Being born in the United States comes with many privileges. But it also comes with many responsibilities. According to Fortunly’s insightful infographic, the United States is one of two countries in the world that implement citizenship-based taxation. The only other one is the northeast African nation of Eritrea.
Interestingly enough, America’s citizenship-based tax system doesn’t only affect its natural-born citizens. Foreigners may also be held liable for income tax if they meet the country’s residency requirements. Spending too much vacation time is a common reason why non-Americans might need to hand over some cash to Uncle Sam.
But, there are legal ways to beat America’s citizenship-based income taxation system.
The most obvious way is to renounce your US citizenship. But this is a major decision that could lead to dramatic consequences. An alternative to such a drastic measure is filing for tax exemptions. The Foreign Earned Income Exclusion (FEIE) is a viable option for American professionals who intend to make a living outside of any US territory.
With the FEIE, a portion of a citizen’s total active income can be excluded up to a certain limit, which changes every year. To increase the excludable amount, a foreign housing credit can be added into the equation.
When it comes to income from passive activities like stock trading, the United States considers them taxable as usual. However, there are ways to classify passive incomes as active in order to render them partly excludable.
In addition, using an offshore company to run a business may provide an income-tax reduction. This move can legally separate an American-citizen owner and a business entity for tax purposes.
Pursuing every allowable avenue to minimize citizenship-based income tax liabilities is more practical than unpatriotic.