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Thursday, May 21, 2015

All About Mexican Taxes (All types) for Gringos living, working and owning real estate in Mexico

By Linda Neil
Whether a property owner or just the occasional visitor on a beautiful beach in Mexico, everyone pays taxes, natives and foreigners. Some of the taxes are hidden and others are not. The purpose of this article is to touch on some of the important taxes levied and paid in Mexico.
Who Collects the Tax
The SAT (Servicio de Administracion Tributaria), also known as Hacienda, is the federal tax collector. It collects all federal taxes such as the ISR (Income or Capital Gains) tax, the IVA (Added Value) tax, the IDE (Tax on ,Deposits) and the IEPS (Special Tax on Production and Services). Each state government has its own taxes such as the 2 to 3 percent tax on lodgings and tourism. The municipal governments assess and levy taxes on real and personal properties.
IVA TAX: This is the Value Added Tax which is charged on goods and services. The only exemptions are medicines and food. Often this tax is INCLUDED in the price of food served in a restaurant, legal services, and the items purchased in a department or clothing store. The business owner and tax resident is obligated to file a monthly declaration with Hacienda and pay the tax on earnings. Credited against this tax are IVA taxes paid on goods and services acquired.                 
There is no IVA tax on the sale of vacant land or on the sale of residential dwellings. The tax is levied on all commercial construction when it is sold or transferred, at the rate of 16% of the value of construction, regardless of where the property is located.
IVA tax is charged on lodgings, hotel rooms and furnished homes which are rented.
The IVA tax is 16% in the interior of the country and 11% in the border zones EXCEPT for commercial construction which is charged at the rate of 16% throughout the entire country.
IEPS TAX: This is the Special Tax on Products and Services which is a new tax for 2010. It will cover certain internet and cable TV services, alcohol, cigarettes, and gaming.
IETU TAX: The Unique Rate Business Tax (Impuesto Empresarial de Tasa Unica) is a tax on income obtained for the transfer of goods, independent services and for granting the use or temporal benefit of goods. The rate is currently 16.5%of income, less deductions.
PROPERTY TAX; This is a municipal tax with assessments on properties generally being made annually. The tax can be paid in six installments (every two months) but probably should be paid in full within the first two months of the calendar year to obtain a discount. Rates vary from area to area but are often far lower than U.S. or Canadian property taxes.
ISR TAX; Literally the Tax on Rents has been described as both an income tax and a capital gains tax. It is complex and a subject of confusion.
ON INCOME. Any income generated from sources within Mexico, is taxable. From business or salary, the rates are variable depending upon the amount of income received.
On the sale of a primary residence
No primary residence is exempt from tax UNLESS the taxpayer has resided in the home for the previous five years. Proof of residency is in the form of taxpayer identification number (RFC), voter’s registration with the property address, bank statements and utility bills.
For those who have sold or transferred a primary residence within the past five years and have not declared an exemption previously, an exemption of up to 1,500 UDIs or approximately 6,500,000. Mexican pesos, is available.
This applies to nationals and to those foreigners who have established a tax residency in Mexico (obtained their tax identification numbers) and make declarations on world wide income. They must also provide documents that the property being transferred is a primary residence.
On the sale of a vacation home or rental property
No exemptions are permitted.
The tax on non-exempted transactions is 30% of the difference between the value declared in the deed and the value of the new sale, less allowable deductions or 25% of the entire amount of the transaction, whichever is less. It is very important when acquiring property to insist upon having the full amount of the sale declared in the deed, in order to avoid overpaying taxes upon sale.
Enforcement of the ISR tax on transfers is the obligation of the Notary Public formalizing the transfer. He has the obligation to enter the seller’s name and data on the internet and to check status of prior transfers.
ON RENTAL INCOME: There are several ways to calculate tax on rental income:
1. The blind deduction of 35% of total income, without deductions with tax of 35% paid on the remaining amount;
2. A 30% tax on income, less allowable deductions which include property tax, maintenance, interest on loans for construction expenses, insurance, salaries of employees and commissions paid to rental agents and property managers.
3. A 25% tax on the gross income, no deductions.
Hacienda is paying more attention to internet advertising and is beginning to inquire into the income of those who are renting their homes. It makes sense to become legal since penalties for non-compliance can be considerable. Methods one and two above require the RFC (taxpayer identification number) which can be challenging for a foreigner to obtain. Method three outlined above does not require residency or official status.
IDE TAX This is a Tax on Cash deposited into banks. In the year 2009, it was applicable on any combination of deposits made in a month totaling 25,000.00 pesos, or more. Tax was 2% of the excess. Now the tax is triggered by monthly cash deposits in excess of $15,000. pesos and the tax is 3%. This tax is thought to discourage the informal economy (the street vendors).
STATE HOSPITALITY TAX. This is charged by hotels and on furnished short-term rentals. Money generated from this tax is used for promotion of tourism in the state and varies from state to state but is generally two to three percent of the per night cost of lodging.
It is important to understand the difference between Tax Resident and Non-resident for tax purposes.
The Tax Resident is the person, citizen or non-citizen, who has acquired his Federal Taxpayer Identification Number and who files and declares taxes in Mexico on his world-wide income. Any party receiving income from Mexican sources, such as from rental or from the sale of real properties, or from business activities, is required to file. No distinction is made between citizens of Mexico and non-citizens as to tax rates.
Tax authorities in the U.S., Canada and Mexico are working together and share information. Everyday there is more cooperation between the countries due to tax treaties. It is no longer possible to own a property in one country, enjoy income from that property, and not report it in BOTH the country where the property is located, and the country where the owner lives. Failure to comply means the owner is subject to double taxation and heavy penalties when the omission to file and declare is discovered.
DIGITAL FISCAL INVOICES. As of January 2011, taxpayers must use invoices produced by Hacienda (SAT) on internet. Hopefully this will simplify the “factura” situation which at present is challenging for the tax payer attempting to obtain receipts for deductible items. .
This is an overview of the tax situation in Mexico and may vary in individual cases. For additional information and consultations, please contact the author. at www.lindaneil.com   Article is excerpted from the BAJA INSIDER at http://www.bajainsider.com/
Even  though you live in Mexico, you still must file a US tax return each year reporting your worldwide income and worldwide financial assets. Go to www.TaxMeLess.com to learn more about your US taxes.


Tax Benefits For Expats Sending Their Children to College

There are credits and deductions for many expatriates and residents if they go to college or send their
children to college. Do not overlook these possible tax credits and deductions when doing your return.

READ MORE ABOUT COLLEGE EDUCATION BENEFITS FOR EXPATS AND THEIR CHILDREN HERE 

Friday, May 15, 2015

ALMOST EVERYTHING YOU NEED TO KNOW ABOUT YOUR US TAXES AND THE OWNERSHIP OF REAL PROPERTY IN MEXICO

by Don D. Nelson, Attorney, CPA, International Tax Expert

If you own real estate in Baja Sur, almost everything you need to know about the US IRS tax reporting rules on that Mexican real estate are reported in this article.  The rules are complex, but if you plan ahead, your Mexican real estate can benefit you on your US tax return.

Owning a Full time residence in Baja Sur

The US tax rules are the same on your US return whether your primary residence is located in the US or in Mexico.  You can deduct the interest on the mortgage you incur to purchase the property on up to a 1.1 million dollar mortgage and you can deduct the property taxes you pay on the property.  Both of these are deducted on Schedule A as itemized deductions.  When you ultimately sell the property up to $500,000 of gain on the sale will be exempt from US taxes if it was your primary residence for 2 out of the 5 years prior to sale.  Your gain on sale may also be exempt from Mexican taxes if you fill all of Mexican tax law’s criteria.  You should consult a Mexican CPA to determine the Hacienda’s criteria.

Part time residence

Again the rules are the same as for a second home in the US.  You can deduct property taxes and interest (subject to the limitation of the amount for deductible interest on your first and second home under US tax law) on Schedule A as an itemized deduction.

Rental Property

Mexican rental property held through a Fideicomiso or in your individual name is treated the same as a rental property in the US and reported on Schedule E.  The only primary difference is that you must depreciate the property over a 40 year period versus 27.5 year period for a US residential rental property.  Of course if you pay Mexican income taxes on the net rental income  (and you are required to pay Mexican income tax on that income!)  you can take it as a credit offsetting any US federal  tax on the same income dollar for dollar.  Most states do not allow foreign tax credits.  You can also deduct IVA tax you are required to pay on rental income in Mexico on your US return also

If your Mexican property is used part time by you and is rented out part time as a vacation rental, the US tax vacation rental limits may reduce the amount of deductions you can take on the property.  Read more about Vacation Rental rules and limitations  in IRS publication 527.


IRS Disclosure

Though there are special forms which must be filed with the IRS to report on foreign bank accounts and foreign financial assets (form 8938) real estate held in your own name (or through a fideicomiso) is not required to be reported anywhere on your tax return.  If the real estate is held by a Mexican partnership or corporation that entity may have to be reported on the foreign financial assets form.   The fact that there is no required IRS reporting may account for many of the very expensives homes in Baja Sur that seem to be used very rarely.

Mexican Corporations

If you own commercial property and it is in the restricted zone (which is a large part of Baja Sur) and you follow Mexican law you must as a foreigner own it through a Mexican Corporation.  You are required to file form 5471 and sometimes form  926 reporting that ownership with your US tax return and capital contributions made to that corporation..

It may be to your benefit to make sure the Corporation is a  Sociedad de Responsabilidad Limitada, S. de R.L.  Only with this type of  Mexican corporation can you make an election for US tax purposes to treat the corporation’s net profit or loss  as a flow through to your US tax return which gives you several benefits including  (a) claiming foreign tax credits on your US return for Mexican income taxes paid by the corporation; (b) deducting losses from the corporations rentals on your US return to offset other income; and (c)  avoid double taxation of the gain on sale (or deducting a loss) when the corporation ultimately sells the property.

Mexican and other foreign  Bank & Financial Accounts

You may in connection with your real estate ownership in Baja Sur open a Mexican Bank account or account with a money exchange company. If the combined balances in those accounts at any time during a calendar year are $10,000 US you must file form 114 (filed on line and separate from your tax return) to report those accounts. Failure to file this form can result in a penalty of $10,000 or more.  The form must be filed by June 30th following the end of the calendar year and cannot be extended.  The Mexican banks are reporting your balances to the IRS.
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About the Author:

Don has been preparing US Tax Returns and providing US tax planning for US Citizens living in Baja Sur for 25 years.  He offers his clients the absolute privacy of “attorney-client privilege.”  He has assisted numerous Baja residents with the procedures necessary to catch up with past unfiled US tax returns and Foreign Financial Account Disclosure (FBAR and FATCA).  His website is at www.TaxMeLess.com  and his email  is at ddnelson@gmail.com.   Phone him in Mexico at 624-131-5228 and in the US at 949-480-1235 .

Monday, May 11, 2015

DIRECTIONS FOR FILING FBAR (FORM 114) FOREIGN FINANCIAL ACCOUNT REPORT ON LINE - THIS IS DUE 6/30/15 FOR 2014

You can download step by step directions for filing the Form 114 (FBAR) to report your foreign financial accounts HERE   If you need help filing this form or want a CPA/Attorney  to file the form for you email us at ddnelson@gmail.com.   Also if you have questions on whether or not you should file the form or need to file ones for past years (the statute of limitations is six years which means if you are required to file the form you should file the past six years) please contact us. www.expatattorneycpa.com 


This means if you had combined highest balances in your Mexican Bank and Stock accounts of $10,000 US (when converted from Pesos) or more in 2014 you must file this form.  This includes accounts you own and those you just sign on but do not have any interest in!  Penalty for not filing this form is $10,000 or more per year and possible criminal penalties up to five years in prison.

Friday, April 24, 2015

Mexico's New Tax Laws on Real Estate Purchases and Improvements

By Cheryl T. Miller, Broker, Baja Realty and Invesment

A few years ago, the Mexican IRS, known as the Hacienda or SAT, made sweeping changes in their tax system.  The system they created became geared to electronic filings and the use of computers/internet for all acceptable documents, reports and files. Since then, many changes have occurred.  Among them is the requirement for all taxpayers to have electronic signatures, an RFC or Taxpayer ID number, to pay all taxes through the internet (cash at a bank is no longer allowed), to receive electronic official receipts for purchases of goods and services in order for them to be allowed as possible deductions from  income tax or capital gains tax, when a property is sold.. 


​This past July another change, without pomp, circumstance or notification, was passed that became effective September 1st of this year.  This change affects ALL real estate purchases, and ALL buyers and sellers who are foreign or national. READ MORE


Tuesday, April 7, 2015

Individual Tax Rules Including Allowable Deductions to Use on your Mexican tax filings for 2014

In the prior post we included a graphic showing the various rules in spanish which apply to your Mexican individual tax return for 2014.  It appears many of our friends and clients in Mexico are not that good with Spanish. We have therefore provided the following information on the Mexican income tax rules very roughly translated into English:

If you are from those taxpayers who this month must submit its annual statement to avoid problems with the Mexican IRS, lose fear, as there are tools to help in the process, and may even apply their personal allowances and, where appropriate, get a refund.
Aristotle Nunez Sanchez, head of the Tax Administration Service (SAT), explained that until April 30 taxpayers, individuals enrolled in the register of causes are required to submit their annual return; otherwise, will be entitled to a fine.
The obligors to fulfill this responsibility are all natural, except Incorporation Fiscal Regime (RIF) people; those receiving income from fees, leasing, business, sale and purchase of goods, dividends, premiums and other revenues, and employees who earned revenues of 400,000 pesos, as well as additional income earners salary.
He recalled his right as a taxpayer to make personal deductions. He explained that from this year individuals can deduct their personal expenses up to 10% of their income or four high minimum wages per year (up to 98.243 pesos), whichever is less.

Applications that facilitate the process

To facilitate compliance, Aristotle Núñez said you can use the applications available on the website of the SAT.
In case of an individual who receives income from wages can only access the application within the minisite Employees Annual Statement. To enter only requires RFC, password and personal deductions.
While if it is registered as an individual whose income comes from leasing, interest, business, and does not belong to the tax regime Incorporation must be submitted through the DeclaraSAT application, available on the same site. In this case, you should have on hand the RFC, password, personal deductions and monthly statements to date (in case you have any pending, you must file before making your annual statement).
The head of the SAT noted that applications are preloaded data identification, income and deductions in the case of wages, plus interest income to the information provided by financial institutions.

No income individuals also have obligations

Finally, he said, if you are discharged in the RFC for any of the above items, but not received income during the year, you need to report this situation, presenting the annual return to zero. This it can do online or call Infosat (01 800 46 36 721).

The SAT advised

To avoid complications with his fiscal SAT recommended:
  • Fill each and every one of the fields of the statement.
  • Declare all income which have been collected in the year.
  • In the case of being obliged to have the current interim payments in 2014.
  • Check the validity of electronic signatures.
  • Submit your annual statement as soon as possible and no later than April 30 to avoid penalties.

Expenses you can deduct

In order to obtain a credit balance you may file tax receipts of the following expenditures:
  • Payments for educational services (school) with the following buffers.Preschool 14,200 pesos; Primary 12,900 pesos; secondary 19,900 pesos; professional technician 17,100 pesos, and baccalaureate or equivalent, 24,500 pesos.
  • Medical and dental fees. Drugs are included in hospital bills, analysis and clinical studies. No vouchers are from pharmacies.
  • Insurance premiums medical expenses.
  • Funeral expenses. Only the amount not exceeding the minimum wage of the geographic area of ​​the taxpayer, raised annually.
  • Donations granted to authorized institutions. The amount of donations deducted must not exceed 7% of the taxable income of the previous year to which it is declared.
  • Actual interest paid on the mortgage of house room whenever the credit granted does not exceed 1 million Udis 500,000.
  • Deposits in special personal accounts for savings, premiums for insurance contracts that are based pension plans and acquisition of shares of investment companies.
  • Additional contributions for retirement. The amount of this deduction shall not exceed 10% of its taxable income for the year, without those contributions exceed the equivalent of five minimum wages of its high geographic area annually.
  • School transport (mandatory) of children or grandchildren.
  • Payments for educational services with the following buffers: Preschool 14,200 pesos; Primary 12,900 pesos; secondary 19,900 pesos; professional technician 17,100 pesos, and high school or equivalent, 24,500 pesos.