2019 Year End Tax Planning for US Expatriate Taxpayers in Mexico

Our year end  2019 Expatriate Tax Planning Letter can be read and downloaded here (pdf file).  Read it to learn of tax law changes for 2019 and possible planning steps you can take before year end to save you money.

If you want to get started early on your 2019 expatriate tax return you can download our 2019 Expatriate Tax Questionnaire HERE. (MS word file )  After you fill it out send it to us for a fee quote and fast preparation.

If you have  US expatriate, international or US nonresident tax questions email us by clicking HERE

Our firm CPAs and Attorney have been assisting Americans with their US taxes in Mexico for over 25 years. 

SAT goes after landlords for not declaring rental income

By John Glabb CIPS - The Settlement Company 

SAT will begin inspecting landlords to ensure that they meet their tax obligations 

There has recently been a crackdown in tourist beach communities, many homeowners that use their property as vacation rentals have received notice to ensure they are registered as rentals and claim the income they are receiving. Most rentals are listed on social media or Airbnb, making it easy for the government officials to find properties being used as a rental. It is not unheard of for authorities to base taxes and penalties on a perceived rental income by using the area’s occupancy rate, which will be much more expensive for you in the end.

According to the Ministry of Finance and Public Credit (SHCP), the evasion of ISR by lease represents 0.1% of GDP. In addition, according to a study by the University of the Americas Puebla, in 2016 the rate of evasion of natural persons who obtain income from leasing was 73.5%. To combat this, the Treasury implemented a reform that has already entered into force to inspect landlords.

Landlords must verify that they have been issuing CFDI for income from rentals. When a tenant does not pay the rent and a lease trial is reached, the judge will ask the landlord to show you the CFDIs that protect your income. If you do not prove them, the judge must notify the SAT no later than five days after the deadline.

The reform will change Article 118 of the Law of the ISR to be as follows:

“In the case of real estate lease judgments in which the lessee is ordered to pay the overdue income, the judicial authority shall require the creditor to verify that he issued the tax receipts referred to in this section. In the event that the creditor does not prove to have Once these vouchers have been issued, the judicial authority must inform the Tax Administration Service of the omission mentioned within a maximum period of five days from the expiration of the period granted by the judicial authority to the creditor to comply with the requirement.

According to some specialists, the proposal could achieve more revenue and an increase in the rental price. According to Arturo Rosales, director of finance at Homie, prices will increase due to legal processes.

For years foreign property owners have not paid their rental income taxes. Vacation property income seemed to fall under the radar of taxable income in Mexico, until recently.

Whether you are investing in Mexico, doing business in Mexico or retiring in Mexico, you need to learn about the Mexican tax system. Consult a tax attorney in Mexico when you make an investment purchase or rent out your home.

The Federal Government expects foreign owners to follow the Mexican tax laws that come with owning property investments in Mexico.  Any rental property in Mexico, whether it is just a small suite or a luxury condominium, whether you rent it part-time and live there part-time or you rent it full time, these tax laws apply. Many foreign homeowners in Mexico are not complying with the laws, whether they choose not to, because they think anything goes in Mexico, or they are not aware of the Mexican tax laws and tax system. The reality is you can not escape taxes, no matter where you live. Avoiding these laws will put their homes at risk.

SOME FOREIGN OWNERS ASSUME THEY DO NOT NEED TO PAY TAXES ON THE PROPERTY BECAUSE THE INCOME FOR THE RENT IS PAID TO THEIR HOME COUNTRY BANK ACCOUNT, THIS IS NOT THE CASE. ANY RENTAL PROPERTY IN MEXICO IS SUBJECT TO TAX IN MEXICO, NO MATTER WHICH COUNTRY OR BANK ACCOUNT THE RENT IS PAID TO.

Property owners that do not comply with these laws may lose their rights as the property owner, face possible jail time, fines, deportation from Mexico and forced sale of the property.

   Email  US with questions and to learn more

Consider Forming a Mexican Sociedad de Responsabilidad Limitada (SRL) when Incorporation Your Business or Rental in Mexico

When you decide to incorporate your business or rental property in Mexico and you are a US taxpayer it is wise to consider making your Mexican corporation a Sociedad de Responsabilidad Limitada (S. de R.L. ).  rather than the more common  Sociedad Anonima de Capital Variable, (SA de C.V.).  One offers great advantages on your US tax return due to the "Check the Box" regulations (IRS Form  8832). Most Mexican attorneys and accountants  are not familar with the advantages of a S. de R.L. and recommend the other type of corporation.

Advantages of using an S. de R.L :

1. Allows losses and profits  of the corporation to flow through to your personal US return (avoids double taxation)
2. Allows you to claim a foreign tax credit on your US return for all Mexican income taxes paid by your corporation in Mexico.
3. Avoids the new US GILTI tax which causes owners of Controlled Foreign Corporations to have to pay taxes on part of the corporations profits even if they are not distributed to you.

We can help you structure your Mexican business or real estate in the optimum manner for your US tax return and to save taxes.  Please email us with your questions or to set up a planning session.  We can also then do the return.  EMAIL US  We have been assisting US Gringos in Mexico with their US tax returns for over 20 years.

Gringos - Who Will Inherit your Property In Mexico

If  you as a nonresident American or Canadian  have property in Mexico, and you pass on, it is important you take steps to make certain your Mexico property goes to those you wish.  If you fail to make a Mexican Will or hope to use your US will, it will be time consuming and expensive for your heirs. You need a Mexican will to pass on property to your heirs with efficiency and low cost.  To learn more READ THIS

If you are living in Mexico, and you have property in the USA, you definitely need a US will and very likely need a US living trust to avoid probate (time consuming and expensive) and keep your estate private. We can help you with your US estate planning and the documents required.  Email us at ddnelson@gmail.com  Get the combined expertise of a US CPA firm and a US attorney

PAY YOUR MEXICO TAX ON YOUR RENTAL INCOME OR THE PENALTIES MAY CAUSE YOUR FINANCIAL RUIN

An actual true story but the names and places have been changed to protect the guilty.

1.  Bill and his wife Sarah rent out their  condominium in San Jose for 5-6 months
out of the year on a weekly or monthly basis to tourists.  Though they report their
rental income and expenses on their US tax return, they have never paid any
taxes on that rental income to the Mexican tax authorities.  Their neighbors
have told them not to worry, since no one ever pays taxes on vacation rental
income in Mexico and probably do not have to.

Is this actually true?  No!  Definitely not!   Bill and his wife must pay taxes on
their income which is generated in Mexico!

What kind of taxes should they be paying and how much?.  They must pay
the ISR tax a type of income tax, in the amount of 25% of the gross rents and,
if the unit is furnished, a 16% Value Added Tax (IVA).

An important point  The ISR TAX they pay can become a tax credit in the US,
so double taxation is avoided.   The 16% IVA tax is generally paid by the tenant
and is simply declared by the landlord.

What are the penalties, interest, etc. they might incur?  The penalty for not
being enrolled as a taxpayer is 2,740. to 8,230 pesos.   The penalty for not making
declarations as required range from 1,100. pesos to 13,720. pesos per month in
addition to interest for not paying on time and as required is 1.13% per month.

Are there any other possible legal consequences for failing to pay taxes
on rentalincome from their condominium?   If the tax authorities have not
discovered the illegal rental income and notified the landlords, back interest
and penalties may be waived.It is important, however, to begin declaring and
paying prior to discovery.

If you want to pay the taxes Mexico imposes on rental income we can help.
Contact us at taxmeless@gmail.com We are US attorneys and CPAs and
can refer you to a firm in Mexico that can help with your Mexican taxes and
we can help with your US tax return on that income. Visit our website
at www.taxmeless.com for a a lot of useful information.

TAX ON RENTAL INCOME: PAYING IT and BEING LEGAL IN MEXICO

If you need help with your US taxes on rental income, or your other Mexico income email us at taxmeless@gmail.com or visit our website at www.taxmeless.com.  We are CPAs and attorney with over 30 years experience with Americans living in Mexico and their taxes.

TEMPORARY VISA REQUIRED?  I read an article on the internet about your services.  We have spoken to an accountant in PV about paying taxes on our rental income.  One accountant has told me I need to get my temp visa. This seems like a hassle when I am using the condo only a short time each year.   What is your take on this?

 Ronnie from Puerto Vallarta

Hi Ronnie:  Thanks for your email.  Per Articles 158 and 159 of the Tax Code, a visa, other than a tourist visa when you visit Mexico, is NOT necessary.    As a non-resident you may rent your property and pay taxes in compliance with Mexican law.   Additionally, due to treaties, there is no double taxation and expenses of your property can be deducted in your country of residence

IS RENTING MEXICAN PROPERTY PROHIBITED? I have been told that the standard bank trust wording for foreign individuals does not permit the rental of residential property at all.   How can you offer to pay taxes on income on a prohibited activity?

 Jim from Playa del Carmen

Hi Jim.   The foreign investment law specifically permits the beneficiary (foreigner) to rent, sell, modify their properties and to collect the profits therefrom.      Many trusts state that the bank must pay the taxes but we know that will not happen.   It has been our experience that if the foreigner pays his/her taxes on rental income and has the receipts to prove it there is absolutely no quarrel with Mexican officials.        

OUR PROPERTY TITLE IS IN AN LLC.   HOW CAN WE PAY TAXES ON THE INCOME?

Marilyn from Cozumel

Hi Marilyn.   Thanks for your question!  We will need to have your documents translated and authorizations prepared in the name of the LLC and signed by the legal representative.  With this we can pay your taxes and provide you with receipts which will be accepted by the tax authorities in your country of residence.

IS THE FIDEICOMISO THE PROPERTY DEED? 

 June from Michigan with property in Ixtapa.

Yes, the Fideicomiso to hold property in the restricted zone of Mexico is both a contract with the Mexican bank to hold your title as trustee, and also is the deed to your rights in the property.

WE HAVE HEARD THAT OUR PROPERTY CAN BE SEIZED BY THE GOVERNMENT IF TAXES ARE NOT PAID MONTHLY.   IS THIS TRUE? John from Puerto Penasco

Yes.   Definitely failure to pay taxes on income is a violation of the Mexican law and property can be attached and sold as payment for past due taxes after a procedure similar to that used by the US and Canada tax authorities.  To date the Mexican tax authorities have not aggressively pursued violators but this is changing as they have access to internet and rental promotion programs.

PENALTIES FOR NOT FILING,  FOR NON-PAYMENT:   The penalty for not being enrolled as a taxpayer is 2,740. To 8,230 mxn.    The penalty for not making declarations as required range from 1,100. To 13,720. Mxn  per month in addition to interest at the rate of 1.13% per month on the amount owed.   These penalties are being adjusted upward to compensate for exchange rates, etc.

Mexico has tax treaties with 32 countries,   no double taxation!

PAYING TAX ON YOUR RENTAL INCOME FROM MEXICAN PROPERTIES IS A MUST, WHETHER YOU LIVE IN MEXICO OR NOT.  GET LEGAL and AVOID THE CONSEQUENCES OF TAX EVASION!

US Tax Consultations Now Available in Mexico by US Tax Attorney re; real estate, business, investments, tax returns

A "MINI TAX CONSULTATION" IS NOW AVAILABLE with a US Attorney by Phone or Skype: If you have specific tax questions on your personal situation and need to discuss it with an US expatriate international tax expert, with the protection of  Attorney-Client privilege, you can request a "Mini Consultation."   "Mini Consultation" costs a minimum of $300 US for up to 30 minutes of Mr. Nelson's professional legal tax advice over the phone, skype or by  email from any where in the world.         

  No need to visit his office.  If  you send us an outline of your situation, facts and questions in advance, we prepare in advance and this time is extremely productive and usually resolves all of your questions  within the time allowed. Over 900 U.S. expat taxpayers located everywhere in the world  have used "Mini Consultations" to resolve their tax problems and issues.  US Phone (949) 480-1235. US Fax (949) 606-9627 or we can talk on my skype address dondnelson. Email:ddnelson@gmail.com   Payment can easily be made by credit card, or  paypal, or direct  bank transfer. If your questions or problems are URGENT let us know and we can often schedule it on the same day. Learn More About  How your Mini Consultation Works

Don Nelson, Attorney at Law has ever 30 years experience with US expatriate, international and nonresident taxation and representing taxpayers before the IRS.  He is also a partner in Kauffman Nelson LLP Certified Public Accountants.  Read more about his background and experience.

www.TaxMeLess.com

2018 FAST US TAX FACTS FOR AMERICAN WORKING AND LIVING IN MEXICO- EXPATRIATES AND GREEN CARD HOLDERS

BY Kauffman Nelson LLP CPAS and Don D. Nelson , Attorney,  Charles Kauffman CPA

If you are a US Citizen or green card holder you must file a US tax return every year unless your taxable income is below a certain threshold.  Even if your income is below that threshold, you may still be required to file certain forms to report foreign assets, etc. Failure to file these forms can result in severe IRS penalties.   If you do not itemize your health, tax, interest, charitable and miscellaneous deductions you get a standard deduction of $12,000 if single or filing as married filing separately or $24,000 if you file jointly with your

spouse.

As a US expatriate living and working abroad 4/15/19, your 2018 tax return is automatically extended until 6/17/19  but any taxes due must be paid by 4/15/19 to avoid penalties and interest. The return can be further extended until 10/15/19 if the proper extension form is filed. An even further extension until December may be available if the proper letter is sent to the IRS.

✦  For 2018 if you are a qualified expatriate you get a foreign earned income exclusion (earnings from wages or self employment) of $104,100, but this exclusion is only available if you file a tax return. You must qualify under one of two tests to take this exclusion: (1) bonafide resident test or (2) physical presence test. You can read more about how to qualify in IRS Publication 54. This exclusion only applies to income taxes and does not apply to US self- employment tax (social security plus medicare).  You spouse who lives and works abroad with you will also be able to use this exclusion against any earned income they have abroad. You can lose this exclusion if you file your return more than 18 months late. The exclusion can only be claimed on filed tax return and does not apply if you fail to file a tax return.

✦  For 2018 if you qualify for the entire year  for the foreign earned income exclusion  (form 2555) you will be excluded from having to comply with the health insurance rules  (or possible penalties) of Obamacare (ACA). These rules are complex and should be reviewed if you do not qualify for the expat exclusion for the entire year of 2017 because you may have an obligation to purchase health insurance or be penalized.

✦  If your foreign earnings from wages or self -employment exceed the foreign earned income exclusion you can claim a housing expense for the rent, utilities and maintenance you pay if those amounts that exceed a minimum non-deductible amount.   There is a limit to the housing amount and certain “high-cost” locations there is a higher amount of housing expense which can be considered. (For “high-cost” country limitations see Form 2555 instructions).

✦   You get credits against your US income tax obligation for foreign income taxes paid to a foreign country but you must file a US tax return to claim these credits. This avoids double taxation of the same income.

✦   If you own 10% or more of a Foreign corporation or Foreign partnership (LLC) you must file special IRS forms,  or incur substantial penalties which can be greater including criminal prosecution if the IRS discovers you have failed to file these forms.

✦   If you create a foreign trust or are a beneficiary of a foreign trust you may be obligated to file forms 3520 and /or 3520A each year to report those activities or be subject to severe penalties. Foreign foundations and non-profits which indirectly benefit you may be foreign trusts in the eyes of the IRS.

✦   Your net self- employment income in a foreign country (earned as an independent contractor or in your own sole proprietorship) is subject to US self -employment tax (medicare and social security) of  15.3% which cannot be reduced or eliminated by the foreign earned income exclusion. The one exception is if you live in one of the very few countries that have a social security agreement with the US and you pay the equivalent of social security in that country.

✦   Forming the correct type of foreign corporation and making the proper US tax election (to cause the income and foreign taxes  the foreign corporation pays to flow through to your personal US tax return) with the IRS for that corporation may save you significant income taxes and avoid later adverse tax consequences. You need to take investigate this procedure before you actually form that foreign because it can be difficult to make that election later and only certain types of foreign business entities are eligible to make this election..

✦   If at any time during the tax year your combined highest balances in your foreign bank and financial accounts (when added together) ever equal or exceed $10,000US you must file a FBAR form 114 with the IRS by October 15, 2019 for the 2018 calendar year or incur a penalty of $10,000 or more including criminal prosecution. Foreign financial accounts often include accounts in you sign on for a foreign corporation, foreign partnerships foreign pension plans, stock brokerage accounts, and cash surrender value of foreign life insurance.  This form does not go in with your personal income tax return and can only be filed separately on the web at: http://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html

✦   The IRS gets lists of Americans applying or renewing for US passports or entering the country. They will compare these lists with those who are filing US income tax returns and take action against those who do not.

✦   Often due to foreign tax credits and the foreign earned income tax expats living abroad who file all past year unfiled tax returns end up owing no or very little US taxes. The IRS has several special programs which will help you catch up if you are in arrears which will reduce or possibly eliminate all potential penalties for failing to file the required foreign asset reporting forms. We can direct you to the best program for your situation, prepare the returns and forms and represent you before the IRS.

✦  Beginning in 2011 a new law went into effect which requires all US Citizens report all of their worldwide financial assets with their personal tax return if in total the value of those assets exceed certain minimum amounts starting at $50,000. Failure to file that form 8938 on time can result in a penalty of $10,000. The form is complex and has different rules that apply to you if you live abroad or live in the US. This form is required in addition to the FBAR form 114.

✦  Certain types of income of foreign corporations are immediately taxable on the US shareholder's personal income tax return. This is called Subpart F income. The rules are complex and if you own a foreign corporation you need to determine if these rules apply to you when you file the required form 5471 for that corporation. For 2018 a new tax was enacted with the acronym of GILTI tax. This may or may not cause every Controlled Foreign Corporation to owe taxes on the income it does not distribute to its owners. LEARN MORE HERE

✦   If you own investments in a foreign corporation or own foreign mutual fund shares you may be required to file the IRS form 8621 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.

There are many more special tax laws too numerous to mention here that apply to expatriates, green card holders and US  taxpayers with foreign assets, businesses, etc. Please consult a tax expert if you have other offshore matters to be certain what is required to be filed.

Download your   2018 US tax return questionnaire prepared expressly for Expatriates HERE. Send us your completed questionnaire and we will immediately provide you with a flat fee quote for preparing your return(s).

Don D. Nelson, US Tax Attorney, Charles Kauffman CPA, Kauffman Nelson, LLP, CPAs
Huntington Beach, California USA
US Phone: (949) 480-1235, US Fax: (949) 606-9627
Email:ddnelson@gmail.com or ustax@hotmail.com
Skype address: dondnelson

Visit our International Tax Blog for the Latest Expat and International Tax Developments at www.usexpatriate.blogspot.com    /   http://us-mexicantax.blogspot.com/

We have been preparing tax returns and assisting US clients located in over 123 countries around the the world for over 35 years. We also assist US Nonresidents meet their US tax obligations and return filing requirements. Email, skype or phone us for immediate assistance.

MINI TAX CONSULTATIONS BY PHONE, SKYPE OR EMAIL: We offer mini consultations (with attorney client privilege) to answer your tax questions and resolve your tax issues.  Email: taxmeless@gmail.com to learn more or request a consultation

For additional useful information and tax assistance go to our website at. www.TaxMeLess.com

Disclaimer and Conditions: The information contained herein is general in nature and is not to be construed or relied on   as tax or legal advice with respect to you individual tax situation or questions. Your use of this material does not create any attorney/CPA relationship between you and this firm or any other obligation. You are advised to retain competent tax professionals help with your individual tax matters and for appropriate answers your specific tax questions.

THE 3% HOSPITALITY TAX AND ITS IMPLICATIONS FOR RESIDENTIAL RENTALS

Many have suggested that the 3% hospitality tax needs to be paid by owners of residential rental properties (single family homes, condominiums) Airbnb is trying to collect it.

Following is an explanation by a Mexican certified public accountant of the tax provided in 2015:: .

The 3% hospitality tax is a local tax, not a federal tax.    If paid by the owner of a home (house or condominium) in Mexico, the tax is being paid  in an improper manner, contrary to the purpose of the tax.

The 3% hospitality tax is not paid by those who handle rental properties (understanding that rental properties is the temporary use or enjoyment of a real property that has a residential dwelling or commercial use.).    Those who pay the hospitality tax are those whose activity is hotels.    The hotel business is a totally commercial and touristic activity. The real properties destined for hotel usage were not designed to be residential dwellings such as the ones non-resident owners have in the Mexican bank trust (fideicomiso).  The local authorities should not request same tax from you since you are not managing hotels.

______________________________________________________________________

As US tax professionals we express no opinion on Mexico's tax structure and suggest you contact a Mexico tax accountant to advise you on your personal situation if you are a rental property owner.

Need a Good Mexican Accountant for your Mexico Taxes and Accounting?

We are often asked about referrals to a Mexican Contador/ CPA. The following firm is an excellent choice for your Mexican tax and accounting needs:

LS Accounting & Tax Services SC is a firm located in Cabo San Lucas, BCS Mexico
The owners are USA and Mexico CPA’s with decades of experience, zero language barrier and many proven local contacts.

The services provided range from monthly accounting and tax compliance to banking administration, budgeting, operational reporting, internal control audits, legal representation services, legal domicile services, new business formation, immigration services and legal documentation. The firm provide these services to a wide range of clientele from construction companies, restaurants, hospitality, retail, tourist activities, etc. The firm also  partners with US CPA firms  and Attorneys to provide a streamlined service for their  US tax payer clients and for US nonresidents who wish to do business in the US..

LS Accounting & Tax Services SC
LAT180131E55
Plaza Novva Local #37
Colonia El Tezal
Cabo San Lucas, BCS Mexico
MEX: +52 (624) 128-3700
USA: +1 (949) 436-7737
E: Sarahi0585@icloud.com