Wednesday, March 27th 2019

Changing Residency Before You Move to Mexico to Avoid Taxes

Written by

Rafael Bracho

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Changing state residency to avoid taxes

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Should I Change Residency Before I Move to Avoid Taxes:

When you are moving to Mexico—or any other country for that matter—you can often file for a Foreign Earned Income Exclusion (FEIE). This can allow you to exclude from your income for a certain amount that is adjusted each year for inflation: 92,900 for 2011, 95,100 for 2012, 97,600 for 2013, 99,200 for 2014, 100,800 for 2015. . . etc. In some cases, you can exclude foreign housing, logding, and meals. This can save you vast amounts of money that you would normally owe in the United States. 

Therefore, it can be a huge lifesaver to change your state residency before you move.

States That Do Not Let You File For A FEIE:

There are several states that do not accept Foreign Earned Income Exclusion applications, and they will thus continue to expect you to file a tax return while living abroad. The letter of the law in many of these states articulates that it is one’s intent on returning that is the key factor on whether or not you get charged income taxes. Therefore, cutting all ties is necessary to not filing an annual tax return in that state. These states are:

  • Massachusettes
  • New Mexico
  • North Carolina
  • New York
  • Virginia
  • California

*Click here for more information.

States You Can Move to and Pay No Income Taxes At All:

On the opposite end, there are states that charge you no income taxes at all. These states get their revenue from property taxes and sales taxes. This makes these particular states ideal havens for expats. If you leave your American ties to these tax haven states, then you don’t have to file a tax return:

  • Florida
  • Alaska
  • Texas
  • Nevada
  • Washington
  • Wyoming
  • South Dakota

*One particular reason to choose South Dakota, if you are planning on bringing a car to Mexico, is that you can register your car in South Dakota through a loophole in one county. Click here to learn more.

*To learn more about importing a car to Mexico permanently, click here.

States That Make It Difficult to Move for Tax Purposes:

Some so-called “Sticky States” make it difficult to end your formal residency—and nearly impossible if you are living abroad. You have to be in the United States to manage much of the bureaucracy, therefore it’s best to get it done before you move to Mexico.

These are some of the Sticky States (though not all, and many other states have some degree of “stickiness”):

  • South Carolina

  • New Mexico

  • Virginia

  • California

If you don’t cut all the ties with these particular states, then they will continue to tax you even if you have not lived in that state for the entire year. In order to cut ties with sticky states, you have to change or remove the following documents related to these states:

  • State Driver’s License/ID Card
  • Mailing Address in the State (whether P.O.Box or family member’s home)
  • Investment or bank accounts registered in that state
  • Property Ownership
  • Spouse, Children, or other dependents living in that state
  • Absentee Ballots and Voter Registration

*For more information on how to cut ties with Sticky States, click here.

*In California, if you work abroad on a job contract for more than a year and a half, then you can qualify under the Safe Harbor rule which forgoes your need to pay taxes to California. For more information, click here.

*For more information on filing California taxes as an expat, click here.

Also if you have your money in a foreign offshore bank account—especially if that number exceeds 10,000 USD—then you may also need to file a Foreign Bank Account Report (FBAR) and Foreign Account Tax Compliance Act (FACTA) Form 8938. It depends on the requirements of your state whether or not you have to file one, both, or neither of these.

*For more information on FBAR and FACTA, click here.

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