Technology is always moving forward. Every innovation has its own effects on how people live their lives. Innovations in communication, especially cell phones and the internet, have opened up more possibilities than ever before.
In this new age of remote working, American entrepreneurs don’t have to choose between traveling the world and running their businesses. Today, American entrepreneurs can do both. Resourceful entrepreneurs can even grow their businesses if they know what they’re doing.
One big hurdle for American expats: Figuring out their tax obligations. Here’s what you need to know.
Travel and Taxation as an American Entrepreneur
If you want to travel while running your business it’s important to remember that your U.S. tax obligations don’t go away. Knowing how to manage and correctly file your U.S. taxes is critical for successful expat entrepreneurs.
Here are a couple of tips:
As a traveler or U.S. citizen living in another country, you can use the Foreign Earned Income Exclusion, which lets you exclude up to the annual limit of your income from U.S. taxes. For the 2021 tax year, the annual limit is $108,700. To claim this tax benefit you need to be able to prove that you’ve been a resident in a different country (also known as the Bona Fide Residence Test) or that you’ve spent 330 of the previous 365 days outside the U.S. (the Physical Presence Test).
If you’re paying foreign taxes, you can claim the U.S. Foreign Tax Credit which reduces your U.S. tax bill by the same amount of foreign taxes you’ve paid for the same period.
Not sure if either of those tax breaks will help in your situation? Here are some of the ways 5 of our clients have maintained their businesses while traveling the world.
Expat A – Company In The UK
Our first client, Expat A, is an American citizen but grew up in France. After getting his college degree, Expat A moved to the United Kingdom. In the UK, he set up a business refurbishing and selling second-hand goods on eBay.
Since the company is registered in the UK, Expat A has to file IRS Form 5471 to report it, but because he is an employee of a non-U.S. corporation, he doesn’t have to pay U.S. social security taxes. Furthermore, as he pays UK income tax as a UK resident and the UK has higher income tax rates, he can claim the Foreign Tax Credit to reduce his U.S. tax bill to zero.
Expat B – Didn’t Know About U.S. Taxation Requirements
Expat B is a 25-year-old entrepreneur living in Japan. She went ahead with a Partnership in Filmmaking with a friend, who was not a U.S. citizen, a few years ago in Japan. Unfortunately, Expat B didn’t know that she had to file U.S. taxes while living abroad.
Fortunately, Expat B was eligible for a U.S. amnesty program, the Streamlined Procedure, which allowed her to catch up on her taxes without facing penalties for late payments. Plus, she was still able to maintain her business efforts in Japan and claim the U.S. Foreign Tax Credit.
Expat C – Globetrotter Without Residence
Expat C works on his own time as a freelancer. He’s visited 4 countries in the last year, but he hasn’t established permanent residence in any of them. As a U.S. citizen earning more than Foreign Earned Income Exclusion (FEIE) limit, he owes U.S. taxes on his additional income.
We were able to use the Physical Presence Test to help limit his tax impact and make sure he could claim the FEIE for the first $107,600 of his earned income (for the 2020 tax year), so more of his money stayed in his pocket.
Expats D – Married, Traveling, and Working
Expats D are married and have recently taken a long trip to the Ukraine. The couple has been in and out of the United States ever since 2016, traveling to different locations and working abroad and in the US. Each year we work with Expats D to exclude eligible income and plan U.S. workdays to keep them eligible for the FEIE. We’ve also discussed establishing permanent residence in the Ukraine to meet the Bona Fide Residence Test for more tax savings in future. In this case, due to their international movements, some bespoke planning was required.
Expat E is based in the UK and invests in foreign mutual funds abroad. For high-net-worth individuals, tax planning can offer significant annual savings. Working with financial advisors could have helped Expat E avoid investing in foreign mutual funds, which the IRS considers Passive Foreign Investment Companies (PFICS), since PFIC reporting is complex and they tend to have high taxation rates for U.S. citizens.
Traveling the world, building your business, and maintaining good tax status in the United States is easier than ever before. If you’re not sure what your tax responsibilities are, or what tax breaks and benefits you may be eligible for, an experienced U.S. expat tax specialist can help.
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