Author Topic: How Do Taxes Work when you Work Remotely FOR US Company From A House in Mexico?  (Read 2194 times)

Hoosier Daddy

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Hey guys,

I have tried to do my own research first and couldn't find an answer on these forums or even through numerous Google searches. Thus I'm hoping someone here can point me to a good resource for the below situation:

I currently work fully remote for a US company. Next year, my wife and I would have enough to scrape by on Early Retirement in Mexico for the rest of our lives. However my current job is relatively fun and it pays well so I figure I might as well keep doing it as long as I can (or until I get a bit more cushion) when we move to Mexico.

I have done some initial research and understand there are tax treaties between the US and Mexico. If I understand correctly, it sounds like I can offset my Mexican tax bill by any US Taxes paid, or vice versa. So here are some questions I have:

  • Are ALL US Taxes (Federal, State, Local) able to be credited against Mexican tax bill?
  • If I work for a US Company, but own a home and live in Mexico, who gets paid first? (I.e., who am I paying first from which I am crediting to the other?
    • If I understand correctly, my RESIDENCY status would be Mexico which would then subject me to Mexican income taxes... but the SOURCE of the income is the US... Thus does SOURCE come before RESIDENCY?
    • I suspect since the money is coming from a US organization, the taxes would be paid to US first and then US Taxes would be credited against any potential Mexican tax bill but was wondering if someone can confirm
  • Can you exclude 401k contributions from your Mexican income?
    • I can't find any literature on 401k income exclusions from Mexican income determination... It almost feels like the 401k is not a concept in Mexican tax law?
  • Are Roth Contribution withdrawals still tax free (since you already paid tax up front) in Mexican tax law?
  • Are there any other considerations I should take into account for doing the backdoor roth? I.E., Will doing a back door Roth from Mexico increase my tax bill vs doing it from the US?

I'd really like to reduce my expenses and slow down my pace of life next year by moving to Mexico but am trying to wrap my head around the tax implications of doing so. I am struggling to find good resources to help me and was hoping some of the more nomadic FIRE super heroes would be able to point me in a good direction? HUGE thanks to anyone who can help!

EDIT: This was post 100! Woot woot!
« Last Edit: April 23, 2019, 05:38:26 PM by Hoosier Daddy »

happyexpat

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Hey Hoosier

Iíll try to chime in later with more info.  Iím no expert but have been feeling our way through this stuff for the past 4+ years from Spain.

My first thought reading your questions was you should no longer pay any state or local US taxes once you move your residency abroad.  For us, former GA residents, this is a 6% savings every year.

Also, under certain conditions you may be able to get the IRS to issue you a certificate for a given tax year - and one for your spouse as well if applicable, stating that as the competent authority (verbiage from the tax treaties) they have found you to be a US tax resident for the year in question.  I have done this for my wife and I each year since 2015 with no issues.  We donít even bother filing a Spanish tax return (this is not tax advice!) since I have no earned income inside of Spain.  We are physical residents here despite being ruled tax residents of the US...if that makes any sense.

reeshau

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Hey Hoosier

Iíll try to chime in later with more info.  Iím no expert but have been feeling our way through this stuff for the past 4+ years from Spain.

My first thought reading your questions was you should no longer pay any state or local US taxes once you move your residency abroad.  For us, former GA residents, this is a 6% savings every year.

Also, under certain conditions you may be able to get the IRS to issue you a certificate for a given tax year - and one for your spouse as well if applicable, stating that as the competent authority (verbiage from the tax treaties) they have found you to be a US tax resident for the year in question.  I have done this for my wife and I each year since 2015 with no issues.  We donít even bother filing a Spanish tax return (this is not tax advice!) since I have no earned income inside of Spain.  We are physical residents here despite being ruled tax residents of the US...if that makes any sense.

Not a tax expert--also an Expat, who just survived my first tax year, trying to figure it out.

@happyexpat

I am confused by your summary.  How would you be declared US tax resident, and not owe state taxes?  Are you not a citizen or green card holder?  In a cursory reading, I do see that Georgia only taxes local-source income, but since you were in Georgia, is your employer in another state?  I think this is a relatively rare feature.  Typical advice is to establish US tax residency in a state that has no income tax before you move internationally.



happyexpat

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Hey Hoosier

Iíll try to chime in later with more info.  Iím no expert but have been feeling our way through this stuff for the past 4+ years from Spain.

My first thought reading your questions was you should no longer pay any state or local US taxes once you move your residency abroad.  For us, former GA residents, this is a 6% savings every year.

Also, under certain conditions you may be able to get the IRS to issue you a certificate for a given tax year - and one for your spouse as well if applicable, stating that as the competent authority (verbiage from the tax treaties) they have found you to be a US tax resident for the year in question.  I have done this for my wife and I each year since 2015 with no issues.  We donít even bother filing a Spanish tax return (this is not tax advice!) since I have no earned income inside of Spain.  We are physical residents here despite being ruled tax residents of the US...if that makes any sense.

Not a tax expert--also an Expat, who just survived my first tax year, trying to figure it out.

@happyexpat

I am confused by your summary.  How would you be declared US tax resident, and not owe state taxes?  Are you not a citizen or green card holder?  In a cursory reading, I do see that Georgia only taxes local-source income, but since you were in Georgia, is your employer in another state?  I think this is a relatively rare feature.  Typical advice is to establish US tax residency in a state that has no income tax before you move internationally.

I know that was a pretty cursory explanation.  The certificate that we have (issued on form 6166) has the following verbiage:  the above-named taxpayer is a resident of the United States within the meaning of the United States - Spain Income Tax Convention.

Here is a some more info excerpted from the IRS website:



Information on Completing the Form 8802, Application for United States Residency Certification

Many U.S. treaty partners require the IRS to certify that the person claiming treaty benefits is a resident of the United States for federal tax purposes. The IRS provides this residency certification on Form 6166, a letter of U.S. residency certification.

The Internal Revenue Service (IRS) procedure for requesting a certificate of residency (Form 6166) from the Philadelphia Accounts Management Center is the submission of Form 8802, Application for United States Residency Certification. Use of the Form 8802 is mandatory.

Form 6166 is a letter printed on U.S. Department of Treasury stationery certifying that the individuals or entities listed are residents of the United States for purposes of the income tax laws of the United States. You may use this form to claim income tax treaty benefits and certain other tax benefits in foreign countries. Please refer to the instructions for Form 8802.

Some additional information will also be required in order to obtain certification under the new procedures. This information is generally set forth in the Instructions to Form 8802.

happyexpat

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Just to add on a little more...

We lived in GA before the move.  We no longer have any ties to GA - the kids go to school in Spain, we spend most of our time here (except for a week at Christmas to visit family), have driverís licenses here, years worth of utility bills here, own a car, etc.  All of this goes towards establishing your habitual residence outside of your old state.

No matter where you live in the world, so long as you are a US citizen, you will owe US federal taxes.  However after a year or so of not living in GA, we consulted an accountant and were told that there is no obligation to continue paying taxes in a state we no longer reside in, despite it having been the last state we lived in. 

As to the employer question, I work for myself as a software developer and contract my services out on a freelance basis to clients exclusively within the US, which is the basis of our application for form 6166, using form 8802.

reeshau

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No matter where you live in the world, so long as you are a US citizen, you will owe US federal taxes.  However after a year or so of not living in GA, we consulted an accountant and were told that there is no obligation to continue paying taxes in a state we no longer reside in, despite it having been the last state we lived in. 

Maybe that advice is true for Georgia, but it would be too broad to infer to *any* state...

https://www.greenbacktaxservices.com/blog/tax-for-expats-state-taxation/

I'm still interested in your case, though.  Do you not vote somewhere in the US?  Do you have no US accounts, investment, savings, or otherwise?  Has your US driver's license expired?  Residency is a fuzzy thing, and states have incentive to "recognize" you--any of those things could be noticed.

Then, there is the other concept of domicile, vs. residency...

https://www.form8621.com/expat-moves/
« Last Edit: May 07, 2019, 09:41:50 AM by reeshau »

happyexpat

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No matter where you live in the world, so long as you are a US citizen, you will owe US federal taxes.  However after a year or so of not living in GA, we consulted an accountant and were told that there is no obligation to continue paying taxes in a state we no longer reside in, despite it having been the last state we lived in. 

Maybe that advice is true for Georgia, but it would be too broad to infer to *any* state...

https://www.greenbacktaxservices.com/blog/tax-for-expats-state-taxation/

I'm still interested in your case, though.  Do you not vote somewhere in the US?  Do you have no US accounts, investment, savings, or otherwise?  Has your US driver's license expired?  Residency is a fuzzy thing, and states have incentive to "recognize" you--any of those things could be noticed.

Then, there is the other concept of domicile, vs. residency...

https://www.form8621.com/expat-moves/

Great links.  Thanks for sharing.  Just spent the last half hour reading through them. 

Pasted from the first article:

1. Determine if youíre a resident of the state, or if the state considers you a resident for tax purposes. This would be determined by the following:

  • You lived in the state at any point during the tax year.
  • Your immediate family lives in the state while youíre overseas.
  • You return to the state each time you return to the US to live.
  • You maintain an abode in the state (a permanent place of residence).
  • You keep your driverís license or ID card or voting rights in the state.


^^^These are all good points for the OP to consider for sure.  I can say, for us, that the answer is no to all of the above.  I also will caveat that a lot of these blog articles are written to foment fear of getting something wrong, and drive business in the door for their advice. 

From my DIY perspective, it seems clear that our domicile is in Spain.  I'm sure a revenue-hungry tax commissioner may try to argue it another way, but all we can do is make our best effort (within the bounds of our understanding of the law) and go from there.  If GA for some reason decides to audit me someday, I feel comfortable defending our actions.  Mostly because the bottom line is we left the state in 2015, and have no intention of moving back. 

If you make decisions like a person normally would when re-establishing a domicile somewhere, then I think most of the "have your cake and eat it too" situations resolve themselves.  i.e. sell the car(s), sell the house or turn it into a legitimate rental property, set up your life in your new home as if it were forever, etc. 


To answer the rest of your questions:

Voting - we did vote absentee in the 2016 presidential election - also the last year we filed GA state taxes.  I've actually been trying to research how we can vote in 2020 without having a home state, but don't really have a clue yet - maybe the topic for another thread?  We haven't voted in any state/local elections.

US Accounts - sure nearly everything is in the US, and we transfer money over as required - everything is online banking now, so I hadn't even considered the concept of which brick and mortar bank we initiated the accounts in.  Thanks to your links this is a weak spot in our "termination of domicile" that I am going to look into.  Good info.  We do have a Spanish bank account that we use for everything over here.

Driver's License Expiration - my wife's yes; mine is still valid for a few more years (10 year license).  We both have Spanish drivers' licenses though, and that was a priority with establishing a new domicile in mind.  Maybe I need to have a notary witness me sacrificing the plastic card just to be on the safe side :-)

reeshau, what has your experience been?  Did I see you're in Ireland, or did I imagine that?  Can you share your general work/residency/former state/tax setup?  Generally what is your living situation:  retired, working remotely, etc?  I'm always curious to learn how other expats are dealing with these issues.

Enigma

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As an individual that has lived overseas for most of the past 12 years.

Read Publication 54 & about the "Foreign Earned Income Exclusion".
Ensure you file form 2555 when you do your taxes
Stay out of the US for at least 330 days of the 365.  (I heard there may be slight changes to that and exceptions)
*Cruises/flights count as if you are in the US.  You have to physcially be in a foreign country
*Sliding rule...  Physcial presence test starts and ends on the any 365 calendar cycle 5-May-2018 until 4-May-2019

Federal tax exclusion doesnt exempt you from having to pay state taxes.  Excpect to have to pay them on the first dollar you earn depending on where you consider your home state to be.  Mine home state was Tennessee which doesnt have a state tax on personal income.  I knew individuals from California overseas that were paying large amounts of taxes.

Note that the "Foreign Earned Income Exclusion" is on the first $102,100 of your earnings.  Any more than that is taxed at the tax bracket above $102,101.

BicycleB

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From blog reading, gocurrycracker's commentary on these issues seems like a good illustration of some of the principles. A little link- and promotion-happy, but seems to give accurate information. I'm not an expert though.

https://www.gocurrycracker.com/never-pay-taxes-by-moving-abroad/
https://www.gocurrycracker.com/to-feie-or-not-to-feie/
https://www.gocurrycracker.com/6-years-of-nearly-income-tax-free-living/
https://www.gocurrycracker.com/feie-and-capital-gain-harvesting/


flipboard

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I have done some initial research and understand there are tax treaties between the US and Mexico. If I understand correctly, it sounds like I can offset my Mexican tax bill by any US Taxes paid, or vice versa. So here are some questions I have:

  • Are ALL US Taxes (Federal, State, Local) able to be credited against Mexican tax bill?
  • If I work for a US Company, but own a home and live in Mexico, who gets paid first? (I.e., who am I paying first from which I am crediting to the other?
    • If I understand correctly, my RESIDENCY status would be Mexico which would then subject me to Mexican income taxes... but the SOURCE of the income is the US... Thus does SOURCE come before RESIDENCY?
    • I suspect since the money is coming from a US organization, the taxes would be paid to US first and then US Taxes would be credited against any potential Mexican tax bill but was wondering if someone can confirm
  • Can you exclude 401k contributions from your Mexican income?
    • I can't find any literature on 401k income exclusions from Mexican income determination... It almost feels like the 401k is not a concept in Mexican tax law?
  • Are Roth Contribution withdrawals still tax free (since you already paid tax up front) in Mexican tax law?
  • Are there any other considerations I should take into account for doing the backdoor roth? I.E., Will doing a back door Roth from Mexico increase my tax bill vs doing it from the US?

I'd really like to reduce my expenses and slow down my pace of life next year by moving to Mexico but am trying to wrap my head around the tax implications of doing so. I am struggling to find good resources to help me and was hoping some of the more nomadic FIRE super heroes would be able to point me in a good direction? HUGE thanks to anyone who can help!

EDIT: This was post 100! Woot woot!

I think you're getting your ordering confused.

You need to start with the place you live. As a fundamental principle, the place where you live or work is the place that taxes you. If you live in Mexico, then in general Mexico will tax you completely (note: this is just the way things work for every other country - perhaps Mexico has some special exceptions, but every single other country I've been in takes primacy for taxation). Mexico likely won't care that you're American (there might be some minor adjustments on passive income depending on the dual tax treaty).

You happen to be affected by US citizenship which puts you in a weird and unique position (that other people in the world don't have to suffer) - any taxes the US applies to you are additional to residency based taxes, and entirely a "bonus" due to your US citizenship. But that doesn't absolve you of paying taxes to your place of residence first and foremost, the place you live in usually gets to tax you fully.

But the good news is: your income will very likely be considered "foreign source income", at least for the days you were physically outside of the US (depending on tax treaty, days in the US might count too). That gives you two options: the foreign earned income exclusion (see other comments in this thread about 330 days not in the US being required), or you can use the foreign tax credit.

If you earn less than 102k per year then the income exclusion works well and is simple. Above that, the Foreign tax credit often wins (especially if tax rates are higher in country of residence - that depends on the country you live in). But even if the income exclusion is available - using the foreign tax credit can be nice if your local tax rate is higher than the US tax rate AND you are considering moving to a lower tax country in future: the tax credit can be carried forward, which lets you reduce taxes in future years in certain circumstances.

In general most people are well advised to find a tax adviser who knows the laws of both the country you live in and US tax law. Beware: many tax advisers don't know this combination well and make mistakes...

Just to be clear: for foreign tax credit, the US doesn't care who pays the money (US or other employer) - what matters is where the work is performed, see the form 1116 instructions. I don't know if the income exclusion has similar rules, but that's something you can easily determine yourself by reading the relevant IRS publications.
« Last Edit: May 07, 2019, 01:21:01 PM by flipboard »

reeshau

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reeshau, what has your experience been?  Did I see you're in Ireland, or did I imagine that?  Can you share your general work/residency/former state/tax setup?  Generally what is your living situation:  retired, working remotely, etc?  I'm always curious to learn how other expats are dealing with these issues.

Yes, I am just coming up on 1 year in Dublin.  I relocated for work from Michigan, but I established residency in Texas, where I intend to move when we return, before I left.  I use my in-laws' address as our US address, and have changed addresses for all US-based business to this.  (and moved everything I could to online / paperless for easy access)  I am working for our US subsidiary (now, the HQ) as an Irish employee, and paid in euros.  There are a number of my co-workers who also relocated to Texas or Florida prior to moving.  For those that didn't take steps to move from Michigan, they are having to pay state and/or local (Detroit city) income taxes.

Steps I have taken to establish residency:

Sold our house in Michigan
got Texas driver's license
registered to vote in Texas
established checking account with brick-and-mortar bank in Texas
closed checking account with brick-and-mortar in Michigan
moved address for all online accounts to Texas
Storing most of our goods in Texas (Dublin houses are very small!)
have goods (renter's) insurance in Texas

So, it's both cutting ties to the old state, and establishing ties with the new state.

As I said, residency and domicile are fuzzy topics.  @Enigma 's suggestion to read Pub 54 is a good one in general--even if reading IRS publications is slightly more painful than gouging out your eyes, this is one to suffer through.  @happyexpat , it sounds like your are establishing residency.  The most common thing I hear when talking domicile with tax and/or legal professionals is: "Have you bought a burial plot?"  You aren't just proving you have moved, with domicile you are proving you intend to never come back.  Citizenship would be a powerful piece of evidence, too--either way.

Here'e the Irish revenue service's view on domicile: https://www.revenue.ie/en/jobs-and-pensions/tax-residence/what-is-domicile.aspx

Here is another example comparing residency and domicile from an Irish legal firm I have talked to:  https://parfreymurphy.ie/residence-ordinary-residence-and-domicile/

You can vote through the state department, but the act of voting (for state and local offices) might impact what you are trying to do.  From: https://travel.state.gov/content/travel/en/international-travel/while-abroad/voting.html

Voting and Taxes

Voting for candidates for federal offices does not affect your federal or state tax liability. Voting for candidates for state or local offices could affect your state tax liability. Consult legal counsel if you have questions.

For more information see:

Absentee Voting Basics
Registration/Absentee Ballot Request
Receiving Your Blank Absentee Ballot
Voting and Returning Your Ballot
Using an Emergency Write-In Ballot
Verifying Your Registration
Role of Local Election Officials
Be an Educated Voter
Voting and Taxes



Enigma

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Steps I have taken to establish residency:

Sold our house in Michigan
got Texas driver's license
registered to vote in Texas
established checking account with brick-and-mortar bank in Texas
closed checking account with brick-and-mortar in Michigan
moved address for all online accounts to Texas
Storing most of our goods in Texas (Dublin houses are very small!)
have goods (renter's) insurance in Texas

I did about the same thing.  When I was living in Arlington Virginia and working in the Washington DC area I got a job offer to work in Africa.  I immediately put in my 2 week notice at my company and had about 6 weeks before moving overseas.

VA - Transfered lease to another individual
Moved in my with parents in TN
got Tennessee Driver's license
registered to vote in Tennessee

I have been a Tennessean most of my life so it wasnt that big of a leap.

MustacheAndaHalf

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If you move permanently out of California, you no longer owe CA taxes from that point on.

But if you ever move back, they'll assume you temporarily moved abroad and owe back taxes.  They also look for lingering connections like storage lockers or local accounts - California is known to have an aggressive tax authority.

bocifule

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I was also doing some research in this topic (in digital nomad forums) and found out that as long as you keep your citizenship (it is a very difficult situation to decide if it would be worth giving up on a US passport...) you have to pay certain taxes. US is one of the very few countries that makes you pay your taxes based on your citizenship not on your physical location. Advise if I'm not correct!

flipboard

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I was also doing some research in this topic (in digital nomad forums) and found out that as long as you keep your citizenship (it is a very difficult situation to decide if it would be worth giving up on a US passport...) you have to pay certain taxes. US is one of the very few countries that makes you pay your taxes based on your citizenship not on your physical location. Advise if I'm not correct!
US
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