Taxes and economic growth
You might wonder why, as someone working abroad, you still need to pay taxes. Paying taxes is an obligation by law and civic duty as well. Our taxes fund government programs, which then bring a net benefit to the economy. Taxes invested in the development of infrastructures like railways and roads lead to higher economic growth. Imagine a beautiful town that was hitherto not connected to the larger world now has superb connectivity and other infrastructure to facilitate tourism in that place. In a few years, that place might become the tourist hub of its state, leading to a higher contribution to the country’s economy. Better schools, government programs, and other infrastructural developments inspire a sense of safety and confidence in its citizens resulting in higher economic activities.
One of the critical problems US expats face when they move to another country is double taxation. Although they moved to another country and pay their tax, they also pay taxes as a US Expat. Many Americans living abroad are unsure which country they should be paying tax to and on what income. The pocket-burning fact is you have to pay taxes in both countries. Consequently, while you look for tax saving strategies by talking to locals in the country you are earning from, you also need to find how to reduce the tax in your home country. In this article, let’s look at some strategies you, a US expat, can employ to save your tax:
1. Claim Exclusions
Under the US tax regime, the IRS offers various deductions and exclusions. If you can prove that you live abroad, you can be excluded from up to $100,000 on your earned income.
One of these two ways is called Foreign Earned Income Exclusion (FEIE) where you have to prove that you have been a bonafide resident of another country during the entire tax year. The second way to verify is via Physical Presence Test; under it, you have to prove that you have lived outside the US for three-hundred-thirty (330) days of a tax year.
2. Consider Moving to a Low Country
For those expats whose job profile requires traveling to different countries, or allows such freedom, it’s best to move to a country where the tax is low. Through this, you will reduce your overall tax and will have more to spend for yourself or invest. It is essential to thoroughly research countries with low taxes. These countries include the United Arab Emirates, Somalia, Bermuda, and Belize. However, these countries have their tax regimes and you must research them as well if you do decide to opt for this strategy.
3. Claim Tax Credits
Foreign Tax Credits (FTC) allows the expats to claim $1 US tax credit for every dollar they pay as tax to another country. Although one cannot argue FTC on the same income as FEIE, many expats who earn more than $100,000 claim both for taxes they pay abroad above this Exclusion Limit. In another option, FTC can be beneficial over FEIE for expats who would pay more tax than they would owe IRS. This allows you to save the excess credits.