Why We Love Foreign Earned Income Exclusion

If you’re a new reader, you’ll want to start here and get an idea of who we are and what our motivations are behind building our Quantigence DGI Portfolio. Sure, we wanted to develop an objective way to construct a dividend growth investing (DGI) portfolio and share it with other DGI investors but what really motivates us is that we can’t stand working in the corporate world any more.

Let’s be clear here. There are people working in corporations who love what they do. They find HR to be a useful part of their lives. They truly enjoy getting up at the same time every morning and commuting to work alongside all of the other drones. They truly look forward to compensation day because they get paid what they are worth. They truly believe that emerging market “talent pools” are enjoyable to interact with. Sure, there are people like that in this world. It’s just that they are far and few between.

Unfortunately we are not one of those people. We’re counting the days until we can either engineer our own layoff or put in our notice. What are you waiting for you might ask? We’re specifically waiting for Hong Kong permanent residence because then we can quit our jobs and avoid paying any U.S. taxes in the future on earned income because of what’s called the “foreign earned income exclusion” loophole. What this means is that you can avoid paying any taxes on income of up to $100,800 (for 2015) if you meet the following requirement:

You must be a U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

Think about that. You can make up to $100,800 and not pay any U.S. taxes as long as you don’t spend more than 35 days a year in the United States of America. This is precisely why we can save so much each month to invest in our portfolio. We only pay a tax rate of less than 11% here in Hong Kong. But what about dividends you might ask?

Dividends are not considered earned income so we will need to pay tax on them the same as if they were income we earned in the U.S. using the normal tax brackets seen below:

US Tax Bracket

When we leave the corporate world, we plan to have $1,000 in monthly dividend income which comes out to about $12,000 a year. If we subtract the personal exemption of $4,000, that gives us taxable income of $8,000 a year which would put us in the 10% tax bracket.

While there are a number of countries that we’ve been to where you can live very comfortably for $1,000 a month, we’re going to need more than that to continue traveling and enjoying the extravagant lifestyles we became accustomed to while working in finance. This is why we want that “foreign earned income exclusion”. Any income we earn while outside of the United States is not subject to U.S. taxes. In the long run that can help you save quite a bit.

Share This:

Comments are closed here.