American tax law subsidizing remittances to Mexico
Why does the U.S. tax code contain a special encouragement for our taxpayers to transfer money to Mexico? Has consideration been given to using this provision as a bargaining chip in connection with our trade and immigration negotiations with Mexico?
Specifically, the Code creates a special provision with respect to cash transfers to residents of Mexico (with the same applicable to Canada) that are not available for transfers of funds to relatives living in any other country outside the U.S. According to IRS Publication 501, Table 5 on page 12, the (U.S. taxpayer's) eligible relatives include:
- Your child, stepchild, foster child, or a descendant of any of them (for example, your grandchild). (A legally adopted child is considered your child.)
- Your brother, sister, half brother, half sister, stepbrother, or stepsister.
- Your father, mother, grandparent, or other direct ancestor, but not foster parent. Your stepfather or stepmother.
- A son or daughter of your brother or sister. A son or daughter of your half brother or half sister.
- A brother or sister of your father or mother. Your soninlaw, daughterinlaw, fatherinlaw, motherinlaw, brotherinlaw, or sisterinlaw.
- Any of these relationships that were established by marriage aren't ended by death or divorce.
The provision allows the U.S. taxpayer to claim an exemption and deduct $4,050 from taxable income for such relatives living in Mexico, so long as the relative's gross income is less than $4,050 per year, and the U.S. taxpayer taking the exemption provides more than half the person's total support for the year.
The result of this special tax provision is certainly a greater outflow of funds from our country to Mexico than otherwise. These excess funds could be put to work in our own economy. U.S. tax revenue would increase, no longer suffering deductions each exemption claimed for dependents living in Mexico.
Remittances to Mexico from the U.S. exceed $25 billion per year. With Mexico's average household consisting of 3.8 members and household income averaging approximately $10,000 among its 120 million-strong population, it's easy to imagine the large number of legitimate family exemptions taken by relatives in the U.S., without even considering the opportunities for abuse in claiming such dependents living in Mexico. One may also wonder why, for example, support for relatives in Haiti or other poor countries is not offered the same tax advantages.
Harry Hunter is the pen name of a writer in Florida.