Living abroad may seem tempting but this decision comes with its share of pitfalls as well. Americans who move overseas or across the border to Mexico still have to deal with the Internal Revenue Service and its army of tax collectors
The process of filing a return and paying the associated taxes can be much more complicated as an expat. Still, there are many U.S. citizens who believe that leaving the country will relieve them of their obligations to the IRS; even if you know that you have to file, you may not know the many steps it takes to submit a federal income tax return for expats. Furthermore, there are tax perks designed to benefit expatriates, such as the foreign earned income exclusion (FEIE) and the foreign tax credit (FTC). Claiming these exclusions and credits can enable you to lower your tax liability to the United States and reduce instances of double taxation on the same income. We can help you plan and prepare your U.S. taxes and submit them by the deadline so that you are not penalized for tax non-compliance while living in Mexico.
For assistance during tax season while living in Mexico, call the tax CPAs for American expatriates at US Tax Help today at this link – get in touch.
Filing and Paying Taxes as a US Citizen in Mexico
Given its proximity to the U.S., Mexico can seem like a convenient place for relocation. From the bustling culture of Mexico City to the beautiful beaches of Cancun, there are many places an American could enjoy. However, even crossing the border and establishing a life in a new country doesn’t exempt a U.S. citizen from their American tax obligations, since the U.S. taxes based on citizenship instead of country of residence – making America one of only two countries in the world to do so.
If you are a U.S. citizen living in Mexico, make sure to fill out and file the usual IRS Form 1040, U.S. Individual Income Tax Return, just as if you were still in the United States. Most of the information on this form will be the same regardless, though there is one important difference that Americans should know: U.S. expats living abroad are eligible for an automatic two-month filing extension, making the effective deadline June 15 for Americans living in Mexico. One important caveat is that this deadline only applies to filing an expat tax return, not to paying what you owe. This means that any payments you must make will begin accruing interest starting on Tax Day.
There are other extensions available to expats as well, though these also only apply to filing your paperwork, not sending your payments. Expats can add four months to the automatic extension mentioned above for a total of six extra months to file, and in special circumstances, it’s even possible for some U.S. citizens living abroad to get an additional two months, making their final filing deadline December 15. Our tax CPAs for American expatriates can handle your taxes so that they are filed well before the deadline, eliminating the possibility that you incur financial penalties for late filing while living in Mexico.
Tax Breaks for US Expats Living in Mexico
Though the tax return filing process is certainly more complicated for expats living in a foreign country, there are some advantages to this situation as well. One of the biggest benefits of living in another country is that the U.S. allows you to exclude a significant portion of your income from taxation by the IRS, part of the effort to avoid double taxation on expats – a situation in which the same income is taxed twice by two different governments. The two biggest tax provisions that address this issue and help expats reduce their U.S.-based taxes are the foreign earned income exclusion and foreign tax credit.
Foreign Earned Income Exclusion
If you earn income in another country in which you are effectively a resident, you can likely reduce or even eliminate your taxable income by using the foreign earned income exclusion. To take advantage of this provision of the U.S. tax code, you must first pass either the bona fide residence test – which requires that you are a resident of another country for at least one full tax year – or the physical presence test – which requires that you be physically present in another country for at least 330 full days over the course of a 12-month period.
If you pass one of these tests, you can exclude up to $126,500 of your foreign earned income from taxation by the IRS in 2024. For joint filers, the FEIE threshold doubles. Keep in mind that this only applies to wages, salaries, and other amounts earned by providing professional services. Money earned through passive sources, such as the collection of rent, is not eligible for exclusion under the FEIE. Use IRS Form 2555, Foreign Earned Income, to claim this exclusion, no matter if you work for a company or are a self-employed U.S. expat. The FEIE only applies to income earned from a foreign source. If you continue working remotely for an American company when residing in Mexico, you cannot exclude your income using the FEIE as it will not be from a foreign source.
The foreign earned income exclusion also includes the foreign housing exclusion. This can allow you to exclude foreign income used for certain housing costs from taxation by the IRS while you live in Mexico.
Foreign Tax Credit
The foreign tax credit is a tool that allows U.S. citizens who paid taxes to a foreign government and are subject to U.S. taxation on that same income to claim a credit and effectively reduce their taxable income by that amount. For instance, if you fail to qualify for the FEIE but earned income in Mexico and must pay taxes there, you can avoid double taxation by taking advantage of the foreign tax credit. However, you should note that you cannot take a foreign tax credit on income that you already excluded under the FEIE or another provision like the foreign housing deduction, and doing so may lead to the loss of both tax advantages.
To claim the FTC, you can submit Form 1116 to the IRS by Tax Day. The foreign tax credit only applies to certain taxes paid to a foreign country like Mexico, such as income, war, and excess profits taxes.
Reporting Foreign Financial Assets as a US Expat Living in Mexico
As long as you are an American citizen, the IRS may want to know what you are doing with your money and where you are holding it. Because of this, you may have additional reporting requirements to the IRS on top of your normal income reporting liability.
Expats with certain foreign financial assets must report them to the IRS annually. For example, if you live in Mexico and have over $200,000 in foreign financial assets on the final day of the tax year or more than $300,000 at any time during the tax year, you will have to file IRS Form 8938 for that year. For joint filers, the reporting thresholds are doubled. By informing the IRS of your foreign financial assets, you are not putting yourself at risk of incurring more taxes. The IRS simply requires filers to submit Form 8938 for informational purposes only.
On top of reporting such assets to the IRS, you might have to report some of them to the Financial Crimes Enforcement Network (FinCEN). FinCEN was created to monitor American money domestically and overseas. To comply with FinCEN’s reporting requirements, you must complete a Report of Foreign Bank and Financial Accounts, more commonly known as an FBAR, if you have more than $10,000 across all foreign bank accounts in a tax year. You can file an FBAR using FinCEN Form 1114. Such information is also due by Tax Day each year.
What Does it Mean to Be a Covered Expatriate as a US Citizen Living in Mexico?
If you are considered a covered expatriate, that means you might be subject to exit tax upon your expatriation from the United States to Mexico. Our tax accountants can help determine if you are a covered expatriate according to the IRS’s guidelines.
Covered expatriates are any U.S. citizens who have relinquished their long-term residency in the United States on or after June 16, 2008 and meet the additional criteria set by the IRS. For example, you may be deemed a covered expatriate if your net worth is more than $2 million. Or, if your net income was above the average for the last five years, you might be a covered expat. Furthermore, if you cannot prove your tax compliance over the last five years, you may be a covered expat. Pre-exit tax planning with help from our tax CPAs for American expatriates can help you avoid becoming a covered expatriate and paying an exit tax.
If you are covered expatriate, you will be subject to the exit tax, and any gifts you make to a U.S. person will be subject to a gift tax. However, you may be able to defer the exit tax if you are able to satisfy certain criteria.
If you are a covered expatriate and you expatriated on or after June 4, 2004, you will have to complete and submit Form 8854 to the IRS. This form is used to document initial expatriation and continuing expatriation. When completing this form, you will need to provide certain information, such as your income for the five years preceding your expatriation to Mexico, proof of your American citizenship, proof of your domestic residency in the U.S., and your various assets and properties prior to your expatriation. IRS Form 8854 and its corresponding schedules are due annually on Tax Day.
Tax Planning for US Expats Who Live in Mexico
For expats living in Mexico, tax planning is crucial in order for all reporting guidelines to be met and all tax perks to be claimed. Our tax accountants can handle planning and preparing your taxes so that you ultimately face no stress during tax season.
Tax planning is a process that involves assessing all of your financial information and the IRS’ various deductions, credits, and exclusions to determine which you are eligible for. We can look closely at all sources of your income, whether they be foreign or domestic, your dependents, your expenses, and other financial information so that we can properly claim the foreign tax credit, the foreign earned income exclusion, and any additional credits you are eligible for, be they expat-specific or not.
Tax preparation is another process that involves completing the tax forms you are responsible for submitting to the IRS. We can ensure all information included on these forms is accurate so that you are not unnecessarily fined for mistakes by the IRS.
Call Our International Tax Accountants Serving US Citizens in Mexico
Call the tax CPAs for American expatriates at US Tax Help today at this link – get in touch for help with your tax needs.