While the self employed can still use the FEIE they still have the SE tax to deal with right?
I haven’t seen a way to eliminate that without setting up a legal business entity and advising my clients to now pay my foreign entity. But there are trade offs to running a foreign business entity like filling and reporting costs opposed to the US qualified joint partnership that we currently use, as my spouse and I are able to maximize individual 401k plans plus the traditional IRA contributions to reduce our taxable income to only owing the SE tax, which can’t be reduced.
The SE tax is calculated on the total income before the FEIE correct?
I could be wrong, but if we are operating a foreign legal entity I don’t think we can contribute as much to retirement accounts to reduce tax burden, right? But there might be other ways to get that money tax free, like through the FEIE and taking it as salary. I guess that all depends on the the jurisdiction of the foreign entity, if it’s in a no tax country for foreign income, and the earnings are passed through on the salary if under the FEIE limit right?
I feel like I come across as whining when I try to understand how to reduce my tax rate from around 12% of gross, since many have a greater tax burden.
We are in a no income tax state, so we only have US Federal income to deal with. For us, it’s still a larger number than we’d like to pay, that we’d like to ultimately reduce or redirect without having to drop US citizenship and still have social security earnings reported and submitted (secondary goal). It’s the only system we qualify for and we do not have earnings or a pension in another system or country.
Without specific values I know it’s hard to understand, but our federal income tax (currently only SE tax) burden is our largest expense, annually. Out of these four expenses making a 100% pie chart, our family health care is 25%, housing 35% (mortgage 22% + property tax 12%), federal income tax is 40%. We have other expenses, but those are our most expensive and the others will not change dramatically if we relocate to Europe.
So here is the scenario and a long way to get to a question I guess.
- (Same housing costs) If we (US/EU dual citizens) were renting/living in Europe, our desired location our housing costs would be about the same, as we were successful with that budget for a 5 month trial in 2014 when the EUR to USD was much more expensive.
- (Recovery of 40% - SE Tax) If we are not considered a tax resident in any country (not staying put for more than 90 days in most instances).
- (Recovery of 40% - SE Tax) If we setup a legal business entity in a low reporting, low/no tax haven.
- (Recovery of 40% - SE Tax) If we are claiming the FEIE from income from our foreign entity that has no tax burden.
- (Recovery of 12% - Property Tax) If we sold our property here, we save the property tax too.
- (Recovery of 25% - healthcare insurance) If we are covered on our EU healthcare we’d recover that expense as well.
Although the down side:
D1. No taxable income reported for the social security pension
D2. My clients would have to start paying a foreign entity. Not sure how to mitigate that.
Q1>> We’d essentially have the savings from the federal income/SE Tax and no tax burden?
Q2>> Is that a legal and viable tax strategy?
If that is legal and viable, I guess it would make sense to see what those savings would total and start crunching numbers. Here is my quick math.
How much would you have to save yourself if you decided to abandon the SS system, and to match the projected social security pension of ~$2200/mo (at full retirement age 67 for me) with a pension/annuity, if earnings continue this way for the next 25+ years since all of our credits have long been earned?
It seems that an annuity earning 2% annually and paid out over 30 years (at age 67 for SS full retirement age for full payout amount - 97) at a monthly rate of ~$2200, you’d need to fund it with $600,000. Of course you don’t need to use the annuity vehicle and have this invested in a diversified brokerage account of laddered CDs for deflation protection/minimal growth % where you could limit/throttle the withdrawls if you are self controlled and able.
In this scenario, it would take less than 12 years at current earnings without any interest to save from just these recovery items (SE tax, property tax, healthcare expenses), 24 years if setting this up for my spouse as well. I am 25+ years away from being retirement age qualified, my wife 35+ years away. So it seems like it might make sense. Comments? What am I missing in this quick run down?
I think there is a risk and FUD that our SS earnings would dip and our projected SS payouts would drop and it is not guaranteed by the government to be there, etc…
What happens to your SS if you stop contributing 25+ years before being able to pull benefits?
Does it just get forfeited or do you still get something, just minimal?
Are there US citizens doing something like this in Europe?
Instead of paying into the US SS system, but setting up their own system, to complement the standard 401k/IRA retirement savings plans?
You did say to ask you anything. TIA
EDIT: Sorry - my calculations of SS payouts were wrong. I wrote ~$1300/mo but the SSA.gov site shows me ~$2200/mo at age 67.
I changed annuity value required from 350,000 to 600,000 and ROI from 8 years to 12 years for me, and 24 years for me and my spouse to save the value required for that annuity versus paying into the SS system.
Other logic errors or shortsightedness?