The US Corporate tax rate was substantially lowered in 2018. In the world of international business, it was a critical move if the US wanted to stay competitive. Prior to lowering the rate, the US had one of the highest corporate tax rates of all industrial nations. So, while it may look like it was merely a move to appease the wealthy, it was actually a move to keep the US competitive in the business world. Otherwise multi-national businesses would simply move their operations to other countries.
Now, with a lower corporate rate and the big American consumer market, a US corporation is even more desirable.
That is, unless you’re an American taxpayer. As an American, you have to pay taxes on worldwide income. If you make money in another country, you have to pay tax, as long as you’re an American resident.
Corporations got their break with the Trump Tax Plan. (By the way, Americans who use US Corporations can take advantage of the same tax breaks.)
It’s the American individual who pays the taxes.
Or rather, it’s the American taxpayer who thinks inside the box. In this case, the box are the boundaries of the US. If you live in the US, you’ll pay US tax. You’ll pay less if you have a business and likely less even still if you have a corporation. For that to work, though, you need a strategy that takes into account your current income, type of income, goals, spending habits and plans for the future. We can help you with that, if you’re interested.
It used to be that US business owners could send some of their income off to foreign, offshore businesses. If you had a business deduction for your US business, it would be income for the foreign company. The trick was to have a business purpose so it truly was a business deduction and to pick a foreign country for your foreign company that had little to no tax.
That was then.
Foreign corporate planning like that doesn’t work anymore. We now have something called a GILTI tax.
GILTI (global intangible low-taxed income) is a newly-defined category of foreign income added to corporate taxable income each year. Basically, it is a tax on earnings that exceed a 10 percent return on a company’s invested foreign assets. GILTI is subject to a worldwide minimum tax of between 10.5 and 13.125 percent on an annual basis.
In essence, it means that you pay taxes to the US no matter what.
That is unless you actually do think outside the box. Not just think outside the box, but actually live and work outside the box. In this case, that means leaving outside the US.
This is one of the fastest growing segments of entrepreneurs, the digital nomad or location independent worker. A digital nomad or location independent worker works online. They can live anywhere and make their money basically anywhere.
If that “anywhere” is a foreign location, then there is a huge tax break possible. It’s called the foreign earned income tax exclusion. For this next year, it’s $107,600. In other words, if you made money online and lived outside the country (according to the IRS parameters) you could make up to $107,600 and not pay any US taxes .
If you’re married and work together, you can make $215,200 in total and not pay US taxes. Plus, you can take a housing allowance. That’s a deduction for living expenses against your income.
You will have taxes subject to a foreign country, so the strategy is to pick a country with low to no taxes.
This is obviously a very broad brush definition of how the process works. You have to prove you are a foreign resident by either passing the physical presence test or the bonafide residence test. You need to determine where you actually are working (which country) and file the proper tax returns both with the foreign government and the IRS.
Make sure your tax preparer is familiar with foreign tax exclusions. The form you use to claim the exclusion, Form 2555, can be tricky if you’re not familiar with it.
Want to pay less tax? Give us a call. We may have a tax strategy idea that could save you thousands (or more). Call Richard at 888-592-4769.