The Foreign Earned Income Exclusion only addresses George's U.S. tax benefit from working overseas. But can George avoid paying income taxes to a foreign country? After all, reducing U.S. income tax may not be such a great benefit if he must pay more foreign income tax.
There are ways to avoid or limit tax liabilities to foreign countries. But this depends on where someone is living, how often they move, and the nature of the foreign tax system. If an expat is uncertain, consulting a tax professional can help.
The web site, Best Places in the World to Retire, covered this topic and others related to expat living. The site has more than 400 contributors who have answered more than 6,500 questions about living in several other countries.
Among the contributors is Stewart Patton, a U.S. tax attorney now living in Belize. Patton is founder of U.S. Tax Services.
Patton made clear that he could only discuss tax law in general terms and that everyone's situation is different. He said that everyone should consult a qualified professional before implementing a tax strategy.
Patton said that "the simplest way" for George to avoid foreign income taxes would be "to live in a jurisdiction that has a zero tax rate."
There are several jurisdictions with zero income tax rates, including the Bahamas, Bermuda, and the British Virgin Islands. "If George lives in any of these places and qualifies for the Foreign Earned Income Exclusion," said Patton, "he really does have a zero tax rate on his first $100,800 of income."
Patton said that George can also avoid income taxes if he spends less than 180 days in a country over a year. "While the laws of each country are different and subject to change, for many countries, George would be considered a tax resident only if he spends more than 180 days in any year in that country," he said. "If he isn't considered a tax resident, he is not subject to paying taxes in that jurisdiction."
Patton said that so-called Digital Nomads do not generally spend more than 180 days in a country. A Digital Nomad is someone who works remotely (generally using the Internet). "George may spend four months in France, the next four months in Mexico, and then drive across the border and top it off with 4 months in Belize," said Patton. "Given the current rules of the Physical Presence Test for the Foreign Earned Income Exclusion, he could even spend up to 34 days a year in the U.S."
The result of such wandering, says Patton, is that George does not become a tax resident in any foreign country. So as long as he qualifies for the Foreign Earned Income exclusion, he owes zero income tax to any country for his first $100,800 of income in 2015.
What if George doesn't want to (or can't) live in a zero tax rate jurisdiction like Bermuda and doesn't want to move three or more times a year?
Patton says that George can still reduce or eliminate his non-U.S. tax liability by living in a country that uses the territorial tax system. He says that some foreign taxes are based on where income is based. In these cases, if George receives his pay checks from the U.S., he may not owe income tax to the country in which he resides.
Countries that use the territorial tax system include Costa Rica, Hong Kong, Panama and the Philippines. "Under the territorial tax system," Patton says, "only income that George generates from the country in which he lives is subject to tax."
For example, Patton said that if George lives in Panama and earns $100,000 worldwide but generates zero income from Panama, he owes zero income tax to Panama. If George generates $100,000 worldwide but just $10,000 of income from Panamanian employers, he would owe Panama income taxes on $10,000.
Patton says that there are circumstances in which George could live in a country that does not use the territorial tax system but taxes all income, and still qualify for an exemption that would reduce his taxes to that country to zero. "There are specialized cases where this is true," he says. "They are very worthwhile knowing about, and there are several of them."
Another Best Places contributor, Belize-based Ryan Wrobel, managing partner of Wrobel & Co., Attorneys-at-Law, said that there is an exclusion tied to the Belize Qualified Retired Persons visa. "Qualified Retired Persons are exempted from payment of all Belizean taxes on income received from outside the jurisdiction of Belize," Wrobel said.