Get to know the authorJohn, an American entrepreneur, saw Portugal not just as a scenic backdrop but as a land of opportunity for his business ventures. His entrepreneurial spirit led him to delve deep into the intricacies of US taxation for expatriates, a realm fraught with complexities and potential pitfalls. While he was adept at managing the operational aspects of his business, navigating the maze of US tax regulations from abroad was a different ballgame.
Challenges of Taxation for US Expats
American business owners like John, operating internationally, encounter distinct challenges. They need to align their business structure with both their tax residency and US tax filing obligations, as the US requires its citizens to file annual tax returns, irrespective of their residence. Navigating IRS provisions for overseas taxpayers, while accessible, can be complex and costly. Misinterpretations often lead to missed opportunities for implementing effective, long-term tax-saving strategies.
John initially approached his US tax filings with a cost-saving mindset, opting for a DIY approach. However, this limited his expertise to the time he could dedicate to research, leaving him and his business exposed to potential IRS complications. In the 2022 tax year, John landed a $1,500 tax bill, not fully realizing the long-term financial implications of taking tax matters into his own hands. Moreover, errors in US tax filings lead to considerable financial and time expenditures in correcting mistakes and resolving misunderstandings.
Turning to Bright!Tax
In 2023, John discovered Bright!Tax at an in-person event in Portugal. His CPA, Nicolas Castillo, conducted in-depth 1:1 meetings with John, meticulously reviewing his prior years’ returns to assemble a complete picture of his tax situation up to the present year.
On its face, John’s tax strategy was tax efficient — for someone based in the US. But when it comes to taxpayers living abroad, there is more than just US taxation to take into consideration. While your business structure and tax positions may be creating maximum US tax efficiency, if the country you reside in taxes you and your business in a way that varies from US tax treatment — and most often it does — your worldwide tax bill may very well present an unwelcome surprise.
The 2022 Savings
Following the initial engagement with Bright!Tax in 2023, John’s Tax Team first focused on amending and optimizing the 2022 tax year, leveraging their expertise to enhance John’s US tax filing and financial strategy. This approach yielded remarkable results. By tapping into the Foreign Earned Income Exclusion over the Foreign Tax Credit, the $1,766 tax owed under his previous strategy for the 2022 tax year was transformed into nearly $10,176 in tax refunds.
This financial windfall not only improved John’s immediate financial situation but also set the stage for ongoing reinvestment and the growth of his business. His case illustrates the transformative impact that expert tax guidance can have on maximizing immediate tax savings while maintaining a nuanced, forward-thinking approach for the years to come. There is top-dollar value in seeking professional tax assistance, especially for expatriates navigating complex international tax regulations.
Restructuring for Ongoing Tax Efficiency
Beyond rectifying the 2022 tax year, John and his Bright!Tax CPA embarked on a strategic journey to restructure his business for ongoing tax efficiency. This approach was aimed at ensuring that future tax obligations were minimized while complying with all relevant regulations.
When John & his wife began their professional services firm, they lived in California and were subject to both Federal & California state taxes. Once they hit a threshold of net business earnings of $80,000-$100,000, it made sense for them to change their default Schedule C reporting business and elect S-Corp treatment.
With an S-Corp election, taxpayers are able to differentiate between owners pay, which is subject to US FICA tax, and business earnings, effectively saving the 15.3% FICA on business earnings that they would have paid through a Schedule C. All of their income, both salary and business profits, were subject to both Federal and California tax. But at least they were saving on FICA taxes.
Fast forward to today, John & his wife now reside in Portugal. As Portuguese tax residents, both their salaries and business profits, which the Portuguese system attributes to them as individual taxpayers, are now subject to Portuguese tax as well – a system in which tax rates range from 14.5% all the way up to 48%.
The Transformation and Trust
Since their partnership began in 2023, John has been working closely with his dedicated CPA at Bright!Tax, meeting virtually each quarter to revisit and refine his tax strategy. The pivotal decision to transition his US S-Corp to a C-Corp marked a significant turning point. This strategic move effectively shielded his business profits from Portuguese taxation, optimizing his tax position.
John and his wife now enjoy greater financial flexibility. They manage their salaries to minimize tax liabilities, leveraging the Foreign Earned Income Exclusion (FEIE) for US tax benefits while remaining mindful of FICA obligations. Additionally, they can continue to deduct business expenses to lower their net profits, further benefiting from the US corporate tax rate of 21%.
John’s journey with Bright!Tax is more than a success story; it’s a testament to the power of expert guidance in navigating the complex world of expat taxation. His experience highlights the significant benefits of strategic tax planning and the value of partnering with knowledgeable professionals.
