U.S. Income Tax Obligation While Living Abroad
As a U.S. expatriate residing abroad, you still
owe U.S. taxes each year on your worldwide income! The stories you
hear from some of your fellow expatriates sitting next to you at the bar
that once you leave the U.S., you no longer owe any taxes.
That is true for citizens of some countries, but
not of the U.S. Its even against the law to give up your U.S. citizenship
in order to avoid U.S. taxes!
The IRS Presence Overseas
The U.S. has tax treaties with many countries in
the world which allow them to exchange data on their citizens living in
the other country for tax purposes.
The U.S. also has a few agents located in each
country that are there to help U.S. expatriates with their tax questions
and problems, but are suspected to also report on activities of U.S. expatriates
which might not be included in their U.S. tax returns.
The IRS has paid bribes, and made other deals with
foreign bankers and investment advisors to secure lists of U.S. people
who have offshore accounts, and businesses in order to determine if those
individuals are reporting their activities on their tax returns.
The IRS will not release their statistics on the number of individuals
living overseas who do file tax returns, but it is believed that a large
number do not.
If you do not file a tax return for a tax year,
the statute of limitations on that year never runs out.
Therefore it is advisable to file a return for
each year, even if your taxable income falls below the minimum amount required
for filing in order to cause the statute of limitations to run out.
If you do file your tax return each year while
living in Mexico, the statute of limitations for IRS audits will
expire three years after you file those returns. That means the IRS cannot
go back (absent fraud) and try to audit or change those returns later.
Therefore, you should file your return even if you have no income
or don’t owe taxes in order to force the statute of limitations to run
and eliminate future problems when you decide to return to the U.S.
Foreign Earned Income Exclusion
If you live abroad for a full calendar year, or
live there for 330 days out of any consecutive 12 month period, you
can exclude up to $74,000 of earned income from U.S. Income Taxation for
If you are married, and both of you earn income
and reside in Mexico, you can also exclude up to another $74,000
of your spouses income from taxation. These exclusions can only be claimed
on a filed tax return and is not automatic if you fail to file your Form
1040 for the year it applies as well as the appropriate forms claiming
this exclusion. This is a fantastic advantage for people who live
and work overseas. in Mexico. Earned income is that paid you for
your work or services and does not apply to rental income, dividend or
interest income, or other types of income that is not paid for your own
personal efforts. You can also claim additional an additional exclusion
from your U.S. taxes in excess of the $74,000, if the rent you pay
on your residence overseas and other living expenses exceed a standard
amount established by the IRS. This exclusion only comes into play when
your earnings are in excess of the $74,000 foreign income exclusion.
Foreign Tax Credit
You can claim a foreign tax credit which directly
offsets your U.S. taxes for any income which is earned overseas and is
subject to tax providing your residence country requires you to pay income
This foreign tax credit can only be used to offset
U.S. taxes on income you earn abroad or on interest or dividends earned
abroad. The credit cannot exceed the amount of U.S. taxes you actually
pay on that foreign income. If the amount of foreign taxes, exceeds
the amount you can claim as a credit on your Form 1040, the excess can
be carried over to future years when it might be utilized when your foreign
taxes on foreign income are less than your U.S. taxes on that income.
U.S. Self Employment Tax and Social
If you are a bonafide employee of a foreign employer
and have that country’s taxes and social security numbers withheld from
your pay, you do not have to pay U.S. social security or self employment
tax. The U.S. has social security treaties with only a small number of
countries, however. If you actually own your own business abroad
or are an independent contractor, you may owe U.S. self employment tax
on your earnings, even though those earnings are not subject to U.S. taxes
due to the foreign earned income exclusion previously mentioned. The self
employment tax rate is 15.3% of your net income from self employment.