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Avoiding Income Tax for US Expats

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sun.sunvy

Junior Member
Let's say that John is a freelance consultant. He is a US citizen, but does not live there (Physical Presence Test satisfied).

There is a possibly for him to be paid a significantly large sum of money contingent on a successful transaction on the side of the foreign client (who is not US based). Let's say the amount is $500,000.

Here's the issue: in 2014, expats earning above $99,100 suffer from federal income tax. His goal is to avoid it (as much as possible). Any strategies?

Here are a few more details on the situation:
- The 15.3% self employment tax we'll deem unavoidable. This will be payed (though getting around this would be nice).
- He does not mind the money in reasonable installments.
- He is not deemed a resident of any country (for tax purposes), so the US is his sole tax burden.
- The foreign client wants to minimize his tax burden as well (he/she makes money if the transaction is successful)

This is my simple (probably naive) idea:
- John sets up an offshore company in a zone without corporate tax, which bills the foreign client for $500,000.
- This company pays John $95,000 a year until exhaustion.

What are the problems with this? Anyway to get this to work while minimizing the tax burden as much as possible?

And of course, are there any other possibilities or ideas?
 
Last edited:


single317dad

Senior Member
If John wishes to minimize his tax obligation to his country, I recommend he retain a proper tax attorney for the purpose. DIY offshore shell corps are the sort of thing that could land John in prison.
 

LdiJ

Senior Member
If John wishes to minimize his tax obligation to his country, I recommend he retain a proper tax attorney for the purpose. DIY offshore shell corps are the sort of thing that could land John in prison.
This isn't that....John doesn't live in the US. However this whole thing does pose some potential other problems. The fact that he is not deemed a resident of any other country, and therefore not subject to income tax in any other country means that he would NOT be entitled to the 99k exclusion for foreign earned income. So that blows the whole idea out of the water.

However, if John has the potential to earn that kind of income while living outside of the US , there is nothing inherently illegal in him forming a corporation to handle the business. In fact, its probably wise in many circumstances other than tax. There is also nothing inherently illegal in him drawing a salary from the corporation instead of taking out all of the corp's income. However, it will make his taxes infinitely more complicated. He will have to submit a form showing that he is more than a 50% owner of a foreign corp, which includes balance sheet and profit and loss information for the foreign corp in both the currency of the country where it is located AND US currency. He will have to file another form that divulges any and all bank accounts over which he has signing authority. There is also another form that he will have to file regarding the bank accounts.

What has the potential to get people in a lot of trouble with the IRS, and therefore has the potential to get them jailed is playing "hide the money".
 

LdiJ

Senior Member
In what way is "hide the money" and "avoid taxes owed" not what OP described?
Well, he didn't say he intended to hide the money. Opening a corporation and having the corporation receive the money is not automatically hiding it. It is also not automatically illegal to structure income to minimize taxes.

Examples:

My boss wants to give me a large one time bonus in December because I landed the company a huge, one time sale. However, it will bump me into a higher tax bracket. So, my boss and I decide that he will give me 1/2 in December, and 1/2 in January to spread it over two years. That is not an illegal structure of income.

I am self employed and I decide to open an S-Corp because my business is growing tremendously. I opt to pay myself a salary that is fair market value for the services I am providing to the S-Corp and take the rest of the profits as distributions so that I do not have to pay self employment taxes on the distributions. That is not an illegal structure of income.

Opening a corporation overseas when you live and work overseas, or just do business overseas is not in and of itself illegal. Opening a corporation overseas and not filing all of the necessary disclosures with your tax return is illegal.
 

sun.sunvy

Junior Member
This isn't that....John doesn't live in the US. However this whole thing does pose some potential other problems. The fact that he is not deemed a resident of any other country, and therefore not subject to income tax in any other country means that he would NOT be entitled to the 99k exclusion for foreign earned income. So that blows the whole idea out of the water.
I don't think this is true. According to the IRS website, you must meet one of three requirements to be entitled to the foreign earned income condition.

One of them is this (which I hinted at by mentioning "Physical Presence Test"):
- A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

I've known people who travel constantly outside of the United States and owe no income tax anywhere. They do pay self-employment tax, however.

______________

Also, there's a reason why I chose the word "avoid" instead of "evade". There is no intent to "hide" money. I am not advising anyone to break the law, but I do advise doing as much as you can legally to minimize your tax burden.

I posted this thread to get some preliminary ideas to first see the plausibility of this scenario to be armed with some helpful information before consulting a tax attorney.

My boss wants to give me a large one time bonus in December because I landed the company a huge, one time sale. However, it will bump me into a higher tax bracket. So, my boss and I decide that he will give me 1/2 in December, and 1/2 in January to spread it over two years. That is not an illegal structure of income.
This is an excellent example converging at what I'm trying to get it. I guess I'm wondering if there's a way (or what standard/typical practices exist) for John to receive deferred payments in a way that will be optimal in a tax sense to both the foreign client and John. I'm aware of all the draconian paperwork imposed by the IRS as well as the nontrivial fees to set this up, but I imagine such labor is worth the tax savings.
 

LdiJ

Senior Member
I don't think this is true. According to the IRS website, you must meet one of three requirements to be entitled to the foreign earned income condition.

One of them is this (which I hinted at by mentioning "Physical Presence Test"):
- A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

I've known people who travel constantly outside of the United States and owe no income tax anywhere. They do pay self-employment tax, however.

______________

Also, there's a reason why I chose the word "avoid" instead of "evade". There is no intent to "hide" money. I am not advising anyone to break the law, but I do advise doing as much as you can legally to minimize your tax burden.

I posted this thread to get some preliminary ideas to first see the plausibility of this scenario to be armed with some helpful information before consulting a tax attorney.



This is an excellent example converging at what I'm trying to get it. I guess I'm wondering if there's a way (or what standard/typical practices exist) for John to receive deferred payments in a way that will be optimal in a tax sense to both the foreign client and John. I'm aware of all the draconian paperwork imposed by the IRS as well as the nontrivial fees to set this up, but I imagine such labor is worth the tax savings.
Since you are going to consult a tax attorney, I won't go into any further details on the bolded. However, make sure the tax attorney has experience with dealing with international issues. Sometimes a tax attorney will also end up referring you to a CPA with experience on international issues.
 

Just Blue

Senior Member
Let's say that John is a freelance consultant. He is a US citizen, but does not live there (Physical Presence Test satisfied).

There is a possibly for him to be paid a significantly large sum of money contingent on a successful transaction on the side of the foreign client (who is not US based). Let's say the amount is $500,000.

Here's the issue: in 2014, expats earning above $99,100 suffer from federal income tax. His goal is to avoid it (as much as possible). Any strategies?

Here are a few more details on the situation:
- The 15.3% self employment tax we'll deem unavoidable. This will be payed (though getting around this would be nice).
- He does not mind the money in reasonable installments.
- He is not deemed a resident of any country (for tax purposes), so the US is his sole tax burden.
- The foreign client wants to minimize his tax burden as well (he/she makes money if the transaction is successful)

This is my simple (probably naive) idea:
- John sets up an offshore company in a zone without corporate tax, which bills the foreign client for $500,000.
- This company pays John $95,000 a year until exhaustion.

What are the problems with this? Anyway to get this to work while minimizing the tax burden as much as possible?

And of course, are there any other possibilities or ideas?
Let us say your John Post for himself. Thanks!! :)
 

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