How I Slashed My Taxes

Once again, the calendar has rolled ‘round to that time of year Americans love to hate: Time to cleave off that pound of flesh Uncle Sam demands every year so that he can waste your money on bombs and $200 million ad campaigns for a (recently fired) border-protection chimp.

I just finished doing my taxes a few days ago—I owe a few thousand dollars. But I can’t complain too loudly because I got to write off the first $130,000 in personal income. And, well, who can complain about that?

Ultimately, that’s what today’s dispatch is about… but before we come to that, I want to talk about AI.

As I’ve done every year for a decade now, I completed my own taxes using an IRS partner website, freefillableforms.com. Prior to three or four years ago, I plugged all my numbers into a popular tax-prep software, but it annoyed me for reasons I won’t bother you with.

So, I started using that IRS-partner site.

For sure, it’s more hands-on than tax software. You’re responsible for some of the math, and for making sure that the number on Line 39 of Form XYZ is accurately transposed on Line 2 of Schedule 789.

That doesn’t really bother me, though. Over the years, it has given me a deeper understanding of how tax forms work. And it has forced me to be a better record keeper, which ultimately means reduced taxes.

But like I said, this is about AI.

Because artificial intelligence is so ubiquitous now, I turned to it several times when prepping my return this year. I wanted to make sure where certain expenses go relative to which lines on which forms. I wanted to know what legit deductions I might be overlooking in a particular category. Things like that.

And it’s crazy how helpful AI is.

I mean, you probably already know that. But I’ve not used AI for taxes before, so I was truly pleased at the depth of knowledge I was able to extract from the various AI engines I used. I double checked things along the way by actually reading the IRS instructions attached to a particular schedule or form, just to make sure AI wasn’t leading me down some path to tax prison. Turns out AI was right every time.

Granted, my taxes are not prone to any nuanced reading of tax law that might befuddle AI. And they’re not especially complex, given that as an independent contractor all my income flows through an LLC, which in turn just rolls up to my Form 1040. Still, the takeaway here is that AI at this stage of the game is a pretty darn good tax-research assistant that markedly boosted my efficiency in completing the variety of tax forms I needed to fill out.

Last year, I needed a couple of weeks to read through instructions as I completed each form to make sure I was doing this, that, and other things properly. I was going back and forth between different forms and different instructions. Tax prep isn’t terribly hard, just time-consuming.

This year, however, powered by AI I finished my taxes in just under a week.

I would have completed the task sooner—probably in three days—but my managing editor is a stickler about me actually doing real work, so I had to put aside my obligations to Uncle Sam whilst I focused on writing Field Notes and some stories for an upcoming issue of International Living (be on the lookout for a fabulously written cover story on Braga, Portugal soon).

Now, about that $130,000…

This is one of the joyous financial perks of working as an American expat.

We’re eligible for the Foreign Earned Income Exclusion—a perfectly legit IRS rule that allows expats who can prove they live and work abroad to write off the first $130,000 in personal income. Meaning: I don’t pay personal income taxes on the first $130k in income. The sum rises every year based on inflation. Back in 2018, my first full year living abroad, the exclusion was $103,900.

The math of this year’s exclusion means tax savings of $22,855, based on 2025 tax brackets.

As part of the exclusion, us working expats also benefit from a housing credit. The amount changes based on factors including income, where you live, and whatnot. But in my case, that was another credit exceeding $6,000 on this year’s tax return.

Ultimately, the Foreign Earned Income Exclusion is what has helped me rebuild my financial life abroad after navigating a divorce nearly a decade ago that sharply reduced my nest egg.

To be clear, the phrase to focus on is “working expats.”

Lots of retirees approach me at International Living conferences wanting to know how they too can benefit from the Foreign Earned Income Exclusion.

And the answer is: They can’t.

The reason is in the title: “earned income.”

You have to earn a paycheck, either as an employee working overseas for some company, or as an independent contractor/digital nomad/freelance whatever. Pension income, Social Security checks, rental income, annuity payments, dividends and interest… none of those count.

However, if you’re collecting those kinds of payouts but also working a side-hustle as, say, an online consultant from some hammock in Bali or a hacienda in Spain or wherever, that income is eligible for the exclusion.

Thus, the exclusion is a great way to bolster your lifestyle in retirement.

Pick up a side-hustle, use proof of that income to land a residence permit somewhere tied to a digital nomad scheme (lots of countries offer those these days), and then employ the Foreign Earned Income Exclusion to legally skip out on personal income taxes you’d otherwise owe… thereby increasing your spendable income.

You’ll still owe some self-employment taxes at 15.3%, but if you run your side-hustle through a one-person LLC, then you’ll have a host of legit write-offs that will also reduce your taxable income, thereby bulking up your spendable income even more.

So, this tax season, pay Uncle Sam (or claim a refund) and then get to work building a side-hustle that gives you access to a digital-nomad residence permit and a huge income exclusion—both of which will improve your standard of living.