The United States is one of only two countries in the ENTIRE WORLD (war-torn Eritrea being the other) that taxes you even if you don’t spend a single second inside the nation.
But there are totally legal ways to reduce your U.S. taxes and save big time, without renouncing your citizenship.
I'm going to share the three easy strategies I used to cut my taxes down to just 12.1%.
(Remember I’m in no way a tax expert, so take my advice with a grain of salt. Talk to a professional.)
1. File for FEIE (Foreign-Earned Income Exclusion)
But James, what if you live outside the United States and are yet a citizen? There’s no way they yet make you pay federal taxes. Right?
Wrong. If you have a US passport, you must file and pay taxes. Yep, even if you live all 365 days outside the country.
But there’s a little known rule called FEIE - the foreign-earned income exclusion. What’s this all about?
In a nutshell, FEIE allows US citizens who live and work abroad to exclude a certain amount of their foreign earned income from US taxes. In 2022 that amount is $112k.
In 2023 the exclusion increases to $120,000. That’s 120 big ones!!
To qualify for FEIE, you have to meet one of these tests:
- The bona fide residence test: You're a resident of a foreign country for an entire tax year
- The physical presence test: You're not physically present in the United States for more than 34 days during any 12-month period
I only spent about 25 days in the US in 2022 and therefore, met the physical presence test.
So I saved a ton of money by excluding a big chunk of my income ($112,000 to be exact) from US taxes. I only had to pay marginal tax on the income I earned over that amount.
2. From LLC to S-Corp
If you don’t already have an LLC, get one set up asap. Even if you’re not an entrepreneur or own your own business.
An LLC will allow you to expense business-related stuff and save big time on taxes.
But once you start making money, consider switching from your LLC to an S corporation.
When I started freelancing in 2021, I opened an LLC in Wyoming. No rhyme or reason. I even so had to pay state taxes to my domiciled state Indiana (where my business was based). Plus, I had to pay self-employment taxes because they’re not pulled from my paycheck like they would be if I had a 9-5.
But as my income grew, I learned that I could save on taxes by converting to an S-corp. Here's why:
- As an LLC, your entire income is subject to self-employment taxes (social security and medicare). Ouch!
- With an S-corp, you can split your income into a “reasonable” salary and dividends. Only the salary is subject to self-employment taxes, which can lead to some sweet tax savings.
My accountant helped me make the switch and I was able to save thousands of dollars in taxes.
Remember, every situation is different. So make sure to talk to tax and accounting experts before making any changes to your business infrastructure.
3. No More State Income Tax
State income taxes can take a huge bite out of your earnings.
The above table is California’s state income tax brackets in 2023. If you make $700,000, you have to pay 12% of that to the state. Plus another 37% to the federal government.
Meaning you’re paying just about 50% of your income to the government.
Imagine giving away more of your income than you get to retain for you and your family…
Indiana’s state income taxes weren’t outrageous like California’s or New York’s. But I even so moved my residence to Florida, a state with zero income tax.
There are currently nine U.S. states with no income tax:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
By getting residency in FL, I eliminated my state income tax burden and saved even more money. It's like giving yourself a nice little raise without doing any extra work!
So these 3 relatively easy changes to my business and life …
- filing for FEIE
- switching from an LLC to an S-corp
- ditching state income tax
… helped me reduce my tax burden to 12.1% of my income and save thousands of dollars.
Get the most bang for your buck. Pay less in tax and use that money to invest in things you truly enjoy doing, not shitty roads.
And also remember, I'm just a guy who's been through the process and wanted to share my experience. Consult with a tax expert before making any changes to your financial situation lol
