Fast US Tax Facts for Americans Living and Working in Mexico By Don D. Nelson, Attorney, C.P.A.

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

Email:ddnelson@gmail.com

Skype: dondnelson

Visit our US – Mexican Tax Blog

We have been preparing tax returns and assisting clients in Mexico with their US/Mexican tax planning for over 20 years.

IRS Releases Inflation Adjusted Foreign Housing Expense Deduction Limits

The IRS has provided the inflation-adjusted limitations on foreign housing expenses for 2011 (Notice 2011-8).

Under IRC § 911(a), a qualified individual can elect to exclude from gross income his or her foreign earned income and housing costs. Section 911(c)(1) provides a formula for determining the excludible amount of the individual’s foreign housing costs. Generally, under section 911(c)(2)(A), a qualified individual will be limited to maximum housing expenses of $27,870 in 2011.

Expats can deduct foreign housing
expenses

However, the IRS can adjust the maximum limitation based on geographic differences in housing costs relative to housing costs in the United States, and since 2006 it has issued annual notices adjusting the limitation for qualified individuals who live in countries with high housing costs compared to U.S. housing.

Notice 2011-8 provides a table of more than 400 foreign locations for which the IRS is allowing an increased limitation on housing expenses. Some of the highest limitations for 2011 are for Bermuda ($90,000 for the full-year limitation); Hong Kong ($114,300); Paris ($84,800); Tokyo ($118,500); and Moscow ($108,000). 

In locations where the amount has increased from the amount in 2010 (listed in Notice 2010-27), the notice also allows taxpayers who incurred housing expenses in 2010 to elect to apply the 2011 limitation amount to the 2010 year.

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.