Cruising around the internet and I saw that the UAE does not have an income tax … so work int Dubai and pay no income tax? Not hardly since the United States will tax my income anyways. But wait … I saw this which seems to imply that I can exclude just over $100K from being charged tax by Uncle Sam. Is that on the up and up? Can I really live a virtual income tax free life over in Dubai?
Yes, you can. The trick is:
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Live in Dubai (or another of the relatively small number of countries with no income tax).
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Make sure you have no US-source income (interest on US bank deposits, dividends on US stock, rent from a property you own in the US, that kind of thing).
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Make sure your total income from all sources is below the Foreign Earned Income Exclusion.
Income can be US-sourced. I used to take the exclusion working in Mexico all the time. All I needed was a bona fide residence, and the right number of days outside of the USA. My income was 100% US-based, and I always gave the IRS my US-W2’s.
Even my five years in China, my company took that deduction for me (as part of tax equalization, an insane, complicated process whereby in the end I’m “made whole”).
I don’t know the current law, but when I was doing it, you needed foreign residence for a period of 18 months to qualify for the deduction. And it applied only to salaries, not to interest, dividends, or (significant for me) pensions. The amount of the exclusion was $80,000 in 1968 (which was a huge salary then) but has grown only painfully slowly.
I’m open to correction here, but I think to avoid income tax on US-source income you need to be tax-resident in a country with with the US has a double-taxation agreement which provides for residents of that country to avoid tax on their US-source income. (The default position is that everyone is liable to US tax on US-source income.) And you avoid having to explore the question of whether there’s a double taxation agreement between the US and your country of residence and, if so, what it says about this if you have no US-source income.
Unless things have changed this has effect only for tax credits for foreign taxes paid, not relevant in this case. But the earned income exclusion is world wide and requires only absence from the US for (if I recall correctly) 17 months in an 18 month period and independent of foreign residence. But it applies only to earned income, not any other kind.
I believe this is correct. However, the “physical presence” test is 330 days outside the US in 12 months, not 17 months out of 18. You can also qualify by establishing your “tax home” in a foreign country. Then you can be more time in the US, but have to pay tax on any income earned while you are in the US.
I’ve had a “bona fide residence” in Panama since 1992, and have been able to take advantage of the Foreign Earned Income Exclusion. As the name implies, it applies only to salary/wages, not other income, and only to income not paid by the US Federal Government. (Thus, military posted overseas can’t take it.) Also, it doesn’t apply to FICA taxes (Social Security and Medicare taxes).
Because I had the equivalent of diplomatic status in Panama, I was exempt from Panama taxes as well, so the exemption meant I was essentially tax-free except for FICA.
Yeah, but if you’re a salary-earning person, it’s unlikely that your non-salary income is going to be high enough to result in huge taxes, because once you remove the foreign exclusion, you get all of your normal deductions (I seem to recall; this should be fact-checked).
In all honesty, I’d rather be here paying taxes than in that kind of heat surrounded by endless miles of sand. I guess I’d call it an “acceptable trade-off”.
I will retire in 120 days. I have worked in Saudi Arabia for twenty-five years mostly to avoid taxes.
Of the more than 2 dozen countries I’ve been to, UAE was by far the most expensive. I’m not just talking as a tourist. I went into some of the larger local grocery stores and looked up housing costs. You’d have to make a pretty penny in Dubai to make it worth any tax savings.
Oh, sure. Plus, there are many other characteristics of living in Dubai that might make you think twice about wanting to live there, depending on your values, preferences and tastes. Tax exile is called “exile” for a reason. Foreign places are, well, very foreign, and often a long way away from a great many people and places that you care about.
I think the OP’s question is being addressed on the assumption that avoiding income tax is someone’s overriding priority, to which other considerations will be subordinated. In reall life, a decision of this kind is always going to require some kind of balancing between, or compromise of, competing preferences.
Taking that into consideration Dubai is one of the last places I’d be an expatriate in. I found it rather boring. It’s not an ancient city so there is no mystique to it. It’s too westernized. The rules and regulations are fairly strict, though not as bad as other places in the mid-east. After 2 weeks I was glad to go home.
Nope. I asked the question because since the US citizens all over the world pay income tax I didn’t think there was a way to avoid paying taxes living overseas hence (for an American) “tax-free salary” was not really tax-free.
US citizens are liable to US income tax, no matter where they are resident. But they have various allowances, exemptions, etc available to them, including (but not limited to) the foreign income exclusion, so the amount of their liability may be nil.
This doesn’t, of course, necessarily result in " a virtual income tax free life"; they will also have to consider liablity to income tax levied by the country in which they reside and/or the country in which they derive their income.
But, yeah, it is possible to arrange your affairs so that you have no liability to income tax in any country. Probably the easiest was to do this is to have no or next-to-no income, but there is an obvious downside to this strategy. Other methods mainly focus on some combination of (a) limiting your income; (b) deriving it from the right places; and © residing in the right place while you do it. It requires careful planning, and a great many other things may have to be compromised in order to acheive it. But it can be done, and some people do it.
IRS Publication 54 has all the information needed.
When I was working in the ME, I was making just under the FEIE limit, so I effectively paid no US income taxes for 2 years. Once I received my civil ID and drivers license, I satisfied the bona fide residence test, and could take my 30-day vacations to the US without worrying about the 330-in-365 rule.
EDIT: Apologies for post resurrection