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Discussion Starter · #1 ·
I am a full time resident of Mexico for many yrs now. I am an architect designing and doing plans for US based contractors and and other architects within the US. All of the work I do is for jobs in the US. I am paid by the various contractors and architects directly into my US bank account. I do not and do not have a need to visit any clients or work in the US. All of my design work is done from my home in Mexico. Is there a chance I can qualify for the foreign earned income exclusion.
Thank you.
 

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Is there a chance I can qualify for the foreign earned income exclusion.
You qualify. You presumably pass the physical presence test since you are resident in Mexico and are not physically present in the United States.

Note that work is where you physically perform it, not how long the wire (or wireless connection) is between you and your clients or where your bank account is located. And you are a resident of Mexico on top of that. Presumably you have a tax obligation to Mexico, including social security tax. You have the option of skipping the U.S. Foreign Earned Income Exclusion and taking only the U.S. Foreign Tax Credit (to reflect your income taxes paid to Mexico), or you can take the FEIE and take the FTC only on unexcluded income.

Regarding social security tax, if you are self-employed (which it appears you are) you'll also need to pay the U.S. SE Tax. There is presently no social security treaty between the U.S. and Mexico, so even if you are required to pay social security tax to Mexico that doesn't affect your U.S. obligation. Social security taxes do not factor at all into the FEIE or FTC -- they're always paid and nonexcludable.

The U.S. and Mexico do have a non-social security tax treaty, and that tax treaty may offer some relief.
 

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Thank you for a concise and clear answer. I have a good friend that is an artist that paints and creates all of his work here in Mexico and then it is taken North to Galleries and sold. He certainly passes the residency requirement as well. Would his income, which comes in the form of chech/payment to his US bank account, be exempt as well?
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I have a good friend that is an artist that paints and creates all of his work here in Mexico and then it is taken North to Galleries and sold. He certainly passes the residency requirement as well. Would his income, which comes in the form of chech/payment to his US bank account, be exempt as well?
Art and artists are a bit tricky, and they're actually among the popular targets for IRS audits since there's a lot of unreported and improperly reported income in the art gallery business. Generally, as I understand it, artists are self-employed, and their net income (income less allowable expenses, such as paint and canvas) from art sales is treated as ordinary earned income. Since your friend is also not physically present in the United States (I presume), he would pass the physical presence test and could take the FEIE on that earned income. Since he's self-employed (I also presume) he would be subject to the SE Tax.

In some cases artists can treat certain income as royalties. For example, if your friend receives variable fees paid for each use of his work in advertising -- per broadcast, per book, per billboard, etc. -- then those licensing fees he receives are likely royalties. Royalties are treated differently. Royalties don't apply too often in art gallery situations where the artist's work is straightforwardly sold piece by piece, and the buyers of those pieces acquire all rights.

Like you he would presumably be subject to Mexican taxes (income and social security). Like you he'd presumably be able to take the U.S. FTC for Mexican income (not social security) taxes on any income that he does not exclude via the FEIE. Taking the FEIE is optional so, like you, he could run two tax calculations to decide whether taking or skipping the FEIE is more favorable.
 

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The key thing to consider is where you (and your artist friend) are physically located while doing the work. That is considered to be where you are working. Where or how you receive payment for your work is by and large irrelevant.

There is then the question of qualifying for either the Physical Presence or the Bona Fide Resident test if you want to go the FEIE route. The physical presence test limits you to something like 35 days in the US each year, whereas the bona fide resident test is based on where you have established your residence.

You may also want to refer to Mexico's rules on establishing residence, particularly tax residence.
Cheers,
Bev
 

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By the way, lest there be any confusion, the subject line for this thread is misleading. The Foreign Earned Income Exclusion (FEIE) is not at all the same as the Earned Income Tax Credit (EITC).
 

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Discussion Starter · #7 ·
Thank you for all the useful information!
You keep referring to the Mexican taxes. I am a Residente Permanente and work frpm my home here in Mexico but all my income is from the US. I don't have any income here in Mexico. Am I somehow subject to Mexican taxes?
 

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You keep referring to the Mexican taxes. I am a Residente Permanente and work frpm my home here in Mexico but all my income is from the US. I don't have any income here in Mexico. Am I somehow subject to Mexican taxes?
Yes, I believe so.

I don't know the specifics for Mexico, but as a general rule, if you live in a country permanently, that's where you pay your taxes, regardless of where you derive your income, be it earned from working or from investments (with some treaty exceptions for state pensions).

For US citizens there's also this rather odd requirement (odd because almost no other countries do this) to file tax returns even if you don't live in the US. However, you either use the FEIE to exclude the first $100k from taxation, or the FTC to write off foreign tax already paid, so in most cases you'd owe little or nothing.

What you should have been doing all these years, I think, is paying taxes in Mexico on income earned in the US - Mexico is where you live and consume public services, after all - and using the FEIE or FTC to file a US return with little or no income tax due, though apparently you'd be paying self-employment tax for US social security.

What it seems like you wanted to do - and who could blame you? - is not pay any Mexican taxes because the money is earned in the US, then at the same time reduce or avoid US income tax by claiming the FEIE. That's a very good deal, but alas unless you are living in some kind of tax haven, it's probably not kosher.
 

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Like Nononymous says, you pays your taxes where you have your residence (normally, though the US kind of does things their own way). In most countries, it does not matter where your income comes from - except for a few limited exceptions. The most common exceptions are: income from real estate located outside the country (which is usually taxed by the country where the real estate is located) and government pensions from a foreign country (though that depends on the existence of a tax treaty between the two countries).

All other income usually must be declared in your country of residence, since you are deemed to be "working" in the country where you are physically located while doing the work. Even if you're paid in the US, you did the work in Mexico, so it's Mexico's to tax if your their resident.
Cheers,
Bev
 
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