Thursday, November 11, 2010

2010 Year End US Income Tax Planning Ideas for Expats and Residents

Its now time for you to take steps to try to reduce your 2010 US Income tax burden. We have now published our invaluable annual tax planning letter. Read or download it now! Click Here to Reduce you Taxes for 2010

Sunday, October 24, 2010

YOU MUST NOTIFY THE IRS OF YOUR ADDRESS CHANGE WHEN YOU MOVE ABROAD TO AVOID PROBLEMS

When you move to Mexico or other foreign countries you MUST notify the IRS of your new address. The IRS is not responsible to keeping its records up to date with your new address, you are!  You should notify them using Form 8822.  If you fail to notify them of the address change, any notices they send to your previous address are deemed received under the law, and various time limitations, assessments, etc. , may expire even though you are not receiving the IRS notices.

One client who failed to notify the IRS of her new address  was erroneously assessed a large sum of money and only learned about it many years later when the IRS took levied and took all of the money out of her bank account.  It was very expensive and time consuming to finally convince the IRS of their error and get her money refunded.  The problem would have never happened if a Form 8822 had been filed.  The error could have been corrected immediately when the initial erroneous assessment was made.

Due to poor mail delivery in many countries, it is wise in some situations to keep using a US mailing address of a friend or relative, so your IRS notices will be delivered to a competent person who can then forward the mail by fax, email or a private delivery service.

Estate Planning for US Citizens Living in Mexico or Owning Assets in Mexico

If you have assets in Mexico or in Mexico you need to plan your estate carefully. You most likely need to do a will in Mexico  which provides for the disposition of your asset in the event of your death. You also need to determine what type of taxes (inheritance or transfer tax) you heirs may occur upon your death.  In Mexico failure to do a will or trust could result in your assets being distributed under that Mexico law and could result in people inheriting the property other than those you would prefer. If you own real estate in a Fideicomiso, you can have that document drafted to provide who will receive ownership in the event of your death.  Mexico may honor your US will or trust but if it often  easier often have specific instruments drawn up in Meixco that comply with local law by a local attorney to avoid potential problems and expense later if  Mexico later  does not or has difficulties honoring a US will or trust.

Remember, if you have done a power of attorney appointing someone to handle your affairs, it Mexico that document may expire upon your death. So do not rely on that to handle the disposition of your foreign assets.

Of course, you must also prepare to US will or  living trust (which avoids probates and a lot of expense and time) to cover the disposition of your US assets and which also states the disposition of your foreign assets the same as a foreign trust or will you have had prepared.

The US will impose its estate tax on your worldwide assets, though it will allow a credit in most situations for any foreign inheritance tax you had to pay on assets located outside of the US.  Until Congress amends the law, starting in 2011 all estates in excess of $1 million will be subject to US estate tax.  If you are married special provisions can be inserted in your US will or trust to secure estate tax savings.

Monday, October 18, 2010

Expatriates Elgible For Additional 2 Months Extension of Time to File Their Tax Return Beyond 10/15



All taxpayers are generally entitled to an automatic 6-month extension of time to file their returns by filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Returnalso available en espaƱol, with the Internal Revenue Service.

In addition to this 6-month extension, taxpayers who are out of the country (as defined in the Form 4868 instructions) can request a discretionary 2-month additional extension of time to file their returns (to December 15 for calendar year taxpayers).

To request this extension, you must send the Internal Revenue Service a letter explaining the reasons why you need the additional 2 months. Send the letter by the extended due date (October 15 for calendar year taxpayers) to the following address:
Internal Revenue Service Center
Austin, TX 73301-0215
USA
You will not receive any notification from the Internal Revenue Service unless your request is denied for being untimely.
The discretionary 2-month additional extension is not available to taxpayers who have an approved extension of time to file on Form 2350 (for U.S. citizens and resident aliens abroad who expect to qualify for special tax treatment).

Most Current IRS Position on Filing Form 3520 & 3520A for Fideicomisos (foreign trusts)

The IRS has never in writing or in any other manner exempted Mexican Fideicomisos from filing forms 3520 and 3520A which are required of foreign trusts.  The Fideicomiso documents are worded like foreign trusts and they due hold title to real property in Mexico on behalf of the property owner.  The Trustee of a Fideicomiso is a Mexican Bank.

 Today in an off the record phone conversation a knowledgeable IRS representative stated that currently they do not plan to ever publish anything that would exempt Fideicomisos from filing those forms.  There are huge monetary penalties not filing those forms or for filing them late (though currently if you file late they have been in almost all situations waiving those late filing penalties).

Therefore, though there are several articles being circulated written by aggressive attorneys that conclude in theory that Fideicomiso's should not have to file Forms 3520 and 3520A, the IRS  has not concurred with those conclusions.     Any Fideicomiso beneficiary that does not file these required forms each year, is doing so without the concurrence of the IRS and is in grave danger of incurring huge civil penalties.



Wednesday, September 22, 2010

Mexican Fideicomisos and Filing Forms 3520 and 3520A each year.

In Mexico Fideicomisos hold title to  certain real property owned  by non-Mexicans citizens. A Mexican bank is designated as the Trustee and the wording of the Fideicomiso document is clearly that of a trust.  The IRS has never made a written pronouncement or ruling that excludes Fideicomisos from the requirement that they file annually  Forms 3520 and 3520A.  Penalties for not filing these forms or filing them late are huge and can be up to 15% of the value of the property in the trust.

A Texas attorney recently has been widely circulating a  written opinion she wrote and a copy of her  email alleging that Mexican Fideicomisos may not be foreign trusts and  may  not be required to File Forms 3520 and 3520A. Her email cites a situation where the IRS informally agreed that her client did not have to file Forms 3520/3520A or pay any penalty for not filing. 

We have checked with an IRS representative who directly deals with these issues.  They stated it is very unlikely that in the near future the IRS will ever issue any written ruling or opinion that Fideicomisos do not have to file these foreign trust reporting forms or are not foreign trusts.   

Informal decisions made by the IRS by law cannot be cited as authority by other taxpayers by law. The law also states  written private letter rulings in almost every circumstance cannot be cited as authority by other taxpayers.  Therefore reliance on a privae attorney's written opinion or an informal decision by the IRS can be very risky and will offer no protection in the event you fail to comply with currently accepted IRS filing requirements.  Filing the 3520/3520A form also would be significantly cheaper than going to Court to fight the IRS on this issue when you cannot even cite the informal decision as authority.

Until the IRS (if ever) declares in writing that  Fideicomiso's are exempt from the foreign trust filing requirements or are not foreign trusts, all owners of property in Mexico which hold their title through Fideicomiso's  should continue to file Forms 3520 and 3520A each year to avoid being assessed large monetary penalties by the IRS.

Wednesday, September 1, 2010

Treasury Inspector General Finds 10% of Foreign Earned Income Exclusions claimed in 2008 Are Invalid or Erroneous

TIGTA Finds Significant Loss in IRS Revenue Because of Erroneously Claimed Foreign Earned Income Tax Exclusions

WASHINGTON - The Internal Revenue Service (IRS) lost an estimated $90 million in revenue for Tax Year 2008 because of erroneously claimed foreign earned income tax exclusions, according to a report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).
The foreign earned income tax exclusion allows a taxpayer to exclude up to $91,500 of foreign earned income. A taxpayer qualifies for this exclusion if he or she has foreign income and a home in a foreign country. An eligible taxpayer designates this status by filing Form 2555 (Foreign Earned Income) with the IRS.
TIGTA conducted a performance audit to assess the IRS's ability to ensure the accuracy of these exclusions. TIGTA reviewed 231,277 tax returns from Tax Year 2008 and found that 10 percent (23,334) of taxpayers claiming the exclusion either failed to qualify for the exclusion or inaccurately computed the exclusion. The income erroneously excluded totaled $675 million. The estimated tax avoided totaled $90 million.
"This is very troubling. Over five years, the estimated revenue loss to the IRS could total more than $450 million," said J. Russell George, Treasury Inspector General for Tax Administration. "Improvements must be made to reduce erroneously claimed foreign earned income tax exclusions," he added.
TIGTA made seven recommendations to the IRS in this report, and the IRS agreed with four of the seven recommendations.
To review the report, including the scope and methodology, go to: http:www.treas.gov/tigta/auditreports/2010reports/201040091fr.pdf.

Thursday, August 5, 2010

New Foreign Account Tax Compliance Act (FATCA) reporting requirements

The new Foreign Account Tax Compliance Act (FATCA) requires that taxpayers report all foreign financial assets if the aggregate current fair market value of all such assets equal $50,000 or more. Foreign financial assets include foreign bank accounts, brokerage accounts, stocks, bonds, and ownership in foreign entities such as foreign corporations, partnerships, trusts, and LLCs.   The IRS has the ability under the new law to define almost any asset located outside the US as a foreign financial assets required to be reported under this law. They will in the future be issuing regulations defining the type of assets they have determined are included under this new law.

These items will either be reported on an attachment to your US tax return or the IRS is most likely to create a new tax form to attach to your return for the reporting. For each such asset you must state full information including account numbers, name and address of financial institution or stock issuer, and the highest value of the foreign asset during the tax year.

If you meet the aggregate $50,000 in value threshold, you will have to report all the information on each asset regardless of the percentage you own or its small value. All other foreign asset reporting forms such as FBARs, Form 5471, 8865, 3520, 3520A, etc must also still be filed if required.

The minimum penalty for failing to report this data begins at $10,000 and can go up from there depending on the circumstances.  This is generally effective for tax years that begin after 3/18/10.

Saturday, July 31, 2010

Fideicomiso US Income Taxation Under New 2010 HIRE ACT INVOLVING FOREIGN TRUSTS


A widely distributed article recently published by some attorneys contains some dire warnings about the  adverse income tax  consequences of the new foreign trust provisions in the HIRE-FATCA Act passed early in 2010 with respect to Fideicomisos (which the IRS currently requires file Forms 3520 and 3520A  because the IRS currently holds Fideicomisos  to be foreign trusts).  The conclusions in this article are  most likely not correct if the Fideicomiso has no income and contains property held for investment or held for personal use by the beneficiary (not a rental property). The IRS has not at this time ( nor is it likely to  in the near future)  issued any regulations further explaining the effect of the provisions of the new law on Fideicomisos and foreign trusts.  What the regulations or further guidance may say is pure speculation.  The general principles of trust taxation which are most likely to apply are stated in the next paragraph.

Under general trust tax law involving income and distributions from trusts to beneficiaries, unless the trust generates taxable income, the mere fact that personal use of foreign trust real property by a beneficiary is treated as a distribution to that beneficiary, will not cause the personal use to be taxed to the owner or beneficiary of the Fideicomiso because distributions from trusts are only taxable to the extent of the trusts DNI (Distributable Net Income).

You must keep in mind that  until the IRS issues further guidance and regulations on this new law, you cannot be certain they will not "twist" its interpretation of the new changes in a manner which is not consistent with prior long standing us trust tax principles. Therefore some uncertainty will exist until then.

Sunday, June 27, 2010

TDF 90-22.1 FOREIGN FINANCIAL ACCOUNT REPORT DUE 6/30/10 - STREET ADDRESS TO USE FOR DHL, FED EXP OR UPS DELIVERY

The following street address should be used to file TDF 90-22.1 (FBAR) form when the US mail is not available for delivery. These private delivery services will not deliver to the PO Box shown delivery address shown on the form's instructions.:

IRS Detroit Computing Center
Attn: FBAR Mailroom
4th Floor
985 Michigan Ave.
Detroit, MI 48226
(313) 234-1062




This form must be filed immediately. If it does not arrive by 6/30/10, you may incur a $10,000 late filing penalty. The fine can be greater if you do not file at all and also might include criminal prosecution.  When in doubt whether you owe the form to the US Treasury, best to file just to be certain there are no problems since it does not cause any additional income tax cost, and is only a reporting form.

Monday, June 14, 2010

Due Date of FBAR Filing Fast Approaching


The deadline for filing Report of Foreign Bank and Financial Accounts,Form TD F 90-22.1 (FBAR) for calendar 2009 is fast approaching. These reports are due by June 30th each year. Unlike the rule for tax forms, FBAR must be received by Treasury on or before the June 30th date to be considered timely filed. Therefore, one should plan accordingly and file the FBAR in sufficient time in advance of the due date. No extension of time to file is permitted.

Penalties can be severe. Persons who are required to file the FBAR and who do not do so by June 30th are subject to a penalty. For a willful violation the penalty can be as high as the greater of $100,000 or 50% of the amount in the foreign account. For a nonwillful violation that is not corrected and for which there is no reasonable cause, the penalty can be as high as $10,000.

Several IRS pronouncements should be considered when working on 2009 FBARs, including Announcement 2010-16 and Notice 2010-23. You can link directly to

Sunday, April 18, 2010

FAST US INCOME TAX FACTS FOR AMERICANS LIVING AND WORKING IN MEXICO

· If you are a US Citizen you must file a US tax return every year unless your income is less than $ 9,350  (for 2009 and lower for earlier years) or have self employment-independent contractor  net income of more than $  400 US per year.  You are taxable on your world wide income regardless of whether you filed a tax return in Mexico.



· As an US expatriate living in Mexico on 4/15, your 2009 tax  return is automatically extended until 6/15 but any taxes due must be paid by 4/15 to avoid penalties.  The return can be further extended until 10/15/10 if the proper extension is filed.


· For 2009 if you are a qualified expatriate you get a foreign earned income exclusion (earnings from wages or self employment) of $91,400, but this exclusion is only available if you file a tax return.
· If your spouse works and lives abroad, and is qualified, she can also get at $91,400 foreign earned income exclusion.


· You get credits against your US income tax obligation for taxes paid to foreign country but you must file a return to claim these credits.


· If you own 10% or more of a Mexican corporation or hold an interest in Mexican property through a Fideicomiso you must file special IRS forms each year or incur substantial penalties which can be greater including criminal prosecution if the IRS discovers you have failed to file these forms.


· Your net self employment income in Mexico is subject to US self employment tax of 15.3% (social security) which cannot be reduced or eliminated by the foreign earned income exclusion.


· Forming the correct type of Mexican corporation and making the property US tax elections with respect to that corporation can save you a significant amount of US income taxes.

· If at any time during the tax year your combined highest balances in your Mexican bank and financial accounts (when added together) ever equal or exceed $10,000US you must file a FBAR form with the IRS by June 30th for the prior calendar year or incur a penalty of $10,000 or more including criminal prosecution. This form does not go in with your personal income tax return and is filed separately at a separate address.
· We understand the Mexican income tax laws and can coordinate your US taxes with those you pay in Mexico to help you achieve the optimum tax strategy.


· In the past year the IRS has hired more than 800 new employees to audit, investigate and discover Americans living abroad who have failed to file all necessary tax forms.


· Often due to foreign tax credits and the the foreign earned income exclusion expats living in Mexico and file all past year unfiled tax returns and end up owing no or very little US taxes.


· Beginning in 2010 a new law is in effect which requires all US Citizens report all of their world wife financial assets if in total the value of those assets are $50,000 or more.


· Income from certain types of foreign corporations are immediately taxable on the US shareholder's personal income tax return.


· If you own investments in a foreign corporation or own foreign mutual fund shares you may be required to file the IRS forms for owning part of a Passive Foreign Investment Company (PFIC) or incur additional, taxes and penalties for your failure to do so. A PFIC is any foreign corporation that has more than 75% of its gross income from passive income or 50 percent or more of its assets produce or will produce passive income.


· The IRS is now matching up your US passport with your US tax records and now knows if  you  have not been filing all required US tax returns while you are living  in Mexico.


· Download your 2009 US tax return questionnaire drafted expressly for Americans living in Mexico at  http://www.taxmeless.com/07_Expat_Questionnaire__v2.doc

Wednesday, March 31, 2010

NEW LAW IN FORCE WITH RESPECT TO FOREIGN TRUSTS AND MEXICAN FIDEICOMISOS

Provisions In New Tax Law related to foreign trusts & Mexican Fideicomisos


Clarifications with respect to foreign trusts. Under present law, a U.S. person is treated as the owner of the property transferred to a foreign trust if the trust has a U.S. beneficiary. Under current Treasury regulations, a foreign trust is treated as having a U.S. beneficiary if any current, future or contingent beneficiary of the trust is a U.S. person. Notwithstanding this requirement, some taxpayers have taken positions that are contrary to this regulation. In order to enhance compliance with this regulation, the Act codifies this regulation into the statute. This provision is effective on Mar. 18, 2010. The Act also clarifies that a foreign trust will be treated as having a U.S. beneficiary if (1) any person has discretion to determine the beneficiaries of the trust unless the terms of the trust specifically identify the class of beneficiaries and none of those beneficiaries are U.S. persons or (2) any written oral or other agreement could result in a beneficiary of the trust being a U.S. person. As a final clarification, the Act clarifies that the use of any trust property will be treated as a payment from the trust in the amount of the fair market value of such use.


Presumption with respect to transfers to foreign trusts. For transfers of property after Mar. 18, 2010, the Act provides that if a U.S. person directly or indirectly transfers property to a foreign trust (other than a trust established for deferred compensation or a charitable trust) IRS may treat the trust as having a U.S. beneficiary unless such person can demonstrate to the satisfaction of IRS that under the terms of the trust, (1) no part of the trust may be paid or accumulated during the year for the benefit of a U.S. person, (2) that if the trust were terminated during the year, no part of the trust could be paid to a U.S. person (3) and that such person provides any additional information as IRS may require with respect to such transfer.


Minimum penalty with respect to failure to report on certain foreign trusts. Under pre-Act law, a taxpayer that fails to file an information return with respect to certain transactions involving foreign trusts (e.g., the creation of a foreign trust, the transfer of money or property to a foreign trust, or the death of a U.S. owner of a foreign trust) is subject to a penalty of 35% of the amount required to be disclosed on such return. If IRS uncovers the existence of an undisclosed foreign trust but is unable to determine the amount required to be disclose on such return, it is unable to impose a penalty. The Act strengthens this penalty by imposing a minimum penalty of $10,000 on any such failure to file. This provision applies to notices and returns required to be filed after Dec. 31, 2009. Notwithstanding this minimum penalty, in no event may the penalties imposed on taxpayers for failing to file an information return with respect to a foreign trust exceed the amount required to be disclosed on the return. 

Sunday, March 21, 2010

Just Enacted HIRE ACT contains many offshore and international tax provisions


To pay for the hiring incentives in the recently enacted “Hiring Incentives to Restore Employment Act” (the 2010 HIRE Act), Congress passed several offsetting revenue raisers, including a comprehensive set of measures to reduce offshore noncompliance by giving IRS new administrative tools to detect, deter and discourage offshore tax abuses. Here is a brief overview of the new offshore anti-abuse provisions.
Increased disclosure of beneficial owners
Reporting on certain foreign bank accounts. The Act imposes a 30% withholding tax on certain income from U.S. financial assets held by a foreign institution unless the foreign financial institution agrees to disclose the identity of any U.S. individual with an account at the institution (or the institution's affiliates) and to annually report on the account balance, gross receipts and gross withdrawals/payments from such account. Foreign financial institutions would also be required to agree to disclose and report on foreign entities that have substantial U.S. owners. Congress expects that foreign financial institutions will comply with these disclosure and reporting requirements in order to avoid paying this withholding tax. These provisions are effective generally for payments made after 2012.
Reporting on owners of foreign corporations, foreign partnerships and foreign trusts. The Act requires foreign entities to provide withholding agents with the name, address and tax identification number of any U.S. individual that is a substantial owner of the foreign entity. Withholding agents are to report this information to the U.S. Treasury Department. The Act exempts publicly-held and certain other foreign corporations from these reporting requirements and provides the Treasury Department with the regulatory authority to exclude other recipients that pose a low risk of tax evasion. Any withholding agent making a withholdable payment to a foreign entity that does not comply with these disclosure and reporting requirements is required to withhold tax at a rate of 30%. These provisions are effective generally for payments made after 2012.
Extending bearer bond tax sanction to bearer bonds designed for foreign markets. Bearer bonds (i.e., bonds that do not have an official record of ownership) allow individuals seeking to evade taxes with the ability to invest anonymously. Recognizing the potential for U.S. individuals to take advantage of bearer bonds to avoid U.S. taxes, Congress took a number of steps in the 1980's to eliminate bearer bonds in the United States. First, they prevented the U.S. government from issuing bearer bonds that would be marketed to U.S. investors. Second, they imposed sanctions on issuers of bearer bonds that could be purchased by U.S. investors. The Act extends many of these sanctions to bearer bonds that are marketed to foreign investors and prevents the U.S. government from issuing any bearer bonds. These provisions apply to debt obligations issued after the date which is two years after the new law's enactment date.
Foreign financial asset reporting
Disclosure of information with respect to foreign financial assets. The new law requires individuals to report offshore accounts and other foreign financial assets with values of $50,000 or more on their tax returns. Individuals who fail to make the required disclosures are subject to a penalty of $10,000 for the tax year; an additional penalty can apply if Treasury notifies an individual by mail of the failure to disclose and the failure to disclose continues. These provisions apply for tax years beginning after the new law's enactment date.
Penalties for underpayments attributable to undisclosed foreign financial assets. For tax years beginning after the new law's enactment date, the Act imposes a penalty equal to 40% of the amount of any understatement that is attributable to an undisclosed foreign financial asset (i.e., any foreign financial asset that a taxpayer is required to disclose and fails to disclose on an information return).
New 6-year limitations period. For returns filed after the new law's enactment date as well as for any other return for which the assessment period has not yet expired as of the new law's enactment date, the Act imposes a new six-year limitations period for omissions of items from a tax return that exceed $5,000 and are attributable to one or more reportable foreign assets. The Act also clarifies that the statute of limitations does not begin to run until the taxpayer files the information return disclosing the taxpayer's reportable foreign assets.
Other disclosure provisions
New reporting rule for PFICs. Effective on the new law's enactment date, activities with respect to passive foreign investment companies (PFICs) are subject to a new reporting rule. Unless otherwise provided by IRS, each U.S. person who is a shareholder of a PFIC must file an annual information return containing such information as IRS may require. A person that meets this new reporting requirement could, however, also have to meet the new reporting rule requiring disclosure of information with respect to foreign financial assets (see above). It is anticipated that IRS will exercise its regulatory authority to avoid duplicative reporting.
Electronic filing. For returns the due date for which (determined without regard to extensions) is after the new law's enactment date, the Act creates an exception to the general annual 250 returns threshold for electronic filing: IRS will be permitted to issue regs requiring filing on magnetic media for any return filed by a financial institution with respect to any taxes withheld by it for which it is personally liable. Thus, IRS will be authorized to require a financial institution to electronically file returns with respect to any taxes withheld by the financial institution even though the financial institution files less than 250 returns during the year.
Provisions related to foreign trusts
Clarifications with respect to foreign trusts. Under present law, a U.S. person is treated as the owner of the property transferred to a foreign trust if the trust has a U.S. beneficiary. Under current Treasury regulations, a foreign trust is treated as having a U.S. beneficiary if any current, future or contingent beneficiary of the trust is a U.S. person. Notwithstanding this requirement, some taxpayers have taken positions that are contrary to this regulation. In order to enhance compliance with this regulation, the Act codifies this regulation into the statute. This provision is effective on the new law's enactment date. The Act also clarifies that a foreign trust will be treated as having a U.S. beneficiary if (1) any person has discretion to determine the beneficiaries of the trust unless the terms of the trust specifically identify the class of beneficiaries and none of those beneficiaries are U.S. persons or (2) any written oral or other agreement could result in a beneficiary of the trust being a U.S. person. As a final clarification, the Act clarifies that the use of any trust property will be treated as a payment from the trust in the amount of the fair market value of such use.
Presumption with respect to transfers to foreign trusts. For transfers of property after the new law's enactment date, the Act provides that if a U.S. person directly or indirectly transfers property to a foreign trust (other than a trust established for deferred compensation or a charitable trust) IRS may treat the trust as having a U.S. beneficiary unless such person can demonstrate to the satisfaction of IRS that under the terms of the trust, (1) no part of the trust may be paid or accumulated during the year for the benefit of a U.S. person, (2) that if the trust were terminated during the year, no part of the trust could be paid to a U.S. person (3) and that such person provides any additional information as IRS may require with respect to such transfer.
Minimum penalty with respect to failure to report on certain foreign trusts. Under pre-Act law, a taxpayer that fails to file an information return with respect to certain transactions involving foreign trusts (e.g., the creation of a foreign trust, the transfer of money or property to a foreign trust, or the death of a U.S. owner of a foreign trust) is subject to a penalty of 35% of the amount required to be disclosed on such return. If IRS uncovers the existence of an undisclosed foreign trust but is unable to determine the amount required to be disclose on such return, it is unable to impose a penalty. The Act strengthens this penalty by imposing a minimum penalty of $10,000 on any such failure to file. This provision applies to notices and returns required to be filed after Dec. 31, 2009. Notwithstanding this minimum penalty, in no event may the penalties imposed on taxpayers for failing to file an information return with respect to a foreign trust exceed the amount required to be disclosed on the return.
Dividend equivalent payments
Dividend equivalents treated as dividends. For payments made on or after the date that is 180 days after the new law's enactment date, the Act treats a dividend equivalent as a dividend from U.S. sources for certain purposes, including the U.S. withholding tax rules applicable to foreign persons. A dividend equivalent is any substitute dividend made pursuant to a securities lending or a sale-repurchase transaction that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources within the U.S. or any payment made under a specified notional principal contract that directly or indirectly is contingent upon, or determined by reference to, the payment of a dividend from sources within the U.S. A dividend equivalent also includes any other payment that IRS determines is substantially similar to a payment described in the preceding sentence. Under this rule, for example, IRS may conclude that payments under certain forward contracts or other financial contracts that reference stock of U.S. corporations are dividend equivalents.

Monday, February 22, 2010

When You Buyer or Sell Mexican Real Estate Consider Adding an Arbitration Clause to Your Contract

Linda Neil, a Mexican real estate expert, recently pointed out in her article in the Gringo Gazette that Mexico has changed it laws to allow for arbitration and mediation of disputes between parties to a contract for the purchase of real estate in Mexico.  Articles 1415 to 1463 of the Mexican Commercial Code provides guidelines. It is now possible to avoid the uncertainties of the Mexican Courts.  This will allow parties to a contract to resolve their disputes with much greater speed than ever possible in the Mexican Courts and perhaps with more certainty in the final decision, not to mentioned significantly lower costs in legal fees, etc.  If both  the Buyer and Seller are US residents, it may be possible to agree that the mediation or arbitration will be held in the United States using the American Arbitration Association or another recognized arbitration organization.

Next time you buy or sell, tell your agent you need an arbitration and mediation provision put in the contract.  Since so many real estate transactions in Mexico often  result in problems, it is a good decision. Agents who tell you that you must follow their standard contract are not correct. You can always make changes or add additional provisions.

Friday, February 19, 2010

Sale of Primary Residence in Mexico -US and Mexican Tax Rules

For US tax purposes, if you home in Mexico is your primary residence (this is subject to documentary proof on audit) for 2 out of the 5 past years (from date of sale) up to $500,000 in gain is not subject to taxes if you file a joint return, and $250,000 is tax free if you file as single.  Any gain above those amounts are subject to taxes at capital gains rates.  You can claim a credit for any Mexican capital gains taxes you paid on the sale against any US tax you pay as a result of the sale.

For Mexican taxes, to claim the unlimited exemption from taxes on the sale of your  personal residence you first must have lived as your primary residence it for five years prior to the date of sale and be a Mexican citizen or hold an FM2 visa.  You must also have documentary proof that it was your primary residence for that period of time. Such proof would include phone bills and utility bills; passports showing entry and exit dates from Mexico, etc.  You cannot have two primary residences for either Mexican or US tax purposes.

You cannot get the exclusion from Mexican tax if you only hold an FM3, even though you have lived in your home full time for the 5 years.  You must convince the Mexican Notary that your really did live in the property being sold as your primary residence for at least five years. The Notary makes the final decision whether to exempt you from taxes or not.

You should consult with a Mexican accountant, contadore (CPA) or tax abagado (attorney) if you wish to take advantage of the personal residence tax exemption to learn the steps required to qualify. Do not wait until the last minute when it is too late!

Therefore, it is possible to qualify for the gain exclusion on your US tax return though you may not qualify for Mexican tax purposes.