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HOW TO: Get the Government to Pay for Your Next Round-the-World Trip

by Globetrooper Todd | 20 Responses
Free Round the World Trip

I run into a lot of people who dream of traveling round the world in search of something more. They’d love to explore new places, meet new people, and just have a better understanding of what’s really out there.

The age-old problem though, is that traveling takes money. And while our careers provide that money, our careers also demand so much time that we can’t spend our newfound wealth on anything truly life-changing. It’s a vicious cycle really.

Just like our previous post, Travel on Equity, there are certain prerequisites for this strategy. Firstly, you must currently have a job that pays relatively well. Secondly, your country of residence must have increasing marginal tax rates (see below for more info).

The Fundamentals

In most countries, income tax is paid on marginal rates that increase as your income increases. So as you earn more money, you don’t only pay more in tax, but your rate of tax also increases. Your income tax is paid directly each time your employer pays you based on a few assumptions about your income for the full year. Then, at the end of the financial year, those assumptions are reconciled with reality (did you really earn what you expected?) and you either owe the tax man (boo!), or he owes you (yay!).

An Example

Let’s say I make $100k per year. Let’s also assume the average tax rate at that level of income is 35%. So I pay $35,000 in tax for the full year.

But in January I start to get itchy feet and decide that a round-the-world trip is just what the doctor ordered. By the end of January, I’ve worked seven (7) months of the financial year, so I’ve earned about $58,333 and paid $20,417 in tax.

At $58,333 of income, let’s say the average tax applicable is 15%. That’s because we have a tax free threshold (a level of income where no tax is paid) and tax rates for lower income earners are much less. So if I leave my job now, I only owe $8,750 in tax, rather than $20,417, which means I paid $11,667 too much.

The Outcome

Technically, that additional $11,667 is not the government’s. But it would have been the government’s if you didn’t take a break to travel the globe. So in my crazy world, which I don’t try to understand for fear of it not making sense, I see this as the government paying me $11,667 all because I decided to take a round-the-world trip.

Sure, you may need more money depending on the length of your trip, but either way, $11,667 is a nice donation to your RTW fund. If your country has even more disparate tax rates, your tax refund will be larger, and if you make more money, it may also be larger.

In Practice

Firstly, you need to leave your job at the right time. If you leave just after the start of the financial year, you wouldn’t have paid enough tax. If you leave at the end, you won’t be eligible for a large refund. Generally, if you leave between 5 and 7 months into the financial year, you’ll receive the greatest refund.

Secondly, in most countries, you can’t access your tax refund until the end of the financial year. So you may need to use your savings, or more likely, a credit card, and then repay those funds once the tax refund comes through. Make sure you account for interest on any credit cards before going too crazy planning your round-the-world trip.

The Caveat

The main caveat relates to your country’s marginal tax rates. They may not be disparate enough to make this work. The solution is to use unpaid vacation leave to supplement your trip budget. Then of course there’s eBay. If you’re going to be away for a while, don’t let your material possessions depreciate, sell them on eBay and spend the proceeds unwisely.

If you’re looking for a reason to travel round the world, this may be it. If you time it properly, you won’t have to save nearly as much to take the plunge. Happy travels.

Posted in How-To Guides, Travel Hacking | August 9th, 2010

20 Responses to HOW TO: Get the Government to Pay for Your Next Round-the-World Trip

  1. I don’t understand too well the “tax machine” of this country (USA) but what I have found useful for me is that I let myself be taxed on a higher bracket (more money is taken out of my paycheck than what it is supposed to) so when I file my tax returns I always get money back… Many economists don’t recommend doing this because it is thought to be a “tax free loan” you are giving the government with that extra money… but I don’t care. Taxes here are not as high as in Europe and other countries, but when I get my refund it feels extremely good and it goes straight to my travel pot. Otherwise that money would have been spent in other stuff.

    • That’s a really good point Norbert. In finance, they talk about an illiquidity premium. So when you invest money that you won’t get back for a while, they say you should get more money back (a higher interest rate). That would apply to your example too; financial analysts would say you should get paid for that loan to the govt. But of course, being finance, they forget about the human aspects. As you suggested, illiquidity can be a virtue.

  2. Excellent. I think what you’re basically doing is using your government as a savings account. You have to earn more to save more. I know I couldn’t do this in the UK — and there’s only a certain amount of times you could feasibly leave a $100k a year job.

    I like this theory.

    On a much smaller scale, this is one of the biggest benefits of the Working Holiday Visa is Australia. I worked for around 6 months there and I got several thousand dollars back! Whereas here in NZ, there’s no such thing as a rebate and in my native UK, well, let’s just say “no chance!”

    I like your way of thinking, Todd. A lot of people could benefit from this.

    • Hey Ant. It all came from having to do my tax return for the financial year ending June 30. Let’s just say the refund made up for previous profligacy. But like you said, it’s not a recurring thing, so we’ll have to exercise a bit more discipline here onwards. All the best mate.

  3. A handy tip, if only it worked so well in the UK. I did at least manage to get a tax rebate from the tax man as I had only worked for a few months of the year when I quit, which I have taken a year to get around to claiming. It’s a handy bit of cash though that will keep me going a bit longer :)

    • Hey Laurence. With everyone mentioning the UK tax system, I thought I’d have a look. So it seems you have relatively simple brackets, but a really low tax free threshold (£2440). So a quick calculation to see how it would work in the UK:

      Say I make £100k. It seems the tax due on that is (40% high bracket) 25040 + (20% on lower bracket) 6992 = 32032. So in half a year you’d year £50k and pay £16k in tax. But if you left your job, you should only have paid tax applicable to a salary of £50k, which is 5040 + 6992 = 12032. So, in theory and my very limited knowledge of the UK tax system, you should receive a refund of £4k.

      Not too shabby, but then a £100k job isn’t that easy to come by either. Sure you could just work a couple of weeks to make that £4k, but that’s not the point. The point is that you’re sick of the BS and want to go travelling now, and that £4k is as good a reason as any to do something a little crazy. :)

  4. You do realize, Todd, that you don’t get that pay for the rest of the year, right? ;) If you can live on that much less of your income, surely you could have just paid for the vacation up front, I’m thinking. I feel quite certain that if I had a job that paid twice what I needed, I would not be worrying about my tax refund. Ah, well, fat chance that ever happening.

    Your article reminds me of the little boy I know who informed his single dad who was having dating woes: “I think what you need to do is be more handsome.”

    • Hi kwc, thanks for dropping by. My experience was that I needed that income to sustain the life I’d built at home. So there’s not much chance to save for a RTW trip unless you first cut back your standard of living. But we used our RTW trip to change our way of life. So the tax refund was actually very helpful because we dropped our consumption so much that it was enough to live on. You know, people think life would be perfect if their salary doubled. But in practice it doesn’t work that way. You simply double your expenses and end up in the same predicament. Isn’t it easier to halve your consumption than double your salary? Just a thought :)

  5. Over here in France, tax doesn’t get taken out of your income as you earn it. Rather, you end up with a massive bill at the end of the year! With my woeful financial management that means no RTW trips for a long time :-(

    • But you live in France, so you clearly don’t deserve a RTW Trip. I bet you drink great wine and eat even better cheese in the parc on a daily basis. :)

      Seriously though, I wonder how many people don’t have the money at the end of the year to pay the tax bill. I can’t imagine that working in many places. But maybe it’s just ingrained in the culture. From my limited understanding, France is relatively socialist??? So maybe people are more accepting of government and tax.

  6. Genius! I don’t know why I haven’t thought of this. I tend to quit a lot of my jobs within 11 months anyways (an ugly habit), but if I start planning my quits a little better I could totally make off with more money.

    I like the cut of your jib!

    • Wow, thanks for comments Corbin. Yeah, I’m usually like that too, though I planned well ahead this time. Worked out great. Just as I was lamenting the gap between actual spending and budget (in Montreal no less), the Australian government sent a lovely gift to make all the pain go away.

      If you like that post, you may like this one even more: http://globetrooper.com/notes/travel-on-equity. It gets more technical, but same premise of objective re travelling the globe forever.

  7. Good post Todd – we’ve already considered the timing of our RTW and the end of financial year, but it’s very complicated!

    We were planning to leave in June, but may push it back until July so that our termination payments (we’re saving up big on the annual leave!) and some of our pay counts towards the 2011-2012 financial year here in Australia and we can claim most of it back via the tax-free threshold.

    As you mention, the downside is that we will have to wait over 12 months to see this tax refund!

    • Hey Kieron, 12 months later might be the perfect time for a little cash injection :) Hope the saving and planning is all going well. And we hope to catchup with you both somewhere around the world. We’ll be in Mongolia by the time you leave, but not sure after that.

  8. I’ve done exactly this – I left my job half way through the financial year and I got $4k tax return! Nice! :)

  9. in regards to waiting a year for a tax rebate in the u.k, you can actually fill in a p85 alongside your p45 in order to qualify for an early refund of tax, and therefore use this money on your trip. although the form does state it is not to be used for short holiday breaks. i’d imagine my rtw trip of 9months should qualify as long enough, i guess we’ll have to wait and see..

    • Many thanks for the tip Todd. Australia has something similar, but I believe you have to file before the year starts, which sort of defeats the purpose.

  10. Many thanks to you for sharing these kind of wonderful discussions. In addition, the perfect travel in addition to medical insurance approach can often reduce those worries that come with traveling abroad. A new medical crisis can rapidly become expensive and that’s certain to quickly set a financial impediment on the family’s finances. Having in place the ideal travel insurance program prior to leaving is well worth the time and effort. Thank you

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