I am a US citizen working in Mexico, do I owe the US income taxes?

Question

I heard that if I live in Mexico than I will not have to pay income taxes of up to $85,000. How do I prove that I am living in Mexico?

Answer 1

As a US citizen you are subject to US taxation on your world-wide income regardless of where you live.

If you have a permanent residence in a foreign country all year or meet the physical presence test you may choose to exclude some or all of your foreign earned income from US tax. You MUST file a timely return to claim the Foreign Earned Income Exclusion. Alternatively you may choose to take a credit against your US tax liability for any foreign income taxes paid. You may not do both, however. You claim the exclusion by filing Form 2555 with your Form 1040 return or the credit using Form 1116.

If your foreign residence is challenged, you'd prove your residence the same way you would here in the US: Copies of leases or deeds, utility bills, school and employment records, medical records, vehicle registration records, insurance policies, etc. Filing your return from your address in Mexico listing your Mexican address would help a lot as well.

The issue of foreign income is complex. Get a copy of IRS Pub 54 from their website and get educated.