My Personal Tax Secret…

You smell that? It’s braincells melting.

Tax season is upon us once again, and all over America, taxpayers are coming to grips with their obligation to pay the piper. The piper being Uncle Sam—a deeply indebted man desperate for every penny and quarter he can find buried in the couch cushions.

I spent nearly all of last weekend pulling together all my tax documents, as well as reading tax code and applying it to a do-it-yourself online tax-form site.

I’m determined to do my own taxes this year rather than rely on one of the tax-prep software applications…

I made that decision because the software I normally use (I won’t name it) says I owe $X to Uncle Sam.

But $X seems wildly out of proportion to my income and expenses this year, given a very expensive, cross-border move.

So I tried a different program, just to compare. And it came up with a figure that is less than half of $X. That seemed much more logical and consistent with my tax-paying history.

Still, given that the same data generated two different answers from two different tax programs, I figured the best thing to do is to read the tax code—or at least the parts pertinent to my life—and try to do my taxes myself.

I will say this: I hate taxes. But apparently they’re a necessary evil.

And I will say as well that I was surprised at how (relatively) easy it is to do your own taxes, even complex taxes, when you actually read the code.

Granted, the code reads like it’s written by a precocious 12-year-old with sloppy sentence construction who’s hyped up on Adderall and trying to impress a teacher with too many big words…

Still, if you take your time and read through the instructions, and you jump back and forth between the various forms, schedules, and worksheets, you begin to get a far deeper understanding of how the tax code works and how your income and expenses flow, particularly when you’re a freelancer living overseas and running all your income and expenses through an LLC.

What I learned is that the initial tax software I used is wrong. What I owe in taxes this year matches what Program #2 indicated.

Now, I should say here that the problem with Program #1 is quite likely me. It’s pulling in data from somewhere that I cannot figure out nor correct. And if I were able to correct that, then the tax situation would mirror what I and Program #2 have calculated.

But frankly, that’s neither here nor there. Because the real story here is that I did my own taxes this year… and my federal tax rate is just 8.8%

Yep, 8.8%.

That’s a legit number.

My taxes are so low because of how I’ve structured my income and because I live overseas.

Let’s address the overseas component first…

As an American earning an income abroad, I’m eligible for the Foreign Earned Income Exclusion, or FEIE.

For the 2023 tax year (the year for which I’m filing), this benefit allows me to exclude $120,000 of income from my personal taxes. Meaning: I pay a precisely 0% personal tax rate on the first $120,000 of income. (For the 2024 tax year, the limit is bumping up to $126,500. It goes up with inflation each year.)

I also benefit from an overseas housing credit. In my case, that was just over $13,000 for tax year 2023.

While I get to exclude all that money from my personal taxes, I do still owe self-employment taxes, since I am a self-employed writer.

However, because my income flows through an LLC that, in turn, pays me a monthly dividend, I get to write off all my expenses for travel, a home office, business supplies like my website, and such. That means the self-employment taxes I owe are calculated on income net of all my expenses.

I won’t bore you with the minutiae here.

I will simply say that the end result is that all-in tax rate of 8.8% that I owe to Uncle Sam.

Now, you might rightly think, “Ah, yes. But, El Jeffe, what about the taxes you owe to Portugal, where you now live? Portugal is a high-tax country, no?”

To which I reply: “Si, si. Very much is a high-tax country!”

However, I made it into the country’s nonhabitual resident (NHR) tax program before the government sunsetted that beloved regime at the end of 2023. Under the NHR program, I pay 0% taxes on dividend income that I earn abroad. And because my LLC is based in Wyoming and pays me a monthly dividend, I owe 0% taxes to Portugal… for 10 years.

Alas, those who’ve not yet applied for residency in Portugal can no longer benefit from the NHR program. (Though I would still pay attention to Portugal. The NHR brought billions and billions of dollars into Portugal, and I don’t think the government yet realizes the benefit it’s giving up. So, I’d bet Portugal will introduce a replacement some point soon that could look a lot like the NHR.)

Nevertheless, other lower-cost tax arrangements exist for Americans working abroad, and for retirees who retire abroad.

Italy’s so-called Lavoratori Impatriati tax regime, for instance, offers a way to exempt between 70% and 90% of income from taxes for as long as 10 years. That’s not a 0% rate, but it’s certainly a way to radically reduce your tax obligations in-country while pursuing the benefits of Uncle Sam’s FEIE tax rule.

Lots of these kinds of tax benefits exist in countries like Spain, Greece, Thailand, and elsewhere. You just have to go look for them.

If you’d like to pay a low-teens or even single-digit tax rate to the IRS… it’s entirely possible—with the right overseas move.