Monday, February 7, 2011
Fast US Tax Facts for Americans Living and Working in Mexico
By Don D. Nelson, Attorney, C.P.A.
If you are a US Citizen you must file a US tax return every year unless your income is less than $ 9,700 (for 2010 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 4/18/11, your 2010 tax return is automatically extended until 6/15 but any taxes due must be paid by 4/18 to avoid penalties. The return can be further extended until 10/15/10 if the proper extension is filed.
· For 2010 if you are a qualified expatriate you get a foreign earned income exclusion (earnings from wages or self employment) of $91,500, 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 $91,500 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 several years the IRS has hired more than 2,200 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 2011 a new law is in effect which requires all US Citizens report on a new form filed with their tax returns all of their world wide 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 2010 US tax return questionnaire drafted expressly for Americans living in Mexico at www.TaxMeLess.com or at www.ExpatAttorneyCPA.com
Don D. Nelson, US Attorney, CPA
US Phone: (949) 481-4094, US Fax: (949) 218-6483
We have been preparing tax returns and assisting clients in Mexico with their US/Mexican tax planning for over 20 years.