Washing Capital Gains with the FEIE: My Favorite US Expat Tax Hack

I’m a US CPA who’s been living abroad and working with expats for several years now.

I know taxes aren’t exactly the sexiest topic, but when you start seeing your tax bill plummet every year by leaving the US, it makes FIRE and living abroad much easier. If you're a high-earner, then oftentimes your tax savings can pay for your life outside of the USA.

I've written in the past about the Foreign Earned Income Exclusion (FEIE), but one of the more interesting tactics involves using the FEIE to effectively “wash” capital gains each year.

Say you earn around $100k outside the States and exclude it all with the FEIE. Your federal taxable income in the US is now basically zero...leaving your standard deduction (and other deductions) intact. The standard deduction this year is $15k.

That means you can harvest, at least, $15k in capital gains/interest each year and still owe nothing. If you're in the 15% capital gains bracket, that means you can save $2,250 each year in capital gains tax.

Another angle is to do a Roth IRA Conversion and to convert $15k of a traditional IRA into a Roth IRA. Typically this would be taxable, but not if you're using this 'wash' strategy.

It just takes some forethought, planning, and a bit of tracking.

This best applies to expats earning <$130k in wages and/or business income. If you earn more than that (as a single person), or already have a lot of other types of income, then this might not work.