The American and the Taxman

Some of you may know that one of the things I enjoy is reading comments on social media. It helps me get a feel for concerns in the minds of people. I also remember that for every person that takes the time to voice concerns or questions, several may have similar mindsets.

That is why I write today about something basic, fundamental in fact. It has to do with the way the US taxes its citizens. Drum roll, please… US citizens are subject to federal tax on worldwide income, no matter where they live. Take time to digest that. It doesn’t matter if you live in Mars, getting Martian income. Or Mazatlan. If you are required to (depending on age, filing status, amount and type of income) you are required to file a federal return, factor in the computations all your income, figure if you owe tax, and pay it. That is what some people call “citizenship based taxation”. Pardon the important repetition: moving to Mexico or anywhere else for that matter, does not relieve you, the US citizen, from federal tax obligations.

Most of the world’s countries use a different method for their tax systems, based on residence instead of citizenship. In case you are curious, Mexico taxes based on “residencia fiscal” or tax residency as they define it. But today we are just talking about US taxes.

To minimize the impact of taxes by additional countries on the same income, US law provides ways to mitigate. One is a US credit for foreign taxes paid (the Foreign Tax Credit). Also available is the exclusion from one’s federal income of amounts ‘earned’ in a foreign country or countries (the Foreign Earned Income Exclusion and Housing Exclusion-Deduction).

Over the years, some question how it is that the United States has the right to tax people far away. That question was settled by the Supremes almost as soon as the income tax was enacted. In the process of considering the 2017 tax law, hopefuls expected Congress to modify citizenship-based taxation for individuals. It did not.

I’ll add a personal belief here: I would not count on the winds being favorable to modification of that system anytime soon. I’m not in favor of the existing regime, but it looks like it is with us for a long while. So long as you are a US citizen, expect to continue having that federal filing requirement. That’s just the way it is.

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Orlando Gotay
Lawyer
Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies.
His love of things Mexican has led him to devote part of his practice to the tax matters of U.S. expats in Mexico. He can be reached at tax@orlandogotay.com, online radio at mixlr.com/orlandogotay