Taxes have a way of rapidly diminishing the income you earn as an individual and the profit a company can generate. Savvy business owners and professionals often go to great lengths to limit their income tax liability each year.
Provided that you do so in compliance with federal law, your efforts at tax minimization don’t leave you vulnerable to enforcement action by the Internal Revenue Service (IRS). There is a big difference between tax avoidance and tax evasion, which involves trying to pay less than you legally should. You have the right to make strategic decisions that will legally limit your tax obligations.
One strategy that may be available if you worked in another country or lived abroad while operating the business in another country may be to pursue the foreign earned income exclusion as a way to limit your income tax liability.
How the foreign earned income exclusion works
The IRS recognizes that those working and doing business abroad will have to pay taxes in those other countries and that those individuals don’t utilize infrastructure domestically in the same way that those who work and conduct business in the United States do. It may be possible for those working or running a business abroad to claim the other country as their tax home and thus diminish their domestic taxes owed in the United States.
As such, some of the income you earn while working abroad or running a company in another country could actually remain exempt from taxation. You will need to show that you have resided in this foreign country for an entire tax year without interruption (or at least 330 days from the last 12 months). You can currently exclude up to $107,600 in income from taxation in 2020.
This exclusion also applies to those who have dual citizenship and have been living in the second country, which currently has a tax treaty with the United States.
Complex tax situations require complex solutions
When your income or business profit could be subject to taxation by more than one government entity, it can be harder than usual to create a functional and profitable business. Reducing your tax liabilities is a way to bolster your business and help you maximize your income. Getting the right help and advice when planning and filing your taxes can help ensure you don’t run afoul of United States tax codes.