You’re an aspiring or current expat entrepreneur. You’re seeing the world and enjoying that Borderless lifestyle, or at least planning for it. Lower cost of living, better weather, leading a life crafted by you. But one thing’s been bugging you.

Shouldn’t I consider an offshore strategy?”

Good question, but the answer may not come as smoothly as you think.

Foreign Earned Income Exclusion

If you’re a US citizen maybe you’re already taking advantage of the Foreign Earned Income Exclusion (F.E.I.E.,) which in 2015 allows you to exclude up to $100,800 from income tax. Great! But if you’re still in the planning stage, don’t make the mistake I did my first year here in Mexico. Without getting too deep, you need to look at what the IRS defines as earned income. I used a common strategy of taking a lot of income as “distributions,” and since that’s not technically earned income, I had to pay taxes on all of it. Crap.

I think for most people who aren’t making a higher income, the F.E.I.E. may be the simple ticket. Just hold a US LLC, (some recommend Wyoming, some New Mexico,) and take all of your income as a Sole Proprietor. Make less than that annual limit? No income tax on earnings. Hey, that’s huge! But can you legally do even better? What about taking the Foreign Housing Deduction or Exclusion? How about getting out of Self-Employment Tax (Social Security & Medicare)? Isn’t it true that with an offshore company, any amount you can’t exclude from income tax can be held tax-free as retained earnings? And shouldn’t you make sure you won’t owe much (or any) tax in your new country of residence?

So buckle up, buster! It’s time to jump in head-first. Time to make a call or two and get the straight scoop. You know, just Google up one of those names you’ve heard bandied about the offshore world and fire off an email. In no time you’ll lay out your situation, ask direct questions and receive the laser-focused, custom-tailored answers!

Yeah? Well tough shit. Not happening. Get used to it.

Differing Offshore Answers

I have spent much of 2015 trying to get these rock-solid answers, and I’m telling you: they’re few and far between. At this writing I think I’m at a total of eleven consultations with professionals in this field, and their recommendations span as wide as John Candy’s coffin.

The first question most people seem to have about establishing an offshore company is What and Where? Most of the pros I talked to are pretty up-front that there are a fair number of good offshore jurisdictions–and they’re mostly the same. Anguilla, Nevis, Belize, Seychelles, Panama, and a few more. No big deal; you’ll figure this one out. Some suggest an IBC (International Business Company) structure, while others say an international LLC (Limited Liability Company) offers certain pleasing protections.

Some have told me an IBC is less expensive to open and maintain, and that–if you experience a profit over and above the $100,800 F.E.I.E.–you can choose to keep it in the company’s account as untaxed “retained earnings.” One great value in this? Let’s say this year you make $130,000 and keep the surplus ($29,200) in your business bank account–without it being taxed. Nice. But let’s say next year you only make $80,000. Then you can draw out an extra $20,000 or so (up to that year’s F.E.I.E. limit) from your account–again without having to pay income tax on it. Beautiful, right?

There are all sorts of questions I have about these retained earnings. Can my business use them to, say, buy real estate or other things? Under what circumstances? Can I take a personal loan against the amount my company keeps in retained earnings? Is it true that when I do withdraw from these earnings that I’ll pay a higher tax than I ordinarily would? Is it even worth it then?

I also have questions about the Foreign Housing Deduction or Exclusion. The IRS indicates that living in most areas of Mexico got you a deduction of up to an additional $39,400 for 2014. But I’m told you won’t get to take any of that if you don’t at least hit the F.E.I.E. limit for the year, and others tell me they’ve never heard of anyone in Mexico taking more than about an extra $15,000 for housing. But, alas, I’m so buried in the bigger questions, I can’t really spend too much time dwelling on this one.

Escaping Social Security & Medicare

Future of Entitlement Spending: Can You Do Better?

People disagree about Social Security and Medicare entitlements. Probably you either 1) recognize it’s presently unsustainable and very well might not be there for you, 2) recognize it’s unsustainable but think politicians will figure out how to save it, or 3) try not to think about it. Wherever you fall, it’s not uncommon to think that 15.3% of your income just might be better managed by YOU going forward.

So how about ditching Social Security & Medicare taxes? One expert told me that depended on the jurisdiction, and that I wouldn’t have to pay them if the US had a Social Security agreement with that country. But others told me it’s quite the opposite: that such an agreement means I would have to pay them, which seems to be what the IRS is saying here.  To be clear: the only legal way out of Self-Employment taxes I’ve found is to be an employee of a non-US company, which of course will be your company.

Why So Fuzzy?

Let’s be fair: the primary factor resulting in fuzzy answers from offshore and tax experts? Fuzzy information provided by the IRS. And why do you suppose it’s fuzzy?

Reminds me of a radio station I worked at in the 90s. They used to have an employee handbook that spelled out all company policies, but at some point it occurred to them that the more clear-cut they were, the more these specifics could be used against them. One day we were told the handbook was null and void, and that it would be replaced with an “updated” version. After more than 6 years none appeared, and they could instead deal with us in any way they chose. Similarly, why would the IRS be perfectly explicit when being vague leaves them with even more power than they already have?

Combine IRS fuzziness with an expert’s healthy fear of coming under scrutiny themselves, and you’ve got a terrific recipe for confusion. It’s kind of hard to blame them. And even when you have everything worked out with an experienced offshore strategist? Then you have to find a tax professional who’s on board. Not always easy.

While the majority of those with whom I consulted recommended forming an offshore structure, one very impressive CPA who’s been helping expats with taxes for nearly 40 years told me to stay away from them, and instead to trust Social Security and start up a US government tax-favored Keough plan.

A US tax attorney claimed that if your offshore business involves performing services, (as opposed to selling products,) the IRS applies a “scale-back rule” to your F.E.I.E. He said that if your business requires your personal services, it’s best to just take your income as a Sole Proprietor and exclude everything up to the annual limit. “But here’s the silver lining!” he said with an audible smile. “You get to keep paying Self-Employment Taxes, and end up with more benefits from the government when you retire!” I didn’t speak for at least 10 seconds. Then I politely explained that, while I respected his opinion, I didn’t share it. This polite response, along with a request for more information about that “scale-back rule” produced an even more audible harumph. This experience leads to an underlying strategic question.

“Trust What They Say?”

While the above attorney initially came across as friendly and professional, all it took to produce an about-face was for me to ask him about some of the things he’d said. I could hear his jaws tightening and voice quavering with indignation that I’d dare ask for clarification about what he’d delivered from on high. He accused me of “trying to piece things together all by myself,” and of “going on internet message boards and believing whatever was posted there.” At first he powerfully asserted that unless someone was a “You-Esss Tax Attorneyyy,” he did “not caaarrrrre what they have to sayyyy.” But he began sarcastically condemning another well known US tax attorney, so we can conclude that not just any You-Esss Tax Attorneyyy will do in his eyes.

At the end of our call I thanked him for his time, but he sent two emails, explaining that I “need to pick someone…and trust what they say.” Of course he asserted that his “pedigree” (I’m not kidding) should convince me that HE was the best person for the job. I believe Pete Sisco well identified this behavior as the frustration of facing “disintermediation.”

disintermediation: reduction in the use of intermediaries between producers and consumers, for example by investing directly in the securities market rather than through a bank.”

Sorry, Skippy. But I replaced travel agents with Orbitz and Hotels.com years ago, and although–as a You Esss Tax Attorneyyy–I really did want to get your advice, your seething resentment, elitist posturing and constant interruptions meant I just couldn’t figure out a way to work with you.

Although he accused me of wanting to “piece-together” my own strategy, which certainly wasn’t true, was there still a related point within his criticism? Was I scrutinizing unnecessarily? Was I investing too much time trying to get answers? Should I simply pick someone and “trust what they say?” I certainly began to consider these questions after his shit-fit.

The answer I’ve arrived at? No. I’m 49 and have been self-employed for 17 years. In that time I’ve often ‘trusted what they’ve said,’ and I’ve too frequently been very sorry–and thousands of dollars poorer. I might screw this up royally. I might be a blithering idiot. But by God when my offshore strategy finally comes together I’m at least going to be able to say I fricking understand it!

That said, I was chatting with one Borderless Podcast listener recently who made an important point. As confusing and contradictory as it is in the offshore space, you can’t let it hold you in a state of paralysis. This means recognizing that whatever plan you create today may very well need to be changed tomorrow. And the more I get comfortable with that reality, the less pressured I feel to make certain everything is ideal right now.

So I’ve found some people who give me good, well-researched answers in accord with IRS rules, who take the time to help me understand what I’m doing, and am almost ready to pull the trigger. I guess the upshot is that establishing an offshore business strategy is probably not going to be the cut-and-dried experience you might think. But combining the guidance of competent experts–along with deep, personal research…you too will be thoroughly confused, frequently frustrated and wanting to scream.

Then you’ll figure it out.