Leave the US to Save on Taxes: Worth It?

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Welcome to another issue of Passionate Income.

Today we’ll be discussing different tax savings strategies American creators, solopreneurs and digital entrepreneurs can take advantage of.

In particular, the savings potential in three hypothetical scenarios related to moving to a no-income-tax state, versus relocating overseas to take advantage of the IRS’ Foreign Earned Income Exclusion.

Let’s dive in.

Depending on your political leanings, you may have strong opinions re: taxes.

On the one side, libertarians believe the government should be as small as possible, and that “taxation is theft.” On the other, certain groups believe in heavy taxation to finance a large number of government programs.

Per the description above, you can probably guess which way we lean. But regardless of how you feel, there’s no denying the government uses (some of) our tax dollars to provide valuable services.

As an example, a man recently fell off a cruise ship and was lost at sea.

In response, the Coast Guard mounted a huge search mission that involved rescue boats and airplanes. It’s likely that mission cost hundreds of thousands of dollars, and would not have been possible without taxpayer money.

Further, given 99% of us would want to be rescued if we fell off a cruise ship, I can’t imagine too many people getting mad about this kind of spending.

At the same time, there’s a never-ending debate regarding where the line should be drawn. Should the government offer ABC service, but not XYZ? Should the government pay for this, but not that?

It’s a constant battle, and one that’s been fought over since taxes were invented.

Given this, it’s unlikely the fight will be settled anytime soon.

What we do know is there are steps you can take to legally reduce your tax burden as an American. And one of the biggest ones involves the Foreign Earned Income Exclusion.

For those of you who don’t know, the FEIE is a tax credit that allows you to skip paying taxes on your first $120,000 in active, foreign-source income per year. To qualify, you must a) spend 330+ days outside of the US, and/or b) become a resident of a foreign country.

While residency can be complicated, most anyone can with a passport can travel outside the US for 330 days per year.

Now, to be clear, we are not Tax Professionals and you should not consider anything we’re saying here as financial advice.

With that out of the way, the FEIE rule allows some people to save tens of thousands of dollars per year in taxes.

And it allows them to do so legally.

Because of this, we wanted to walk you through a few hypothetical scenarios showing just how much someone can save by taking advantage of this legal loophole.

Next, we’ll show you the double whammy of combining 0% state income taxes with the FEIE (versus staying in a high-income tax state like CA or NY).

Further, we’ll assume you have an LLC registered to be taxed as an S Corp (given doing so provides the most tax benefits for 99% of solopreneur types).

Last, we’ll assume this person earns $60k per year, with $15k of that being pass-through profits to themselves as the owner of their own company, and $45,000 of that being a salary they pay to themselves as an employee of their company.

#1 - Lives in US in High Income Tax State 💰

1. Salary: $60,000

2. Federal Income Tax: $5,332

3. NY State Tax: $3,907

4. FICA (SS + Medicare): $6,884

5. Total Tax Burden: $16,123

6. Total Tax Rate: 26.9%

7. Disposable Income: $43,877

#2 - Lives in US in No Income Tax State 💰💰

1. Salary: $60,000

2. Federal Income Tax: $5,332

3. State Tax: $0

4. FICA (SS + Medicare): $6,884

5. Total Tax Burden: $12,216

6. Total Tax Rate: 20.3%

7. Disposable Income: $47,784

#3 - Does FEIE But Remains High State Tax Resident 💰

1. Salary: $60,000

2. Federal Income Tax: $115*

3. NY State Tax: $3,907

4. FICA (SS + Medicare): $6,884

5. Total Tax Burden: $10,906

6. Total Tax Rate: 18.17%

7. Disposable Income: $49,094

*Some federal tax is still owed given pass-through profits are still subject to tax even if you qualify for the FEIE (given they are NOT considered foreign source income).

#4 - Does FEIE, Relocates to No Income Tax State 💰💰💰

1. Salary: $60,000

2. Federal Income Tax: $115 (same situation as above)

3. State Tax: $0

4. FICA (SS + Medicare): $6,884

5. Total Tax Burden: $6,999

6. Total Tax Rate: 11.67%

7. Disposable Income: $53,001

The above math illustrates a couple of important points.

First, everyone knows moving to a no-income-tax state can reduce how much you owe.

But if you’re not a fan of Texas, Florida, or the handful of other states that do not tax your personal salary, odds are you’re not going to move there strictly for the savings.

Second, if you don’t want to leave the US - but want to reduce your tax burden - moving to a no-income-tax state helps you achieve almost the same amount of savings you’d get from relocating overseas to qualify for the FEIE.

Obviously, your savings would fluctuate depending on which state you’re moving away from. But either way, this is something worth considering.

Last, officially relocating to a no-income tax state before leaving the US (to quality for the FEIE) would help you save the most (by far).

Compared with staying in the US in a high-income tax state, you save nearly $10,000 in taxes. Which, on a $60,000 per year salary, is a 16.7% increase.

Not to mention it’s likely your cost of living will be lower overseas (assuming you don’t move to a high-income area like London or Sydney).

And even if you move to / already live in a no-income-tax state, going the FEIE route shaves your tax bill by $5,250. Which on $60k per year, is a 7.75% gain.

Now, we don’t have time to discuss the Pros and Cons of expat life relative to staying in the US (although if that’s something you’re interested in, reply here to let us know and we’ll cover it in a future issue).

But as you can see from the math above, taking advantage of the FEIE can help you save thousands of dollars per year.

On top of that, consider the following:

• In 2024, the FEIE exemption is $126,500

• If you file your taxes jointly, married couple would avoid federal taxes on double this amount ($253,000 tax free!!)

As you can imagine, not having to pay federal taxes on $126k - $253k could save you tens of thousands of dollars per year.

Especially if you can avoid state taxes as well.

Something worth thinking about!

💡 Takeaway: If you’re interested in being a digital nomad or expat, the IRS’ FEIE program provides a legal path to saving thousands of dollars on taxes. And if you don’t want to spend the year traveling (or move overseas), relocation to a no-income-tax state can still help you achieve massive savings.

I'll leave you with this quote…

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