Expat Logistics 101: Tax

Oh Tax!

One of the two certainties in life... or is it?

One of the least talked about benefits of leaving your home country to become a expat/digital nomad is the enormous potential tax savings.

As an Enrolled Agent (EA), I am qualified to speak on this.

First off if you are a U.S. Citizen you will likely still have to file. There's just no getting around it. However, what you owe can be greatly diminished (or entirely eliminated) if you set up everything correctly.

For most of the rest of the world, you just have to prove that you are tax non resident in your country of origin and tax resident in a newly adopted country. Yes you may be able to avoid being tax resident anywhere, but I wouldn't recommend it. As a non U.S. Citizen you'll be in good shape if you can take care of those two things (Paraguay is a great solution). For Americans it is more complicated and that is who I am primarily speaking to in this article.

Taxes For U.S. Expats:

The U.S. operates under a uniquely draconian tax policy known as citizenship based taxation. This means that you are taxed on the basis of your citizenship rather than where you live. Pretty much all of the rest of the world is taxed by where they live (residency based taxation).

What this means is that if you hold a U.S. Passport or Green Card, barring few exceptions, you'll automatically be a tax resident of the U.S. no matter where you live.

The one advantage of this is that other countries are unlikely to try to claim you as a tax resident if you are a nomad, because you are already claimed. This is why tax residency abroad is generally more important for other nationalities.

Luckily you have access to the most powerful tax eliminating exclusion in the U.S. tax code:

The Foreign Earned Income Exclusion (FEIE)

This allows foreign earned income to be exempt from U.S. tax up to a certain threshold ($126,000 in 2024). The key word here is earned, meaning it must come from a job, self employment, etc. Basically you must trade your time for money. Unearned income like investments will be taxed normally.

What this means is that if you base yourself in a territorial taxed country where they only tax local income or a no tax country. You can potentially earn six figures tax free. The same applies for full time nomads who never stay in one spot too long.

To qualify there are two main tests:

The Physical Presence Test or the Bona Fide Residency Test. For most expats the easiest will be the Physical Presence Test. To Pass this test you must spend 330 days outside of the U.S. and within a foreign country in any 12 month period. There are other considerations, but this is the main one.

FATCA/FBAR

The next major consideration has less to do with tax and more to do with avoiding money laundering. The U.S. government is paranoid about the wealthy individuals and corporations evading tax. Their solution is nested in the Obama Care legislation:

The Foreign Account Tax Compliance Act (FATCA)

FATCA unironically sounds like fat cat. Yes congress you are hilarious, expats everywhere are laughing when they aren't angry or terrified.

Like I said FATCA is primarily targeting corporations and high net worth individuals, unfortunately any ordinary American is also subject to it.

In practical terms this severely limits your ability to have a financial life outside of the U.S. because many institutions will not want to incur the compliance costs that come with having American clients.

If you are accepted then you may be subject to an FBAR filing.

FBAR filing is only required if all of your combined foreign accounts exceed $10,000 at any point during the year. If you have other significant assets and investments abroad that can open up additional reporting but its beyond the scope of this article.

Conclusion

For most Americans overseas these are the two main tax/compliance areas to be aware of. Of course it can get much more complicated depending on your individual situation, which is why I will be launching an Expat Tax Course that goes deep into this topic. But, the majority of American Expats who are 1099 or W2 employees wont have that much more to be worried about. For additional information on this topic I recommend taking my course or scheduling a call with me so I can best advise you on your unique situation.

And if you are not a U.S. Citizen, then I hope this article can give you a new found appreciation for your country and the fact that they don't put their citizens through such extreme measures.