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Possible Changes on Taxation for U.S. Citizens in Mexico and Abroad

With a possible change on tax reform, U.S. citizens living abroad wouldn't have to pay taxes

An individual U.S. income 1040 tax return, photo: Flickr
By The News Whatsapp Twitter Facebook Share
3 months ago

The United States has a very intricate tax code that differs from other countries’ and part of this comes from the way it taxes U.S. citizens who live abroad.

The current systems is known as Citizenship-Based Taxation (CBT) and it subjects U.S. citizens living abroad to the same system as citizens living in the United States.

During a May 2017 hearing on the Tax Reform by the Ways and Means Committee, Representative George Holding, Republican from North Carolina, said that the United States is “only one of two countries, Eritrea being the other, to tax the worldwide income of U.S. citizens that live and work in foreign jurisdictions.”

“We’re the only country that has, through its tax code, put both our companies and our citizens at a competitive disadvantage on the global stage,” said Holding.

According to the U.S. State Department, there are over 1 million U.S. citizens currently living in Mexico, all of which have to pay taxes in the United States. However, the tide might be about to change for all of them.

Attorney Charles M. Bruce. Photo: Courtesy of Charles M. Bruce

Charles M. Bruce, a tax attorney who served in the Senate Committee on Finance (1977-1979), and is Of Counsel at the firm of Bonnard Lawson-Lausanne in Switzerland, believes that the current Tax Reform being analyzed by the U.S. government would include what is referred to as “territoriality” for companies. This means that U.S. companies would pay taxes only on the money that they earn in the United States and not abroad.

Bruce also donates his time to work with the group American Citizens Abroad (ACA), a non-profit membership organization that advocates and informs U.S. citizens living outside the country. The News talked to Mr. Bruce in order to provide people with better information regarding future changes to tax law.

According to Bruce, the probability of territoriality or Residency-Based Taxation (RBT) being applied to individuals as well is likely and that “both Democrat and Republican lawmakers and citizen groups abroad support and welcome this change.” If this becomes part of tax reform, U.S. citizens will be taxed as non-residents in their home country.

“Under RBT, an American residing anywhere outside the United States would not be subjected to U.S. tax on her worldwide income. She would be taxed on certain income from U.S. sources, such as, U.S.-source interest, dividends and gains from the sale of U.S. real state property,” said Bruce.

This transition from citizenship-based to residency-based taxation wouldn’t be difficult given the fact that tax rules for non-residents are already in place in the United States in the form of withholding taxes.

“This tax, if it applies, is imposed by means of the normal system of withholding tax, which is applied to non-U.S. [foreign] individuals and, with RBT, would be applied to nonresident U.S. citizens,” said Bruce.

Bilateral tax treaties such as the ones between the U.S. and Mexico would allow U.S. citizens in Mexico to reduce the tax rate from the sale of holdings and properties in the United States.

U.S. citizens would also be free of having to pay back taxes after returning to the United States, as long as their time abroad under RBT and their return to their country is done in a period of more than five years. At least this is current thinking as the legislation begins to take final shape.

ACA is one of the groups currently advocating for RBT to be included in the future Tax Reform, however the RBT bill needs to be scored for its revenue effect, to determine the cost for taxpayers. ACA wants to present a revenue neutral bill and as part of this effort it is currently crowdfunding in order to achieve the revenue estimates for the bill.

You can contribute to this effort by making a donation directly in the ACA site ( All U.S. citizens abroad are welcomed to join this organization in order to stay better informed about the issues that affect them the most.

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