The U.S. Tax Grab

Dodge it by staying here longer
BY: ORLANDO GOTAY

The Seattle city council recently approved a city income tax. This is a very noteworthy development in a state that has no income tax. It might be tied in litigation soon, but for now it’s a fact.

Roughly speaking, it’s a 2% tax on the total income of a Seattle “resident taxpayer” who’s income level is above $250,000. That means a lot of deductions and subtractions are not taken into account, and will make many people eligible for this new tax. That will be 2% of a much larger pie. 

To be a resident taxpayer one has to either have a domicile for the entire tax year or, failing that, have a “permanent place of abode” in Seattle and spend more than 184 days of the year in Seattle.

Why should you care? If you are one of my Seattle readers who lives part time in Mexico, you should definitely pay attention to this. Even if you are not a Seattle person, I recommend you pay almost as much attention. Because I am afraid this is a development we will see more of in the future. Facing budget shortfalls, local jurisdictions will attempt to impose additional taxes, and liability for many of these taxes could hinge on their definition of residency. You can either conform your behavior so as to not make yourself liable for the new tax, or document that you are not liable. Who knew that staying a few extra days south could pay off so well?

The Seattle income tax uses as a starting number the “total income” off one’s federal return. The good news is that that number allows for the subtraction of the federal Foreign Earned Income Exclusion, if entitled. That could make someone fall below the $250,000 Seattle threshold—for now.

Many other local jurisdictions have income taxes already on the books. New York City and Philadelphia come to mind. Your time away from those places might help make a difference. In fact, the savings could pay for more than a few margaritas down here.

I always recommend you keep a journal with some narrative or evidence of where you spend your time, and that is good advice for both the Mexico part timer and for the year-round dweller.  The journal may help with the IRS, a state tax authority, and soon to come, the Seattles of the world.

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 or Facebook: GotayTaxLawyer.