The Party Line on Taxes

Wednesday, April 2, 2008
Mérida, Mexico

Read more about doing your taxes overseas in International Living Postcards—your daily escape

Suzan and I went to a party the other night at a friend’s house here in Mérida. I met a guy named Jim who just retired and is in the process of renovating a house here in town with his wife. As usual among the guys in any expat gathering, we eventually started talking about U.S. politics.

“About the only thing I agreed with [former presidential candidate] Mike Huckabee on,” I said, “was his idea to reform the tax system. Get rid of the IRS and just charge a value-added tax on everything. Then you have complete control over how much tax you pay. If you don’t want to pay taxes at all, don’t buy anything.”

“I strongly disagree,” Jim said politely. “I’ve worked all my life, and I’ve already paid income tax on everything I’ve earned. Now that I’m retired, should I have to pay tax again on everything I buy? To me, that’s double taxation. And let’s face it…you can’t buy nothing.”

He was right, of course. I wasn’t thinking like a U.S. retiree. I realized then how much I’d come to take for granted many of the advantages I enjoy by living outside the U.S., even as a still-working 53-year-old.

As a U.S. citizen, I owe income tax on everything I earn, anywhere I earn it (that’s an oversimplification, but not much of one). However, I live, work, and am paid outside the U.S., which qualifies me for the Foreign Earned Income Exclusion. This exclusion lets me claim more than $80,000 each year in tax credits on income I earn outside the U.S. (The maximum amount of the exclusion changes yearly—in 2008, the maximum is $85,700.)

I’ve also lived in Latin America for so long that I’ve become used to value-added taxes. Most of the countries I’ve lived in have them. I simply don’t notice or think about them anymore…they’re just a fact of life. The only time they enter into my calculations is when I’m figuring out how much tip to leave at a restaurant. I don’t lean into punches, and I don’t tip on tax, so I subtract the VAT from the bill before I figure the waiter’s propina. Even the waiters understand…once I explain it to them.

But for Jim, who just retired and still lives in the U.S., the picture is different. He’s already handed the government a hefty chunk of everything he’s earned. Handing them even more via a value-added tax when he spends what he has left doesn’t appeal to him. And the money he now gets from his investments and other passive income doesn’t qualify for the Foreign Earned Income Exclusion—only salaries, wages, and work-related housing costs can be claimed.

All of this puts cost of living high on Jim’s list of priorities…it’s one of the few remaining variables he can control to make his money go as far as possible. Back where I come from, that’s called “moving where the weather suits your clothes.” It’s one of the reasons I moved abroad in the first place, and it’s something International Living has been talking about for almost 30 years. And I think it’s one big reason why I’m seeing more and more folks like Jim and his wife renovating and moving into beautiful old colonial houses in Mérida.

They can buy and restore a place here at a fraction of the cost of the U.S. (yes, even in today’s chaotic Stateside housing market). And when they’re done, they pay less in almost every way, including taxes and monthly expenses, to live in and enjoy that house here in Mexico as opposed to the U.S.

I didn’t get a chance to do so at the party, but I want to thank Jim for reminding me about the realities faced every day by retirees in the U.S. It’s easy to become extremely laidback in Latin America…after all, that’s what most of us came here for in the first place. But that doesn’t mean we can ignore what’s happening Stateside…especially if we’re planning, as many of us are, to live the good life part time and keep one foot in the trenches back home.

Dan Prescher
Publisher, International Living

Editor’s note: You could organize your situation so that you pay less tax as an American abroad than you did as a full-time resident in the States...your multiple jurisdiction liabilities notwithstanding. How much less? That depends on your situation…but you could organize your affairs as an overseas American so you pay no U.S. tax. That's a big deal. (And, for the record, yes, it's all legal.)

In years of looking, we've never found a reliable, current, complete, and comprehensible resource on the subject of taxes for the American abroad...so we created one ourselves. You won't find a more up-to-date and user-friendly guide to how to figure your liability to Uncle Sam than the 2008 edition of The Expatriate's Tax Bible: The Complete Guide to U.S. and Foreign Taxes for the American Abroad. Plus, during our Anniversary Bookstore Sale, you save $41 on this valuable resource.

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