How To Stop Paying Taxes Legally (8 Ways from Easiest to Hardest)
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Contents
- The Difference Between Legally Avoiding Taxes and Illegal Tax Evasion
- #1: Investing in Tax-Free or Tax-Deferred Retirement Accounts
- #2: Invest in tax-free investments
- #3: Move to a State with lower or no income tax
- #4: Move to Puerto Rico for Big Tax Savings
- #5: Move to another country and claim a Foreign Earned Income Exclusion (FEIE)
- #6: Offshore Structures in Low Tax Countries
- #7: Tax-Deferred and Tax-Exempt Insurance Policies
- #8: Renounce US Citizenship: Drastic but it Works
- Weighing the Costs
- So is it Really Possible to Pay No Income Taxes Anywhere?
- The big lesson
No one enjoys paying taxes. Especially when the money supports things that we don’t believe in.
But, unfortunately – with one notable exception – you don’t have the right to “opt out” of the system. You must pay Caesar his due.
Thankfully, Caesar also gives you a number of ways to reduce or even stop paying taxes. That’s what this article is about.
The Difference Between Legally Avoiding Taxes and Illegal Tax Evasion
To be clear, we first need to state the difference between (legal) tax avoidance and (illegal) tax evasion.
At its simplest, tax evasion is taking action that is illegal under the law. Claiming deductions that you don’t qualify for, underreporting income earned from overseas assets, or falsifying records to cheat the taxman are just a few examples.
Tax avoidance, on the other hand, is about using smart, legitimate strategies to minimize what you owe. Although the mainstream media would have you think otherwise, Uncle Sam actually gives you quite a few ways to reduce what you owe every year. From regular old retirement accounts to the Foreign Earned Income Exclusion if you live and work overseas.
However, you need to be smart about it. You must follow the rules correctly. With few exceptions, you need to work with advisors to ensure the i’s are dotted and t’s are crossed at set up and over time.
In this guide, we’ll cover eight ways on how you can legally reduce your tax burden—and in some cases, stop paying taxes entirely.
Plus, we’ll answer that holy grail question: is it actually possible to pay no taxes anywhere? The answer might surprise you.
#1: Investing in Tax-Free or Tax-Deferred Retirement Accounts
The easiest and most well-known tax shelter is to maximize contributions to tax-deferred retirement accounts like IRAs or 401(k)s. Certain business owners can shelter a lot more with a solo 401(k).
Not only do these accounts help you save for the future, but they also allow you to defer taxes on the money you contribute until you withdraw it in retirement—ideally when you’re in a lower tax bracket.
"Will taxes be lower when I'm retired?"
Clients increasingly ask me if retirement accounts still make sense should taxes rise in future.
For now, we say yes because even if taxes do rise, they would need to rise A LOT to overcome the tax-deferral benefit you get while those assets are in the plan.
In some cases, it can also make sense to explore Roth options: you don’t get the tax deferral but all income or gains generated from assets within the account are tax-free.
#2: Invest in tax-free investments
Certain US investments are tax-free either at the state level, federal level, or both depending on the investment. Some examples:
Municipal Bonds
Interest from these bonds, issued by state and local governments, is generally exempt from federal taxes and may also be exempt from state taxes if you live in the issuing state.
U.S. Treasury Securities
Interest earned on U.S. Treasury bills, notes, and bonds is exempt from state and local taxes, though it is subject to federal tax.
Series I Savings Bonds
The interest is exempt from state and local taxes and may be tax-free at the federal level if used for qualified education expenses.
#3: Move to a State with lower or no income tax
We have multiple clients who have or who are currently moving from one state to another with low state taxes, or even none at all (Florida, Texas, and Nevada have been quite popular in recent years.) Although this doesn’t reduce your federal tax burden, it does leave a little more money in your pocket at the end of the year.
Some clients find this more attractive than moving to a foreign country with a new language, new culture, and the need to navigate a whole new bureaucracy.
Other clients use this as a “test” to get a sense of what it’s like to move, but without having to leave the country entirely.
If you live in a high-tax state...
Some high-tax states (notably California and New York) make it hard for you to give up state residency and stop paying local taxes. You’ll need to sever ties with your former state—think selling property, closing bank accounts, and moving your business operations elsewhere. Thorough documentation is a must.
#4: Move to Puerto Rico for Big Tax Savings
A lot has been made of the tax incentives offered to qualified residents of Puerto Rico. Thanks to Section 933 of the US Tax Code, Puerto Rico offers tax benefits that mainland US can’t match, specifically:
For individuals, 100% tax exemptions on Puerto Rican-source dividends, interest, and capital gains.
For businesses, business-friendly rates like a 4% corporate tax on export services, with tax-free dividends for owners who relocate.
However, because it’s a US territory, you don’t need official permission from foreign immigration
officials to move there. And you get to benefit from a “tax haven” without actually going offshore, which helps you avoid certain regulatory burdens to Uncle Sam.
But — to take full advantage of these benefits, you’ll need to meet some pretty specific residency requirements…
You will need to spend at least 183 days per year in the territory.
You will need to show that Puerto Rico has become the center of your life and business. In other words, maintaining any substantial connections to the mainland could cause you to be disqualified from the program. Factors like property ownership, driver’s license, health care providers, clubs and memberships you belong to… all of these will be looked at.
And yes, you will be audited.
For obvious reasons, the tax authorities in Washington are not thrilled with the idea of losing tax revenue to Puerto Rico.
So they’ve become quite strict on making sure you follow the residency requirements to a fault. Because the authorities will check.
There are two audits you can expect:
At a local (Puerto Rico) level, anyone who moves to the island to take advantage of the Act 60 program will be audited regularly. For the business tax incentives, you can expect an annual audit.
Back on the mainland, the IRS is in the process of auditing every US citizen who has applied for a personal tax incentives package.
It is very important that you document your compliance. If you make a mistake, you may face a big tax bill.
At the end of the day, although Puerto Rico offers some fantastic opportunities, the Act 60 incentives will put you on Uncle Sam’s radar. Before using them, you need to do a proper analysis and compare the potential risks and costs to the benefits in your specific situation.
#5: Move to another country and claim a Foreign Earned Income Exclusion (FEIE)
If you’re new to the world of international planning, you might not have heard of the Foreign Earned Income Exclusion (FEIE). But if you plan to live overseas for a while, it might just become your best friend.
This provision allows US citizens living abroad to exclude a good chunk of their foreign-earned income from all US federal taxes.
For 2024, that’s $126,500 per person. If you’re married and both spouses qualify, you can double that amount to $253,000.
The Foreign Earned Income Exclusion is one of the most effective ways to reduce your tax burden while maintaining your US citizenship.
To qualify, you’ll need to pass one of two tests: the physical presence test or the bona fide residence test.
The physical presence test is pretty straightforward—you need to be outside the US for at least 330 days within a 12-month period.
The bona fide residence test is a bit more subjective but works if you’ve established residency in another country for an extended period and intend to stay there indefinitely.
While the FEIE is a great tool, it does have its limits. It only applies to earned income. Things like investment income or rental income won’t be excluded without additional planning.
(Reach out to us if you have foreign real estate income, are living internationally, and want to know what this additional planning looks like.)
WARNING: Only use the FEIE if you qualify
We sometimes hear from Americans living abroad who want to claim the Foreign Earned Income Exclusion but don’t meet the requirements. They ask us for a “loophole”.
Now, we don’t do that sort of planning. All of our solutions are fully above board and in line with the rules and regulations of the Tax Code. On that alone, we will turn the client away.
But more than that — you don’t want to mess with the FEIE.
The IRS pays close attention to tax returns that claim this deduction using Form 2555. If you don’t qualify and claim you do — and then get caught — the penalties can be steep. Trying to game the system isn’t worth the risk.
If you’re unsure whether you qualify or need help navigating the rules, schedule a free, no-obligation consultation with a Nestmann Associate. We’ll help you get it right from the start.
#6: Offshore Structures in Low Tax Countries
A little while back, I had a call with a successful US real estate investor who wanted to set up a bunch of offshore companies specifically to avoid US taxes. He’d read about it online and heard it was possible from “armchair experts.”
Of course, Uncle Sam would never leave such a huge loophole open… and didn’t. Just about any income a US citizen generates through an offshore company is taxable. And in many cases, offshore companies are subject to the Controlled Foreign Corporation regulations, or CFC rules for short.
Everything he wanted to do would be subject to US taxes no matter how the money was booked. AND they would create a whole new regulatory headache thanks to the CFC rules.
But that said, occasionally it is possible to be a US taxpayer, to have an offshore company, to book income through that company, and legally avoid US taxes.
However, it’s quite complicated, it’s not cheap, and it requires you to give up a lot of control over your assets.
For the vast majority of clients, it’s not worth doing. But if you are an entrepreneur earning more than $500,000 a year through a company you currently control, feel free to get in touch and we can see IF there’s a legal way for you to do this for your situation.
(If not, we’ll let you know right away.)
#7: Tax-Deferred and Tax-Exempt Insurance Policies
If you aren’t interested in leaving the US and none of the other options above are right for you, certain types of insurance policies can help you defer tax or, in some cases, even generate tax-free income.
The nice thing about such programs is their flexibility — they can hold stock, bonds, mutual funds, ETFs of course. But they can also hold hedge funds, “exotic” crypto investments, private equity, domestic and international real estate, commodities, venture capital, and, of course, precious metals.
They can even get you access to investments not directly available to US investors.
The two most common options for this are:
Private Placement Variable Annuity: Also known as a PPVA, this product lets you use after-tax assets you transfer into an insurance contract to defer taxes far into the future. In that way, they are like a Roth retirement account.
However, they aren’t subject to any contribution limits and can offer some very strong asset protection.
Private Placement Life Insurance: Also known as a PPLI, this option lets you put after-tax money into an insurance contract, which can then earn a return tax-free. (Assuming it’s set up properly of course.)
PPLIs also offer some of the strongest asset protection available. For clients at a higher risk (e.g. doctors, real estate investors, entrepreneurs in certain industries), this can be an excellent way to preserve your nest egg, come what may.
#8: Renounce US Citizenship: Drastic but it Works
The nuclear option when it comes to stop paying taxes permanently is to give up US citizenship entirely. That’s because the US taxes its citizens no matter where they live or how long they’ve lived overseas.
All of the options above still require you to follow with Uncle Sam’s rules. The only way to escape his net entirely is to formally renounce your citizenship.
Beyond the emotions that come with permanently leaving your home country, it can also be very expensive if you’re considered a “covered expatriate”. Specifically, you may need to pay an exit tax.
The Exit Tax: Expatriation and Taxes
In 2008, the US government passed a law that imposes an “exit tax” on people who give up their US citizenship or give up their long-term residency (green card holders).
If you qualify under any of the following, you may have to pay the exit tax:
High Income: Average annual US tax liability over $201,000 (as of 2024, adjusted annually for inflation) for the last five years.
High Net Worth: Net worth of $2 million ($4 million for a married couple filing jointly, both of whom expatriate) or more at the time of expatriation.
Non-Compliance: Failure to certify full US tax compliance for the past five years.
What you pay:
Unrealized Gains: Taxes are owed on unrealized gains (the increase in value of your assets) as if they were sold at the time of expatriation (even if you don’t sell them). The good news is that the first $866,000 ($1.72 million for married couples filing jointly if both expatriate) of gains is excluded. This phantom income is taxed as a capital gain at the same rate as if you actually sold the asset.
When you actually sell the assets, no additional US tax is due.But your adopted country might tax the gain a second time, leading to double taxation on the same income.
Expatriates who were not born in the United States may choose to value their property at its fair market value on the date they first became US-resident, rather than when they first acquired it.
Retirement Distributions: IRAs and many other types of retirement plans terminate upon expatriation, with the entire balance subject to tax at a top rate of 37%. Other types of retirement accounts, such as 401(k), are subject to a 30% withholding tax on future withdrawals. Again, if your adopted country taxes this income too, you’ll be double taxed.
Gifts of Bequests to US Citizens: A tax is imposed on any gifts of bequest you make to US persons after expatriation.
Avoidance/Deferral:
Lowering net worth below $2 million may help to avoid the tax.
You can defer payment of the exit tax but may need to pay interest and post a bond.
Weighing the Costs: What You Lose and What You Gain by Renouncing US Citizenship
Expatriation also means you’ll be giving up the protections and privileges that come with being a US citizen. This includes the right to vote, access to certain government services, and the immense travel benefits of an American passport.
More than that, thanks to a law passed in 1996, unless you have another passport that gives you visa-free access back to the US, you might not be allowed back in… ever.
Needless to say, it’s a big decision, and one we’ve helped many clients over the years make for themselves. 90% of the time, they hold off and find another way to get (most of) what they want without giving up their US passport.
The other 10% have worked with us to free themselves entirely of the US permanently entirely. Most don’t regret it, but a few do.
How to Move Out of the US Permanently... From Start to Finish.
Thinking about saying goodbye to Uncle Sam? Here’s everything you need to know about expatriation. The good. The bad. And the often unspoken.
Learn more here: How to move out of the US.
So is it Really Possible to Pay No Income Taxes Anywhere?
Over the years, we’ve had quite a few clients ask. And the answer is, yes — even without giving up US citizenship. But it requires some real planning. Here are just a few examples from our files.
Example #1:
Client was born in a country that taxes worldwide income based on residency (i.e. most of them, but not the US). They moved to Panama and got permanent residency through the Friendly Nations program. They still earned a nice income as a consultant from a company based outside of Panama. Because Panama is a territorial tax system — you only pay tax on income earned in the country — they paid no tax on this consulting income. They also made no money within Panama. No taxes anywhere.
Conservatively, this saved around $120,000 a year in taxes versus if they stayed in their country of birth. Over more than a decade, that added up to more than a million dollars.
Example #2:
Married couple from California moved overseas and set up a small technology company in a Caribbean country with no income taxes. They qualified for the FEIE. They also lived a comfortable but not extravagant lifestyle. As a result, they never earned more than what was offset by the FEIE ($253,000 as of this writing) in federal taxes. Because they no longer lived in California, no state taxes. And because they lived in a no-tax jurisdiction, no local taxes due either.
Example #3:
A recently retired US client with no interest in leaving the country put $5,000,000 of after-tax money into an international Private Placement Life Insurance Policy. That money was then invested into a variety of overseas assets including Swiss asset management and foreign real estate. When structured properly in the right jurisdiction, no tax is owed (so far as Uncle Sam is concerned) on all gains from that $5 million. In addition, the structure allowed for all of that money (including gains) to pass to his heirs tax-free.
The big lesson
As you can see, there are plenty of ways to legally reduce or even pay no taxes. However — with few exceptions — it’s not something you want to try on your own. Setting up and maintaining a structure that’s fully compliant with the rules is not a Do-It-Yourself project.
Indeed, legally compliant tax and asset protection planning is something we’ve done for clients since 1984.
If you’re interested in exploring how we could help you legally reduce your tax burden as part of a comprehensive plan, please feel free to request a free, no-obligation consultation with a Nestmann Associate today.
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We have 40+ years experience helping Americans move, live and invest internationally…
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We have 40+ years experience helping Americans move, live and invest internationally…
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