How to (Legally) Pay Less Than 15% Tax

Tax evasion is illegal. But tax avoidance? That’s totally legal and an Olympic sport the world over. And it seems I just nailed the landing on an avoidance strategy that means I’ll soon be paying a global tax rate of less than 15% per year… and probably closer to 10% or 12%.

I call it the “Ultimate Tax Hack for Americans.”

To be clear, this works only if you’re an expat and self-employed. But the fact that this tax strategy exists at all is reason enough to consider living and working as a freelancer overseas—if you have the ability to do so.

It’s a feasible way to supercharge your savings before retirement.

Consider the possibilities…

Say you earn $100,000 a year. Between state, federal, and local taxes in the U.S., you’re going to lose 25% to 40% of your income. But with this strategy, you could potentially cut your tax obligation by more than half.

That’s thousands of extra dollars every year to feather your nest egg. In fact, you’ll likely pocket even more since moving overseas will almost certainly reduce your cost of living as well (unless you alight in a seriously expensive destination like London, Oslo, or Zurich).

The “hack” is structured around two tax truths:

1. As an American reporting earned income overseas (not passive income), you’re eligible for the Foreign Earned Income Exclusion, or FEIE. This is a part of the U.S. tax code that allows Americans who can prove they’re living and working abroad to exclude up to $120,000 in earned income for 2023. (The amount rises regularly with inflation.)

2. Certain countries impose no taxes on personal income, or on income that flows through a corporate structure such as a limited liability company (LLC).

Combine those two facts into a tax strategy, and you can create a seriously robust tax-avoidance plan.

I know this because I’m currently in the process of pursuing this strategy as part of my pending move from Prague to Portugal…

The Tax Benefits of Expat Life

To qualify for the FEIE, you need tax residency outside the U.S. That means you have to prove to the IRS that you’re either a bona fide resident of a foreign country, or that you’re living and working outside the U.S. for more than 330 days per year.

The bona fide residence test would apply to those, like me, who live full-time in a foreign country. The 330-days test would apply to, say, digital nomads who are bopping from country to country every few months.

Meet either of those residence tests and you can strike your first $120,000 in income from your U.S. personal tax return.

You will, however, still owe Uncle Sam 15.3% for self-employed withholding taxes. Here, you’re basically paying both sides of the Social Security and Medicare taxes. In a traditional job, you’re only paying half that amount while your employer pays the other half.

But the 15.3% you pay as a self-employed worker is based on your net income, not the gross. So, the amount of self-employment tax you owe is reduced by all your expenses throughout the year for office supplies, home-office costs, travel, and whatnot.

Thus, your effective tax rate after the FEIE benefit is much less than 15.3%. By gaining overseas tax residency, you can legally reduce your U.S. tax obligations to a fraction of what they would otherwise be if you lived year-round in the States.

But, to avail of this “ultimate tax hack,” you also need to eliminate your taxes abroad. That’s where judicious selection of a country to call home will make or break this strategy.

That’s why I’m moving to Portugal. It’s the first step in my three-step plan to dramatically slash my global tax bill…

Step 1: Move to a 0% Income Tax Jurisdiction

Several appealing foreign destinations offer Americans both a pathway to permanent residency and a 0% tax rate on personal income. The latter means you will owe your adopted country nothing on the income you earn, even as a tax resident of that country. The only tax obligation you’ll have, then, is to Uncle Sam.

Countries that offer this include Antigua and Barbuda, the Bahamas, Bermuda, the Cayman Islands, the United Arab Emirates, and Portugal (with a few caveats).

Costa Rica offers a 0% tax rate as well, but only to digital nomads and only for a maximum of two years. If you decide to live permanently in Costa Rica, then you will owe personal income taxes locally.

For me, Portugal makes the most sense because I want to remain in Europe.

Now, to be clear, Portugal does not technically offer a 0% income tax rate. However, the country does have the Non-Habitual Residence program, or NHR.

Under this tax scheme, new residents are eligible for beneficial tax treatment in Portugal that effectively halves the local tax rate to a flat 20% for the first 10 years. But—and this is where the magic happens—dividends under the NHR plan are taxed at 0% for that first decade.

Thus, if your salary arrives as a dividend payment, you create a 0% tax obligation in Portugal. Moreover, because Portugal classifies dividends as the byproduct of capital-at-work rather than employment, you don’t owe the Portuguese version of social taxes for healthcare and social security.

I’ve had conversations with a tax professional in the U.S., as well as a tax lawyer in Portugal, and they both agree that this plan will work as advertised (though if you want to pursue a similar strategy, you should, of course, consult a tax expert about your own specific situation).

In short, through this approach, you can create a lifestyle in which you’re living in Europe, yet paying a global tax rate well under 15%. Kind of a dream situation, really.

Question is: How do you structure your salary as a dividend payment?

The answer lies in a corporate structure such as an LLC.

Step 2: Set Up an LLC

With this strategy, the cash flow process looks like this: Your freelance salary goes to a bank account tied to an LLC, and that LLC bank account then pays you a monthly dividend equal to your salary.

In Portuguese terms, you’ve turned taxable earned income into dividend income that’s not taxed because of the NHR program.

Back home in the U.S., the LLC is all but meaningless, so it has no impact on your strategy. If a single person owns an LLC, the IRS looks at that LLC as a “disregarded entity,” meaning that for tax “A feasible way to supercharge retirement savings.” purposes, it doesn’t exist.

The money that flows into the LLC is deemed your income, which is pretty darn wonderful as an expat because it means that you remain fully eligible to claim the Foreign Earned Income Exclusion.

To accomplish all this, you’ll need an LLC of course.

I spent weeks searching for the right location to set up one. I talked to LLC experts in the U.S. and the Caribbean, as well as lawyers in the Isle of Man and Cyprus.

If you want an LLC that offers some of the strongest legal and privacy protections in the world, you should go with an LLC on the Caribbean island of Nevis. That will cost you, though.

Starting the LLC there will set you back about $2,500, and you’ll pay about $1,200 per year in administrative and filing fees. Frankly, though, that’s not too bad, given the strength of a Nevis LLC.

But I’m not necessarily looking to load up my LLC with assets that I want to protect from creditors. I just want a simple corporate structure through which I can run my income. For that, an LLC in the U.S. is sufficient.

Several U.S. states have strong LLC laws, particularly Wyoming, Nevada, and Delaware. They each have their pros and cons, so you have to determine which one is best for your situation. The cost, I can tell you, is substantially cheaper than Nevis.

I chose Wyoming. Setup fees run about $250 or less, depending on the complexity of your needs. You’ll also have annual admin and filing fees that are generally up to $100. The firm you use to set up your LLC should be able to process those filings for you annually.

Step 3: Open a Bank Account for the LLC

For my particular situation, I decided that the bank account associated with my LLC should be based offshore. I see two benefits with this…

First, if anyone goes after you for whatever reason, they have to figure out not only where your LLC is located, but also where the associated bank account is based. And if that bank account is overseas, they now have an entirely different and more challenging barrel of legal fish to sort through.

Second, in my case, my primary income arrives in euro. Since most U.S. banks do not operate in euro, I needed a bank that has no problems handling euro deposits.

Europe uses the so-called SEPA system that allows consumers and businesses to zip money around with what’s known as an IBAN number. This is similar to a bank account number and ABA routing number all rolled into one. I wanted a bank that operates in SEPA since it can more easily transfer my LLC dividends into my personal Portuguese bank account.

In this age of the Foreign Account Tax Compliance Act, or FATCA, finding a foreign bank that will work with Americans can be a challenge (I wrote about the challenges of FATCA in the June issue here). However, you will find some in the Caribbean, the Isle of Man, Singapore, and elsewhere. Those jurisdictions are often amenable to business accounts tied to a corporate structure.

If you go through an agency that specifically helps you set up an LLC offshore, they will almost always offer a service that also helps you open a local bank account. Once you open your bank account, you’re all set.

So, there you have it… three (relatively) simple steps to legally reduce your taxes to well under 15%.

Of course, I can’t say how long this tax “hack” will stick around. Maybe Portuguese regulators shut down this dividend strategy tomorrow. Maybe it’ll sticks around for decades. Either way, I plan to use it for as long as I can to dramatically slash my global tax bill.