Today, for yet for another time and by another individual, I was asked by a good friend of mine who is working in Dubai, United Arab Emirates to come work there as well. Among all benefits that we talked about, the single biggest benefit was legal tax avoidance; simply speaking not paying tax on your earnings.
Not paying tax legally is one of the BEST ways to increase your net worth faster and keep more of the wealth you earn with you. It helps you get ahead in life significantly. Think about what you can do with all that tax money you currently pay Uncle Sam?
Here is the USA, we work hard and pay our taxes. Most people however have no idea how much they really end up paying in income taxes. Why? Because there are several types of income taxes, Federal, State, City, Social Security, X, Y and Z. Not many people understand the concept of what their effective tax rate is. When you add up everything, you end up paying almost half your earned income in income taxes. This is why not paying tax is a big deal!
How does it feel knowing that you have to work from January to potentially May or June just to cover your taxes? Fun isn’t it? I won’t get into the details as it is beyond the scope of this post and will surely start a controversy. Do keep in mind that there are other taxes as well such as sales tax, property tax, fuel tax, vehicle registration tax, etc. Do you really know how much money you are earning vs. keeping?
If you are a US Citizen or Green Card holder working abroad, you are called an expatriate. As an expatriate not working on US soil, you are allowed to exempt a portion of your income from income taxes, thereby not paying tax “legally”. The rationale behind this is that the US Government understands that the jurisdiction in which you work has its own tax laws and therefore you will have some tax liability there locally based on income earned on local soil.
Another reason is that since you do not live in the country (USA), chances are you are not utilizing the resources of the country as much as someone living in it. Therefore, the Government feels it is fair not to tax you fully for all its expenditures which benefit the country as a whole. No, I really don’t think so – I just made this one up 🙂
The first reason is really the real reason. Whether or not the exclusion amount is fair is a topic beyond the scope of this post, and I will gladly continue discussing it with you if you’d like to through the comments below.
The US tax code, which is governed by the Internal Revenue Service (IRS) allows for an exclusion of $91,500 for single individuals and double that amount ($183,000) for married couples filing a joint return (as of 2010).
What does that mean? It means if you are single and living and working abroad making the equivalent of $80,000, you have no tax liability in the United States. If you make $200,000, only $108,500 ($200,000 minus $91,500) of that income is taxable.
By utilizing the foreign expat exclusion, you are essentially lowering your effective tax rate. Each time you do that, you are adding money to your bottom line (net income). To say it in another way, you get to keep more of what you earn.
I cannot answer that for your specific situation. However I have friends who have moved overseas to work, of which some are saving $30,000 annually while others are saving north of $50,000 between husband and wife combined. It’s a good option to quickly stash up some cash over a short period of time and then return home to enjoy the cash.
Now there are other tests as well such as the residency test that you must meet to qualify for the expat income exclusion. However, if you are living and working abroad, it would be rare if you are not allowed the exemption amount for whatever reason.
Typically, if you were a US Citizen working as an expat in a foreign country, you are entitled to the foreign tax exclusion in the US. Instead, you pay taxes to the Government in the local jurisdiction in which you work.
Because the US taxes its permanent residents and citizens’ income on a global basis (yes it sucks), you have to file income tax returns in the US as well. You may end up not paying tax based on your income level.
For example, if you made $250,000 working in Germany and paid $90,000 in taxes to the German Government, the US gives you a credit for the amount of tax paid in foreign nations to ensure you are not taxed twice when you file your US tax returns.
Usually, expats who live and work abroad do not get to completely avoid taxes. At the very least, taxes are paid to the local jurisdiction where the expat is working. There is a way however that you can completely avoid tax all together as an expat up to the full exclusion amount allowed by the IRS. How?
The best deals are found in the Desert. Most Arabic nations, usually in the Middle East or the Gulf Coast Country (GCC) region do not tax earned income because of certain religious beliefs. Taxes are viewed as “free income” to the “taxor” and therefore is considered “Haram” in the Muslim / Islam religion. Not paying taxes is therefore the norm.
Haram refers to unjustifiable or wrongful claim to property in this example (or “Free Money” in other words). For the same reasons, many Muslims do not invest their money where they earn interest yield. Interest on investments such as a fixed deposit (CD) is considered Haram, hence the reason for specialized Islamic banks that offer investments permitted by the religious beliefs.
So how can you take advantage of this? The United Arab Emirates (UAE) is a good example to discuss where at least two cities are growing and are occupied mostly by foreign expats who are living and working within. The local / National population of the UAE is not too large, therefore creating opportunities for expats to work there.
Dubai and Abu Dhabi are two very modern and developed cities in the UAE that have the appetite and demand for expat help, and typically pay more than a Westerner would make working in their home country. These cities / countries understand that they need to provide some sort of incentive for folks to fly over seven seas to work there.
So if you are a single individual making $80,000 annually and you move to one of these cities, you will get away with not paying tax anywhere. Not in the UAE because they do not tax income, and not in the USA where the first $91,500 of your earned income is exempt from taxes. Beautiful indeed.
Similarly, there are other countries with favorable tax laws where expats chose to work in for a few years to save more money than they would in the USA. Singapore for example caps-off your tax ceiling at a certain point, so you are not penalized for earning more.
Higher salaries and zero income taxes are just two of several benefits countries like the UAE have to offer. There are a ton of other benefits that lure millions of expats to similar places every year. You can read more about the benefits of living and working in Dubai here. If you are – considering working in Dubai or Abu Dhabi, I highly recommend the following two resources:
Up and coming jurisdictions are attracted to Western expatriates because the Western corporate experience is viewed as valuable to emerging markets. Why? Because the USA today is still the most developed Nation with the longest history of industrialization, technology and corporate activity.
As other Nations emerge and start to develop, Westerners have a chance to go back into the future and implement what worked in the USA decades ago. Therefore, your passport typically dictates your salary in most Middle Eastern nations. Unfortunately, your skin color on the hand determines how you are perceived. I know!
The reason why many do not take advantage of this opportunity is because they simply do not know about it. Education and awareness is usually always the first “barrier”. Of those that do, many have taken advantage of working abroad, and many want to at some point in their lives.
That said, there is always the fear of the unknown, or the uncertainties involved in mass relocation efforts, especially with family. This is what keeps others who are aware of these opportunities from taking advantage of them.
Other reasons include the fear of losing some civil liberties, lack of appetite to have kids grow up in the suppressive environment (this is why many of the expats are single) and the difficulty to break back into the Western job market when it is time to come back.
Unless you are working for a global multi-national company, living and working on the other side of the world for a few years removes you from environment where you are well connected, therefore affecting both your personal and professional networks.
There are several ways you can go about exploring opportunities in the Middles East.
• Social networks such as Facebook
• Linked In & similar professional networks
• Your school’s alumni association
• Recruiters & Headhunters
• Online Recruiting Specialists – Bayt is my best recommendation from experience
Above are some resources that can help you get connected with local resources in the Middle East. The culture is heavily based on personal relationships however (read-up on the concept of “Wasta” online), therefore face to face interaction is very important. That is why I usually recommend taking a trip for a week or two to meet potential employers and network locally.
However, to ensure you maximize your time during your trip, use the above resources to start dialogues with key individuals and start developing a relationship that you can call on to when you are there. Try to arrange meetings and preferably your entire week’s schedule before traveling to maximize the benefits from your trip.
It usually costs north of $1,000 for the flight alone from the US to Dubai for example. I can keep going on about the Middle East but that is not what this blog is about. However, The Dubai Information Site is an excellent free resource on information about Dubai. You can read all about Dubai, Abu Dhabi, the UAE, as well as information about living and working there on the website.
If you are contemplating moving and working abroad for a few years to save more money (or are already there), I highly recommend consulting with a good CPA like me 😉 to ensure you are in good hands from a tax compliance perspective. If you can’t find one, let me know and you and I will work something out.
Readers: Can you relate to this discussion? What are your thoughts on this legal method of not paying taxes? Have you considered taking advantage of this possibility? Why or why not?
Here are my thoughts on not paying tax on affiliate income, regardless of where you live or work.
Great advice Sunil, there are potentially big savings for people working outside of the United States by taking advantage of tax arbitrage. You will need to be careful to continue to file tax returns in the States, even if you don’t owe any money. Also, structuring how you are paid can make a big difference in your taxable income; so if tax avoidance is a big motive make sure to plan it well or see a professional.
Well said Tyler and a very valid point. Tax compliance must be continuous, whether or not you make or owe money. The US likes to keep close tabs on everything, and taxes on a Global Income basis.
With regard to structuring packages – that is a great point. In many countries, especially Middle Eastern, it is not uncommon to negotiate total compensation packages that include airfare back to the home country for the entire family annually, housing, bills, private school fees for kids, vehicle/gas allowance, drivers, maids, etc.
When it comes to giving some and taking some, keep these in mind as many of the benefits/allowances may not reflect in your “basic salary certificate”, a document equivalent to the W2 form that shows your earnings.
Thanks for the time and effort you put into this blog, I’ve got a quick question and I hope you can give me a couple of pointers.
I’m highly considering moving abroad in 2012, and I’m a little unsure of how the whole foreign tax exemption works. I am currently making money right now through Google adsense, and I was wondering if I would qualify for this exemption.
Right now I have it structured as a sole proprietorship, and I would maintain a U.S. “presence” probably at my parent’s home. So, my income source would be U.S., but based on itineraries I could prove that I spent more than 330 days outside of the U.S.
Any advice you could offer on this topic would be greatly appreciated. Thanks again for your help.
I am pretty sure the exclusion applies to income earned from foreign sources (even if it’s a US based multinational with a location overseas which you work for). Do check with an active professional, but I remember this to be the case when I was considering a move. I too am in a similar situation, with multiple passive income sources based in the US.
I’d be interested in what you find out though – do come and update! Welcome to the blog and thanks for your comment.
very nice post, i undoubtedly enjoy this good website,