The Completely Legal Way to Slash Your Tax Bill

I’ve Been Using This Strategy Successfully for Years…

The tax man cameth. And he tooketh his ounce of flesh.

You’ll notice I didn’t say “pound of flesh.” We’ll get to that.

I’ve just recently filed and paid my taxes in two countries—America, where I was born, and the Czech Republic, where I live.

That I owe Uncle Sam is a bit frustrating in that he provides me with no real services, given that I don’t live in the States, haven’t for five years, and I impose no real costs on the system. America is one of only two countries in the world that impose taxes based on citizenship rather than residence. The other is dictatorial Eritrea—so at least we’re in good company… right?

But I get it.

Uncle Sam is desperate for cash. If I were him and I’d run up history’s largest credit card bill, I’d probably impose unfair rules, too (such as Biden’s new idea to tax unrealized capital gains, one of the most egregiously stupid taxation ideas I’ve ever heard).

And to a degree I will ultimately tap back into the U.S. system on a limited basis when I start drawing my Social Security one day. So, I guess there’s that…

Nevertheless, lots of expat groups regularly complain about America’s taxation-by-citizenship arrangement. And while there is more than a touch of unfairness to it, Uncle Sam at least acknowledges that and offers up a lucrative form of mitigation: the Foreign Earned Income Exclusion, or FEIE.

For those of us who live and work abroad, the FEIE is a little piece of taxation nirvana.

By way of this IRS rule, I could write off for 2022 as much as $112,000 in earned income—meaning I pay 0% personal income tax on the first $112,000 I earn. Anything after that is taxed at my marginal rate. (Basically, if you earn $130,000, for instance, you’d pay taxes on $18,000 at a 24% rate.)

For tax year 2023, which I’ll file next spring, the rate FEIE limit jumps to $120,000. Note: This is earned income, not passive income like Social Security, dividends, or rental income.

The IRS also allows expats to claim housing credits as well, which can also knock off an additional few hundred or even a few thousand in taxes due.

To be clear, as a self-employed digital nomad I still owe self-employment taxes to the IRS. But even with that, my overall tax rate is a fraction of what it was when I was self-employed back in the States.

That’s why I wrote up top that the taxman tooketh his ounce of flesh instead of the pounds he’d otherwise claim if I lived stateside.

Because I can prove I’m a bona fide resident of the Czech Republic, my overall tax obligations are a good bit lighter. (As a freelancer in Prague, the first 60% of my income is written off as “costs” for running my business, and on the remaining 40% I pay a flat 18% rate, meaning my effective Czech tax rate is 7.2%.)

Combine all of that with the lower cost of living in Europe, and my lifestyle is actually superior to what it was when I called America home. I’m basing that assertion not just on my costs of living in Southern California, but also the costs I faced living in southern Louisiana.

This, to me, is one of the strongest arguments for moving abroad to work, assuming that option is viable.

As you might know, I moved abroad after a divorce, and after losing a job that then sent me back to (an expensive) university to pursue a new degree. My finances were wrecked.

Relocating to Europe offered me a Mulligan—a chance at a do-over so that I could rebuild my finances and prepare better for retirement that is approaching way too damn quickly.

And I’ve done that.

My savings account is much more robust. I’ve bulked up my IRAs with annual contributions, which I’d not been able to do for a few years. And over the five years I’ve now lived in Europe, I’ve been able to put six figures into crypto (which I’m convinced has a seven-figure future).

Next up, a move to Portugal, which will bump up my lifestyle a bit more. I’m already working on a tax plan there that could reduce my tax obligations even more. (If you’d like to learn more about the legal ways you can reduce or even eliminate your tax bill, International Living’s Chief Global Diversification Expert Ted Baumann is hosting an online event called How to Pay Zero Taxes, in which he’ll share the strategy he used to pay 0% in tax to the IRS for 25 years. Details here…)

If you’re looking for a way to scale up your lifestyle while at the same time bolstering your ability to bulk up your savings before retirement, living and working abroad and taking advantage of the Foreign Earned Income Exclusion is one of the best opportunities that exists today.