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Tom Azzara lives and works in sunny, tax free Nassau, Bahamas. His company, New Providence Estate Planners, Ltd. publishes a newsletter, The Tax Haven Reporter, on tax havens and financial planning.  In 1999, Mr. Azzara also published a well known book on tax havens of the world called, Tax Havens of the World available through Amazon.Com. The book has received multitudes of rave reviews worldwide. Additional Resources Azzara website  Links to Tax Havens  Investing Offshore View the Book

The amount one can exclude increases to $80,000 for fiscal year 2,002. for 2001 the amount excludable is $78,000.

Here's what my IRS 2,000 (1040) Booklet says on page 15 (Chapter 4): Source of Earned Income: "The source of the earned income is the place where you perform the services for which you receive the income. Foreign earned income is income you receive for performing "personal services in a foreign country. Where or how you are paid has no effect on the source of the income. 

For example, income you receive for work done in France is income from foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City." - verbatim - IRS.

For Example: Anguilla Real Estate broker company X received $1,000,000 in annual commissions in 2,002. John and Joan Dakota (now living in Nassau, Bahamas or GeorgeTown, Cayman Islands) are the owners of Anguilla Real Estate broker company X - a company that has no offices inside the US.

John and Joan of Nassau could receive up to $160,000 in salary from the offshore IBC, as employees, and they would only have to file a IRS Form 2555 with their 1040 tax return.

This "exclusion" is called the Foreign Earned Income Exclusion - and can be taken annually; but if you don't file Form 2555 with your 1040, you don't get the EXCLUSION!

Anguilla Real Estate broker company X would owe no taxes on its $1,000,000 revenues, so long as it does not "do business inside the US". Anguilla has no income tax system. Furthermore, countries like Anguilla, Cayman and the Bahamas do not tax capital gains, dividends, royalties or interest. There is no estate tax duty in these places either, and no gift taxes.

Furthermore, with a little tax planning, the corporate income accruing to the Anguilla company from "services performed outside the US" would not ordinarily be "Foreign Personal Holding Company Income" in the hands of the shareholders. Using a foreign trust to hold the shares of the foreign company from the very beginning can often help avoid some of the other pitfalls in the US Tax Code – i.e.,  that might apply to John and Joan Dakota (as shareholders of Anguilla company X).
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Incidentally, US taxpayers John and Joan Dakota (above) would owe taxes on their capital gains and interest income, as these incomes are not considered "Foreign Earned Income" under the US Tax Code. That's the only real downside to this "loophole".

For IRS information about Foreign Earned Income and Housing Exclusion - Deduction Click here

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Over 20 tax havens are covered in the book 'Tax Havens Of The World' including, the Bahamas, Caymans, Switzerland, Vanuatu, Bermuda, Barbados, Hong Kong, Singapore, Channel Islands & the Isle of Man (famous havens used by modern British businessmen), Campione, Panama, Anguilla, Antigua, Liberia, Gibraltar, Cyprus (shipping tax havens), and little Nauru (3rd smallest nation in the world), and many more. Also covered are the Exempt Companies, the International Business Corporation (IBC), the Foreign Trust, the Foreign Personal Holding Company, Exempt Shipping Companies, Exempt Offshore Banks, Exporting U.S. products tax free, the important U.S. Income Tax Treaties, and Australian & Canadian tax havens. American planners must learn how to avoid the USA's "Controlled Foreign Corporation" (CFC) legislation. To order this book directly from Amazon.com - Click Here -