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What Every U.S. Expat Should Know About Paying Their Taxes

Updated: Apr 3

DISCLAIMER: This article is for informational purposes only. It is not intended to substitute for professional tax advice tailored to your situation.


Paying U.S. taxes as an expat


Whether you're an American citizen already living in Mexico -- or merely dreaming of a new life abroad -- paying taxes can be complicated and confusing for expats.


Even though I'm a big believer in education on tax matters (and DIY projects in general), this is one area where I recommend using an experienced professional, at least in your first years living abroad.


Not only do tax experts ensure you fulfill your legal obligations-- they also know about various credits and exemptions expats can claim to reduce their tax bill, which DIY filers often miss.


Why is this so important? Missing an exemption like the FEIE (which we'll cover below) even once can cost you a five-figure sum. Missing it repeatedly? Ouch.


Tax prep is one area where being too frugal can cost you a bundle.


But don't worry about Googling tax pros. At the end of this post, I'll recommend a team of American tax experts here in Mexico, if you decide to seek assistance.


Now, let's dive in. If you're anything like me, you're probably wondering ... What are the most common questions American expats ask Google regarding taxes? Here's a sample:


  • Do U.S. expats still have to file taxes?

  • Do I get double-taxed if I live in a foreign country?

  • Do U.S. expats get audited more often by the IRS?

  • Do expats pay taxes to the Mexican government?

  • What is FBAR and who needs to report a foreign bank account?

  • Who can claim the Foreign Earned Income Exclusion?

  • Do expats still have to file by April 15th?

  • Do U.S. expats still have to file state taxes?

  • Where can I get help filing taxes as an expat?

  • What can happen if I'm behind on filing my taxes?

  • How do I receive my refund if I live abroad?


Let's examine these one by one.


Do U.S. Expats Still Have to File with the IRS?


Yes!


The reason is that U.S. taxes are based on citizenship, not the "physical location of the taxpayer" as the IRS explains on its website. This means that regardless of where you live, you will be taxed on the income you've earned worldwide.


If this sounds a little odd, that's because it is. Only the U.S. and Eritrea use citizenship-based taxes.


Most other countries practice "territorial taxation," or taxing an individual based on income earned within the country's borders.


Not even a move to Mars would free a U.S. citizen of their tax obligation to the IRS. The only way to legally do it is to renounce your citizenship, which few Americans do.


Assuming you're not interested in taking that radical step, let's keep going.


Do I Get Double-Taxed if I Live in a Foreign Country?


Double taxation happens when a person is taxed twice on the same income or assets. U.S. expats encounter this problem regularly. First, they're taxed by the IRS, and then a second time in their foreign country of residence. 


In practice, the IRS offers various exclusions and tax credits to help expats avoid double taxation. In addition, the U.S. maintains bilateral tax treaties with 57 countries to address this problem. The U.S.-Mexico bilateral tax treaty was signed in 1992.


Two of the more popular ways U.S. expats in Mexico avoid double taxation is through the Foreign-Earned Income Exclusion (commonly referred to as FEIE) and foreign tax credits.


With the former, you can exclude a portion (or all) of your earned income from taxes. With the latter, you may "credit" an itemized deduction for foreign taxes paid against your U.S. tax liability.


The key thing to know about exclusions and credits is that they can't be combined. You have to choose one or the other. And for the inexperienced expat, it isn't always obvious which one will save you the most money.


guide to expats taxes
Disclosure: This post contains affiliate links, i.e. if you purchase through them, I earn a small commission. This doesn’t cost you anything but enables me to keep this blog 100% free to read.

Do U.S. Expats Get Audited More Often by the IRS?


Unfortunately, yes. American expats do get audited more often than citizens living inside the United States.


In 2021, the audit rate for all U.S. taxpayers was just 0.4%. For expats the audit rate is about 3%, based on 2018 data, the most recent year I could find numbers.


That said, budget constraints and staffing shortages at the IRS mean the chances of an expat being audited in 2024 are lower than they used to be. So expat or not, it probably won't happen to you.


Candidly, the real audit risk is for those with incomes of $10 MM USD or more. These fat cats are audited at a rate of around 21%.


Do Expats Living in Mexico Need to Pay Taxes to the Mexican Government?


Expats do not pay taxes to both countries on the same income. However, that doesn't mean expats never owe taxes to their host country.


Essentially every expat pays taxes to Mexico when they buy stuff, through the IVA (sales) tax, which is pretty hefty at 16%.


If you own real estate in Mexico, you must pay annual property taxes, known as a predial tax.


The good news is that property taxes are incredibly low in Mexico compared to what you're used to paying in the U.S. Our annual property tax bill declined 96% when we moved from Denver, Colorado to Guadalajara, Mexico.


To learn more about paying property taxes in Mexico, check out my previous post.


Other reasons an expat may owe taxes in Mexico include earning income from a job with a Mexican company, having investment income from Mexican financial assets, or renting out property on a platform like Airbnb.


tax services for expats

What is FBAR and who needs to report ownership of a foreign bank account?


“FBAR” refers to a requirement that U.S. citizens “Report Foreign Bank and Financial Accounts” to the U.S. Treasury under the Foreign Crimes Enforcement Network (known as “FinCen”) if they exceed a certain threshold.


Under this rule, a U.S. citizen who owns or has signing authority over a foreign bank account with deposits valued at $10,000 USD or more (at any time during the tax year) must file an FBAR.



FBAR doesn't apply to accounts held at foreign branches of U.S. financial institutions -- only financial accounts in foreign branches of foreign institutions.


Individuals may also be required to file Form 8938 if they own foreign assets in legal arrangements like partnerships or trusts if the value of those assets exceeds $50,000 at any time during the tax year.


For married couples filing a joint return, Form 8938 would be required when the value of these foreign assets exceeds $100,000 USD on the last day of the year, or $150,000 at any time during the tax year. For more information on who must file Form 8938 visit this page.


For other cases, it's best to consult the IRS's website, which explains the rules in excruciating detail.


The FBAR filing deadline is October 15, but it's best to file it at the same time as your federal tax return.


paying taxes as a U.S. expat

The counterpart to FBAR is FATCA (the Foreign Account Tax Compliance Act) enacted in 2010 and directed at foreign financial institutions rather than individuals.


Under FATCA -- and no, that cute acronym is not an accident -- foreign banks are obligated to report to the IRS the existence of accounts held by U.S. citizens.


The impetus for this legislation was to provide a legal means for the IRS to crack down on uber-rich American citizens hiding princely sums in Swiss bank accounts to evade taxes, and so forth.


What is the Foreign Earned Income Exclusion and Who Can Claim It?


As referenced above, the “Foreign Earned Income Exclusion” (or FEIE for short) is something many U.S. expats use to significantly reduce their federal tax bill.


The amount you can claim under the FEIE is adjusted each year. Lately, it’s been rising.


For the 2023 tax year, full-time expats can exclude up to $120,000 USD per person from their federal taxes. (up from $112,000 per person in 2022)


A couple with two incomes can each claim this amount (for a total of $240,000 USD) providing they file Form 2555 separately.


Even if Mexico isn’t your full-time residence, you might still be able to claim the FEIE exemption if you can pass the “physical presence” test.


According to the IRS website, you must be at least one of the following:


  • A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,

  • A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or

  • A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.


The vast majority of U.S. expats can meet at least one of these criteria to qualify for the FEIE exclusion on earned income.


There is also good news for digital nomad expats who work for themselves (this is you if you receive 1099s instead of W-2s). These expats can take advantage of the FEIE by claiming their self-employment income.


Here's how the IRS website explains it:


"A qualifying individual may claim the foreign earned income exclusion on foreign earned self-employment income. The excluded amount will reduce your regular income tax but will not reduce your self-employment tax. 


Also, as a self-employed individual, you may be eligible to claim the foreign housing deduction instead of a foreign housing exclusion."


And retirees take note, the FEIE applies to earned income only, not passive income generated from investments, social security, pensions, or annuity payments.


paying taxes as a U.S. expat

Do U.S. Expats Need to File Their Taxes by April 15th?


No! If you're a U.S. citizen living outside the country on April 15 when taxes are normally due, you are granted an automatic extension until June 15th to file.


For those who need even more time to get their return together, filing Form 4868 will extend that deadline another four months to October 15.


Do I still pay STATE taxes when I move abroad?


I never minded paying state taxes as a U.S. resident, but it brings me no satisfaction to pay them when I no longer live there and don't receive services. Finding a way to minimize state taxes is important to many expats.


Because there are 50 states -- and each one has its own rules regarding residency for tax purposes -- this is a tough topic to address with specificity.


In many states, your tax status will depend on a "domicile" test. In other words, if you earned any income from a particular state or maintain a permanent residence there, you'll be obligated to file a tax return to that state in addition to your federal one.


Even if you own no property, your driver's license, auto registration, or voter registration can be used to determine your domicile.


Other states (like New York) use a "statutory" test to determine residency. It's based on the number of days you spend in the state each year. If you maintain a home and are physically present above a certain threshold (e.g. 183 days or more per year) they will consider you a resident for tax purposes.


Some expats become exempt from state taxes by establishing non-residency. This is possible in many states if you can prove that you've lived abroad for at least six months of the tax year and no longer maintain a residence in that state.


Another way to eliminate state tax obligations is by switching your residency to a state that does not require individuals to file tax returns, such as Florida, Texas, or Tennessee. This can be done by obtaining a mailing address in that state (critical) and getting a driver's license or voter registration there.


Where Can I Get Professional Help Filing My Taxes as an Expat?


If you're like most people, trying to understand the tax code and its ever-changing rules makes your head want to explode. I've always loathed doing taxes and knew that I was in over my head attempting to DIY my tax return as a new expat.


On a personal recommendation, I turned to Lakeside Tax Services (LTS) for help. Based in Lake Chapala, Jalisco, Lakeside Tax Service has been helping U.S. expats solve their tax challenges for the past 14 years with a team of experts that's amassed 40 years of experience.


Working with LTS founder Patrick Oden (originally from Texas) all I needed to do was upload my tax documents to the company's secure server and answer some basic questions. He takes care of the rest.


Working with LTS I've been able to file my taxes minus the usual suffering and claim some hefty tax savings. Best of all, it can be done remotely.


For the 2024 tax season, Lakeside Tax Service has agreed to give my readers a 10% discount on their tax prep fees simply by mentioning the code "LiveWell10."


Like I said earlier, a tax expert's fee is often returned many times over by the savings they find for you. To say nothing of the time you'll free up when you don't have to work on taxes!


How Do I Get My Refund If I Live Abroad?


The IRS will only direct deposit tax refunds into U.S. bank accounts, so don't forget to include your account and routing numbers on your return.


If you lack a U.S. bank account but still want to receive your refund electronically (safer than a paper check) an excellent alternative is to open a multi-currency online account with Wise, the international money transfer service.


Using the U.S. bank account and routing numbers for the Wise Dollar account, you can request a direct deposit of your refund from the IRS.


It takes about 15 minutes to create a new account with Wise and costs you nothing. If unfamiliar with Wise, I highly recommend them as a convenient, reliable, and low-cost money transfer service. It's a bonus that their website and mobile app are intuitive and easy to use.


If you didn't provide direct deposit information to the IRS on your tax return, your only other option is to receive a paper check. In this case, it's better to have the check mailed to a U.S. address and then sent abroad by a courier service, instead of international snail mail. It will cost a bit more, but at least the check will reach you.


What Can Happen To Me If I'm Behind on Filing my Taxes?


This is a scary place to be. Fortunately, I have good news.


The IRS has developed a program for those who've skipped filing for one or more years -- or failed to accurately report their foreign assets.


It's called the "Streamlined Tax Amnesty Program" and has been quite popular for offering U.S. citizens a way to avoid paying significant penalties and fees for their past error(s).



Now that you're informed about your expat tax obligations and (hopefully) excited about the myriad opportunities to save money, let's all get back to doing something more fun.


 

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