7 Ways to Save on Taxes Abroad

As the US tax season gets going, I thought it would be useful to say a few words about optimizing your taxes through global diversification. After all, it’s one of the biggest draws of life abroad.

First, the bad news: If you’re American, and you’re living on retirement income, there’s no way to avoid paying US taxes, no matter where in the world you live. The US is alone amongst advanced countries in levying taxes based on your citizenship rather than where you live. If you have money in a traditional 401(k) or IRA, and you haven’t paid tax on it yet, Uncle Sam wants his cut.

The news gets better from there. Consider some scenarios where moving abroad can reduce your taxes:

You’re a US retiree, and you move to a country with a territorial tax system. Countries like Panama, Costa Rica, Paraguay, El Salvador and Uruguay exempt foreign-source income from local taxes. You’ll still pay the IRS, and you’ll still pay things like sales tax or property tax, but not local income tax.

You’re a US retiree, living primarily on Social Security, and you move to a country with a reciprocal tax treaty with the United States. Countries like Canada, Germany, Ireland, Italy, and the United Kingdom (amongst others), exempt Social Security income from local taxes. Again, you’ll still pay the IRS.

You move to Italy or Greece and qualify for a 7% flat tax on foreign-source income. Those two countries have special tax regimes that impose a flat tax rate of 7% for 10 years, in the case of Italy, and 15 years, in the case of Greece. If you’re already paying tax on your US retirement income above 7%, that means you won’t owe anything in local income tax.

You convert some or all your traditional retirement funds into a Roth IRA by paying taxes on the transfer up front. Since Roth IRAS are “post-tax,” some countries (Germany and the UK, for example) regard them as savings, and exempt withdrawals from tax.

You move to a country where only remitted income is taxed, not your global income. A few countries only tax foreign income brought into the country, not foreign-source income that stays abroad. They include Ireland, Malta, Malaysia, the Philippines, and Thailand.

You move income-producing assets into a trust created in a country that doesn’t tax trust incomes. This is more complicated, but it is possible to vest ownership of real estate, businesses, brokerage accounts, and any other income-producing assets into a trust. If that trust is in a country that doesn’t tax trust income like Nevis or the Cook Islands, you’ll only pay tax on distributions from the trust to you.

You create an offshore tax-free trust, create a limited liability company under the trust to manage your global assets, and manage them yourself. A foreign trust is entitled to hire anyone that likes to perform asset management functions. Your foreign trust can hire you to manage the LLC, which holds all of its assets, and pay you a salary for it. If you establish tax domicile in a country like Panama or Costa Rica that doesn’t tax foreign-source income, you can avoid paying tax there. And if you do the work of managing that LLC from outside the US, you can claim the IRS’s Foreign Earned Income Exclusion for up to $260,000 for a couple. If you get this one right, you can avoid paying income tax altogether.

Some of these strategies are simple, while others require some sophisticated design and implementation. But all of them are possible… as long as you’ve thought about it beforehand.