Here's how a change of business structure can result in a $5000 refund instead of $6000 in tax due.
When a US citizen lives abroad, and their spouse is not a US citizen, it opens up some interesting tax planning options. Here is how this would work in an example:
$75,000 in self employment income, a joint venture between the spouses. 3 children under the age of 17, US citizens.
If the US citizen spouse reports all the income as their own business, it will result in $11,475 in self employment taxes.Â
Take off $1800 (2024 child tax credit)x3= $5,400.Â
$11,475-$5,400 = $6,075 due for taxes. This is before discussing income taxes.
Now, say that the non-US citizen spouse opens a LLC, starts filing jointly with their US citizen spouse using a 6013(g) election and applies for an ITIN number.
The LLC is used for all business operations, and the non-US spouse claims all the self employment income as their own on their tax return.
According to IRS regulations, while the non-US spouse must take upon themselves to be taxed like a US citizen in order to file jointly, they are exempt from self employment taxes. This is a special exception.
Now, instead of owing self employment taxes, they would get a refund of $5,400.Â
Providing that the foreign tax credit from their country of residence covers their income taxes, the full $5,400 will be theirs as a refund.
There are more complex aspects at play as well, but this is the core simplified breakdown.
Note that compliance and accounting costs for maintaining a foreign-owned LLC can be costly, so each instance has to be considered on its own merits.
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