Newly living abroad with foreign income

[scaldalupo]

My family moved to Mexico at the beginning of the year, and we have just started our own small business here. My wife and minor daughter are dual-citizens of the US and Mexico, and I am a US citizen with a residency visa. At the end of the year, we will have spent 60 days in the US and the remainder in Mexico. We will have had no domestic income.

Generally, how will filing our taxes be different this year?

Specifically regarding our foreign income, will we have to report it as a gross total or will we be able to deduct our expenses just as if it were a domestic small business? Should we file our Mexican taxes first and use the totals reported there? (The business is in my wife’s name, equivalent to a sole proprietorship in the US. And we have always filed our taxes jointly since marriage.)

And finally, is there any benefit or drawback to transferring our income from our local Mexican account to our domestic US account?

Thank you so much in advance!

[Anonymous · Accepted solution]

@scaldalupo thank you for participating in our event

US citizens and resident aliens must report the income they earn outside the US annually. There are, however, certain credits and exclusions you can apply to significantly reduce or eliminate your owed taxes. The two main ones are the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).

To use the FEIE, you must be:

• Physically present in another country for 330 days of the year, or
• A “bona fide resident” of the country

TurboTax will figure out if you’re eligible for this exclusion or you can use this tool from the IRS.

The FEIE allows you to exclude a significant part of your income. In 2022, this amount is $112,000, and it’s adjusted annually for inflation. There’s also a housing allowance component of the FEIE that may help you exclude additional income.

In your situation, you lived in the US for 60 days, therefore you will not be eligible for FEIE for 2022 tax return. You will be eligible for FEIE in future years if you live outside the US over 330 days.

The FTC is beneficial for you if you:

• Live and work in a foreign country with income taxes (foreign income taxes are often higher than those in the US)
• Have US citizen children, aged 16 or younger, with Social Security numbers (you’ll be eligible for the Child Tax Credit)
• Haven’t previously used the FEIE
• Contribute to Individual Retirement accounts (IRAs) or Roth IRAs
• Need to show a positive number for adjusted gross income (AGI) on your tax return

FTC will be the right choice for you for 2022 taxes. For that you should first file Mexico tax return, so you can include the taxes you paid to Mexico for Foreign Tax Credit.

How do US taxpayers living and working abroad report their income? 

Regarding your final question, that would be a question for your financial planner.