{"id":26544,"date":"2019-11-06T08:46:18","date_gmt":"2019-11-06T13:46:18","guid":{"rendered":"https:\/\/www.escapeartist.com\/?p=26544"},"modified":"2021-03-01T13:28:52","modified_gmt":"2021-03-01T18:28:52","slug":"guide-to-foreign-tax-credit-foreign-tax-treaties-and-foreign-housing-exclusion","status":"publish","type":"post","link":"https:\/\/www.escapeartist.com\/blog\/guide-to-foreign-tax-credit-foreign-tax-treaties-and-foreign-housing-exclusion\/","title":{"rendered":"Guide to Foreign Tax Credit, Foreign Tax Treaties and Foreign Housing Exclusion"},"content":{"rendered":"
Tax exclusion and tax credits are the gateways to long-term financial stability. As you go up to higher income brackets, you\u2019ll be expected to pay higher taxes and take on greater financial burdens. Scandinavian countries and much of the developed world charge an average of <\/span>23% income tax rates<\/span><\/a> across the population. As someone who makes $1,000,000 a year, you\u2019d have to pay $250,000 in taxes to the government; a quarter of your annual income. Although $250,000 may not seem like much, if you project tax payments across years and account for increasing incomes, taxes can really add up.\u00a0<\/span><\/p>\n With regard to your long-term financial stability, you should devise a tax strategy that minimizes tax payments. Tax credits, foreign tax treaties <\/a>and foreign housing exclusions <\/a>tools to reduce tax burdens. Diversifying your holdings, shifting businesses overseas and investing in foreign property can significantly bring down tax payments. As you learn how to capitalize on tax differences across borders, you\u2019ll save hundreds of thousands of dollars which will add to your finances in the long run.<\/span><\/p>\n On a personal level, I have always been <\/span>skeptical<\/span><\/a> of high taxation. I think governments are oppressive when they charge taxes. You\u2019ve spent significant time and energy to accumulate a certain amount of wealth and to have the government take a chunk out is unconstitutional. Governments present rationales like income redistribution and income equality to justify high taxation, but I hardly see this happening. Besides the failure of income redistribution through taxation, I don\u2019t see why economic inequality is your problem. It\u2019s a failure of state institutions that inequities sprout up in the first place and you don\u2019t need to punish people for it, instead, the state needs to reflect on their failures to overcome.\u00a0<\/span><\/p>\n When the state fails to protect your rights and acts contrary to your personal beliefs, it\u2019s time to begin looking out for yourself. Despite the failures of the state, it isn\u2019t all bad; you still have constitutional rights to safeguard your wealth from taxation. The IRA has developed tax exclusion and tax credit policies that allow you to save up on tax payments. Additionally, foreign tax treaties present tax-saving potentials which can effectively supplement your tax strategies. I thought it would be best if I present these opportunities in simpler terms because otherwise, the law is too convoluted to understand on its own.\u00a0<\/span><\/p>\n <\/p>\n When people come to me for advice, they\u2019re often worried that taking advantage of tax avoidance strategies is illegal. I want to <\/span>reiterate<\/span><\/a> that tax <\/span>evasion<\/i><\/b> is illegal but tax <\/span>avoidance<\/i><\/b> is absolutely above board.<\/span><\/p>\n <\/p>\n Tax avoidance<\/a> is the use of legal means to minimize your tax burdens. The real problem is a lack of awareness of avenues to save up on tax payments. The United States government offers people various tax rebate and tax credit opportunities, which it also hides from them.\u00a0<\/span><\/p>\n Information about tax rebates and credits should be common knowledge to give people all the chances to preserve their wealth, but sadly only a tax specialist can tell you of these. <\/span><\/p>\n In the United States, you get tax exclusions for home maintenance, property investments, IRAs and many other financial instruments. These aren\u2019t significant, but these give you a fighting chance against a state that would flush your money down the drain. I just feel that if more people knew about domestic tax avoidance strategies, it\u2019s a short step from there to understanding foreign tax avoidance strategies also.<\/span><\/p>\n It\u2019s unfortunate that tax<\/a> avoidance is privileged information that\u2019s restricted to certain obscure professions. The lack of knowledge on tax-saving strategies is a sign of how the state wants to impose higher taxes to prevent you from becoming financially successful. Be that as it may, you should know that the <\/span>2018 tax reforms<\/span><\/a> were the single greatest boon to the American wage earner. With lower tax rates, increases in tax deductions and dependent credits our society can flourish.\u00a0<\/span><\/p>\n Since options like the Tax Reforms are designed and advocated by the state, these can\u2019t ever be illegal (the immorality of charging taxes in the first place is a different conversation though). You should take advantage of any and all opportunities presented by the state to protect yourself. You are responsible for your long-term financial well being and you should learn everything there is to know about tax exclusion strategies. Wherever you\u2019re stuck, people like me are always an email away<\/a>.\u00a0<\/span><\/p>\n <\/p>\n Tax avoidance requires you to declare your entire income and assets to the state, then use the law to reduce the tax burden. It isn\u2019t illegal because the state knows where your money comes from and you\u2019re using prescribed laws to protect yourself. <\/span>Tax evasion<\/span><\/a>, on the other hand, involves hiding your income from the state and is, therefore, a form of lying. If you don\u2019t document your income and file tax returns, all your income is technically unlawful because the state can\u2019t regulate it.\u00a0<\/span><\/p>\n When people hide their incomes, of course, they\u2019ll need to pay fewer taxes because the government doesn\u2019t even know that the income exists. This is an illegal form of tax avoidance because it uses unlawful means to reduce tax burdens. The real difference between tax evasion and tax avoidance comes down to the ways in which you minimize tax payments.\u00a0<\/span><\/p>\n Here is a great interview with Mark Nestmann – Why Americans Shouldn’t Have Negative Views Towards Offshore Investing<\/a><\/p>\n <\/p>\n The United States government currently enforces multiple tax treaties with countries around the world. Tax treaties are agreements between multiple countries to reduce the incidence of double taxation on taxes paid by the natives of either country. If you\u2019re working in Panama for example and getting paid by a local company, you may be required to pay income taxes to the US <\/span>and <\/span><\/i>the Panamanian governments. You would wonder why you should pay income tax twice on the same income and this double income tax is eliminated between <\/span>tax treaties<\/span><\/a>.\u00a0<\/span><\/p>\n Suppose that you shift your business to an overseas location that the US is in a tax treaty with and you get your income from this business. If you pay a lower income tax in the offshore location, the tax treaty will exclude your income from any further income tax payment. With the tax benefits offered by the tax treaty, you will be left with greater disposable income at the end of the year.\u00a0<\/span><\/p>\n If you are shrewd with your business and land ownership, by investing in foreign countries, you will save huge sums of money through tax treaties. The benefits from tax treaties are guaranteed by the state and you won\u2019t have to worry about engaging in illegal activity at all.<\/span><\/p>\n <\/p>\n The United States government currently has enforceable tax treaties with countries from across the entire world. The <\/span>list of tax treaties<\/span> includes Scandinavia, Asia, Europe <\/span>and <\/span><\/i>South America. The terms of all these treaties reduce tax rates on corporations and individuals alike to protect them from double taxation and create better tax terms for each. Some of these treaties completely exclude people from paying taxes and others offer tax credits for them.\u00a0<\/span><\/p>\n Even if you\u2019re working abroad, you\u2019re required to pay taxes to the United States government <\/a>for any income earned abroad. These tax treaties eliminate the need to pay taxes to the government but you\u2019ll still have to show your income to the state. Any resident from the United States or a treaty resident shall enjoy tax benefits through the tax treaties.\u00a0\u00a0<\/span><\/p>\n The <\/span>benefits<\/span><\/a> you can enjoy from a tax treaty include:\u00a0<\/span><\/p>\n Different taxes apply to individuals and corporations. You should not forget to combine the different forms of tax exclusions and deductions with tax credits to minimize your tax liability. There are ways that you can reduce income taxes by transferring property ownership to your personal corporations. If you move to countries with lower tax rates and which have tax treaties with the US, you can significantly reduce your taxing amounts. When you use all available tax laws to your advantage, you can preserve a large percentage of your overall income.<\/span><\/p>\n I will describe the different tax tools at your disposal in detail and also present ways to use them in the most effective ways. By the end of this article, you should fully understand how foreign tax credits and exclusions can help you preserve your finances.<\/span><\/p>\n <\/p>\n Before we can understand how foreign tax credits work, it\u2019s important to know what tax credits are.\u00a0 When taxes are paid, you usually get a tax rebate which is essentially a refund on extra tax payments. The United States government offers people tax credits, rather than tax rebates, and deducts the amount of total payable taxes for the coming year. For example, if you had to pay a total tax of $100,000 and you qualify for a tax payment worth $1000, then you will have to pay $1000 less the total amount of taxes accumulated for the next year. If your tax for next year also amounts to $100,000, you will only have to pay $99,000 in the next year.\u00a0<\/span><\/p>\n There are two kinds of <\/span>tax credits<\/span><\/a> people can avail; refundable and non-refundable credits.\u00a0<\/span><\/p>\n <\/p>\n Assume that you qualify for a tax credit of $1,000 during any year and your total taxes are $900. In situations where your tax credits exceed the amount of payable taxes, the government will carry forward the tax credit to the next year.\u00a0 When your tax credit is carried forward, something like this will happen:\u00a0<\/span><\/p>\n Let\u2019s say in the next year you have to pay $900 again and you have $800 as tax credits. The United States government will add the previous years remaining tax credit to the current year\u2019s tax credit to further reduce the taxes you have to pay. So, if the current year tax credits are $800, the government will add the $100 from the previous year to the current year\u2019s credit to make a total of $900 in tax credits. When the government has added last year\u2019s credits to this year\u2019s, your total tax payments will go down to $0.\u00a0<\/span><\/p>\n Alternatively, it is also possible that the government sends you a check for the amount of credits that are leftover. In a situation where you have $1000 in tax credit and you only had to pay $900 in tax, then you will receive a check for $100.<\/span><\/p>\n <\/p>\n As opposed to refundable tax credits<\/a>, you don\u2019t get paid if you have credits in excess of your tax payments. If you qualify for a non-refundable tax credit, then with $1000 in credits and $900 worth of tax payments, neither is the $100 carried forward nor are these refunded as checks. Even though you don\u2019t get paid for these extra tax credits, you should still avail non-refundable tax credits because they still reduce your tax payments.\u00a0<\/span><\/p>\n <\/p>\n Foreign tax credits<\/span><\/a> are applied exclusively to any income (investment or otherwise) earned in foreign lands. Foreign tax credits also include refundable and non-refundable credits, which work the same way as described above. If you earn from countries that have a tax treaty with the US, you won\u2019t have to pay any extra taxes to the United States government.\u00a0<\/span><\/p>\n As a citizen of the United States, as a general rule, you\u2019re required to pay taxes on <\/span>all <\/span><\/i>incomes earned whether domestic or foreign. Foreign tax credits are deductibles in federal income tax amounts if you\u2019ve already made payments to the government of the country you got paid in. Foreign tax treaties enforce higher tax credits between the US and the other party in the treaty, while you might not qualify for a tax credit if there is no tax treaty in effect.<\/span><\/p>\n <\/p>\n Owning property in foreign lands <\/span>qualifies<\/span><\/a> you for either foreign housing exclusions or foreign housing deductions.\u00a0<\/span><\/p>\n <\/p>\n If you\u2019re self-employed in a foreign land and own a home, then you qualify for a tax deduction from your total income based on the amount of money spent on housing. This doesn\u2019t include the money spent on food or money spent on luxury goods. Since you\u2019ll have to pay property tax, pay rent and possibly other forms of taxes, US federal taxes become a form of double taxation. To prevent double taxation, the government will deduct certain tax amounts from your overall tax payments to reduce your tax liability.<\/span><\/p>\n <\/p>\n You\u2019ll qualify for tax exclusion if your housing is paid for by an employer. If you\u2019re working for an employer in a foreign land, they might make housing payments for you. Your employer will make tax payments, rent payments and any other tax-relevant to your housing. Additionally, the employer will deduct a certain amount from your salary to pay for any taxes or payments incurred in funding your housing.\u00a0<\/span><\/p>\n The foreign housing tax exclusion essentially excludes that amount being deducted by your employer for your housing from your taxable income. As the taxable income amounts become smaller, your tax liabilities also get smaller. When reporting taxable income to the US government, you should not report the amount of money your employer deducts from your income for housing.<\/span><\/p>\n <\/p>\nTax Avoidance And Tax Evasion<\/b><\/h2>\n
Tax Avoidance<\/b><\/h3>\n
Tax Evasion<\/b><\/h3>\n
How Do Foreign Tax Treaties And Credits Come In?<\/b><\/h2>\n
Understanding Foreign Tax Treaties<\/b><\/h2>\n
\n
Understanding Tax Credits<\/b><\/h2>\n
Refundable Tax Credits<\/b><\/h3>\n
Non-Refundable Tax Credits<\/b><\/h3>\n
How Do Foreign Tax Credits Work?\u00a0<\/b><\/h2>\n
What Are Foreign Housing Exclusions?<\/b><\/h2>\n
Applying For Tax Deductions<\/b><\/h2>\n
Applying For Tax Exclusions<\/b><\/h2>\n
Making The Most Of Foreign Housing Tax Exclusions<\/b><\/h2>\n