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An American expat has managed to save $40 K through her tax exempt job (living overseas and working for a foreign employer, she has managed to save this money legally without paying taxes. She is tax exempt as long as her salary is below $73K per year).

Not really. That's the limit on excludable earned foreign income. There is no exclusion for unearned income, save the personal exemptions and itemized or standard deduction.

Her Goal on What to do with that money: She wants to make the money grow, but would like the money to liquidate her money in 1-2 year's time to buy a house in Italy.

Stocks in US: She thought about putting the money in stocks, but knows there will be tax on whatever earnings she makes on stocks (and we Fools know that, generally speaking, long term is when one makes gains in the stock market). So she has ruled out the US stock market.

Good thinking, IMO. For such a short time, I think it should be somewhere where the principal is safe.

Money Markets and CD's: She has thought about putting the 40K in a money market account or a CD, but is affraid that since she will be earning money in the US, the IRS will want to tax her overseas income as well which defeats the purpose of her tax exempt salary.

Rather than being afraid she should learn the law. The foreign earned income exclusion is not affected by other income.

Let the money sit: She could always let the money sit in her bank account in the US at 2% and then withdraw to buy the house in Italy, but she thinks she CAN do better with the money.

Question: What are your suggestions in how to maximize this money in 1-2 years time AND LEGALLY avoid paying unecessary taxes on this money? Your suggestions are welcomed.

It appears that your friend's salary is totally excluded from US tax. Even if she could get a 10% return, highly unlikely in a safe investment, that would only be $4,000 in income, still well below the combined personal exemption and standard deduction. Even if there's enough other taxable income to put her beyond those exclusions, the first $6,000 is taxed at only 10%.

It looks to me like she should put it in the highest yielding safe place she can find. Taxes aren't an issue.

Phil Marti
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