Earn $120,000 With No Personal Taxes Due

Tax evasion is illegal. But tax avoidance? That’s totally legal and an Olympic sport the world over.

And it seems I just nailed the landing on an avoidance strategy. The upshot means I found a 100% legal way to lower my taxes so that my global tax rate is now less than 15% per year… probably closer to 10% or 12%.

I call it the “Ultimate Tax Hack for Americans.”

To be clear, this take on lowering your taxes works only if you’re an expat and self-employed. But the fact this tax strategy exists is reason enough to consider living and working as a freelancer overseas. That’s assuming, of course, you have the ability to do so.

It’s a feasible way to supercharge your capacity to pay off debt. Or to ramp up retirement savings. Or maybe you just want the extra cash to be-bop around the world.

Consider the possibilities…

Let’s Start with $120,000 For Free!

Say you earn $100,000 a year. Between state, federal, and local taxes in the U.S., you’re going to lose 25% to 40% of your income. Maybe more. But with this strategy, you could potentially lower your tax obligation by more than half. That’s thousands of extra dollars every year to feather your nest egg, save, travel, invest, whatever.

The “hack” is structured around two tax truths:

  1. As an American reporting earned income overseas (not passive income), you’re eligible for the Foreign Earned Income Exclusion, or FEIE. This allows Americans living and working abroad to exclude up to $120,000 in earned income for 2023. (The amount rises regularly with inflation). That means a 0% personal tax rate on the first $120,000 in income.
  2. Certain countries impose no taxes on personal income, or on income flowing through a corporate structure such as a limited liability company (LLC).

Combine those two facts into a tax strategy, and you can create a seriously robust tax avoidance plan. I know this because I’m currently pursuing that strategy as part of my recent move to Portugal…

The Tax Benefits of Expat Life

To qualify for the FEIE, you need tax residency outside the U.S.

That means proving to the IRS that you’re either a “bona fide” resident of a foreign country, or that you’re living and working outside the U.S. for more than 330 days per year.

Meet either test and you can strike the first $120,000 in income from your U.S. personal tax return. That alone is a great way to lower your taxes dramatically.

You will, however, still owe Uncle Sam 15.3% for self-employed withholding taxes. But that 15.3% you pay is based on your net income, not the gross. So, the amount of self-employment tax you owe shrinks because of your expenses throughout the year for office supplies, work-related travel, and whatnot.

Thus, your effective tax rate is much less than 15.3%.

By gaining overseas tax residency, then, you can legally reduce your U.S. tax obligations to a fraction of what they would otherwise be if you live year-round in the States.

Of course, to pursue the “ultimate tax hack,” you also need to eliminate your taxes abroad. That’s where judicious selection of a country to call home will make or break this strategy.

Three Steps to Sharply Lower Your Taxes

That’s one of the primary reasons I moved to Portugal. It was the first step in my three-step plan to dramatically slash my global tax bill. (I also moved because I can gain Portuguese citizenship in just five years, and that gets me a European Union passport to live and work anywhere in the EU.)

My three-step plan:

Step 1: Move to a 0% Income Tax Jurisdiction

Several appealing foreign destinations offer Americans both a pathway to permanent residency and a 0% tax rate on personal income. The latter means you’ll owe your adopted country nothing on the income you earn, even as a local tax resident. The only tax obligation you’ll have is to Uncle Sam.

Countries that offer this include Antigua and Barbuda, the Bahamas, Bermuda, the Cayman Islands, the United Arab Emirates, and Portugal (with a few caveats). Costa Rica offers a 0% tax rate as well, but only for a maximum of two years.

For me, Portugal makes the most sense because I want to remain in Europe.

Now, to be clear, Portugal does not technically offer a 0% income tax rate. However, the country does have the Non-Habitual Residence program, or NHR, for newcomers to the country.

Under this tax scheme, new residents are eligible for beneficial tax treatment in Portugal that effectively halves the local tax rate to a flat 20% for the first 10 years. But—and this is where the magic happens—the NHR plan taxes dividends at 0% for that first decade.

Thus, if your salary arrives as a dividend payment, you create a 0% tax obligation in Portugal. Moreover, because Portugal classifies dividends as the byproduct of capital-at-work rather than employment, you don’t owe the Portuguese version of social taxes for healthcare and Social Security.

I’ve had conversations with a tax pro in the U.S., as well as a tax lawyer in Portugal, and they both agree that this plan will work as advertised (though you should always consult a tax expert about your specific situation).

In short, this tax hack creates a lifestyle that allows you to live in Europe, yet pay a global tax rate well under 15%.

Question is: How do you structure your salary as a dividend payment? The answer lies in a corporate structure such as an LLC.

Step 2: Set Up an LLC

Relative to Portugal, your income needs to flow through an LLC. That means your LLC needs to connect to a business bank account that, in turn, pays you a monthly dividend equal to your salary.

In Portuguese terms, you’ve turned taxable earned income into dividend income that’s not taxed because of the NHR program.

Back home in the U.S., however, the LLC is all but meaningless.

The IRS views a single person as a “disregarded entity,” meaning that for tax purposes, it doesn’t exist.

The money that flows into the LLC is deemed your personal income … which is pretty darn wonderful as an expat because it means you remain fully eligible to claim the FEIE.

You can set up an LLC in any U.S. state, though several have stronger protections than others (Wyoming, Nevada, and Delaware, in particular). Or you can up an LLC overseas, in places like the Caribbean, the Isle of Man, and Cyprus. They each have their pros and cons—and higher cost structures—so you have to determine which is best for your situation.

Step 3: Open a Bank Account for the LLC

For my particular situation, I decided that my LLC’s bank account should be based offshore, since I live abroad and my income is paid in euros. I see two benefits to this…

First, if anyone goes after you for whatever reason, they have to figure out not only where your LLC is located, but also where the associated bank account is based. And if that bank account is overseas, they now have an entirely different and more challenging barrel of legal fish to sort through.

Second, my primary income arrives in euros, as noted, and most U.S. banks do not accept euro deposits. So, I needed a bank that has no problems handling euros.

In this age of the Foreign Account Tax Compliance Act, or FATCA, finding a foreign bank that will work with Americans can be a challenge. However, you will find some in the Caribbean, the Isle of Man, Singapore, and elsewhere. Those jurisdictions are often amenable to business accounts tied to a corporate structure.

Or, you can use a Wise.com business account, which is highly convenient and often easier to open.

So, there you have it… three (relatively) simple steps to legally reduce your taxes to well under 15%.

Of course, I can’t say how long this tax “hack” sticks around. Maybe Portuguese regulators shut down this dividend strategy tomorrow. Maybe it sticks around for decades. Either way, I’ll use it as long as I can to dramatically slash my global tax bill.

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