Hi, I am a Mexican citizen who used to work in the US and recently quit my job and moved back to Mexico. 8 years in total I worked for this company, last 3 years spent in the US and the rest in an international assignment. Now I am getting my benefits payment for the couple of years I worked in an international assignment, and I'd like for this money to be deposited into my US bank account. This payment includes the reimbursment of my contributions to the pension plan, profit sharing, and a couple of other benefits. The amount is approximatley $40,000 USD. Will I have to pay tax on this amount?

If the money was earned while you were physically located OUTSIDE of the United States, and you were NOT a resident alien or a green card holder. Then NO income tax (federal or state) are due on that income.

If you get money in your bank account, it is not taxable. However, if you are resident of the U.S. you must report worldwide income on your tax return.

I am not a resident of the US, but I will file taxes for 2010 as I was employed and earned income in the US for the first 5 months of the year. Will I need to report this money even if I earned it while I worked outside of the US?

I understand banks report any money received above $10K to the IRS. I am filing taxes for 2010 as I worked in the US the 1st 5 months of the year. Will I need to report this $40K I will receive since my bank will report it to the IRS?

Paber:

Again, what is the source of your earned income in 2010??

If it was from OUTSIDE of the United States, then you are EXEMPT from all taxes and do not have even file a tax return.

My earned income in 2010 was from work in the US up to May before I quit, so I will be filing taxes for that. But these $40K was earned while working outside the US, a few years ago, but I will be getting it paid out this year in my US bank.

Paber:

The following assumes you are SINGLE. If you are married and/or have children who were in the U.S. with you in 2010, please let me know.

It appears you worked INSIDE the U.S. from 1 January 2010 to sometime in May 2010. Then returned to Mexico. If so, then you have TWO options:

1) You can CHOOSE to file as a resident of the United States for ALL of 2010, claiming ALL world-wide income on your U.S. tax return while claiming the standard deduction and personal exemption on that return, then claiming the Foreign Tax Credit for income taxes incurred on the income earned while working outside of the U.S.

OR

2) You can file a dual-status return, which involves filing BOTH Forms 1040 and 1040NR. On the dual-status return, you get to declare ONLY the income earned while you were physically located in the United States, and you pay taxes ONLY on that income. The income while OUTSIDE of the U.S. does not have to be declared, not is there any tax liability. You CANNOT claim the standard deduction on a dual-status return. Instead, you would itemize your deductions.

Note that a dual-status return is NOT for amateurs, laymen or even tax professionals who are not familiar with the return. Get professional help from someone who has experience preparing dual-status returns.

It is impossible to determine which option is best without actually preparing the returns BOTH ways and comparing the results.

Yes I am single. Thanks so much for the advise!

Glad to help!