Under the US tax code, a perpetual traveler is a US citizen or green card holder living outside the United States who doesn’t becomes a tax resident of another country. Being labeled as a perpetual traveler limits how many days you can spend in the US and can cause all kinds of problems for expats. Here’s how to escape the perpetual traveler tax trap.
A perpetual traveler is someone who travels from place to place never putting down roots. A perpetual traveler doesn’t have a residency visa, doesn’t file taxes in any country other than the United States, and never spends 183+ days in any one country.
The problem being labeled a perpetual traveler is that you can only spend 35 days a year in the United States. Spend one day more and you lose 100% of the tax benefits of living abroad. The international tax benefits that come from living abroad are no prorated over the time you spend abroad… you either qualify for the exclusion and get to take the full deduction or you don’t and get the joy of paying US tax on 100% of your income.
Let’s take a step back… We US citizens and green card holders are taxed on our worldwide income no matter where we live. Also, there’s no benefit to living offshore when it comes to capital gains. We always pay US tax on our passive income and dividends no matter where we live.
- The only exception for capital gains on the planet is the US territory of Puerto Rico.
Business income and your salary from an active business conducted outside of the United States is eligible for significant international tax breaks. The tax benefits of operating a business offshore are:
- The Foreign Earned Income Exclusion allows you to exclude up to $102,100 in salary from Federal income taxes in 2017. A husband and wife working in this offshore business can exclude over $200,000 combined.
- You can hold / retain foreign sourced business income in an offshore corporation tax deferred.
To qualify for the FEIE, you must meet the physical presence test or the residency test. The physical presence test is, in theory, very simple: be out of the United States for 330 days during any 12 month period. That’s all there is… easy enough, right?
I say the physical presence test is simple in theory because everyone tries to push the boundaries and spend more time in the United States. Family emergencies, vacations, business meetings, flight delays, I’ve heard it all.
Unfortunately, the FEIE physical presence test is very rigid. If you’re off by even one day, and spend only 329 days abroad, you lose the entire exclusion. Because most Americans try to push the boundaries, the IRS loves to audit expats who take use the physical presence test.
The second and more reliable way to qualify for the FEIE is through the residency test. You can exclude up to $102,100 in salary from work performed outside of the United States if you’re a tax resident of another country.
- For more, here’s how to report a foreign salary or international business income.
- If your net business income is over $200,000, you might take a read through Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.
A “resident” is someone who makes a foreign country their home and their home base. It’s where they return when they travel, where they have residency, and where they intend to be for the foreseeable future. A resident also breaks as many ties to the United States as possible.
The benefit of being a tax resident is that you don’t need to watch your days in the US so closely. You can spend 3 or 4 months a year in the US without issue. You’ll only have trouble if you spend more than 6 months or 183 days in the United States.
As I said above, the FEIE physical presence / 330 day test is easy to calculate and difficult to implement. The residency test takes work and commitment to qualify for but allows you to spend as much time as you need in the US and greatly reduces your probability of an IRS audit.
With all of that said, in order for a perpetual traveler to qualify for the Foreign Earned Income Exclusion, they must be out of the United States for 330 days a year. This is a challenge and increases your risk of an audit.
The solution to the perpetual traveler tax trap is to gain legal residency in a country that won’t tax your business profits. Find a country that you can make your home base and won’t tax your business. For a list of possibilities, see: Which Countries Tax Worldwide Income?
In my experience, the easiest tax free country for a US citizen to gain residency in Panama. Panama won’t tax your foreign sourced business profits. That is, they won’t tax sales to people and companies outside of Panama. Of course, if you sell to locals, you’ll pay tax in Panama.
And the most efficient residency visa in Panama is the friendly nations reforestation visa. Invest $20,000 into Panama’s green initiative (which means to buy $20,000 worth of teak trees) and get residency. This is by far the lowest cost and lowest investment required in any developed country.
The key to escaping the perpetual traveler tax trap is residency in a zero tax country. Do your research and you’ll find that Panama is the most efficient choice for a home base.
I hope you’ve found this article on how to escape the perpetual traveler tax trap to be helpful. For more information, please contact me at firstname.lastname@example.org or call us at (619) 550-2743. We will be happy to assist you to set up offshore and connect you with local experts for the friendly nations reforestation visa.