatcher: I really don't understand when you say this: --------------------------------------------------------------------------------

It means exactly what I wrote. The IRS has definitions of earned and unearned income, and you need to determine both. (And actually that ~$97K limit can be higher with the Foreign Housing Exclusion.) 

I can't or it's not up to me to determine earned and unearned income. It's not a gray area, unless you could explain it. Unearned income I understand is just deferred annuities and interest of the money you keep in the bank. Earned income is what you make from work; employed or selfemployed. Am I wrong? I wish! I am so disappointed because I've always thought that that $95-97000 refers to all income from us and/or from whatever country you live in as an expat.


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## Nononymous

I believe that you are doomed to disappointment. The FEIE exemption ($95k) is for earned income only - money earned from working. It does not apply to interest, income from annuities, capital gains, etc. See various other threads on the subject.


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## BBCWatcher

Bevdeforges said:


> ...when I start drawing my pension (where the prospect of double taxation looks to be very real).


Why would there ever be double taxation? The U.S. and France have a tax treaty, and the U.S. has its foreign tax credit (and/or deduction). The absolute worst that could happen is you'll pay the gap, if any, between the French rate and the U.S. rate on that income.

Responding to the other post, I'm not sure why what I wrote is unclear. I don't think it is. The U.S. IRS has definitions for earned and unearned income, and you have to determine and follow those definitions in categorizing your various sources of income. The U.S. Foreign Earned Income Exclusion (and Foreign Housing Exclusion) apply to, well, earned income up to certain limits. (And they are optional. You should not automatically use them if you live in a comparatively high tax jurisdiction, because the U.S. Foreign Tax Credit may be a better deal.) You can shield unearned income from U.S. income taxes using the U.S. personal exemption, standard (or itemized) deductions, Foreign Tax Credit, foreign tax deduction, tax treaty provisions, exclusive holding by a nonresident alien spouse (subject to gift limits on the transfers), and/or U.S. tax-advantaged savings vehicles (such as the Roth IRA, 529 educational savings programs, etc.) -- but not the Foreign Earned Income/Foreign Housing Exclusions.


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## RandallSamaritan

If you are self-employed and a U.S. citizen/resident, by extension your company will be considered a U.S. company and self-employment taxes (social security and medicare taxes) will be due irregardless of any foreign earned income exclusion - however, there is an exception if a totalization agreement exists between the foreign country and the U.S. 

Organizing as a foreign corporation will free you from self-employment taxes, but it will also require additional annual disclosures (such as the Form 5471).

While you may have annual reporting obligations and it may be the cause of some heartache, depending on your level of income, it may be just an exercise in filing the necessary forms to protect your claim of no tax liability.

Best regards,
Randall


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## BonjourFrance

nononymous: you are so right pal! I am so disappointed and is nothing I can do but pay, pay, pay!


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## cescolar

BBCWatcher said:


> That's because the U.S. only ever taxes the _difference_ between the foreign tax paid on foreign source income and the U.S. tax rate. And if the foreign tax rate is higher you can actually get a "credit" that you can use to offset future U.S. taxes


I am not a US resident, but have a US brokerage account. In it I have stock of several ADRs (non US corporations) that pay dividends. Every time that they pay, they withold taxes. I have been declaring those foreign taxes paid, but I never get enough credit for them. Every year I get to carry over a larger and larger amount...

When I asked my incompetent ex-accountant how I could recover those credits, he told me to get more foreign earned income, which I believe it is not true!

I am trying to understand why. Looking at the 1040 form I can see that they use a ratio to determine how much of those credits are allowed. I did a simulation, and if I had to pay a lot of taxes, then those credits would be allowed.

Based on BBCWatcher's quote, I was expecting to see some calculations on how much percentage I had paid in foreign taxes, and if that was below the percentage that I should be paying in the US, then I would have to pay the difference. But that is not obviously the case...

My questions are then: is there anything I can do to get those carried over tax credits? What is the idea behind those ratios in form 1040?


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