Monday, May 20, 2024

Primer: as a US citizen living in Mexico, do I need to file with the IRS?

Since the article about the taxpayer registration requirements was published, there have been a lot of questions regarding the tax obligations of foreign residents in Mexico.

This article will not address expats’ tax obligations to Mexico specifically but rather the tax obligations of United States citizens to their home country.

We spoke with Michael Lindstrom, U.S. expat tax specialist and enrolled agent at Living Abroad Tax Services.

What’s the most important thing that people should know?

“U.S. taxes are based on citizenship; you have the privilege of reporting and paying on worldwide income,” Lindstrom says.

Essentially, there are few ways around filing U.S. taxes if you’re a U.S. citizen. But for those who might think, “I already pay taxes to Mexico; I shouldn’t have to pay taxes to the U.S. as well,” be aware: although you may already pay taxes in Mexico, there is no guarantee that you won’t also owe taxes to the United States government.

However, there are a few exceptions: if you are an employee in Mexico but make less than US $12,000 a year, then you do not have filing requirements; if you have no income (in either wages or investments on either side of the border) and are simply living off savings, then you do not need to file.

And finally, if you are living solely off Social Security checks, then there is no need to file (though you’ll want to make sure that they have an accurate address for you, as they may send “proof of life” forms for you to fill out periodically).

All that said, be sure to check with a U.S. tax specialist like Lindstrom to make absolutely sure what your obligations are.

Beyond those aforementioned scenarios, everything else is fair game.

This includes U.S. citizens living in Mexico who are employees of a U.S. company as well as freelancers, who must pay a 15.3% self-employment tax to cover their own Social Security and Medicare payments.

If you’re an employee (not an independent contractor) at a U.S. company, then your company will have already taken out Social Security and Medicare payments before sending you your paycheck, so it’s possible you’ll find out when you file that you owe nothing, or even that you are getting a tax refund.

If you earn less than US $112,000 per year, then you can take the Foreign Earned Income Exclusion. (As the name suggests, this is only for earned income in wages or salaries, not on passive income from investments). Keep in mind, however, that this amount is for federal income taxes and excludes you from being able to take certain other credits.

And freelancers or independent contractors earning well below this amount will still be responsible for paying self-employment tax if their freelance income amounts to more than US $433 a year.

Finally, if you have more than a total of US $10,000 in foreign accounts at any point during the year, then you must report it to the U.S. Treasury.

What about property owned in Mexico?

“If you hold your property here in Mexico as your primary residence, you do not owe additional U.S. taxes on it,” Lindstrom says.

If it’s a rental property, however, then you may indeed need to pay taxes on the income generated by it, and if you sell it, then you would also likely pay taxes on the profit.

Many people have heard that the U.S. has treaties with other countries to avoid “double taxation.” This, however, is not as simple (or as accurate) as it sounds, and in the case of Mexico, one cannot simply decide to pay in one country or the other.

“Tax treaties generally reduce the U.S. taxes of residents of foreign countries as determined under the applicable treaties,” Lindstrom says. “With certain exceptions, they do not reduce the U.S. taxes of U.S. citizens or U.S. treaty residents.”

What if you haven’t filed taxes in the U.S. simply out of ignorance or misinformation?

“One program you might qualify for is the Streamlined Foreign Offshore Procedure.” This provides a way to regularize one’s standing with the IRS without incurring fines.

If you’re simply feeling defiant and refusing to report to the IRS on principle, be aware that there’s no guarantee your money will be safe in Mexico: you could face heavy penalties and fines, and Mexico can collect taxes from you on behalf of the IRS.

The bottom line?

“Taxes are more complicated than most people think,” Lindstrom says, especially when one is outside one’s own country.

To be on the safe side, consult a tax professional to ensure that you’re meeting all legal requirements regarding your money.

Sarah DeVries is a writer and translator based in Xalapa, Veracruz. She can be reached through her website, and her Patreon page.

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