The Seattle Money Grab

Opinion

By Orlando Gotay

The Seattle City Council just approved an income tax. This is a very noteworthy development in a state that has no income tax. It may be tied up in litigation soon, but it’s a fact. They just enacted a city income tax.

Roughly speaking, it’s a two percent tax on the total income of a Seattle “resident taxpayer” above US$250,000. That means a lot of deductions and subtractions are not taken into account and will make many eligible for this new tax. That will be two percent of a much larger pie.

To be a “resident taxpayer,” one has either to have a domicile for the entire tax year, or failing that, to have a “permanent place of abode” in Seattle and spend more than 184 days of the year in Seattle.

Why should you care? If you are one of my Seattle readers who live part time in Mexico, you should definitely pay attention to this. If you are not a Seattle person, I recommend you pay almost as much attention. I am afraid this is a development we will see more of in the future. Facing budget shortfalls, local jurisdictions will attempt to impose additional taxes and liability, for many of these may hinge on their definition of residency. Of course, it will pay in spades to see what they are. One can either conform one’s behavior so as not to make oneself liable for the new tax or document that one is not liable. Who knew that staying a few extra days south could pay off so well?

The Seattle income tax uses as a starting number— the “total income” off one’s federal return. The good news is that number allows for the subtraction of the federal Foreign Earned Income Exclusion, if entitled. That may make one fall below the $250,000 Seattle threshold—for now.

Many other local jurisdictions have income taxes already on the books. New York City and Philadelphia come to mind. Your time away from those places may help make a difference. In fact, the savings may pay for more than a few margaritas here.

I always recommend you keep a journal with some narrative or evidence of where you spend your time, and that is good advice for both the Mexico part timer and for the year-round dweller. The journal may help with the IRS, a state tax authority, and soon to come, the Seattles of the world.

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 tax@orlandogotay.com, online radio at mixlr.com/orlandogotay, or Facebook: GotayTaxLawyer.

 

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