Once again we are approaching every American’s favorite time of year: tax time! Figuring out when and what to file with the IRS can be confusing enough at the best of times, but for those living abroad there are additional complications to take into account. We asked Leonard Purcell, a business consultant with 30 years of experience (including four as a taxpayer service specialist at the US Embassy), to help answer some of our questions and clear up some misconceptions.
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Inside México: All my income is earned in Mexico – do I need to file taxes here, in the US, or both?
Leonard Purcell: All US citizens need to file a tax return with the IRS every year, regardless of whether you have earned income in the US or not.
IM: I don’t have very much income – should I still file a return? Am I exempt? Is there a cut-off?
LP: A common and dangerous misconception is that expats with a small income earned abroad are exempt from paying taxes and thus do not need to file a return. In truth, Americans may earn income in Mexico up to $82,400 USD annually without being taxed on it: however, in order to claim this exemption they must file a return.
IM: Do I need to file a return if I am a resident alien living outside the US?
LP: Like citizens, anyone with resident alien status in the US needs to file a federal tax return, regardless of where they live or where they earn their income.
IM: I earn employment income here in Mexico, and some in the US – what filings do I need to make? What if my only US income is from investments?
LP: All income, whether salaries, self-employment income, dividends, or rental income, needs to be entered into the appropriate sections of your return (form 1040 or the attached schedules). This applies to income earned in the US, Mexico, and anywhere else.
IM: What if I don’t file for several years? Will I be audited?
LP: Your risks of being audited are low. However, if you do not file with the IRS for several years you may be forced to pay back taxes on your foreign income – at the rate levied on US income. In other words, you will not receive the exemption for Americans earning a foreign income of $82,400 USD or less.
IM: Do I have to pay taxes on Social Security income?
LP: There is an exemption if you receive less than $ 27,000 USD (for individuals) or $32,000 USD (for married couples). Above these figures you will taxed at the same rate as in the US.