Introduction:
Have you ever wanted to avoid paying income tax in the US? Well, let me tell you something: It is possible to do that legally! Yes, you heard me right! You can avoid paying income taxes in the US legally. So, let’s get straight to the 4 ways in which you will be able to avoid paying the income taxes in the US, legally, of course.
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- Shifting out of the US for tax savings.
One of the simplest and quickest ways to avoid paying income tax is that you live outside the US most of the time. This is something familiar as the Physical Presence Test of the FEIE (Foreign Earned Income Exclusion). This test is a very common strategy of reducing taxes for most ex-pats and it works well too. If you live outside the US for a minimum of 330 days out of a total of 365 days, you will be able to exempt around $101,300 of income from your yearly taxes, as per the IRS. The best thing about this tax strategy is that you will be able to leave the United States whenever you wish to. If you move out of the US today, apparently you’ll be able to claim the benefits of the last 34 days too.
There is however one thing that you must not forget. It is that the exemption refers to the time you will spend in a foreign country. So, in simple words, it is not as easy as being out of the US for 330 days. It has to do with being in a foreign country for that time. Know that the international waters and the air space won’t count as a foreign country. Generally, the physical presence test is simple and easy to be qualified for. But the only other matter that you must keep in mind is if you will be having lots of flights over the oceans. It is an issue when you have been in the US for 4 weeks. Then you will be having multiple overseas flights.
If the authorities take a look at the overall time you spent in the international air space, they might be able to see that you were on flights for many days, over the oceans or you were on a cruise for about 12 days in the international seas and therefore they might disqualify you. So, even though the physical presence test is easy and simple for the reduction of taxes, a few important things must be kept in mind to make it work perfectly.
- Create residence in some other place.
One of the best things we suggest to people all the time is to get a 2nd residence somewhere. It offers a lot of benefits to everyone on so many levels and in so many regards. Being able to reduce the taxes in the US is one of the many benefits of a 2nd residency. However, you should know that there are a few specific types of residencies that qualify for this purpose. All of it depends on your situation in general. Considering the overall strategy, this isn’t suitable for all the people but it is good and acceptable for those who want to be able to spend more time in the United States. Also, who are able to easily establish residency outside the US.
If you are going to be a wanderer who is in a different country and place all the time. Then you try to take the residence test, it will definitely not work even if you have a residence permit. So, this strategy is actually a difficult and complex one. You can spend around 4 months in the US if you qualify under the bona fide residence test. Though there are lots of tax-related problems that will arise. If you run your own business and are spending 4 months per year in the US. The qualification process is actually very subjective in nature.
As per the IRS: questions and queries of the bona fide residence will be determined according to a case by case basis, considering factors such as the purpose and intention of the trip and the length and nature of the stay abroad. You will be required to show the IRS that you have been a proper bona fide resident in a foreign country for a period that includes an entire tax year.
This strategy is very complicated and difficult for the majority. It is especially complex when you’re running your own business and spending time in the US as well. If this strategy is worked out correctly, it results in many benefits.
- Moving to one of US territories.
There’s another legal strategy to avoid paying income tax, that works really well. This one is all about moving to one of the US territories such as Puerto Rico. If you are someone who won’t mind the poor offshore fundamentals then there are 2 ways in which you will be able to reduce your income taxes by shifting your business to Puerto Rico. The first one is Act 20 which is also known as the Export Service Act. This act basically focuses on specific service-based businesses by offering them incentives. Such as a very little 4 percent export income tax rate and a 0 percent tax on the profits and earnings to those who choose to export from the island and relocate there as well.
Act 22, also known as the Individual Investors act focuses on investors with a high net worth. The benefit is 0% tax on dividends, capital gains, and interest. The only issue is that you will have to spend half the year in Puerto Rico,(around 183 days). Another act that is not known by many is Act 273. Under this act, the tax exemptions are only made to the businesses that are engaged in eligible activities. Also set in Puerto Rico.
In order to qualify for this, the IFE (international financial entity) must have a capital stock of at least $5 million and it must be authorized stock. Such an entity must also have at least 4 employees. A lot of people think that they will be able to qualify for Act 273 by hiring drivers and chefs. But that’s totally wrong. It won’t work at all. You will have to hire actual employees who will work at an actual business. Even if they’re going to be the low-scale employees who won’t be doing any major work. You’ll be facing lots of issues during the audit if you don’t have actual employees.
Puerto Rico is the only territory of the US that offers tax benefits to investors and businesses as well. The Virgin Islands has a program as well. The programs in both these territories will allow people to reduce their taxes by around 90%. But the issue is that both territories will require you to spend half a year there. If you’re willing to live in any one of these places, then these programs are going to be very beneficial. If you’re someone who makes a lot of money and doesn’t want to settle for the FEIE. Then you should go to Puerto Rico at once. It will offer you lots of benefits in many ways.
- Renouncing citizenship.
We know that for a lot of people, renouncing their US citizenship will most likely not make any sense at all even if it leads to avoid paying income tax. If you were to renounce your citizenship, you will be paying an exit tax from all the unrealized capital gains of your business to real estate and for some people that can be an issue. Though if you have less than 2 million dollars then you won’t have to pay any exit taxes, as long as you pay your regular income taxes properly until you renounce citizenship.
The good thing is that once you renounce the citizenship, it’s all done. You won’t be stuck in complications of handing over more than half of your income to the government every single year. It’s a big move but it is legal so it’s good. It definitely won’t work for all people but those who think they can make it work will find lots of benefits.
Concluding Remarks:
So, these are the few legal ways in which you can avoid paying your US income taxes in a legal manner.