Doing the Limbo, Tax Style

BY: ORLANDO GOTAY

At the beginning of the year—and tax season– it’s always important to review some of the basics of U.S. tax, for the benefit of American newcomers to Mexico. I read a lot of questions and comments in local social media and so far, I can spot a common trend in questions. I’ll address some very important ones.

I live in Mexico now.  Do I have to file (U.S. taxes)?

If you are a U.S. citizen (or have a green card) you are among those subject to the federal income tax regime. It doesn’t matter if you no longer reside in the U.S., your migratory status in Mexic ... or even Mars!  The U.S. is a standalone among countries, subjecting all its citizens to tax, no matter where they live.

So we now know you are subject to the U.S. tax regime. Now we need to figure if you have an obligation to file an income tax return. Another common misconception is that one has to file a return even having zero income for the year.  Alas, that is not the case.

Visualize a limbo dance, where the bar is set at a particular dollar amount of income. If your income is at or lower than the limbo bar (the filing threshold) you would not be required to file a federal return.

Not everyone goes to the same limbo bar, however! They depend on filing status. If you are single, you get one. If you are married filing jointly, or separately, or Head of Household, or Qualifying widower ... they are all different.  Whether you are 65 or older also matters.

There are many other special situations where, independent of the filing thresholds mentioned above, one would be required to file a return. A common example is self-employed persons, who have a filing obligation if they have net earnings from self-employment of over $400.

Another misconception I’ve read: “I don’t owe, so I don’t have to file.” Not owing tax is always nice, but it bears no relation to a filing obligation, which is based on amounts of gross income, filing status, and age.

An important source on filing situations can be found at the instructions for the 2019 Form 1040. A note for seniors: Form 1040-SR is available as a new optional alternative to using Form 1040 for taxpayers age 65 or older. Form 1040-SR uses the same schedules and instructions as Form 1040 does.

Orlando Gotay is a California licensed tax attorney (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 federal and state tax matters of U.S. expats in Mexico. He can be reached at tax@orlandogotay.com Facebook: GotayTaxLawyer or WhatsApp at +17604491668. This is just a most general outline. It is informational only and not meant as legal advice.