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trapexit | 4 years ago
U.S. citizens must pay taxes on worldwide income, regardless of what country they live in. Citizens of almost all other countries are not required to do this (they pay income taxes to the country where they live and/or earn income). It's a remarkably raw deal for U.S. citizens abroad, considering that we don't get any services to go along with our tax obligations. You'd think we could at least pop into the consulate for one of those COVID vaccines that are now so plentiful stateside that they can hardly give 'em away, but no.
Now, if you're a U.S. citizen and you live abroad in a country with no income tax (e.g. Monaco) or low income tax (e.g. Bulgaria), and you earn more than the ~$100k limit of the Foreign Earned Income Exclusion (FEIE), then you're going to be paying U.S. tax, because you won't have paid enough foreign tax to deduct it all under the Foreign Tax Credit. Also all of your non-"earned" income is going to be subject to U.S. tax - dividends, capital gains, etc.
But let's say you live in Monaco (0%), Bulgaria (10% flat), Dubai (0%), Panama (25% top bracket), or the Cayman Islands (0%) and your spouse is not a U.S. citizen or permanent resident (not a "U.S. person" for IRS purposes). If your excess (> $100k) family income is credited to your spouse (or a company owned by your spouse), and that income is not generated in the USA (e.g. not from a U.S.-based business, rental properties in the U.S., U.S. stocks, or business trips to the U.S.), and you file with status "Married Filing Separately" on your U.S. tax return, then your spouse's income is not included on your tax return.
Say you do consulting out there on your little island in the Bahamas, and your foreign spouse sets up a consulting company and hires you as an employee. You get paid a salary by the company that is conveniently under the FEIE limit and thus pay no U.S. tax. Your spouse gets the dividends and pays no tax on them. So long as this isn't entirely a paper fiction arrangement wherein you do 100% of the work but your spouse gets basically all of the money, for U.S. tax purposes it ought to be kosher. (Again disclaimer: not a tax lawyer, this could be wildly incorrect, consult your own advisor about your specific situation)
Your family company's profits get invested into real estate (again in low-tax / no-tax jurisdictions) in your spouse's name. The passive income from that again flows to your spouse for tax purposes, and as long as you keep filing "Married Filing Separately", your spouse is invisible for U.S. tax purposes and no U.S. tax is due.
This is the only way that I know of, short of renouncing citizenship, for a high-earning U.S. citizen expat to avoid taxation of their worldwide income. You still have to file a bunch of paperwork, though. Also, due to a stupid quirk of IRS policy, because your spouse doesn't have a SSN/ITIN, you can't complete a 1040 in the e-file system and you have to file a paper return. Hope you FedEx'd it to the right address, because only a few IRS offices will accept courier deliveries.
You must also be careful about how you set things up for estate planning purposes. If you both live in the U.S. then there is in general no estate tax due when one spouse dies and bequeaths their assets to the other spouse. If you live in a different country, then it can get very complicated! Depending on who owns the assets, what country they're located in, who owned them before marriage, whether they were "gifted" to the other spouse over time or not, etc., the surviving spouse may owe substantial taxes in one country or the other.
55555|4 years ago
I know it took you a while to type that out but it will make a big difference in my life.