Reducing Tax By Living And Doing Business Overseas

Some poor, uninformed soul wrote this email in response to the promotion we’ve published for the Wealth Summit I’m hosting in Belize next month:

“Really, what you’re talking about is a plan to cheat our country out of the tax dollars it deserves for personal gain. Some strategy…

“Oh, it may be legal, but evading taxes on income generated here in the U.S. is unpatriotic and unethical.

“Bad luck to you,

“Karma”

I’ve heard this perspective before—that having wealth is bad, that protecting wealth is bad, and that anyone doing anything with his money “offshore” is cheating the government out of tax dollars.The truth for Americans (as the writer of this email seems to be) is that taking your money “offshore” hasn’t been a tax benefit for decades. Most tax loopholes were closed with the Tax Reform Act of 1986. That was the year I went to work for a CPA firm and began preparing taxes for the first time. The tax loopholes that were closed were significant…and the opportunities for reducing your tax burden (assuming, again, that you’re an American) by moving your money to a new jurisdiction (which is what “going offshore” means) today are virtually nonexistent.

Moving your assets offshore into a foreign trust, for example, as opposed to putting them in a domestic trust, doesn’t eliminate or even reduce the taxes paid on the income from the trust. What it does do is allow for better protection of those assets from anyone who might decide to sue you. If you’re living in the United States and have any wealth at all, being sued is a real risk.

Trusts are treated in the same way as any person or corporation is treated for tax purposes. If a trust, domestic or foreign, has US$1 million of income, it reports and pays taxes based on that income.

An American can reduce his U.S. tax burden for both personal earned income and business income by relocating physically offshore. The Foreign Earned Income Exclusion (FEIE) allows an individual to exclude from his income for U.S. tax purposes up to US$107,600 (that’s the figure for 2020) if that income is earned outside the United States and if the taxpayer qualifies for the exclusion (you qualify for the FEIE either through bona fide residency in another country or through the “days test,” which requires the taxpayer to be in another country at least 330 days in a 12-month period).

Taking the FEIE isn’t cheating the U.S. government out of anything, and it isn’t evading taxes. Using the FEIE to reduce your taxable income in the United States is essentially no different than taking the personal exemption and the standard or itemized deduction on your 1040 form. It also doesn’t mean that you’re not paying any taxes. In most cases, Americans working overseas are working in countries that tax their earned income.

U.S. businesspeople who have offshore businesses aren’t cheating anyone either. If they follow the tax rules, they can defer U.S. taxes on their offshore business profits until such time as they pay those profits out as dividends or salaries to the owners of the business. This isn’t a new strategy, and it isn’t illegal. It’s the current tax law.

As the IRS’ own Taxpayer Bill of Rights states (see Right #3), U.S. taxpayers have “The Right To Pay No More Than The Correct Amount Of Tax.”

In other words, you have the right, dear American taxpayer, to take every deduction and exemption allowed by law, including those that apply to Americans abroad.

It’s that simple.

Lief Simon

“Lief, been following your travels these past few months. Glad you enjoyed your Belizean vacation.

“I just thought I would send you this link from a CBC report on seizures of money in the United States. You have written about some of these things before, but this is completely outrageous and I thought you might be interested to know about it.

“Here’s the link: https://www.cbc.ca/m/touch/world/story/1.2760736.”

N.F.