Tax Issues for Americans Living and Working in Mexico – 2014 Filing Version

~ It is that time of year again. ~ The time of year when our banks, employers, mutual fund companies send us notices of our income from last year, which allows us to pay our annual tribute to the State and Federal Governments, as we scramble to figure out what to do.

money changing handsBrave readers who venture into reader’s Comments on other Yucalandia articles have noticed that there have been a spate of questions about tax issues for expats living and working in Mexico. This year’s questions have taken on more specific and detailed forms than ever, including Fideicomiso filing issues (3520 & 3520 forms), even to the level of requesting specific advice about their particular personal situations. Scary, nu ? ~ Do we really have any business giving tax advice? ~

As a frequent filer since age 9, I am definitely no expert, but … I have done tax returns for friends, neighbors, fellow grad students, co-workers, alien friends (a.k.a. resident aliens from Mexico), family members, and for parts of 3 different businesses – and in 11 returns disputed by the IRS, my track record is 11 for 11 in getting the IRS to agree with how we handled complex issues. Still, even as a guy who enjoys figuring out tax rules, even after living here for 7 years I never got around to reading the US-Mexico Tax Treaty of 1993, (mostly because our returns have been relatively simple).

Anyway, getting back on point, several Yucatan readers have asked some particularly good questions that I thought I knew the answers to, but for which I had no/zip/zero/nada references – just the partial remembrances of past conversations with talented friends who have worked and lived overseas for decades.

puzzled faceHaving no formal references had left me puzzling over how to best answer tax questions about: how much a US teacher in Mexico would owe the US Govt, and

how much ($$) a potential teacher living in China would hypothetically have to pay in US taxes if he moved to Mexico to take a position, and if he sold property with Capital Gains, and if he emptied part of his 401K realizing substantial dividends, and if he took social security benefits. The latter poster even gave substantial-looking references/links to official Accountants advice and US News magazine reports that indicate he would have to pay on all-of-the-above (a box I always hated to check).

This article provides the specific official IRS references for people to read about their situations.

Table of Contents for Key Sections Listed Below:
~ Commonly Known US IRS Rules for Innocents Abroad
Tax Guide for U.S. Citizens and Resident Aliens Abroad
~ Got Foreign Income?
~ Where to File… and When to File…
~ E-Filing
~ New Developments in International Taxation: Possible Fideicomiso Exemptions
~ Now that You are Planning to File – on time – … ~ How to Proceed ~ :
~ Just what taxes are owed by US Citizens earning income in Mexico?
~ Recent Changes in IRS Requirements for Americans Living Abroad – FBAR and FINCEN
~ FATCA Requirements for Expats with over $50,000 total in Foreign Accounts and Trusts
~ A tip for teachers, who get paid for teaching in Mexico.
~ OTHER Key Tax Items Affecting Americans Living in Mexico
~ US Income Taxes on Other Mexican Income Sources
~ Income from Immovable Property (Real Property)”>
~ Pension income and Social Security benefits
~ $3000 Income exemption for artists, performers, athletes et al.

~ Useful Internet References:
~ Publication 54, Tax Guide for U.S. Citizens and Residents Abroad (IRS PDF)
~ Publication 4732, Federal Tax Information for U.S. Taxpayers Living Abroad (IRS PDF)
~ International Frequently Asked Questions (IRS Website)

International Taxpayer – Internal Revenue Service

~ http://www.irs.gov/pub/irs-trty/mexicotech.pdf

US – Mexico Tax Treaty

Publication 901 (04/2013), U.S. Tax Treaties

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And now, the rest of the story

Commonly Known US IRS Rules for Innocents Abroad
Many old-hands to Mexico know that there is a Foreign EARNED Income Exclusion of $97,600 for Tax Year 2013 (TY 2013): IRS: Foreign Earned Income Exclusion , which begins a cascade of web-links that we list at the end of this articles, and insert only occasionally at the author’s whim…

Twain Innocents Abroad

Other old-hand-expats (a.k.a. non-gringos) know about the 330 day requirement for “physical presence” outside of the US (for that TY) to definitively qualify as a Resident of Mexico for IRS tax purposes * , while they are not fully a Resident of Mexico if “The resident is present in the United States for more than 183 days in a 12-month period.“***

Confused? In cases where you are in the USA for more than 35 days out of a non-leap year Tax Year (TY), but less than and 184 days, you use the rules for Dual Resident Taxpayers (liable for taxes in both countries for a given TY).**

Ready to go down the rabbit hole? (or through the looking glass…)
Conundrums? The stock and trade of the US IRS.
Next, remember that not everyone who is exempt from paying taxes is also exempt from filing an IRS return. e.g. Even though you may qualify for the Foreign Resident Earned Income Exclusion, you may still need to file.
Tax Guide for U.S. Citizens and Resident Aliens Abroad

Armchair expat experts might know that the 2013 Publication 54Internal Revenue Service, Tax Guide for U.S. Citizens and Resident Aliens Abroad tells us: Single filers must file a US return for worldwide gross income exceeding $10,000 for TY 2013, and joint filers must file a US return for gross income exceeding between $20,000 to $22,800 depending on your ages.****

Got Foreign Income?
To determine the US Dollar value of your 2013 Tax Year (TY) income, you can use one of 2 methods:
~ Calculate and use the average annual exchange rate: ~ $13.157 MXN : $1 USD ~
based on IRS’s accepted OANDA 2012 mid-market data http://www.oanda.com/currency/average ) or
~ You can use the each pay date’s average daily mid-market rate to convert each individual receipt.

currenciesSince the IRS has NOT yet published any official rates for TY 2013, they allow us to use data from XE.com, Oanda.com, or X-Rates.com . In our personal experience, XE.com is the most reliable source for genuine exchange rates, (for when you want to actually change money), because XE actually exchanges MXN pesos, and they use real-world/real-time trade data to get their published mid-market rates. In contrast, the Australians (Oanda) do not actually exchange MXN pesos – instead, they get non-representative data from other sources. As a result Oanda’s (generally too high) rates are good to use for calculating your pesos to dollars for the IRS, while XE rates are better to use when talking with your bank about actual exchange rates.

Now that you know whether to file, we are left with:
Where to File… and When to File… IRS: U.S. Citizens and Resident Aliens Abroad

When to File:
If you are a U.S. citizen or resident alien residing overseas, or are in the military on duty outside the U.S., on the regular due date of your return, you are allowed an automatic 2-month extension to file your return and pay any amount due without requesting an extension. For a calendar year return, the automatic 2-month extension is to June 15. …”

Where to File:
If you are a U.S. citizen or resident alien (Green Card Holder) and you live in a foreign country, and you claim the Foreign Income Exemption, (no check included) then mail your U.S. tax return to:
Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215
USA

If you are enclosing a check or money order, file your return with:

Internal Revenue Service Center
P.O. Box 1303, Charlotte, NC 28201-1303 USA

Residents of Guam, BVI, etc mail to their own IRS special addresses.


Ugly American

E-Filing:
“Taxpayers with an AGI (Adjusted Gross Income) of $57,000 or less can electronically file their tax return for free using freefile. Taxpayers with an AGI greater than $57,000 can either use the Fillable Forms or efile by purchasing commercial software. ” It is worth noting that some commercial software (notably past versions of Turbo Tax) do NOT allow e-filing unless you have a US IP address – and will not work if they detect you are connected to the internet in Mexico. IRS: U.S. Citizens and Resident Aliens Abroad

Now that You are Planning to File – On time – … ~ How to Proceed ~
Before diving into the guts of preparing a return and then having to make after-the-fact edits due to changes in the tax law, it is better to check for that year’s changes in the Infernal Revenue Services Tax Code. Fortunately, a quick check of New Developments in International Taxation for TY 2013 shows only one major item for typical expat situations in Mexico:

New Developments in International Taxation: Possible Fideicomiso Exemptions
In June, 2013 the IRS made a FINAL RULING that Mexican Land Trust (MLT) Fideicomisos now NO LONGER need to file at foreign trusts (3520/3520A) AS LONG AS your Fideicomiso specifies that your real estate trust (fideicomiso) holds just one property and only allows just ONE activity: “holding title to the property” to maintain the exempt Mexican Land Trust status. Mexican Land Trust Not Considered a Foreign Trust (Rev. Rule 2013 – 14) (PDF)

“[An] MLT [Mexican Land Trust, or fideicomiso] is not a trust within the meaning of § 301.7701-4(a). [However] If, under the MLT agreement, B [“B” in the holding refers to your bank] holds legal title to any assets other than Greenacre or is permitted or required [by the terms of the fideicomiso] to engage in any activity beyond holding legal title to Greenacre, the holding of this revenue ruling does not apply… ”

So, the Fideicomiso must hold only one asset (one property), but it does allow renting.

IRS Bulletin No. 2013-26, June 24, 2013, has the IRS’s detailed set of analyses and detailed descriptions of Rev. Rul. 2013-14. http://www.irs.gov/pub/irs-irbs/irb13-26.pdf

In “Situation 1” on p 1267 the IRS clearly describes the exempt type of Mexican Land Trusts (fideicomisos) and on page 1268, the IRS describes under “Situation 1”:
“X (the American taxpayer) retains the right to manage and control Greenacre. X has the right to collect any rent on Greenacre. In addition, X has the obligation to pay directly any taxes and other liabilities due with respect to Greenacre. Accordingly, because X is treated as a disregarded entity under § 301.7701–2, A is treated as the owner of Greenacre. ”

This one IRS publication clearly identifies an American taxpayer who has a fideicomiso as an exempt Mexican Land Trust with the only allowed activity being “holding title to the property”, is not a foreign trust for tax purposes, and does not have to file the 3520/3520A forms – and DOES have the right to collect rents.

Some tax attorneys are advising qualifying MLT fideicomiso owners (who have filed on this in the past) to file one last set of 3520/3520A’s for 2014 – checking the “Final Filing” box – to officially notify the IRS that you qualify for the “IRS Rev. Ruling 2013 – 14” exemption – to keep them from pursuing you in the future if your Mexican bank notifies the IRS of your MLT real estate “title holding” only trust. A belt and suspenders approach ???

This Brings us to the Crux of the Matter:
Just what taxes are owed by US Citizens earning income in Mexico?
There is SO much misinformation, speculation, and arm-chair quarterbacking by gringos, that it seemed like time to finally roll-up-our sleeves and dive into the famed Mexico-USA Tax Treaty IRS: UNITED STATES – MEXICO INCOME TAX CONVENTION – 1993 … all 38 pages. … not bad as treaties and Gob. documents go ,,,

But before we dive into the legalese of the 1993 Tax Treaty, it’s worth taking a look at what the IRS has summarized in: IRS: Publication 901 – US Tax Treaty Summaries . Click on the link and you find it only takes about 120 page-downs to get through the IRS summary… (In their defense, they try to address US tax issues for all countries on the planet – while we only care about ~ Mexico ~ ) Anyway, have fun scanning the Mexico section – paying special attention to the exemptions offered to professionals providing personal services, like lawyers, doctors, physicians, consultants, and … teachers(?) Remember that because the US-Mexico Tax Treaty is reciprocal, then all terms and conditions listed by the IRS for Mexicans living in the USA, also apply fully for US citizens living in Mexico. …

science teacher

Recent Changes in IRS Requirements for Americans Living Abroad – FBAR and FINCEN:
Since July 1, 2012. FBAR (Foreign Bank and Financial Account Reporting) rules requires Americans with foreign accounts and trusts (including some fideicomisos) worth more than an aggregate $10,000 US dollar value to file annual reports with the Treasury Department. http://www.fincen.gov/forms/e-filing/Efiling_FAQs.html

Since our previous FBAR reports on Fideicomisos, it is worth noting that in July 2013, the IRS decided that some “single activity – title holding” real estate Fideicomisos for Mexican properties do not require FBAR filings, as long as the OWNER DOES NOT RECEIVE ANY INCOME (no rental income) from the real estate trust/property, or have any other activities permitted by the trust other than holding the land title. Still, if you are an expat married to a Mexicana, or if your fideicomiso allows other activities, and if you have Mexican bank accounts that have aggregate worth over the $10,000 limit, you are required by the US FinCEN (Financial Crimes Enforcement Network) to make annual e-filings in June with the US Treasury.

KEY FACTS:
~ Filing at the BSA E-Filing website is FREE.

~ FinCEN granted a general exemption for mandatory E-Filing for the FBAR until June 30, 2013.

~ FBAR filers can start the process at: File an Individual FBAR – FinCEN BSA E-Filing System

man with a headache~ The US IRS has kindly recognized “that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), Form TD F 90-22.1, but have recently become aware of their filing obligations and now seek to come into compliance with the law. ” As a result the IRS announced a “New Streamlined Filing Procedure” that includes being: “required to file delinquent tax returns, with appropriate related information returns (e.g. Form 3520 or 5471), for the past three years and to file delinquent FBARs (Form TD F 90-22.1) for the past six years.”

http://www.irs.gov/uac/Instructions-for-New-Streamlined-Filing-Compliance-Procedures-for-Non-Resident-Non-Filer-US-Taxpayers alligator in weeds

*sigh* So, it appears that if you do not owe anything, you can catch up on past omissions using their “new” systems.

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FATCA Requirements:

On Feb. 1, 2012 the IRS updated requirements for Expats who have over $50,000 total of foreign financial/savings/checking/investment accounts to file a new form with the IRS every year, starting with our 2011TY filings in 2012. Specifics can be found at IRS websites: “Foreign Account Tax Compliance Act (FATCA) IRS Nov. 16, 2012 Update” and “IRS: Summary of Key FATCA Provisions”

Summary of Key FATCA Provisions
“The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, is an important development in U.S. efforts to combat tax evasion by U.S. persons holding investments in offshore accounts.

Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS. In addition, FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

Reporting by U.S. Taxpayers Holding Foreign Financial Assets (FATCA)
FATCA requires certain U.S. taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938) that must be attached to the taxpayer’s annual tax return. Reporting applies for assets held in taxable years beginning after March 18, 2010. For most taxpayers this will be the 2011 tax return they file during the 2012 tax filing season. Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent. …”

Another IRS site goes on to describe:
“Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds. For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

The thresholds for taxpayers who reside abroad are higher. For example in this case, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

Instructions for Form 8938 explain the thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted, and what information must be provided.

Form 8938 is not required of individuals who do not have an income tax return filing requirement.
“IRS Releases Guidance on Foreign Financial Asset Reporting”

It is worth noting that the key provisions of FATCA supposedly will not kick-in until July, 2014: http://americansabroad.org/issues/fatca/acas-position-fatca/ ? On July 12, 2013, the US Treasury Department said that due to overwhelming questions and comments from countries around the world, (effectively postponing agreements with other countries), Treasury has extended the start of the withholding and account due diligence requirements of the Foreign Account Tax Compliance Act, or FATCA, for 6 months, until July 1, 2014, to allow the Treasury Department more time to complete agreements with foreign jurisdictions. Treasury Delays FATCA Withholding Requirement – Accounting Today.

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Getting back to the Questions from Readers:
Here’s a tip for teachers and other people providing personal services, (esp. the 2 who have made Comments/Questions), who get paid in Mexico for teaching or working in Mexico.
If you don’t like personally slogging & slugging through 120 page-downs of government-speak regulations… jump now to Table 2’s explanations of the US-Mexico’s Tax Treaty’s Article 14 and Article 15 that explain the reciprocal exemptions for Americans providing personal services in Mexico, and Mexicans providing personal services in the USA:

Table 2
This table lists the different kinds of personal service income that may be fully or partly exempt from U.S. income tax. You must meet all of the treaty requirements before the item of income can be exempt from U.S. income tax. The income code numbers shown in this table are the same as the income codes on Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.

Independent personal services. The term “independent personal services” generally means services you perform for your own account if you receive the income and bear the losses arising from those services. Examples of these services are those provided by physicians, lawyers, engineers, dentists, and accountants who perform personal services as sole proprietors or partners.

Dependent personal services. Dependent personal services usually are those you perform for someone else as an employee.

Then, paging down to the MEXICO section of the table we find that based on “Treaty Article 15”, “Dependent personal services” are exempted from US income taxes, as long as you do not exceed a “Maximum Presence in U.S.” of “183 days”, and that your employer is not a Resident of the United States. Also note that there is “No limit” of “Maximum Amount of Compensation” for US expats providing dependent personal services in Mexico.

slot machine paying off

and if you read just 2 more eeensy weeeeensy little lines, the IRS summary table says that “Studying and training:” activities are QUALIFIED PERSONAL EXEMPTION activities…

Waaaaa- Hoooooo….

Did you teachers connect the dots?
Since the Mexico-US tax treaty exempts “dependent personal services”, and… because the IRS allows “studying and training” activities as qualified TAX EXEMPT “personal service” activities, then … it sure looks like income from such teaching in Mexico, qualifies as an IRS-approved tax-exempt “personal service”. Which makes it … exempt.

(Since “teaching and training” are qualified as personal services for students, then teachers providing that “teaching and training” are providing a personal service… Even though they are not specifically identified in the tax treaty: The IRS set the precedent of “studying and training” as personal services, which means the professional teacher who teaches overseas is providing a tax exempt “personal service”, nu ?)

Whatcha think ?

Not bad for a guy with a head last seen floating at 60,000 feet, nu ?

http://www.irs.gov/pub/irs-trty/mexicotech.pdf ============================================================

A gentle reminder: Sometimes the IRS folks need a little help finding the appropriate regs. The IRS interprets the tax rules for Mexicans working in the USA and reciprocally US citizens working in Mexico as independent contractors providing independent personal services – exactly the same way for both cases (Mexicans and US citizens – because the Treaty requires the same treatment by both/each country of the other’s citizens. Remember, even though the IRS rules are written for Mexicans working in the USA, the same rules apply for Mexicans working in the USA. This means IRS publication 901 on rules for Mexicans working in the USA are exactly the same rules for US citizens working in Mexico. (If either government doubts this: Tell them to read the Tax Treaty’s Articles 14 and 15 for confirmation.)

****************

OTHER Key Tax Items Affecting Americans Living in Mexico:
~ The 1993 Treaty expressly prohibits double taxation on income, which means that any income taxes you pay in Mexico are credited against your in-kind US taxes and vice-versa.
Let’s repeat the point:
~ The 1993 Treaty expressly expressly requires allowing credits for payments of income taxes in one country against in-kind income taxes owed in the other.

~ The 1993 Treaty expressly allows the exemptions, credits, and deductions of the other country’s tax laws:

Original Work by Michele Maugeé:  Not for reproduction.

Original Work by Michel Maugée: Not for reproduction.

“ARTICLE 1

2. The Convention shall not restrict in any manner any exclusion, exemption, deduction, credit, or other allowance now or hereafter accorded:
a) by the laws of either Contracting State; or
b) by any other agreement between the Contracting States.”

US Income Taxes on Other Mexican Income Sources: Taxes that you may owe – or be exempted-from.
Interested readers should also read the Treaty Articles that affect them. These articles are clearly written in easy-to-understand English, (if you know a little government-speak) so, search the following list for topics that may affect you:
~ Article 4: Determining Residency,
~ Article 6: Income from Immovable Property (Real Property)
~ Article 10: Dividends,
~ Article 11: Interest,
~ Article 12: Royalties,
~ Article 13: Capital Gains,
~ Articles 14 & 15: “Personal” and Professional Services,
~ Article 18: Artistes and Athletes,
~ Article 19: Pensions, Annuities, Alimony, and Child Support,
~ Article 20: Govt. Service,
~ Article 21: Students.
IRS: UNITED STATES – MEXICO INCOME TAX CONVENTION – 1993

e.g. Consider

“ARTICLE 6
Income from Immovable Property (Real Property)
1. Income derived by a resident of a Contracting State from immovable property (real property), including income from agriculture or forestry, situated in the other Contracting State may be taxed in that other State.

5. A resident of a Contracting State who is liable to tax in the other Contracting State on income from real property situated in the other Contracting State may elect for any taxable year to compute the tax on such income on a net basis as if such income were attributable to a permanent establishment in such other State. ”

This basically says that US citizens who realize capital gains on the sales of Mexican property owe US taxes on the gains, and that the net Mexican gains are calculated using US tax rules, allowing depreciation, and allowed deductions for expenses and improvements.

Nice, eh ?

happy old man
Pension income and Social Security benefits are exempt. (Article 19)
“…a) pensions and other similar remuneration derived and beneficially owned by a resident of a Contracting State in consideration of past employment by that individual or another individual resident of the same Contracting State shall be taxable only in that State;”

The last clause means that pension and Social Security benefits are basically taxable only in the “State” (country) that is paying them => Meaning that in typical expat retiree cases, (see Article 20 Government Service exceptions), US pension benefits can only be taxed in the USA, and Mexican pension benefits can only be taxed in Mexico.

We report this last item, because the internet currently has a number of seemingly reliable reports from impressive sounding authors like Deloitte and US News and World Report, who just got these two… wrong, in their most recent reports. (And yes, this Tax Treaty has been around since 1993, so, one would think that the “experts” would be able to get something so important to 10,000’s of expats retired in Mexico… not to mention the upcoming 40 million retirees who will have about $1 million of net assets as they retire between 2014 – 2030. )

and one final item to some folks who often don’t like to read government-speak:
…Treaty Article 18 describes a $3000 income exemption for artists, performers, athletes et al.

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Closing Thoughts:
All you folks with Fideicomiso property in Mexico (and no personal/individual exemption letter to you from the IRS) need to file your informational filings as described in FBAR’s and Fideicomisos: To File or Not to File, That is the Question . and Single filer folks (US Residents) with over $50,000 total in foreign financial accounts need to file their FATCA filings ~ Updated 2011 IRS Requirements: Foreign Account Tax Compliance Act (FATCA) ~ Note that the FATCA thresholds for taxpayers who formally qualify under IRS rules as resident of a foreign country are higher. For example in this case, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year. (Since the limits are 4X higher for US citizens who qualify as residents of foreign countries.)

Finally, I am not a professional tax preparer, and all information presented here is just for educational and entertainment purposes – please read the references (all provided) for yourself.

Why write this? I have done tax returns for the past 48 years, did years of returns for the other graduate students, did friends returns, did years of returns for 6 different Mexican friends living and working in the USA, and in the 11 times that the IRS challenged these various returns, I have so far been 11 for 11 , winning every dispute.

I do find some odd pleasure in analyzing and cutting through the Gordian knots…
steve

On that note, I am off to nap.

Disclaimer: Note that all of this information is for educational and entertainment purposes only. Please see a competent professional for all important tax and investment questions.


* * * * * * *
Internet References:
~ *IRS: Foreign Earned Income Exclusion – Requirements
~ **IRS: The Effect of Tax Treaties
~ ***IRS: Publication 54 (2012), Tax Guide for U.S. Citizens and Resident Aliens Abroad
~ ***IRS: Filing Information (for US Citizens and Resident Aliens Abroad)
~ IRS: Publication 901 – US Tax Treaty Summaries
~ ****IRS: UNITED STATES – MEXICO INCOME TAX CONVENTION
~ *****IRS: Who Must File a Return
~ *******IRS: Foreign Currency and Currency Exchange Rates
~ IRS: U.S. Citizens and Resident Aliens Abroad
~ IRS: New Developments in International Taxation
~ Publication 54, Tax Guide for U.S. Citizens and Residents Abroad (IRS PDF)
~ Publication 4732, Federal Tax Information for U.S. Taxpayers Living Abroad (IRS PDF)
~ International Frequently Asked Questions (IRS Website)
~ “Foreign Account Tax Compliance Act (FATCA) IRS Nov. 16, 2012 Update” and

~ “IRS: Summary of Key FATCA Provisions”

~ International Taxpayer – Internal Revenue Service

~ ~ http://www.irs.gov/pub/irs-trty/mexicotech.pdf
~ http://www.irs.gov/pub/irs-trty/mexico.pdf

~ Publication 901 (04/2013), U.S. Tax Treaties

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For readers with US Tax obligations: Yucalandia has a growing body of US IRS information in several articles:

~ Capital Gains Taxes on Mexican Properties
~ Income Tax Liabilities in Mexico
~ Fideicomisos and FATCA: US – Mexico Agreement on FATCA Reporting Requirements

~ IRS Reporting Requirements for Mexico: Fideicomisos / Mexican Land trusts
~ FBAR’s and Fideicomisos: To File or Not to File, That is the Question ,
~ US Income Tax Filing Information for Ex-Pats
~ Tax Issues for Americans and Other Expats Living in Mexico
~ Updated 2011 IRS Requirements: Foreign Account Tax Compliance Act (FATCA)
~ Summaries of US Tax Laws Affecting Citzens Living Abroad


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Feel free to copy while giving proper attribution: YucaLandia/Surviving Yucatan.
© Steven M. Fry

Read on, MacDuff.

39 Responses to Tax Issues for Americans Living and Working in Mexico – 2014 Filing Version

  1. Pingback: Tax Issues for Americans Living and Working in Mexico – A Redux for 2012 | Surviving Yucatan

  2. The Boom says:

    I’m exhausted today so maybe that is why some of this isn’t sinking in but are ira’s and 401ks commonly considered a form of retirement pension or similar remuneration? they are retirement accounts but not sure if “similar remuneration” or pension would include them.
    Where I start getting really confused is in “a” below where if I’m a resident of Mexico does that mean I only am liable for taxes on my 401k in mexico or does that mean only in the US even if I’m a resident of Mexico?

    a) pensions and other similar remuneration derived and beneficially owned by a resident
    of a Contracting State in consideration of past employment by that individual or another
    individual resident of the same Contracting State shall be taxable only in that State
    +++++++++++++++++++++++++
    I assume this means that if the property is in the other state of US and I’m a resident of Mexico then the property is taxed in the US. one of the things I don’t understand is “may be taxed”. in legalize does that mean “only taxed” or “both could tax” and you just pay the larger bill because you get a credit on the smaller one.

    1. Gains derived by a resident of a Contracting State from the alienation of immovable property, as
    defined in Article 6, and situated in the other Contracting State may be taxed in that other State.

  3. Reading Terminal says:

    1. To Boomer, in general, it is fair to say that, for any income sheltered from US Income tax, as a 401K, when you make a distribution (withdrawal) from the fund or instrument that distribution becomes current year income, subject to reporting on US income tax return. The tax rate depends on your then current year income less standard or itemized deductions.
    2. Yucalandia wrote, in part:
    “The 1993 Treaty expressly prohibits double taxation, which means that any taxes you pay in Mexico are credited against your US taxes and vice-versa.”
    Instead of “any taxes”, to be perfectly clear, we should say “any income taxes.” Any 16% IVA, property tax, or (where a Mexican state still charges) vehicle “tenencia” is not eligible as a deduction from US income taxation.
    3. Finally, is that your photo, Yucalandia, by your discussion of Art. 6? Whew, your gripe really hit you hard.

  4. The Boom says:

    Reading Terminal,

    Yep. I’m fully aware of US taxes.

    My issue has always been what I would end up paying in Mexico and whether it is more than the US because with international taxation you mainly pay the higher one even though no double tax.

    I’ll be a Mexican resident full time, working in Mexico but my cap gains and 401K will be US. I think at the end of the day I just need to find the English speaking accountant because it seems few expats have my tax issues.

    I have a lead on one through another site so fingers crossed.

  5. Merlenna says:

    Another question, what a the requirements and documents needed to apply for a work visa? We were told by the Xalapa immigration office that we need to leave Mexico and apply in the US for a work visa. Any advice would be helpful.

    • yucalandia says:

      Hi Merlenna,
      Have you read our main Immigration article’s section on this(?): Interested in Working In Mexico? General INM Qualifications for Working in Mexico by type of INM permit .

      Since there are many types of INM permits that allow working, we cannot tell you the requirements, unless you pick the kind of permit you need. So, you pick the type of INM permit that best fits your situation, then read the Lineamientos or our main Immigration article for the requisitos (requirements) for that type of INM permit.

      Basically, all of them require a passport, a letter from your employer, etc. If you are currently in Mexico on a Visitor /tourist permit, then yes, you have to leave Mexico and go to your Mexican Consulate near your home to apply if you want residency and the opportunity to work. Each Mexican Consulate has some variations in what they require, so decide what type of INM permit you need, and then contact your local Consulate in the USA to ask for their requirements. (e.g. Some Consulates require a report of a clean police background check, others not.)
      steve

  6. Pingback: TAX TIME 2013 ! ~ Summaries of US Tax Laws Affecting Citzens Living Abroad | Surviving Yucatan

  7. Stephen Spiegel says:

    I am a Res Perm Rabbi which I do not see listed as Personal or Professional services. I am paid for services performed, i.e. weddings, bar mitzvah in Mexico. Sometimes pay is in the US and sometimes it will be in Mexico but all services are performed in Mexico. Any thoughts ?

    • yucalandia says:

      Good Morning Rabbi Spiegel,
      The tax treaty does not actually list the accepted professions – giving only examples. From the treaty:
      Table 2
      This table lists the different kinds of personal service income that may be fully or partly exempt from U.S. income tax. You must meet all of the treaty requirements before the item of income can be exempt from U.S. income tax. The income code numbers shown in this table are the same as the income codes on Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.

      Independent personal services. The term “independent personal services” generally means services you perform for your own account if you receive the income and bear the losses arising from those services. Examples of these services are those provided by physicians, lawyers, engineers, dentists, and accountants who perform personal services as sole proprietors or partners.

      Dependent personal services. Dependent personal services usually are those you perform for someone else as an employee.

      Then, paging down to the MEXICO section of the table we find that based on “Treaty Article 15″, “Dependent personal services” are exempted from US income taxes, as long as you do not exceed a “Maximum Presence in U.S.” of “183 days”, and that your employer is not a Resident of the United States. Also note that there is “No limit” of “Maximum Amount of Compensation” for US expats providing dependent personal services in Mexico.

      It is pretty clear to me that you are NOT an employee – especially as the people who hire you do not direct you or tell you how to do your job (like a maid vs. a plumber), which meets the requirement for you to be an independent contractor (like a plumber). Further, you are not physically repairing things or replacing parts or building things, because your services are intangibles like giving advice or training. Completing the package: These services are provided to individuals: marrying a couple, performing a bris, providing counseling of a personal nature on personal matters. These all point to your activities as being tax-exempt professional personal services. I am no legal professional, but your activities seem to meet the key qualifications of the IRS’s requirements.

      Here is what the IRS has written on this: http://www.irs.gov/Individuals/International-Taxpayers/Pay-for-Personal-Services-Performed
      Non Employee Compensation
      Independent personal services (a term commonly used in tax treaties) are personal services performed by an independent nonresident alien contractor as contrasted with those performed by an employee. This category of pay includes payments for professional services, such as fees of an attorney, physician, or accountant made directly to the person performing the services. It also includes honoraria paid by colleges and universities to visiting teachers, lecturers, and researchers. In addition, it includes payments made to athletes and entertainers.

      Sidebar? Do your ceremonies require a minion? How does that work in a place like Yucatan, where there are very few observant Jews?

      All the best,
      steve

  8. Steve, actually there are a number of observant Jews in Cancun, Playa del Carmen and Cozumel. There are Chabads in all three (two in Playa). What I service are the non-observant (Non-Orthodox) segent of the Jewish population which in North America is about 80% of all Jews.

    Anyway, thanks for your information and I have further questions. The car situation is driving (no pun) me loco! Is Q. Roo considered a “free zone”? Can I drive out at Chetumal and return, no TIP and be legal to drive it as long as I stay in Q Roo?

    Thanks again for help. Come visit. BTW, most of my time is spent officiating weddings, both Jewish and Interfaith. Soon though, beginning Destination Bar Mitzvahs

    • yucalandia says:

      Good Afternoon Rabbi Spiegel,
      You wrote:
      “.. I have further questions. The car situation is driving (no pun) me loco! Is Q. Roo considered a “free zone”? Can I drive out at Chetumal and return, no TIP and be legal to drive it as long as I stay in Q Roo? … ”

      The last time I talked with Aduana managers at Chetumal/Subtiniente López, they said clearly: No, they did not consider Q. Roo as a Free Zone for driving US plated or Canadian plated cars.

      In practice: the police chief’s opinions from around Q. Roo ~ vary ~. One friend living midway down Quintana Roo, found his local police chief would NOT budge on the issue, and insisted that he was going to permanently confiscate the friend’s US plated car if he saw him driving it.

      Really, if the cops sniff-out that you don’t have a valid TIP, they have tons of leverage on you in roadside stops.

      Further, if you get in an accident, at least 2 major Mexican insurance companies currently use your vehicle’s illegal unregistered status as a legal excuse to deny coverage on accidents. Since Mexican law cites $5 million liability (the amount is state dependent) per accidental death: Can you live with an outcome, where a Mexican family of 4 was accidentally killed, and you were legitimately put in jail (indefinitely) without food or water, until you could prove that you can pay the $20 million peso liability?

      If you have an accident, the opponent’s insurance adjustor will be on-site, looking for excuses to blame you – and you driving an illegal unregistered car gives them leverage that I would not personally want to face. The Mexican police have a lot of discretion in deciding who’s guilty, and I have seen them use problems with one party’s license or vehicle legality as a deciding factor (even when it was clear that they were not the guilty party).

      In light of those issues, you could choose to continue to drive within Q. Roo, but I would not even consider crossing a state line. The last 2 times we crossed from Q. Roo into Yucatan, the Aduana official at the border insisted on seeing a VALID current paper TIP and windshield sticker – or the car would have been confiscated.

      It’s all up to you, but I tend to take orthodox approaches to the law when dealing with the police and accidents. Mexican law can be frustratingly rigid or flexible in its applications.
      steve

  9. There was an article about expats that rent out their homes while they go back to the states, can you send that link?

    • yucalandia says:

      Hi Pat,
      Good request.

      Our information on IRS filings have evolved over the past 6+ years, as the IRS has changed its policies – so, I am not sure where that link lives. It is difficult to maintain an informational website on government policies, especially when the USA and Mexico keep changing the rules, and becomes even further complicated as they keep introducing new ways to tax us… adding on fresh FBAR, FATCA, and Fideicomiso rules on top of the existing mountains of regs….

      I will look for it,
      steve

  10. Barbara says:

    I’m wondering, if my employer (a non profit) sends me to Mexico for three weeks as part of my job, so I am being paid for that time, do I need to pay taxes to Mexico? I have a colleague who is telling me that even though my employer is a US non-profit (educational) organization and I am not actually moving to Mexico that because I am getting paid for my time while in Mexico that I need to pay taxes to Mexico on what I earn during those three weeks. I’m not going under a work visa and the organization does not have an office in Mexico. Any clarification on that would be great.

  11. Barbara says:

    Last post had my wrong email address for responses, if you answer please respond to this one. I’m wondering, if my employer (a non profit) sends me to Mexico for three weeks as part of my job, so I am being paid for that time, do I need to pay taxes to Mexico? I have a colleague who is telling me that even though my employer is a US non-profit (educational) organization and I am not actually moving to Mexico that because I am getting paid for my time while in Mexico that I need to pay taxes to Mexico on what I earn during those three weeks. I’m not going under a work visa and the organization does not have an office in Mexico. Any clarification on that would be great.

    • yucalandia says:

      Hi Barbara,
      1. Clearly, your tax home is the USA, due to working in Mexico only a short time.
      2. Will the checks/payments for your work be paid in the USA?

      Let’s assume “yes”, and assume that your employer is withholding US taxes on the payments for your work performed in Mexico.

      According to the US Mexico Tax Treaty rules we quote above: Any income Taxes you pay to the IRS for that time worked in Mexico are fully credited against what you might owe Mexico. Since you are paying US taxes for that work, and because Mexican tax rates are so low for the amount of income you earn in 3 weeks in Mexico, the taxes paid to America are almost guaranteed to be higher than anything owed to Mexico. => You should not owe taxes to Mexico. Note that this is only a starting point for you – as we are not licensed tax experts nor tax accountants here.

      Article 1 (item 2) of the US-Mexico Tax Treaty prohibits double taxation on income, which means that any income taxes you pay in Mexico are credited against your in-kind US taxes and vice-versa.
      steve

  12. Dan says:

    I’m not sure if you can answer this question, but hope you can help. I’m a Canadian who taught in Mexico in 2012 and 2013. The two countries have a tax treaty and Canadians aren’t supposed to pay tax in Mexico if they make less than $16,000. In 2012, I made less than that amount, but taxes were taken from my pay checks. When I returned, my accountant told me I overpaid. The Canadian government said to contact Mexico, and the Mexican consulate said I should get in touch with the Mexican Revenue Agency. Do you think it’s worth getting in touch with the Mexican Revenue Agency? Do you know how? Here’s the link to the tax treaty (article 14).
    http://www.fin.gc.ca/treaties-conventions/mexico_1-eng.asp

    • yucalandia says:

      Hi Dan,
      Why not contact Hacienda (a branch of the Mexican Government’s SAT), give them your name, Canadian passport no., your RFC, your CURP, and the years you worked, requesting a refund? I’m confused as to why your accountant did not file for the refund. In any case, your Mexican accountant should be able to handle the refund request, or at least tell you the address and contact info of the office to file with.
      steve

  13. Dan says:

    Thanks a lot. I have no Mexican accountant, and my Canadian accountant doesn’t know how to file a claim for a refund. Do you know which department at Hacienda I should contact?

  14. Dan says:

    Thank you very much.

  15. Dan says:

    Hello again. I tried emailing the address you mentioned above two or three times, and each time I got replies telling me the message was undeliverable. Here’s what I got:
    The recipient’s mailbox is full and can’t accept messages now. Please try resending this message later, or contact the recipient directly.

    Do you know of another way of contacting Hacienda?

    • yucalandia says:

      Hi Dan,
      The Hacienda office is in North Merida – about 2 blocks south of Sam’s club and 1 block west – but you can only enter from northbound C60 (Av. Technologico)- entering from the west, or come in from the south, turning north off Calle 21 in Campestre.
      Calle 8 No. 317 x 1 y 1-B, Fraccionamiento Gonzalo Guerrero, Mérida, Yucatán. En el Centro Hacendario Mérida, entre 1 y 1B. CP 97118

      You can set up a cita with SAT online at: https://citas.sat.gob.mx/citasat/agregarcita.aspx

  16. Dan says:

    Thanks, but I meant online or by phone, since I live in Canada.

  17. Dan says:

    I called the 1-800 number above from Canada and it didn’t work. Do you know of another number?

  18. Thanks for finally writing about >Tax Issues for Americans Living and Working in Mexico – 2014 Filing Version | Surviving Yucatan <Liked it!

  19. Karyn says:

    Do you have any recommendations for U.S. citizens living in Mexico, but still working stateside? I’m doing research for some friends that have been told they’ll lose their social security if they don’t have a residence stateside, and I know that’s not true. Just looking for some more reliable resources. Thanks!

    • yucalandia says:

      Hi Karyn,
      Check with Social Security for details, but it is our understanding that as long as your employer keeps paying into Social Security and you keep paying your part, ~ and the wages are paid into a US account ~, then the employee continues to meet Social Security’s requirements. I don’t know Social Security’s detailed requirements about maintaining a US address, but the last time we spoke with the combination of ACA/Obamacare and US IRS folks about qualifying for (and maintaining) state residency for tax purposes and for ACA purposes, they advised using a family member’s address for residency purposes.

      If they get paid outside the USA – and/or pay into another country’s social security program, them’s whole other balls o’ wax.

      Again, we do not give legal advice, but instead educate and point people to the proper resources, which are the SS admin officials in this case: Call the Social Security Administration’s Office of International Programs. Call (410) 965-3322 if you have questions on benefits under the agreements. For questions on the coverage rules of the agreements, call (410) 965-7306.

      Official website info resources:
      http://www.ssa.gov/retire2/international.htm
      and
      http://www.ssa.gov/international/agreements_overview.html
      and
      http://www.ssa.gov/international/CoC_link.html for employer’s requirements.

      steve

  20. Penelope says:

    Hi, I’m a little confused by all of this. I am working as a journalist in the city for a Mexican company but am making less than 20k and had heard a little rumor that as a US citizen I may be able to opt out of paying taxes for my first year here… Is there any validity to this statement?

    Thank you so much.
    Penelope

    • yucalandia says:

      Hi Penelope,
      Interesting rumor. We have heard nothing of this, but we are neither tax accountants nor lawyers – so, as always, it’s best to talk with a qualified professional about these matters.
      Happy Holidays,
      steve

  21. Christine says:

    Hi! Could you clarify something for me if you can, please?
    Is it necessary to claim the Foreign Earned Income Exclusion? Or is it voluntary? I work for a US company as 1099 contractor and the last few years I claimed FEIE under the impression that I would at least owe less personal tax since it doesn’t affect self-employment tax. However, this year, since I have another dependent (another daughter) it seems I would benefit more from not claiming the exclusion in order to be eligible to receive the Child tax credits (I only earn about 30,000 a year). Thank you for any clarification you can provide!

  22. stephen spiegel says:

    Who prepares your return? They should/will know. If you do your own and use TurboTax, it will lead you through the appropriate form. The IRS helpline will tell you if you qualify.

  23. AMartinez says:

    Good evening. My father owns a business in Mexico, and he became a legal US resident last year. He lives in Texas and crosses to Mexico to tend to his business once or twice per week. How is he to report his income to the US Government? What paperwork does he need? Can we use a software such as Turbotax for these types of returns? Please help! Thank you!

    • yucalandia says:

      Hi AMartinez,
      He really needs to talk with a good accountant on this.

      In theory, the net revenues from Mexico would have Mexican taxes paid on them (by his Mexican accountant). Those taxes paid to Mexico would be fully credited against any tax owed to the US IRS,

      but depending on the type of activities in Mexico, they may be fully exempted from any US taxes, due to the US-Mexico tax treaty.

      For example, if he is providing personal services in Mexico, those revenues would likely be exempt from US taxes.

      Happy Trails,
      steve

    • yucalandia says:

      a follow-on answer re TurboTax

      In our personal experience, TurboTax is designed for people with simple routine returns.

      For years, TurboTax seriously mis-handled the Schedule C self-deduction tax deduction

      (causing T-Tax customers to pay way too much in taxes, because T-Tax ‘experts’ ignored the applicable IRS tax-court ruling)

      T-Tax did a HORRIBLE job the last times I tried to use it for Mexican friend’s returns (with US & Mexican income),

      and T-Tax did a HORRIBLE job the last times I tried to use it for American friends (with US & Mexican income) –

      So, in one person’s experiences: Turbo Tax has struck-out for roughly 20 – 25 years on straight-forward but non-routine tax situations.

      … and T-Tax consistently OVERCHARGED its user/filers with unnecessarily large tax bills,

      due to T-Tax programmers not knowing important details of the US tax code,

      and not knowing important details of the 1993 US-Mexico Tax Treaty…

      ??
      steve

      • sdibaja says:

        🙂
        My experience: identical
        unfortunately many “professional tax preparers” use it, or similar crap software, and also fudge it all up.
        Solicitation: Become informed and educated (this place is a Great resource)…

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