12 THE $80,000 ANNUAL LOOPHOLE

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That’s right! If you are living overseas, you can earn up to

$80,000 a year tax-free and so can your spouse, for a total of

$160,000 per year in the case of a couple. This income can be

derived from overseas employment or from your own foreign-based

business. Two simple qualification requirements must be met to exercise

the $80,000 annual offshore tax-free loophole provided under Internal

Revenue Code 6:

1. A bona fide residency test—if you are a legal resident of a foreign

country and have lived there for at least a full year; or,

2. A physical presence test—if you have spent at least 330 days in a

foreign country or countries, out of 365 days in any 12-month

period.

The burden is on you to prove that you have a new “tax home” in

another country, no matter whether that situation will actually subject

you to taxes in your new country of residence. Naturally, an IRS form

is required to be filed annually. It is Form 2555 and should be sent

with your U.S. tax return.

To prove that you have established a tax home in a foreign country,

you will need to pass one of the two preceding tests, and there are

certain measures that you can take to prove that you meet one of these

two criteria to qualify for the $80,000 loophole. Here they are.

BONA FIDE RESIDENCY TEST

Where do you live when you are overseas? A property lease could

help prove your stay. Did you take personal belongings typical for

your intended stay? You could document your move, thus showing you

physically moved to the new tax home. Some countries will give you a

one-time tax break for importing personal belongings. The status of

your U.S. property sends a signal to the IRS. If you left your home vacant

and did not rent or sell it, it appears as though you are not leaving

the country for long, in which case, you are not establishing a tax

home overseas. Any type of personal and business documentation—

obtaining a local driver’s license, local property lease, or purchase;

paying utility bills in your name; meeting local requirements of various

kinds, establishing a foreign business, securing a job—any and

all will help support your move and claim to the $80,000 exemption.

Even proving your local involvement in social matters can help.

As for taxes in your new tax home country, if you choose a country

with no or low taxes, you are really bucks up after you qualify for the

$80k loophole. But don’t claim that you are not a local resident with

the foreign government for tax purposes or you will immediately send

up a red f lag to the IRS. Better yet, you may want to consider the alternative

test.

PHYSICAL PRESENCE TEST

Here you have a better chance, in fact, the ideal situation, short of

renouncing your U.S. citizenship, to eliminate U.S. taxes, by qualifying

for the $80,000 exemption and avoiding foreign national income

taxes. In this scenario, you satisfy the physical residence test

for the IRS’s sake, by living outside the United States for at least 330

days a year.

To avoid being a taxable resident in your new tax home country,

should it have significant taxes that you wish to avoid, you may want

to spend part of your 330 days in a second foreign country, or on a

boat, or enjoy the entire time in Andorra. If you choose two countries

that don’t tax residents on national income taxes until a person

has lived there for at least six months, you can split the 330-day stay

so you don’t overextend yourself in either, subjecting yourself to

their taxes. You would claim, of course, not to be a resident, and

therefore not subject to be taxed as one. This would be especially important

if local taxes are high. On the other hand, most foreign

countries tax residents only on income earned within the country. If

you are using a tax haven for business purposes, once again, preferably

a no-tax haven or low-tax haven, then you can circumvent the

tax home country’s income taxes because your income will be derived

from outside the country.

Further, you would need to document the preceding to satisfy the

physical presence test. You could start by opening a local bank account

in the country that you claim as your tax home. An employment

contract covering the period of stay outside the United States would

show your need and intent to be overseas. Your own offshore business

activities could require you to be in these other countries and would

be easy for you to substantiate. Document your foreign residence with

a rental or lease agreement for a period matching your intended stay.

The nice thing about this test is that you are only required to stay away

330 days of the year—the rest of the time you can visit the United

States and still qualify for the exemption. Needless to say, you would

not want to do anything to disrupt your well-established and documented

foreign existence while on your return U.S. trips.

You also may travel to other foreign countries while maintaining

your tax home, but take care not to do anything that would jeopardize

your status.

The $80,000 loophole is a significant tax incentive to expatriate if

you do it correctly, and this should not be difficult. You have a big financial

motive for restructuring your personal and financial affairs by

using this tax break to your advantage as long as possible. This move,

coupled with the strategies outlined here for going offshore, can increase

your cash position and give you greater personal financial liquidity

while potentially opening up new opportunities for investment.