Should I live abroad to speed up my FIRE?

[tpac]

My SO and I started our own web business this year while globetrotting about 50% of the time. We're newish to the concept of early retirement, but have really dug in recently now that we’ve successfully hit our first year business income goals and we have our travel routines down. We’ve recently started considering spending most of our time (330+ days) outside of the US to make us eligible for the Foreign Earned Income Exclusion and minimize our tax burden and we're hoping to get some advice!

Financially our business brings in 60-80k/yr and we have 30-40k set aside for a downpayment on a home or other major investment / opportunity. Our only current investments are ~10k in retirement savings. Our only debts are ~50k of low interest student loans. Finally, we have some US exclusive nontaxed income opportunities (average ~20k / yr in cc cashback). If we gave up this opportunity by spending more time outside of the US (330+ days) then the time invested to generate that income could be put back into the business and those earnings in theory would be similarly untaxed due to the FEIE.

We believe that we’ve identified our two core options.

(1) Ramp travel to 330+ days this year while building our business, keeping our expenses low (primarily more China / SEAsia) and dividing our savings between investments we can draw on in ten years (or less) without tax penalty and roth i401k contributions for later on.

(2) Purchase a townhome or other property that would offer a decent airbnb / short term rental return (family will manage it for a small cut) and travel ~6 months / yr. Keep expenses low and tax advantaged savings high to keep us under 200% FPL for ACA subsidies, Saver's Credit, etc.. Plow cashback earnings into near term investments. Spend more time with family.

Thanks for any insight you might have!

 

[Whisper66]

Life is for living. I personally wouldn't feel like it was living to be traveling 330+ days a year. I'd prefer to spend the time with my family, even if it means extending my employed years. But that's just me. You and your SO should consider what would make you guys really happy and head down that path.

 

[tpac]

Life is for living. I personally wouldn't feel like it was living to be traveling 330+ days a year. I'd prefer to spend the time with my family, even if it means extending my employed years. But that's just me. You and your SO should consider what would make you guys really happy and head down that path.

The SO and I have talked about it and we could both be really happy either way. International travel is great and if bumping from 6 mos a year to 11 mos a year allows us to keep more of the money we earn then that's very interesting to us. We've had family meet us overseas too.

On the other hand the appeal of more family time, having a 'home' of sorts to come back to via the part time rental and more regular access to first world lifestyle perks like organic local produce here in the US definitely isn't lost on us either.

If one option is a dramatically better financial decision then we'd probably lean towards that option. Both seem eminently doable, but we're curious if there are any other positives / negatives that aren't immediately apparent to us.

 

[nun]

I see tow issues with this plan

To qualify for FEIE you must be a bona fide foreign resident. So have you thought about where you will become tax resident?

How have you set up your business? Is it a sole proprietorship in the US? To avoid stiff like FICA you'll have to register in another country or try to convince the IRS why you should be exempt from FICA if you can't prove foreign residency.

 

[Sunset]

How about moving your webserver rental to non-us county. Would help with the non-us based income argument.

 

[Dd852]

It is a non-trivial decision. I have lived outside of the us for most of my career and am currently outside during ER. It is the practical issues you need to think about:
1. Where will your tax home be? Even a lot of places with superficially low income tax get you in other ways - high rents, high cost of living, indirect taxes
2. Medical care and health insurance
3. Local bank accounts and reporting to the IRS - facta makes us citizens unwelcome customers in many places
4. Visa issues

All these can be overcome, and yeah I'm doing it now. But my advice would be don't do it for pure tax-avoidance reasons - you'll probably break even at best. Do it because you love culture X or love using language Y , or you found the perfect beach house or the greatest group of friends or the perfect opportunity to do consulting or ... But honestly to do it just to get the foreign income exclusion is probably not going to work out.


Sent from my iPad using Early Retirement Forum

 

[papadad111]

Don't forget that your income on said business (once a properly registered local legal entity is established) will most likely be taxed in the local jurisdiction that you choose base on their applicable tax laws and so avoiding tax entirely via FEIE is not likely.

The FEIE section 911 caps out at approx 80K. That includes any foreign earned income including certain company paid benefits .

You will need to domicile permanently per eyes of the IRS ( physical presence test) or will be subject to annual ACA compliance too - means expensive health insurance to maintain.

Your investment income will need to be claimed on US tax returns - it's not earned income so is taxable as a USA citizen.

Don't let the tail wag the dog. To come online and claim that you are going to choose to live abroad just in order to save a few bucks on taxes is a sign that you have not done your research adequately. You're missing some very big factors to consider first.

Select your new location wisely.

Having lived for decades across Asia I can say China isn't cheap and you listed China. Do your homework. Personal Income Taxes are as much as 45 percent in China ... Business tax is 25 percent. Oh and The cost of living is rising fast.

Places like Thailand and Malaysia are cheap on the surface - many I know choose to domicile there but there are hidden costs - and distractions- making business and life success more difficult.

Don't get me wrong - It can be done .... But after 25 years of living abroad I don't recall any success stores based on a tax decision. There are a lot of other reasons... Tax savings is not one of those reasons that appear on my list.

What's the story on the credit card cash back ..?

 

[Loving Life]

I completely agree with papadad111 - I have lived and worked overseas - mainly Africa/Central and southeast Asia for most of my career (45 years). I spent Christmas in Singapore this year - just returned back to work. Singapore (also KL, Bangkok and Jakarta is getting very expensive --- Back to my point - Christmas dinner at a good western eatery was about 200 dollars for 2, yes, noodles and rice, and local food can be cheap, but you do want your own foods at times. On Christmas eve, wanted Pizza and a Pitcher (I do live in a dry country) cost me about 90 dollars - it is becoming way to expense if you are not living on a good expat salary.

 

[canga]

I see tow issues with this plan

To qualify for FEIE you must be a bona fide foreign resident. So have you thought about where you will become tax resident?

How have you set up your business? Is it a sole proprietorship in the US? To avoid stiff like FICA you'll have to register in another country or try to convince the IRS why you should be exempt from FICA if you can't prove foreign residency.

This statement is not correct. As an expat myself I have some familiarity with US expat tax laws. However I will add the caveat that I am not qualified to give tax advice and the OP needs to consult appropriate professionals that can advise them based on their unique situation, rather than listening to a layman on an Internet forum.

There are 2 options to qualify for FEIE. One option is to be physically out of the USA and its territories for 330+ days per year. This will allow the OP to use the FEIE and Foreign Housing Exclusion, which based on the OP's post would allow them to avoid Federal (and State) income taxes. Careful tracking is needed here if the OP does not establish foreign residency. Read the IRS Publication 54.

If the business is registered in the US then this will create tax obligations (i.e. Social Security). It would be recommended to research registration in Hong Kong which has favorable treatment if you're not located in Hong Kong.

Note that most countries have a minimum time present in the country (i.e. 180 days) before being taxed in that country. If the OP is not present for that duration of time, such as by relocating every few months, then the OP can legally evade taxes for those countries. Obviously due diligence is necessary here to follow immigration and tax laws for those countries.

Make sure the budget includes seeking professional advice. I pay US$2,000+ per year for tax preparation and quite a bit more to satisfy local immigration requirements.

 

[canga]

My SO and I started our own web business this year while globetrotting about 50% of the time. We're newish to the concept of early retirement, but have really dug in recently now that we’ve successfully hit our first year business income goals and we have our travel routines down. We’ve recently started considering spending most of our time (330+ days) outside of the US to make us eligible for the Foreign Earned Income Exclusion and minimize our tax burden and we're hoping to get some advice!

Financially our business brings in 60-80k/yr and we have 30-40k set aside for a downpayment on a home or other major investment / opportunity. Our only current investments are ~10k in retirement savings. Our only debts are ~50k of low interest student loans. Finally, we have some US exclusive nontaxed income opportunities (average ~20k / yr in cc cashback). If we gave up this opportunity by spending more time outside of the US (330+ days) then the time invested to generate that income could be put back into the business and those earnings in theory would be similarly untaxed due to the FEIE.

We believe that we’ve identified our two core options.

(1) Ramp travel to 330+ days this year while building our business, keeping our expenses low (primarily more China / SEAsia) and dividing our savings between investments we can draw on in ten years (or less) without tax penalty and roth i401k contributions for later on.

(2) Purchase a townhome or other property that would offer a decent airbnb / short term rental return (family will manage it for a small cut) and travel ~6 months / yr. Keep expenses low and tax advantaged savings high to keep us under 200% FPL for ACA subsidies, Saver's Credit, etc.. Plow cashback earnings into near term investments. Spend more time with family.

Thanks for any insight you might have!

You do need to have an earned income to contribute to a Roth IRA, and if all of your income is excluded via FEIE and FHE then you do not have an earned income for the purposes of Roth IRA contributions. You can contribute to a Roth 401k, although you should verify that for your situation.

Having a rental property in the USA will complicate your taxes considerably and would open you up to Federal and State income taxes as well on this income. Rental income is not earned income for purposes of FEIE.

Have you run any numbers on current and expat tax scenarios as well as cost of living? If you're losing $20k in income, and adding travel, immigration, and other relocation costs, then you are probably going to be worse off financially. You probably do not pay $20k in Federal income tax to offset the difference. The exception would be moving from a high COL or high tax USA state (i.e. California) to a low COL and low or no tax country.

Are you looking for more general advice for relocating international or just on these 2 questions?

Being an expat is certainly not easy, and it would be made even more difficult if you don't have a company to help with relocation, tax and immigration issues. That said, it's certainly been a rewarding experience and one I'm happy to have made. OTOH I know a few other expats that couldn't hack it after 6 to 24 months and couldn't wait to get back home.

 

[canga]

Lastly this advice could change depending on whether or not you are married to your SO.

 

[nun]

This statement is not correct. As an expat myself I have some familiarity with US expat tax laws. However I will add the caveat that I am not qualified to give tax advice and the OP needs to consult appropriate professionals that can advise them based on their unique situation, rather than listening to a layman on an Internet forum.

Yes I was lax in my definitions. You don't need to meet the days of residence in a single country to qualify as a bona fide resident to get FEIE, but you do need to have a tax home in a foreign country.

 

[tpac]

Lastly this advice could change depending on whether or not you are married to your SO.

@canga We are married. Also, what I implied in my original post was that the 20k of cashback income takes time and this time could alternatively be invested back into the business. The effective hourly is comparable assuming we could find new clients or expand our relationships with existing ones - it's just nice having significant cashflow that there's no precedent for reporting as income. We spend a decent amount of time in Hong Kong so the idea of registering our business there is intriguing. The business is currently a partnership in the US.

We usually find ourselves in lower COL countries, but our expenses don't end up being dramatically lower since when we're in the US we tend to operate out of a smaller metro area that's not in CA, NY etc. and we're very frugal. We spent two months touring China this year and it was very affordable, but I never thought about what it would be like paying taxes there. For what it's worth our effective housing expenses while abroad have averaged out to ~2/3 of what we pay in the US.

@papadad111 It's not that we're considering living overseas for tax benefits, it's that we're overseas *already* a high enough percentage of the time that if there is a benefit to increasing our percentage of time abroad it wouldn't be a significant lifestyle change. I understand that the paperwork could be very complicated.

 

[kramer]

Hi Tpac, I have heard Hong Kong is a good place to incorporate and then your employees pay low taxes, too. But there is still taxation and I don't know if it's worth the trouble. I had dinner this week with the CEO of a Hong Kong company, I can ask him next time I see him. Also, my next door neighbor (I am living in the Philippines) is CTO of same company and he pays Hong Kong taxes no matter where he is overseas. For instance, he is opening a chemistry lab here in the Philippines and hiring chemists but his salary is taxed only in low tax Hong Kong. I don't know all the details.

At 80K per year it is not US income taxes that get you but FICA/Medicare taxes which start at your first dollar. However, there is some payback eventually for FICA and some of my friends earning here are worried about low future social security checks and talk about going back to the USA to build it up a bit. Also, it is very important to get your 40 quarters of work in the USA to be eligible for the Medicare system eventually.

With that said, I don't think continuously traveling is a viable long term plan. I pretty much did that for 5 years after I retired (at age 41), punctuated by long stays in places that I liked. But it got old after several years so for me it was just a phase which I definitely enjoyed for awhile.

Now, I would never give up my comfortable and inexpensive home base but I like to do long trips sometimes. Also, as a bona-fide Philippines resident with residency I can visit the USA longer than 35 days per year. I set up my home base with fiber internet to my door. The total cost for utilities and rent is super low.

 

[FUEGO]

I'd do whatever you want to do in terms of lifestyle and let the taxes end up where they will. If you're targeting an income under 200% FPL, then you won't pay much in taxes at all anyway.