Are you an American new to remote work and thinking about living outside of the US?
Make sure you don’t miss this episode with Mark Dissen, Founder of WayFarer Accounting which is specialized in helping expatriates and digital nomads with their taxes.
The US and Eritrea are the only countries on earth that tax you for being a citizen, BUT there are some ways to save big on taxes while working overseas.
In this conversation we discuss how Americans can save big on taxes when working outside of the US, and what you need to know and watch out for to take advantage of these significant savings – which means more investable cash.
Enjoy this conversation with Mark Dissen.
0:00:00 Welcome and context
0:04:27 What is your background
0:06:40 How many countries tax on a citizenship basis?
0:08:24 How should digital nomads start saving on taxes?
0:11:50 How to qualify for Foreign Earned Income Exclusion?
0:13:51 Avoiding State taxes while doing FEIE
0:17:04 What are the most common mistakes people make in qualifying for FEIE?
0:19:40 Tax liability of not paying taxes in foreign countries?
0:22:33 Walk me through bonafied residence?
0:25:31 How to become a resident of a foreign country?
0:28:39 FEIE for business owners
0:36:41 Definition of an Expat and a Digital Nomad
0:37:46 What other tax information should people consider when going abroad?
0:46:25 Paying for social security
0:52:00 Good resources for people to do their own research
0:55:50 Where can people find out more about you?
Ben: [00:00:00] Welcome to the alt asset allocation podcast, exploring alternative investment opportunities available to the everyday investor. Here’s your host Ben Lakoff.
Hello and welcome to the alt asset allocation podcast. Today’s interview is with Mark Dissen and is all about potential tax savings specifically for Americans living or working outside of the U S.
This may seem like a little different than some of our other episodes. It is. However, whenever you have lower returns on your investments, taxes and fees can make up a significant difference for you in net returns. This coupled with the fact that many companies have gone remote or work from anywhere.
Perhaps looking outside the U S for your next stop might make sense. Tax advice is very difficult to give in a broad brush manner, but I’ve been living abroad for nine of the past 11 years. And these rules really made a difference for me. Yes, we love the U S I’m back now. I definitely missed it, but did you know that the U S and Eritrea are the only countries on earth that tax you for being a citizen?
Eritrea is a very small country in East Africa. If you were curious, it’s pretty wild, but don’t give up as discussed on this podcast, there are some ways to save big on taxes. Why working overseas in this conversation, we discuss how Americans can save big on taxes when working outside of the U S what you need to know and what you need to watch out for, and to take advantage of these significant savings, which means more investible cash at the end of the day.
Or more cash to spend, whatever it is you spend your money on. It doesn’t have to be investment, should be, this is a large topic. And I hope this conversation serves as a catalyst to get you to crunch the numbers and realize the potential benefits of living abroad for a few years. It really might surprise you.
Before you listen, please don’t forget to like us subscribe to the podcast or even better leave a review. This really helps more people find the podcast and keep this thing going. It really, really helps taxes. This sounds boring. I know, but it can really, really pay off dividends. And actually I quite enjoy this stuff now.
Which is weird. I know, enjoy this conversation with Mark Dissen.
Good morning, everybody and welcome to the, to asset allocation pie guests. I’m here with Mark Dissen, who’s the founder of Wayfair accounting. He’s a CFO CPA specializing in tax for us, citizens working primarily with ex-pats and digital nomads.
Mark: [00:02:30] Welcome Mark. Thank you. Thanks for having me on here, Ben.
Ben: [00:02:34] Good. See you. Where are you right now?
Mark: [00:02:37] I’m in Pittsburgh, Pennsylvania, born, born town, but it’s where I grew up. So, here hanging out until COVID is over pretty much. I have least like in the real house finally, after three years of travel.
Ben: [00:02:46] Hey, congrats.
Mark: [00:02:47] And what I can to enjoy it. Thanks. Thanks. Yeah. You gotta be a normal person.
Ben: [00:02:52] I am as well, actually. So we met, we met last year, probably in, October or November in Barcelona. Both of us were kind of doing the digital nomad thing and it seems like the rest of the world has kind of caught up to this.
Hey, you can work anywhere. And it seems like you and I both are in the same case that it’s like, I just want a house now I want a permanent location. So I think, yeah, we’re a little bit against the grain in that sense, right?
Mark: [00:03:20] Yeah. It’s happened to me. This is the second time it’s happened. And so like, I’m like, I know I want a house.
I want a permanent location. Then I come back and like four months later, I’m like, I need to get out of here. So give me a mother too. And I’ll be, it’s going to be on the road again. I’m sure. But yeah, definitely locals.
Ben: [00:03:35] I’m excited to have this conversation. We talked a bit about it, but, you know, this podcast is all about investing in alternative assets, but. The, the prospective returns on a number of different asset class are looking like they might be a lot lower transaction fees, taxes, these will make up a gigantic portion of your returns. And if you can optimize these and lower these where you can, then, you know, you have more take home, pay more, more returns in your pocket.
I wanted to have this conversation because a number of. Employees people that have never worked remotely worked abroad are now starting to venture out into the world. And you are an expert in working with these digital nomads or ex-pats people outside of the U S and working with them to save money on taxes, which means they have more money in their pocket that they can invest in these different types of alternative assets or invest in themselves, obviously.
I wanted to start off today. Just a little background of you. And Wayfair accounting and what exactly you’re doing.
Mark: [00:04:44] Yeah, definitely. so I’m a CPA looking for accounting firms, KPMG, and I’m just in forensic accounting for them. And I think probably make maybe like some of the people listening to this podcast quickly got fed up with the, the corporate culture and wanted to take off and do something on my own.
And so I left and started my own practice and it’s called Wayfair accounting. right now I work with, like you said, ex-patriots all around the world. We’re in like 40 some countries or something like that offering. Tax planning, tax preparation, consulting, and bookkeeping and things like that. but my clients are all these people who, you know, were living normal lives and just decided like I did just to leave the U S and take off and find some other plan.
And, you know, for a lot of them that in, for the same for me, when I first started, it was, it was intimidating, for a number of reasons. But one of the reasons was because I thought it was going to be financially devastating. I mean, I had saved up. No money to do it. And I thought I was going to spend all my money doing that, but reality, it can actually be one of the most financially, responsible things you can do.
And in my case, I mean my money by doing this and it can, you know, it’s something that I try and preach now. And one of my missions is to bring more digital nomads into the world because I think it’s the fun experience as well as the responsible decision.
Ben: [00:05:53] Definitely. And this is something I tell my family and friends here.
That it financially, it will never make sense for me to live in the U S it’s like once you’ve realized this, you live in a mansion for a thousand bucks, I never cooked, and I’m spending still spending a couple thousand bucks on food. Like it, your living expenses are so much lower and everybody I talked to here, it’s just, how do you, how do you live like that?
And it’s like, I think it’s good. Yeah. So it’s pretty, it’s certainly a different mindset for sure.
So I wanted to start how many countries in the world. Tax their citizens on global revenue, global income, wherever they are in the world.
Mark: [00:06:38] Well, a lot of different countries they’ll have different laws. I think maybe the question that you’re kind of getting at is based on citizenship.
So it’s all right. So the U S is one of two countries. There’s another African country. I forget which one it is,
Ben: [00:06:52] Eritrea. I just read it.
Mark: [00:06:56] Yeah. I haven’t been there. yeah, us and Eritrea apparently are two, the only two countries in the world that tax purely based on citizenship. So if you are a us citizen, no matter where you go in the world, regardless of how long, even if you leave and are gone for 20 years, you still have to pay a us tax.
Or at least you’re responsible for paying us tax and filing a tax return. Which is annoying if you’re a citizen, especially when you get into this, expatriate round and you start hanging out with Europeans down in South American stuff and we’re able to escape it. So something we have to deal with.
Ben: [00:07:31] Yeah. And I think this is an important thing, an important key concept, right? Because a lot of people move abroad and they’re like, I’m not in the U S I don’t need to pay us taxes anymore. They meet there, their European friends that aren’t are getting around it. And it’s like, Oh yeah, we’re probably like that too. But in fact you’re not right.
if you were to talk to these new digital nomads work from anywhere. People, how would you, how would you start them off? Like what, what concepts would you want them to know about? yeah, just, just talk to me. Like I am a new, newly found digital nomad that wants to go live abroad.
How do I start saving taxes?
Mark: [00:08:13] What should I know? Yeah, well, it depends on, you know, everyone’s situation. And I think probably the biggest factor is, are you an employee versus do you have your own business? Cause that can have a big role in what you’re paying in taxes. but in terms of foreign concepts, international concepts of income, exclusion is the real popular one.
And then the biggest one that applies to most people when they first start at least. And what the foreign earned income exclusion is, is it’s a tax roll. It’s a tax break that allows you to exclude up to. About $106,000, a hundred, $8,000. It changes every year. It goes up a little bit, $108,000 of your income from income tax.
So if you’re earning $108,000 or less, and you qualify for this exclusion for the full year, you can exempt all of it. From income tax and pay $0 of income tax on that income. that doesn’t, it does it doesn’t exempt you from things like self-employment tax and payroll taxes, things like that, but it can still be a big chunk of money.
if, you know, if you’re earning six figures, it can be 18, $19,000. It’s a lot of money per year. So there’s two ways to qualify for that. One is called the physical presence test and to, to go that route, you have to be outside of, outside of the U S in other countries. It can be more than one country, for 330.
It doesn’t have to be a calendar year. if you are gone for that amount of time, that you can qualify for the exclusion that way. And then the other route to qualify, it’s called a bonafide residents test. And that’s, if you become a full blown resident of another country, so say you move to France. Get your full time, full, full of lots of resident’s visa, start paying taxes there, and maybe you get a spouse there or something like that.
Then you can get an exclusion that way and don’t need to worry about the number of days you spend in the us.
Ben: [00:09:52] Yeah. And I want to dive into each of those in a little bit more detail, but just on FEI E foreign earned income exclusion, that’s the abbreviation. for a lot of these people that are getting, I’ve never done this as, as a, employee from an American company, but American companies normally deduct the taxes from your payroll each month.
does this mean at the end of the year? there’s a calculation and I get a massive refund for all of those taxes that have been withheld throughout the year. If I qualify for the FEI.
Mark: [00:10:24] Often that would be the case, especially in the first year, there is a route you can go where you decrease the withholding that comes out of your paycheck, every period.
but at least in the first year and some people just keep it this way. Yeah. You’ll what will happen is though. Keep withholding the same amount from your paycheck, every period. And then you’ll just get this big refund, when you do file your extra screen, which always makes everyone
Ben: [00:10:44] yeah, that’s, that’s a nice surprise.
And then on EFIE, as well, you can do partial years and you can kind of have this rolling window of 365 days, right?
Mark: [00:10:56] yeah, exactly. And so, you know, if you were gone from June, 2020 to June, 2021, You can take like six months in 2020, and then another six months to 2021. Or if you’re gone for 18 months, you can take the full 18 months.
It doesn’t need to be exactly 12 months chunks. Like you said, it’s on a rolling kind of basis. So 330 days out of 12 months, that’s what once can, you know, once the first month drops off, you add it to the next. If that makes any sense.
Ben: [00:11:24] No, it kind of does. I mean, this is so I’ve, I’ve done fie for the last six years and now I’ve moved back to the U S and so now I’m looking at this partial year and if I go abroad again, I’ll have to figure out this rolling situation.
But, the concept that it’s rolling and you can take a partial year of fie makes sense. And that’s why we pay somebody like you to, figure out the nuts and bolts of all of this as well.
Mark: [00:11:48] Exactly. Yeah. Yeah.
Ben: [00:11:51] now to qualify for the fie, and this is 108,000. So this is one of the biggest, levers that, ex-pats or nomads can pull to have savings on taxes.
Mark: [00:12:03] Yeah. I mean, it’s, it’s, it’s the easiest to comprehend, I think for most people, at least. cause I mean, you’re just like, you know, with the physical presence test, you just, you are out of the country for long enough. So it’s, you know, it’s. Once you kind of get, like you said, those nuts and bolts on the little intricacies of it.
once you understand those, then it’s, it’s, it’s pretty straightforward and pretty easy to do, that. And so say that’s just at the federal level. So most States will recognize this 400 income exclusion to, not all States to that big one that doesn’t as California. So if you somehow are made a California resident.
I know it’s back of his head here. if you were made a California resident, and even if you do qualify for this FEI, ye at the federal level, California will recognize it. So maybe it’ll pink state tax. the reason I’m saying this is because, You can also then find other ways to avoid state taxes or the same way, depending on what state you’re in.
And that’s going to add to your tax savings then. So when I say 18, $19,000, that’s just federal. so depending on how much you’re paying the state level too, you can avoid that by moving out of the country, get becoming a resident somewhere else, or just not live in a unit. That’s an addition to the FBA.
Ben: [00:13:12] And so there’s a few States within the U S that even if you’re not. A resident physically there you’ll still have to pay like California, but so some of these other States, if you’re not there, what are kind of the high-level guidelines that you can legally avoid these state income taxes while you’re doing the FEI as well?
Mark: [00:13:33] Yeah, I mean, well, it depends on the state. you know, some States don’t have income tax, so you don’t have to worry about it, but you know, the. Let’s say the most straightforward route is to no longer be a resident there. so you don’t have to be a resident of a state. You can be a resident of China or Guatemala or whatever you want to be a resident of.
and so you can go that route, try and be a resident of another country, or at least argue that you are, so you don’t have to pay taxes or resident in a certain state. some other people. Like to transition to a no income tax state first. So their first month or two of, Of their digital nomad life in Florida or in Texas or Washington.
And some of these new income tax States become a resident of there so that they detached from that, that prior state, and, and can no longer be responsible for it. state income tax, how that works by the way, if you’re not a resident of a state. If you travel to a state just temporarily entered some money while you’re there you’ll file a non-resident tax return.
So let’s say you go to New York for a month, you in $5,000 while you’re there, you will only pay five tax on that $5,000, but you don’t have to pay tax on your full years. Worth of income to New York, just cause you’re there temporarily. hopefully that,
Ben: [00:14:49] that makes sense. And I, I want to dive into that a little bit more detail, obviously for my own benefit as well, because I’m bouncing around the U S like a, like a gypsy person, to qualify for the FAA, you have the physical presence or the bonafide residents test the physical presence. You need to be in another country for 330 days. So something that always surprised me was international waters, flights. You know, when you’re in the air, Space, these things don’t qualify.
if you happen to go to space, you’re technically in the U S in, in terms of tax purposes, right.
While you’re not another country,
Mark: [00:15:31] you’re not in the U S yeah. The rule. I, you know, a lot of people say you have to be out of the U S for 330 days, for, just for semantic purposes. But the role is that you need to be. Be in a foreign country or multiple countries for 330 days. So if you aren’t in a country, if you’re in international waters, is usually where it comes into play.
then that doesn’t actually technically count towards your 330 days, that doesn’t, you know, you don’t see that too often. I think I’ve seen it twice before where people had done the cruise just across the Atlantic, usually for digital nomads, where they spend seven days in the Atlantic, seven days in the Atlantic.
and that technically doesn’t count towards their 330 days so they can get along up there. But, This technical role. It doesn’t often, but it is there. Yeah.
Ben: [00:16:14] Oh yeah. So again, 18 day cruise in December of last year. And, yeah, it was very worrisome. Like how many days were in international waters, but it was just a few.
So it wasn’t that bad. with physical presence, under the fie, what are the biggest issues or biggest, most common mistakes you see when somebody tries to qualify for this?
Mark: [00:16:34] Well, first of all, it’s it’s all or nothing. So 329 days. Does he, does he? Absolutely. No. Good. so I have seen, I think a couple of clients just miscount and they were like one or two days off and they lost like several thousand dollars just because they spent one or two extra days in the U S than they had.
so that’s, that’s a mistake. People make, you know, I like the physical presence test, cause it’s just so objective and you know, it’s where you out of the country or where you not, there’s not a lot of errors to be made. I had another point of confusion that say, though, I touched on this a little bit earlier.
it only covers income tax. And so, if you are self-employed so you have your own business, it doesn’t cover that self appointed tax, which is about 15%. so you’ll have to pay that still. You don’t, you don’t have to pay no tax every year. You still have to pay a little bit, and it also only. Covers earned income.
it’s called the foreign earned income exclusion. So it doesn’t cover honor. Didn’t come unearned income means things like dividends and interest and capital gains, things like that. So if you sell your house before you go, you’re not, or after you go, this people wouldn’t qualify because you still have to pay tax on the capital gains.
Ben: [00:17:44] I guess you could do some, some quick sweet financial engineering thinking about retirees. You could pay those interests or dividends into a LLC and then pay yourself it’s yourself. A salary from that LLC.
Mark: [00:17:58] not, not really, no,
Ben: [00:18:00] everything always seems so much easier in my head. And then you can, it’s, it’s a boneheaded idea.
Mark: [00:18:05] That’s what an LLC is, is something called a disregarded entity. And so if you pay yourself from an LLC, it has no impact, tax level. It’s like, cause you just get just, you paying yourself with your own money. Basically it’d be like transferring bank accounts. So they wouldn’t, wherever they work that way.
Ben: [00:18:23] Damn well, if it seems too easy, it probably is. Yeah, maybe into an escort maybe into somebody else’s yeah, maybe there’s something there. I’m sure. They’ll walk me through that. I’m a digital nomad I’m bouncing around. I’m spending, I’m out of the U S for a couple of years I’m spending. I qualify for the FEI Yi physical presence.
I’m a month in Spain, a month in Portugal a month in Morocco countries are broke. Governments are broke. Are you like the state, version of this, you’re liable for income taxes in those countries in which you’re working from. but this is just something they never really enforced because they’re not able to, can you walk me through what that looks like, that potential tax liability of bouncing around and not paying taxes in each of these countries?
Mark: [00:19:16] Yeah, well, so I’m a us accountant. I only handle. You know, us taxes, I don’t know, United Kingdom rolls or Spain’s laws or anything like that. But the general answer is that every country has different tax laws. And so theoretically, before you go to each of these countries, you would research the tax laws and follow them enforcement is, is, I’d say non-existent pretty much.
and. In practicality, people are just going there on a tourist visa, a lot of the time spending a month there and then leave in some countries. That’s totally what you’re supposed to do. You don’t have to pay any tax if you’re just there for 30 days, other countries you’re supposed to be there on a work visa, not a tourist visa, if you’re working.
I think there hasn’t been much effort to make rules against this, to prevent this from happening because when people travel there temporarily, they’re not leeching off, you know, The health system and the government programs and things like that without paying into tax. In fact, they’re actually just bringing tourist money into the country.
And so there’s not a lot of like resistance that I’m seeing. but short answer, every country’s got different rules and I’m not exactly sure about what every country does.
Ben: [00:20:23] Right. And typically you’re not taking local jobs. You’re earning this income outside of the country in which you’re traveling. it’s a net positive for the country to have these people come and spend their money there overall.
Mark: [00:20:36] Yeah. Yeah. We’re, we’re seeing, I’m starting to see the opposite, actually. It was as opposed to enforcement of, taxes against people who are coming in, they’re actually encouraging people to comment and say, you know, as long as you don’t take. A local job, which nobody that’s not who I worked with. as long as you don’t take a local job, you know, You can come and work here on that digital nomad visa or something like that, or a temporary visa and just bring your money.
And you’re welcome
Ben: [00:21:03] I would expect there’s a number of these in the Caribbean that are kind of raising their hands now. But I think Serbia did it some sometime last year or the year before. And they said, Hey, digital, nomads, come here, work here for 90 days. We won’t tax you. And everybody kind of scratch their head.
Mark: [00:21:23] Well,
Ben: [00:21:24] it’s kind of nice, but you know, more of these, like why wouldn’t you, tourism is down. You have some, like longer-term tourist person who’s working online for a us company or whatever, and they’re spending their us salary, within your economy. I think there’s a lot of benefits there.
that’s physical presence, pretty plain Jane, pretty, pretty easy to understand, Now walk me through bonafide residents, which is the other test to qualify for FEI.
Mark: [00:21:53] Yeah. That’s it’s, I’d say it’s well, it’s the least common. It’s the lesser common among my clientele. I’m not exactly sure about broadly over the world, but, the second way to qualify for this 400 income exclusion, it’s called the bonafide residents test.
And, it’s a little more subjective than. The physical presence test. It’s not one concrete role. It’s based on a number of factors and technically it’s on a case by case. And so it’s when, when you are a full it’s for when you’re a full-time resident of another country. And so they’ll look at things like what type of home do you have there?
Are you renting? Did you buy, is your family there? Do you have. You know, kids there, are you paying taxes there? How much time did you actually spend there? What type of visa were you on? these all go actually on the form and all those things I just listed. And so it was based on this broad number of factors and not one of those knots, not one single of those factors is disqualifying in certain ways.
So you don’t have to have family there to claim the book. I’ve had residents test, but they look at it at a full picture of what you’re actually doing. I’ve never had it. Rejected. but technically they could, you know, say, no, you’re not a resident there. so what you do is you claim it on your tax return on four 25, 55, Sambo Brezhnev, no X country here’s freezes and what I’m doing and, and you just claim it.
And then in theory, you could get audited.
Ben: [00:23:16] And that’s, that’s the most terrifying part about this, in my opinion. I mean, you’re assuming that you’re going to get this $20,000 deduction from your foreign earned income. And then suddenly, you know, they’re like, no, you didn’t qualify because you, you know, you, you.
Whatever, whatever. And then, then you’re liable for 20 K bill at the end of the year. That’s it? That’s it?
Mark: [00:23:44] Yeah. yeah, I’ve never had it happen, like I said, but, you know, usually, usually these people that you’ll know, I mean, you’re only really running that risk if you’re, if you’re being kind of shady about it.
I mean, you, you take that. Bonafide residents test. If you are a resident of another country, some people will try and like sneak it in with me. And I say like, let’s just not do that, but, no, it’s not. I say it’s subjective and less concrete, but like, you know, most people will know if they’re a resident of the country
Ben: [00:24:11] what are kind of the big ones that you need to keep in mind.
you need to have a rental there. You need to have some income in that country. you’re paying some taxes. What, what are like the big ones that you definitely have to take those boxes before you can even think about going for bonafide resident?
Mark: [00:24:27] I don’t know if there’s one single one that you definitely need to have.
I think. The one that really helps is if you have family there or, and, and by family people that you’re living with. So like a spouse or just children or something like that, you
Ben: [00:24:42] marry a local person.
Mark: [00:24:46] That would be great, you know, I personally, I’ve always wanted to, marry a European for the healthcare that I can’t find anyone to do it. But,
Ben: [00:24:52] any anybody listening to this? You know, we want European passports.
Mark: [00:24:55] Yeah. Any Swedish girls out there too? Just let me know. no, but, but that’s, that’s one thing. Are you paying taxes there? What is a red flag that you don’t qualify as if you’re just permanently on like a tourist visa? you know, some people in Thailand.
Are on tour the fuses and definitely they stay there in there for 30 days and then leave and come back and get another tourist visa and stuff like that. I think that’s going to work pretty strongly against you. You really want to have some sort of residence visa or be working towards a long-term residents visa.
You don’t just want to be like, they’re not going to Hearst for it.
Ben: [00:25:27] Yeah. And I, I wish I would have listened to this podcast before I started my ex-pat route because I was. Doing the physical presence test for the four years that I lived in Thailand, that I was working for an American company on a residency visa, paying taxes in the country had a, had a, you know, own apartment sort of thing.
I definitely take the boxes and I stuck to this. 330 day rule. And I was only limiting my us trips, you know, less than 25 days, just so I had a little buffer sort of thing. And, because I, that works better for me. So, and what I’m talking about, there’s 330 days in another country, or. Roughly, you know, 25, 30 days in the us, to, to add up to that three 65, which I know is the wrong way to do it, but it worked better for me.
Mark: [00:26:23] Get you on a leap year, so I’ll get you. yeah. yeah. And, and just to, just to make that clear, that is the benefit of the bonafide residents test over the physical presence test is that you don’t have to worry about. The number of days you spend in the U S if you are a bonafide resident of another country, you can go to the us for two months, you know, spending the holidays or whatever it is, and still, still claim it with that said with both these tests, with the foreign earned income exclusion, you always have to pay tax.
So if you do go to the U S for two weeks or a month or whatever it is, and you earn a few thousand dollars while you’re there, you have to pay tax, excuse me, income tax on that money. even if you’re otherwise excluding this stuff that you you’re abroad.
Ben: [00:27:06] Okay. That makes sense.
Mark: [00:27:07] yeah.
Ben: [00:27:08] for somebody owning their own business and wanting to take advantage of F E I E.
Can you walk me through how that works? a lot of what we’ve talked about is more, you’re like getting a salary each year, month, and, and this sort of thing, but what if I have my own consulting business, you know, I probably just have an LLC or an S Corp here in the U S how, how is this different for somebody in those, in, in that case?
Mark: [00:27:33] well, it depends on, on what your, your structure is. So an LLC would be different than, than an Corp, which will be different than a corporate C corporation, which will be different than a foreign corporation, income tax. And so you’re still going to be paying self-employment tax if you’re, an LLC or sole proprietor, or you’re still be paying payroll tax.
Maybe if you’re a corporation, So I’m trying to figure out how to, how to most usefully answer that.
Ben: [00:27:58] Let me go through each one. if you’re an LLC that it looks like this, if you’re an escort, it looks like this, and then we won’t cover foreign corporations, because that’s kind of a different animal, right?
Mark: [00:28:09] Yeah. It’s, it’s a bigger animal for sure. so yeah, if you’re a sole proprietor or partnership or LLC, you’re, you’re. It’s it’s, it’s going to be pretty similar. You know, you’re not earning a salary, but you’re earning income and that income is going to be considered earned where your business operations actually are, regardless of where your clients or your employers are.
So, if you’re say a consultant working in Spain for us companies that if you, as long as you are in Spain, working in earning that money in Spain, that’s still going to be considered foreign. Earned income and therefore qualified for the FEI. if you have a bigger business, say you have an agency of some sort, you have to be a little more cognizant and careful of what you’re doing.
Or if you have a partnership where you’ve got multiple different partners working for the same thing, you need to be cognizant of where. Things like your partners and employees and warehouses and offices and things are because just because you’re in Spain, your business, which is bigger than you might be working in the U S and then you’ll have us and they’d come that doesn’t necessarily qualify for the fee.
So it can get a little blurry there if you haven’t, if you’re not just like a freelancer or a consultant or a sole practitioner or something like that. so that’s, that’s at that, that kind of unincorporated level that’s call it. And then when you become an S-corporation, it gets a little more complicated.
I’m not sure how many people are going to be familiar with how an S-corporation works. But usually what happens is you’ll have to actually be an employee and you’ll be the, the owner as well. the trick with that, or the catch is that the owner, when you pay yourself as an owner, it says a distribution it’s called.
And that is considered unearned income, the distribution portion, whether you take from an S corporation, you get the part that you pay yourself as a salary, as an employee, that’s going to be considered earned it, qualified for the FIU. but your distribution is not. And so you have to change your strategy in terms of how much you’re paying yourself.
When you have an escort that’s tricky and it is, needs to be determined at a personal level feeling. Get to a tune to that, but that’s how it would work.
Ben: [00:30:10] Yeah. So it sounds less, Less incentivizing with an escort because obviously you set up an escort so you can pay yourself a lower salary and a bigger distribution.
if you kind of flip that to take advantage of the FEI, ye with income taxes, you’d really need to crunch the numbers to see if in fact it is saving you that much money to stay outside of the U S and obviously you have cost of living arbitrage and other savings as well, but you need to factor in, but it’s not as plain Jane.
I’m getting a salary. I live abroad. I save 20 K every year in taxes, sort of calculation. Right?
Mark: [00:30:46] Exactly. Yeah. It’s a little harder to tell. and you got to play around with it and that’s, I mean, that’s what my consulting is. I do consulting and sit down with people. Go over the numbers and figure out what they should set as their salary and things like that.
so I can, I can help anyone teach that, but, yeah, it, it’s not as straightforward, but it is definitely still advantageous. It’s just that the advantage of an S-corporation are less prominent. if you’re abroad than if you were in the U S you’re still saving money though. It’s, it’s not bad to have necessarily an S-corporation
Ben: [00:31:15] saving money in taxes, as well as the cost of living in all of these other things.
Mark: [00:31:19] Oh yeah. Yeah. Which is, I mean, so overlooked in all of this, I, you know, people talk about like, Oh, and think of it like, Oh, that’s nice. Yeah. But people will look at their investments. I’m sure people listen to your podcasts are very interested in investments. you know, you’ll look at it. Guaranteed 15% annual return as like it doesn’t exist.
You know, it’s some Holy grail there. You’ll never find that these days except in tax, because I mean, if, if you go this route and you’re saving 20% access, that’s literally the same as you taking that money and investing it in getting a 20% return. Every single year, that new, if you factor in the cost of living like you were saying, you know, you go, I used to live in Columbia for several months.
And, I had come from Washington, DC and Columbia was at 24% cost of living of what it wasn’t in DC, according to, online websites with nobody or whatever. and so that, I mean, it’s like quadrupling. Your money, basically, you can think of it that way, or you can think of it, of staying at the same three quarters of what you make plus the taxes, and then you can invest that on top of it.
So it’s an addition to your investments, too. so you do it for a couple of years and, and, you know, you’re, you’re off to a good start with investing and in saving your money.
Ben: [00:32:36] Exactly. this is just kind of the gateway drug into this lifestyle. And I have a number of other interviews that have done already, but you know, this is the startup flag theory.
you’re in these other countries, exposed to this other economy and then they have an interview with. People about investing in overseas real estate. you know, the potential for appreciation or a good rental yielding a rental property in one of these foreign countries starts to make sense.
Then you’re. Acquiring this portfolio of international assets that aren’t tied to your home country, where the majority of your assets are signed, are locked up. it becomes getting very, very interesting, because yeah, you’ve got an extra 20 K a year in savings if you’re making over a hundred thousand bucks.
that’s, that’s enough to start putting towards some of real real estate assets abroad and, Yeah, getting very interesting and interesting tax returns, obviously.
Mark: [00:33:35] Definitely. Yeah. And on the other side of things, you know, I’m not sure what, what demographic you’re shooting for here, but you know, if you’re not that big, maybe you’re not earning six figures yet.
That’s okay. because what I did is I quit, you know, like I mentioned, I quit the company that I was working for. I didn’t have a salary, I didn’t have income. And so I that’s one reason I was in, Columbia is because it was so. Cheap. And that’s where I started my, my practice. And, you know, when I was only earning, you know, a thousand, $2,000 a month or whatever, it was just not a lot of money, $500 a month, whatever it was.
and you could still live a nice life, even when you’re starting out your business, or you’re not earning that much money and you still have all these savings and. You know, you’re not saving $20,000 in tax, but at that point, saving a thousand dollars on tax a year matters and they don’t pay for your rent two or three months too.
so, you know, it’s not just for, for, you know, the higher end of things. It could be people who are just starting out or not quite earning as much too.
Ben: [00:34:28] Very, very good point. Yeah. I mean your, your burn rate here in the U S you’re paying. Two grand for, for rent and food and all of these things, transport car, they add up very quickly and you can go to a beautiful place like Columbia or, or Bali or Thailand or whatever, and, spend just a portion of that, a small fraction.
it’s a very, very good point as people start their ex-pat digital nomad journey. And actually just, just to clarify, so next, Pat, in my, definition, would be a person living in another country. And then a digital nomad would be somebody that is perhaps on a tourist visa, but more shorter time.
Shorter term stays in. A number of countries. Is that, is that an accurate
Mark: [00:35:16] description? Yeah, I don’t know if I’m the ultimate arbiter on terminology, but yeah, I think that that would be the generally accepted terms as an expatriate ex-pat would be someone who’s moved abroad on a more permanent basis.
Whereas a digital nomad travels around from country to country or city to city or wherever it is, without a permanent base that’s calling. Yeah.
Ben: [00:35:40] Okay. And what other. What other tax things should these people know? like F bar factor, like these other forms that only exist when you start going abroad.
Mark: [00:35:55] Yeah. I, there’s a, there’s several things. We can start with the fr that’s something that, we’ll usually apply more to the ex-pat side of things and the digital nomad side. that’s if you have foreign bank accounts or either one or multiple. So if you say you moved to Spain and opened up a Spanish bank account, you have to report.
That bank account that balance every year when you file your tax return. and you, you have to do it. If you’re, if you’re foreign bank account or accounts, have an aggregate balance of $10,000 or more, us dollars. it’s not, it actually doesn’t even go to the IRS. It goes towards, to a financial regulatory agency.
And so it will have zero impact whatsoever, on your taxes, but there is a big. Risk for not reporting it. There’s those big companies. I think the penalties are $10,000 or something like that to
Ben: [00:36:41] per bank account or something crazy. Right?
Mark: [00:36:44] Yeah. And then it gets worse and if you don’t pay it in time, then they add even higher Peleas and stuff like that.
So that it gets, it gets bigger and bigger. They just changed it recently. I think they, I think it’s even now it depends on how much money you have in the account, because if you have a lot of money, they might even increase the penalty. anyway, it’s not bad to file, so just like file it if you’re not sure if you need it, it’s relatively easy and no risk of taxes at all.
So it’s good to just get to know about that first hole so that you could do it. And then once you do know about it, just file that every year. That’s F bar FATCA is for a little, a broader sense of financial assets. I don’t have too many clients that really do that, but, that’s when you have to start dealing with different types of, financial assets.
So it’s probably useful for people listening to your podcast. so you have like investments in, in a German company or something like that. And. Those, those assets are greater than a hundred thousand dollars or go pass the thresholds. You need to start reporting that stuff. those thresholds change, depending on where you live, if you’re in the U S or abroad, and there’s different types of financial assets that that will, that you would need to report, like handles that.
So you don’t need to really know that. like nitty gritty of, of all that, but that’s called FATCA as opposed to F bar, which is just the financial conference.
Ben: [00:37:59] the audio cut out a bit. does this include now just for me and the, would this include real estate gold, precious metals, foreign company ownership?
Like what does this include?
Mark: [00:38:11] it does not include real estate. it, I gold. Probably I would say yes, I’m not entirely sure. do you have any, do you know anyone? Just a treasure chest?
Ben: [00:38:23] Yeah. It’s got this. I got this big Scrooge McDuck thing down in, Argentina.
Mark: [00:38:31] This is completely sidebar, but I just read that there was this national treasure hunt in the Rocky mountains. Some dude like kid he’s worried about that
Ben: [00:38:39] knew about this thing since 2010, actually I had a buddy that told me about it. Yeah, it was a in New Mexico, but he hit a million dollars in gold. Well,
Whatever the value was then. And now I don’t know, but, yeah, so it, he just loved the outdoors and wanted to encourage people to be out and exploring the wilderness. So he did this scavenger hunt.
Mark: [00:39:01] Yeah.
Ben: [00:39:02] Yeah. Nick, Nick, if you’re listening, I’m sorry. We never went down there and, And search for it.
Mark: [00:39:07] I didn’t think it existed. And now they’re another rich.
I just found out about it, but I wish I had known because I would’ve dropped everything in. Got search.
Ben: [00:39:16] I love hiking anyways. It’s just like a more adventurous, hike. It’s a legit treasure, right?
Mark: [00:39:22] Yeah, yeah, exactly. Anyway. So me and my girlfriend were Googling this and we actually found there was a new, there’s a treasure hunt in DC is upcoming a week and there’s a $10,000 prize.
And then it’s stopped. It’s like a weekly by ambition. $10,000 week find the treasure. So
Ben: [00:39:38] I link it. I like it. I’ll link it in the show notes, send people out out and about man, you gotta do something.
Mark: [00:39:44] Yeah. It’s COVID friendly anyway. Yeah. So I think probably you would have to report that real estate. No, investments in, in, in foreign companies.
Yes. stocks and things like that in ownership in corporations, you have to report that. And so if you’re not sure they are just listed out. you just Google fat FATCA IRS, and they’ll be like, do I need to record this? And then it has a list. It says, yes. Then it’ll actually delineate between deaf bar in fact, what, what needs to be reported on what?
Ben: [00:40:11] Well, yeah. And then there’s the other one? The five, seven, four one, if you own more than 10% of a foreign entity, right?
Mark: [00:40:20] That’s yeah. Yeah. 54 71. Yeah. I think that’s, that’s different. So form 54 71, sucks. It’s to put it straight. That is, if you’re a us person, us person can mean. Individual or corporation non us.
So if you say, or an individual and you set up a corporation in Hong Kong, even as a shell, you need to, you need to file this form 54 71. It’s really, really complicated form, that, you know, triples the size of your tax return. And it has the extremely high penalties for not filing it or just getting it wrong.
they it’s rare in that sense and that they’ll just penalize you if you don’t do it right. And there’s, there’s five different ways that you are required to file this. One of them is if you own 10% of a company of a CFC or something like, which is a controlled foreign corporation. there’s a few different factors that can trigger that, but, it’s important to, to know about if you do own or operates a foreign corporation.
Ben: [00:41:22] The key takeaway here is that it’s not as easy as just a plot. It’s just getting the fie and you’re free and clear. There’s other forms that you need to talk to your accountant about, to make sure that you’re filing everything, right?
Mark: [00:41:34] Yeah, absolutely. Yeah. and there’s also another big concept we haven’t touched on yet.
It’s called foreign tax credits. and so, yeah, and so that is it’s different than the foreign earned income exclusion it’s if you’re paying taxes to another country. So if you’ve moved to Portugal and start paying Portuguese taxes, you can get a credit on your us taxes for the amounts that you do.
okay. So, so you pay, you know, $5,000 to Germany. That’s $5,000 credit you can get in the U S it’s a little tricky because of timing, not every country runs on the same calendar year that the U S does. So there’s a little bit of timing differences. and you also have to balance the benefits of foreign tax credits against the foreign earned income exclusion, because you usually can’t take both.
On the same income. So if you exclude all your a hundred thousand dollars using the FAA, you can then take the tax credits in addition to it. but what the advantage is with tax rates, the equivalent $6,000, to Germany, but you only had a $5,000 tax liability in U S so you’ve got this thousand dollars, extra credit that can roll forward to future years.
Whereas the 400 income exclusion that’s only in the current year. It doesn’t, if you can’t roll that forward. So, if you do qualify for tax credits, you often want to get a CPA to determine what’s actually more advantageous for you to take.
Ben: [00:42:48] Okay. That makes sense. if I’m thinking I move abroad, I’m subject to another, more higher tax rate.
Now say it like 50%. One of these, one of these very high ones, It’s the additional tax above what I would have paid in the U S isn’t just like, Oh, this was a terrible year.
That credit will we’ll roll forward. He applied to the U S taxes. I’m paying going forward.
Mark: [00:43:14] Yeah, it’s a U S credit. Yeah. you would apply to your us tax and that’s right.
Ben: [00:43:18] Cool. So over the two year period, the idea is that effectively I’ve paid the same taxes total. I’ll be at different governments, that I would have paid to the U S right,
Mark: [00:43:29] right, right. Yeah. Yeah, exactly. and so, you know, it gets tricky. the, the form is all complicated and, it gets really tricky when you’re dealing with corporate taxes, but the same concept applies at the corporate level too.
but that is the general concept. Yes.
Ben: [00:43:45] Makes sense. what else should I know about? I mean, I know when you’re in the U S you’re paying into things like social security and to, to, to receive social security, when, you know, we’re 95 years old and we’re actually eligible or whatever the new age would be.
You have to have paid into social security for like 40 quarters currently. yeah. Is this something ex-pats long-term ex-pats should be worried about that. They’re not paying into this and therefore wouldn’t be eligible for this social security Ponzi scheme that we’ll probably never get anyways,
Mark: [00:44:24] Ponzi scheme.
I don’t know if it’s a Ponzi scheme. It’s got its bond scheme. Yeah. And
Ben: [00:44:28] by definition you pay into it and
Mark: [00:44:31] hope that it works. Yeah. So it depends, you know, because like I said, the 400 income exclusion doesn’t apply to self-employment tax and payroll tax. That is social security. That’s what self-employment tax is.
So that’s, they’re required to pay into that still because. Theoretically, when you do retire, you will still be a beneficiary of social security. with that said, there are strategies to eliminate that or greatly reduce it. Like even an escort will reduce your self-employment tax will, will ultimately, Reduce what you actually receive and social security, if you ever go on it.
So you do need to be cognizant of that. Careful of that, because if you do go with these strategies to reduce or self-employment or payroll taxes, then if you, and you don’t save, then you’re screwed when you retire, which I hope that doesn’t happen. there’s also something called a. Totalization agreement, which is an international treaty tax treaty between the U S and other countries, some other countries.
And you can just Google it. There’s a list of what countries have it with us. basically what that is is if you’re paying into, another country’s social security system, you are precluded, you don’t, you don’t have to pay into the U S social security, but you can still get credit for having paid into the system.
So if you’re paying into, you know, the UK, It’s not called the national insurance. I think it’s called in the UK. Same thing as social security. Then you don’t have to pay into the U S but you can, if you retire to the U S or something, you can still go on social security when you, when you’re old.
Ben: [00:46:00] same idea as the foreign tax credit, you’re paying somewhere. So you’re getting credit for that in your home country, essentially.
Mark: [00:46:07] Right? Yeah, kind of, yeah. It’s different than the foreign tax credit, but yeah. In the sense that you’re paying to penetrate,
Ben: [00:46:13] right? Yeah. In your home country. Yeah. Yeah. Hypothetically speaking, if someone were to not be thinking that there’s much social security there, when they reach that age, then it would be who of them to minimize the amount they’re paying into it now because that’s more money in their pocket now that they can invest in other ways and ideally have a bigger amount than they. Had they paid into social security. Is that correct?
Mark: [00:46:42] I mean, there’s a number of personal factors. Yeah. That’s what I do. If that helps.
Yeah. It’s still pay self-employed or not. So I pay payroll tax, but, you know, I still pay it, but I reduced it through tax strategies because you know, the benefit that you receive now would be. At least for someone in our position that say would, it would be better to save now and, and just invest it then.
Get it eventually in theory, you know, six years down the road.
Ben: [00:47:12] Yeah. Yeah. I guess it works well for somebody that, spends all of their paycheck, you know? it’s, it’s withholding, it’s forced savings in a, in a sense, or it’s not in a sense, that’s what it is, right. They’re investing for you for your old age.
I just, you know, I come from the, Pensions, whether it be at the company level or at the municipal level are completely underwater and going to have some serious, serious issues in the coming years. so it’s definitely, it’s, it’s going to be something we’re going to work through that’s for sure.
Mark: [00:47:47] Yeah. I mean, you know, I don’t know, cause on the other, on the other side, you know, people would say this forever and it’s still around and you know, people are still going social security, and you know, old people still vote. So, and in fact they, they’re the only people as I understand it, so very true.
Yeah. And so, you know, I think social security is a little protective in that sense, but you know,
Ben: [00:48:10] Well it’s protected for now, but what happens when we are actually looking to, to pull from it, if, if a bunch of these other old, more elderly people have been pulling from it the whole time, and we’re not reproducing at the same rate.
get out there and make some babies. The people listening to this,
Mark: [00:48:28] please do not. I’m I’m not Gusto.
Ben: [00:48:31] We need lots of them. Yeah, bring them on. And then the whole ecological impact of that is a whole nother, a whole nother story. Right?
Mark: [00:48:38] So the next generation
Ben: [00:48:39] we’re talking about finances and social security here.
That’s where, that’s what it is.
Mark: [00:48:45] But I, you know, the, the takeaway is, is. You know, make sure you save in our do and your own thing and investing in, you know, have some of your own financial resources. Don’t retire entirely on that for sure.
Ben: [00:48:58] And do you have any, do you have any good resources, places to look for somebody?
do you have any guides or anything on your website that kind of helps people understand some of the key concepts that we’ve talked about here?
Mark: [00:49:11] No it to be short it’s, you know, it takes a long time to actually learn this stuff. And there’s not a lot of good resources and literature on it, which is why you have to go get a five-year accounting degree to be a CPA and things like that.
but if you are interested in. Learning. I, you know, like I said, I do offer consulting or you can just tell me your general state of where you’re at financially. And your plan is we can just give you the general rules. So it’s, it’s not just me too. It’s just best to really talk to someone about this too.
Can, consolidate all the, all the rules and also filter out all the misinformation. Cause there’s a lot of it out there. Now these are online articles. And, and, and, you know, tell you, tell you what you need to know based on your position. So that would probably the best route if you interested in learning more.
Ben: [00:50:01] Yeah. And that that’s an important note, right? Is, tax advice is very difficult to broad brush give to anybody. It very much determines on your individual situation. Andobviously the disclaimer here that none of this is tax or financial advice, whatever we’re talking about,that applies as well. As it always does.
Mark: [00:50:20] Yeah, of course. Yeah. yeah, but happy, happy to help if anyone, if anyone needs. and also you’re just use the little points of, caution, not. Most accounts. I think aren’t going to be able to speak to this. You should definitely, if you’re interested in this kind of stuff, speak to an international account, for sure, because your standard CPA is not going to know what the foreign earned income exclusion is, are not gonna know what tax rates are.
And they might even be really good at what they do, but it’s, it’s very specialized in each I think. And so maybe look for some international specialists.
Ben: [00:50:51] Definitely and a growing niche. I think you’ve you’ve well positioned yourself. Wayfair has been completely remote from the beginning, which I also think is very fascinating because all of these CPAs and accounting.
Firms that, you know, small, smaller firms that think they need an office and they, they have an office now they’re closed for six months and they’re like, wait, did we actually need an office this whole time? What are we doing? And you’re like, yeah, man, I’ve been doing this this whole time.
Like, it’s an office. I’m available. I can span different time zones, whatever
Mark: [00:51:26] exactly. Yeah. It’s I mean, it’s, it’s not just accounting, it’s every industry, right? Why are we spending money on this? Why are we doing it this way? I joke with some of my colleagues and people that I talked to, they, when I first started, I was a little uncertain of myself.
That stain was living in Columbia when I was first learning the ropes and I was. When I would talk to people on the phone, I would try and project myself as this, like a real grizzled old, like 60 year old accountant with 40 years experience in this back room with his advisor and 10 key calculator, because I thought that’s a pocket and the pocket protector.
Yeah, of course. And I tried to like, you know, pretend like I was that. And so that people would trust me more. the complete opposite is true. I learned very quickly that no one wants to work with that. Person over, you know, someone who’s just, enthusiastic and exuberant, like in the same position as they are too.
And so I, you know, I found that I’m, I, me being a digital nomad has helped me work with digital nomads and expatriates and things like that. That’s who they want to work with people that they can connect with. And so it’s good to have, you know, staff and employees are a few from the business to get out there and do stuff.
You don’t need to be the. Okay in the office. There’s no point then
Ben: [00:52:36] Mark really appreciate you coming on having this conversation. where can my listeners find out more about you about Wayfair? Where do you want to
Mark: [00:52:44] send them? Sure. Yeah, you can check me out on my website. Just Wayfair accounting. Wayfair is spelled a w a Y F a R E.
we started coming.com shoot me an email if you’d like M dissonant, Wayfair, accounting.com. And, on that Google meet, you know, happy to help. let me know what you need.
Ben: [00:53:02] Definitely. And I’ll link all of those things in the show notes, but really appreciate it, Mark. Thanks for coming on today.
There you have it.
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