Death, taxes and Mexico

Tuesday, February 27, 2007

No one expects to live forever. Yet some naively think that moving to Mexico will kill their obligation to pay income taxes. In fact, U.S. citizens have to pay annual income taxes on all income earned from any source anywhere in the world, no matter where they live. While Americans moving to Mexico may escape the rat race, they still don't avoid death and taxes.

Of course, the all-American game of reducing and/or deferring taxes legally becomes just that much more interesting (read: complex) once two federal governments are involved.

Deciding issues related to estate taxes, life insurance, annuities, business or personal deductions and expenses requires specialized tax and legal counseling. Some experts recommend expatriates establish an offshore asset protection trust, while in other cases the creation of a foreign or domestic company is the best strategy. These are decisions to be made before crossing the border to buy real estate. And, then there is always the matter of citizenship.

It was widely reported that investment fund legend John Templeton, Kenneth Dart of Dart Container and Campbell soup heir John Dorrance III all renounced their citizenship and, in turn, legally escaped U.S. income and estate taxes. U.S. citizens have a constitutional right to acquire citizenship from other nations as well as the right to end U.S. citizenship. Not surprising, the U.S. government assumes that American citizens want to remain citizens. So, before a U.S. citizen can become expatriated, obvious proof of that intention is required in the form of a deliberate act. One must officially must renounce legal citizenship by visiting a U.S. embassy or consulate abroad, answering a standard questionnaire, then signing a formal document requesting an end to U.S. citizenship.

U.S. law also affords American citizens the right to dual citizenship. That is, U.S. persons have the right to acquire a second citizenship and passport. That dual status can be useful for those who engage in offshore business or make their home abroad. In Mexico, it relatively easy to acquire Mexican citizenship after having made Mexico one's primary residence for at least five years. This requires documentation and, for property owners, important tax implications.

Not to be denied control of their constituents' income, the U.S. Congress has considered following the Canadian model by imposing capital gains tax on all the property owned by a U.S. person who relinquished U.S. citizenship with the intent to avoid U.S. taxes. The American Jobs Creation Act presumes that anyone who ends citizenship who paid more than US$124,000 in net taxes for the previous five years or has a net worth of more than US$2 million is a tax expatriate and left to avoid taxes. Moreover, former U.S. citizens who return to the United States for more than 30 days will still be taxed on their worldwide income.

In the final analysis, there are only two ways to avoid the IRS -- formally relinquish U.S. citizenship and the right to visit the United States for more than a month at a time, or death. Just moving to Mexico won't do it. Nevertheless, the good news is wherever Americans choose to live, we will all stop paying taxes eventually.