The joys of living in Mexico are many – culture, cuisine, and climate to name but a few.
If you’re a U.S. citizen though, wherever in the world you live you still have to file and pay taxes on your worldwide income to the IRS. Furthermore, there are extra filing requirements for expats, including an FBAR (Foreign Bank Account Report) declaring foreign bank accounts if you have a total of over US$10,000 in them, while FATCA (the Foreign Account Tax Compliance Act) requires you to attach form 8938 to your return if your foreign assets (including property) are worth more than US$50,000.
Expats still have to pay their taxes by April 15, however there is an automatic filing extension until June 15, which you can extend still further until October 15. FBARs should be filed by June 30, but next year they’ll be due on the same date as the tax return.
Penalties for not filing returns and FBARs are steep. It’s almost as if the IRS begrudges you your idyllic life abroad.
It’s not all bad news though, as there are various exemptions that prevent you from paying tax on the same foreign earned income to both the Mexican and U.S. governments. These include the Foreign Earned Income Exclusion, which lets you to exclude the first US$100,000 of foreign earned income from U.S. tax, and the Foreign Tax Credit, which gives you a dollar credit for every dollar of tax you’ve paid in Mexico.
As a rule of thumb, if you owe a higher rate of income tax to the Mexican government than to the U.S., the Foreign Tax Credit will be preferable, as you can claim more credits than the U.S. tax you owe, then carry the excess credits forward for future use. Always consult a professional to ensure that you are electing the right exemptions for your particular situation.
What happens if you have been living in Mexico for some time but weren’t aware you had to file a return in the U.S. too? The IRS Streamlined Procedure allows you to start filing without paying any penalties. You simply have to file returns for the last three years, FBARs for the last six years, and self-certify that you haven’t been wilfully avoiding paying tax.
Hugo Lesser works for Bright!Tax, a leading cloud-based U.S. expat tax return preparation firm with clients in over 150 countries.