At the Crossroads of Nationality and Taxation
By Orlando Gotay, Tax Attorney
Some US citizens who have migrated to Mexico have gone beyond “residente temporal” or even “permanente inmigrado” status. There are those who have chosen to acquire Mexican nationality. There are more than a few out there; I think it pays homage to the country that has welcomed us as home.
The way I read it, Mexican nationality law allows dual nationality for Mexicans who also acquired another nationality elsewhere, but that may not be the case when a “non Mexican” acquires Mexican nationality. Mexico requires “express renunciation” to other nationalities held by the newly naturalized Mexican national.
This becomes an issue because of differences in Mexico and United States nationality law. US law deems US citizenship as a highly valued condition. Therefore, it has established a correspondingly high burden for it to be lost. The individual has to carry out an expatriating act, and it must be established that it was done with the specific intent of actually relinquishing citizenship.
Why, you ask, would a tax lawyer be writing about this? Because citizenship does matter when it comes to US taxation. And there may be some out there who think they may have “let go” of their US citizenship at the moment they acquired Mexican nationality, but it may not be so. Unknown to them, both countries may consider them as citizens. Ignoring this in the US context could have disastrous consequences.
One wishing to relinquish US citizenship must do so through a renunciation process administered by State Department officials at consular offices outside the United States. The extensive process requires interviews and a hefty US$2,350 renunciation fee.
Until a person completes the process, documented by a Certificate of Loss of Nationality, he will still be considered a citizen by US authorities. And that requires—you guessed it—filing federal income tax returns. The “express renunciation” before Mexican authorities does not strip you, under US law, of citizenship and all corresponding federal tax obligations.
If a person intends to renounce, it is critical that accounts are squared with Uncle Sam beforehand. If you cannot certify to the IRS compliance with all federal tax obligations for the five years preceding the renunciation, you become a “covered expatriate.” From a tax perspective, that’s a really bad label to have. It taints you and your US heirs. Most gifts or bequests from the covered expatriate to US persons will have to pay gift or estate taxes (at the highest rate) simply because of the label.
If you have too many assets when you renounce, or if your average federal tax bill is too high, you also become a covered expat. Luxury problems, I say. Special tax calculations must be done for covered expats.
What really troubles me is ending up as a “covered expat” because of unfulfilled tax obligations one did not know about.
In matters of nationality, it pays to understand the true nature of your status, enabling you to fulfill your tax obligations in a timely way.
Orlando Gotay is a California licensed tax attorney with a Master of Laws in Taxation, admitted to practice before the IRS, the US Tax Court, and other taxing agencies. His love of things Mexican has led him to devote part of his practice to the tax matters of US expats in Mexico. He can be reached at firstname.lastname@example.org.