Quite often I write about wealthy Americans or citizens of other nations moving offshore to find a new or second home, lower taxes, greater asset protection and more financial and personal privacy.
But there is a another group of migrants, many of them educated and professional Americans (and others), who are going offshore to find better jobs and, for the Americans, a major tax break that U.S. law allows — the foreign earned income exclusion.
Today’s New York Times (Aug. 20) describes the lives being led by several Americans who have moved to the United Arab Emirates to teach there in a new university. Says The Times : "In this country where foreigners do most of the work, there are migrant maids and migrant masons, migrant tea boys and migrant typists, all doing what most migrant laborers do, menial tasks for meager wages. Then there is Peter Mitias, the migrant professor. An economist with a Louisiana doctorate and a Mississippi drawl, he shocked his friends when he left a tenured job in Virginia for the American University of Sharjah, a school conjured from nothing by a sheik in the suburbs of Dubai. But when he lists the benefits of working abroad, Mr. Mitias crows. He has free housing and utilities. (“Sweet!”) He has international experience on his résumé. (“Huge!”) He has cheap household help, good schools for his children and a BMW and a Mercedes he was able to buy by paying no income tax. Not to mention plenty of American fast food. “Papa John’s delivers to my house,” he said. “It’s all here!”
The tax break to which Prof. Mitias refers is known as the "foreign earned income exclusion."
It allows a U.S. citizen who lives and works outside the U.S. to exclude up to $82,400 of foreign earned income from U.S. income taxes. If both of you work it’s possible that you and your spouse could earn a tax free $164,800 annually offshore, plus lower taxed housing allowances an offshore employer pays.
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De Facto Deficit: It’s there, it’s huge and it’s getting bigger at the hand of a government in denial. How long before it pushes us into 3rd world status?
Socialism Security: As the U.S. government continues to tighten its grip on you and your wealth, will you be able to re-discover opportunity and freedom?
To learn what you can do, click here.
This is not a tax deduction, credit, or deferral. It’s an outright exclusion of your offshore earnings from gross income, so you pay no U.S. income tax on that amount. To qualify for these benefits you must: 1) establish a "tax home" in a foreign country; 2) pass either the "foreign residence test," or the "physical presence test"; 3) actually have earned income; 4) live in the U.S. for no more than one month per year; 5) file a U.S. income tax return for each year you live abroad.
Usually your "tax home" is where your principal place of business is located, not where you live. The term "tax home" is broader when determining eligibility for the foreign earned income exclusion. Confusion over this point stings many Americans overseas. If you work overseas and still maintain a U.S. residence, your tax home remains in the U.S.
To qualify for the foreign earned income exclusion you must establish both your principal place of business and your actual residence outside the United States. A complicated test that determines if you get this exclusion involves counting the maximum number of days you’re in or out of the U.S.A. But the foreign residence test is easier for most taxpayers to pass. You must establish yourself as a bona fide resident of a foreign country for an uninterrupted period that includes an entire taxable year; and you must intend to stay there indefinitely. If you don’t pass this test, you’re considered a transient and wont qualify.
U.S. tax law says your residence is a state of mind. It’s where you intend to be domiciled indefinitely. To determine your state of mind, the IRS looks at the degree of your attachment to the country in question. A number of factors, none of them decisive are examined.
The bottom line; you must establish clearly yourself as a member of a foreign community. This unusual tax break is only for those who live and earn offshore. The Sovereign Society gives expert advice on this and other offshore tax matters. And we can even suggest the best tax-free places to live and work. In fact we will be conducting a Sovereign Society tour to the United Arab Emirate in 2008.
If you want to know more about what life would be like in scores of foreign countries, CLICK here for more about my latest edition of The Passport Book.
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