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- Top Tax Hacks for Travel Lovers
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Welcome to another issue of Passionate Income.
Today we’ll be discussing how to dramatically (and legally) reduce your taxes by living the international WiFi money lifestyle.
Let’s dive in.
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Yesterday I got into an in-depth conversation with some friends about how to take advantage of a legal tax loophole in the country where we're living.
The short version is that by only spending 182 days per year in the country, and delaying the payment of invoices owed until after those 182 days are up, you could live here without paying taxes in this particular country.
And even if you couldn't delay 100% of payments due to your company (unless you have enough savings to live off of for six months), reducing the payments you collect would also reduce the amount of taxes owed.
Now this is just one example.
But it got me thinking about tax loopholes in general, and how there are so many different things you can do to legally reduce your tax burden.
So in today's issue, we'll cover two of the most basic examples (with the understanding you can get much more complicated with this if your business if generating higher levels of revenue).
We should also note the degree to which you can reduce your taxes depends on your home country's tax laws.
If you're an American, you will never be able to escape taxation on your worldwide income (unless your renounce your citizenship, which is a permanent commitment with serious consequences).
However, by taking advantage of the Foreign Earned Income Exception program, Foreign Tax Credits, the Standard Deduction and more, there are things you can do to reduce your tax burden dramatically relative to someone who lives in the US full-time.
#1 - Territorial Tax Systems
Unlike the US, which taxes citizens on worldwide income regardless of where that income was earned, countries like Paraguay, Panama and the Seychelles only tax you on income earned within the country.
Meaning, if you get residency and/or setup a company (or your company's banking) there - but do not actually live there - you will not owe taxes to that country's government.
This can work wonders if you're not an American. Why?
Because most countries only tax their citizens on what they earn inside the country. See, as it relates to legal tax reduction, there are two main goals we're trying to achieve:
Escape your home country's taxes
Escape paying taxes in the countries you're staying in
And setting up your business in a territorial tax system is one of the best ways to escape your home country's taxes (assuming you meet whatever criteria your home country defines as no longer being obligated to pay taxes there).
Admittedly, there are different rules, requirements and fees involved in setting yourself in territorial tax system. Paraguay, for example, is known as being both easy and very low cost.
Panama, however, can be both more complicated and more expensive.
Either way, territorial tax systems are a simple and powerful tool for legally reducing what you would normally owe back home.
And if you're an American, they can still serve a purpose with regards to reducing how much you owe in whatever country you decide to live in.*
*Explaining this gets more advanced, so we're not going to go there today.
#2 - 183 Day Per Year Rules
Once you've legally escaped paying taxes in your home country (not possible if you're American), your second goal is to avoid paying taxes in whatever country you decide to live in.
While some countries offer low or no taxes (e.g. UAE, Bermuda, etc.), the majority tax both residents and citizens somewhere between 10% and 40%.
Which, in some cases, could be even more than you would owe in your home country. As you can imagine, it's not exactly ideal to flee one country only to end up paying even higher taxes in another.
The good news?
While each country's rules are different, many countries (e.g. Mexico) only tax residents who spend more than 183 days inside the country.
We emphasize the word residents for two reasons.
First, because if you're staying somewhere on a tourist visa, it's extremely unlikely you will owe any taxes to that country's government.
More important, tourist visas are not long-term solutions for living somewhere. So if you plan to stay long-term, you will most likely start off as a temporary or permanent resident.
For some people, the idea of having two home bases / having to move every six months is out of the question. And that's totally fine.
However, an increasing number of people are realizing it's impossible to get 100% of their needs met living in just one place. And because of that, more and more people are splitting their time between two, three and even four countries year-round.
Assuming that sounds like something you'd be interested in, choosing countries that only tax residents who stay more than 183 days per year is a great way to legally avoid paying taxes in said countries.
With that said, this stuff gets tricky, so if you plan on going this route make sure you speak with an accountant or tax lawyer who understands the fine print.
Otherwise you could end up with a surprise tax bill and a temporary or even permanent ban from the country if you don't pay.
💡 Takeaway: If you want to live overseas and are willing to remain somewhat nomadic, taking advantage of territorial tax systems and 183 Day Per Year taxation rules can reduce your taxes. And in some cases, dramatically.
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