It sounds tempting. Move your business to another country and avoid US taxes. But, is it legal?<\/p>\n
Like so many other instances in tax planning, the real answer is \u201cit depends.\u201d You may have heard that US citizens are taxed on worldwide income. Most of the time that is true. The default answer for \u201cIs it subject to US tax?\u201d is usually \u201cyes.\u201d There are two main exceptions that may be applicable for you if you have an online business.<\/p>\n
First, if you live outside the US for most of the year, you can exclude a big part of your income. This is known as the foreign income exclusion.<\/p>\n
Second, if you have income from a business that is owned by a foreign entity and the income is not brought back to the US, you may be able to avoid US taxes on that foreign income.<\/p>\n
Let\u2019s start with the foreign income exclusion. In order for this to apply you need a couple of things:<\/p>\n
(1) You must be a qualified foreign income recipient<\/strong>. That means one of the following three is true:<\/p>\n (2) You must have foreign earned income<\/strong>. You can qualify with this either as an employee of a foreign company or by being self-employed.<\/p>\n If you\u2019ve got an online business, it\u2019s pretty easy to qualify for this as long as you are out of the country for the required number of days.<\/p>\n The foreign income exclusion amount for 2013 is $97,600 per person. If you\u2019re married, both working and file jointly, you can exclude up to a total of $195,200.<\/p>\n Plus, you can get a qualified housing exemption for up to 30% of the foreign income exclusion. That is $29,280! The actual amount varies based on where your foreign home is and the number of qualifying days you actually have.<\/p>\n One of the biggest advantages for online business owners is that you can make money anywhere. And if you set up shop in another country, you may slash your taxes at the same time.<\/p>\n There are also some strategies you can use to maximize the deduction if you qualify as a foreign income recipient under the 3rd<\/sup> definition. Using this definition, you select any consecutive 12 month period for the requisite 330 days. So, you may have multiple calendar, tax years may be involved. If you have just a few qualifying periods, you may need to pro-rate the amount of the exclusion. Make sure your tax preparer is up to date on the special advantages for the foreign income exclusion. You could save big-time on taxes!<\/p>\n In the next article, we\u2019ll look at how to strategically use the second income tax exclusion, foreign entity exclusion, to pay little to no taxes.<\/p>\n\n