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.

Helpful Advice on Your Mexican Income Taxes

If you live in Mexico full time you are suppose to be filing a Mexican return as well as your US tax return each year. Here is some helpful advice on your Mexican taxes.

When you need help with your US taxes while living and working in Mexico go to www.TaxMeLess.com.  We have been doing taxes for Gringos in Mexico for over 25 years. 

CAPITAL GAINS IN MEXICO/ and USA ON REAL ESTATE SALES

With the meteoric rise of real estate prices here in Cabo, there are many people realizing gains on their homes when they sell them. When you purchase and sell real estate in Mexico for a profit, you are responsible for certain capital gains tax. This information was prepared to keep you informed about the tax system in Mexico. We also recommend you to consult a notary and/or an experienced tax advisor. Capital gains tax is based on the profit you make when you sell your property in Mexico, when property changes hands, the notary withholds a certain percentage, based on the difference between the recorded value on the title (fideicomiso) and the sales price with a variety of deductions. New Rules for Capital Gains in Mexico Starting 2007 Mexico, as well as the United States, provides its residents a capital gains tax incentive for their primary home. The new tax incentive in Mexico states that if you sell your “primary residence” after five years, you pay no capital gains. This law is in place for residents (Mexicans or foreigners), and in order to provide proof that your house is primary residence you need can provide one of the following documents: 1) Phone Bill 2) Electricity Bill 3) Local Mexican Bank Statements The documentation above needs to be addressed to the property owner, his/her spouse, or his/her ascendants or descendants using the address of the property being sold. Another distinction made on your primary residence is that the land it resides on shall include no more than 3 times the total covered area of construction for the house. This is to prevent the qualification of the capital gains exemption when a land owner sells several acres of land with just a small house on it. Article 109 XV of the income tax law called “Ley del Impuesto sobre la Renta” was recently modified and now exempts from the tax any primary residence sold for an amount no exceeding one million five hundred thousand units of investment (UDIS) which is approximately $500,000 usd as of today. UDIS is a unit of investment calculated in respect to the rate of inflation. The value of a unit is established by the Banco de Mexico, which is published on the internet at www.sat.gob.mx/nuevo.html. If a homeowner sells his house before he has resided in it for 5 years, he will be responsible to paying the capital gains tax for an amount that exceeds the one million five hundred thousand UDIS. Please keep in mind too that the capital gains exemption for your primary residence is applicable only once per year. Hopefully, this information has proven helpful to you and gives you a better idea of what you will have to pay in terms of capital gains taxes once you do sell your home here in Cabo.

Happy House Hunting,

Nick

Los Cabos Agent Nick Fong 312-725-3664(Office) 624-157-3170(Other) 773-346-6444(Fax) Email Nick US TAX NOTE; Remember you can also claim on your US tax return a primary residence gain exemption if you qualify of $250,000 if single or $500,000 if married, if you live in the house full time for 2 full years out of the five years prior to sale.  If it is a vacation property it is not eligible for this US tax exemption, but you can take a foreign tax credit for the taxes you pay in Mexico on the gain which should in most situations offset the IRS tax on any capital gains on sale.  Most states however do not allow a foreign tax credit on state returns and therefore you may owe capital gains in your state of residency. Write us for more information: ddnelson@gmail.com

Highest and Lowest Tax Countries in the World

Expats C should all move to Bulgaria. Though if you are US expat it may make no difference. Definitely do not retire to Spain, France or Portugal. As a US Citizen you will end up paying a lot more taxes.

From the Wall Street Journal.   http://blogs.wsj.com/expat/2015/02/09/the-worlds-best-and-worst-tax-rules-for-expats/

Expats Living and/or Working in Mexico are Exempt from Health Care Law for 2014

Many  US taxpayers are exempt from Obama Care  (ACA) for 2014.   One exemption is expats who live and work abroad. See below:

Citizens living abroad and certain noncitizens - You are:

• A U.S. citizen or resident who spent at least 330 full days outside of the U.S. during a 12-month period;
• A U.S. citizen who was a bona fide resident of a foreign country or U.S. territory;
• A resident alien who was a citizen of a foreign country with which the U.S. has an income tax treaty with a nondiscrimination clause, and you were a bona fide resident of a foreign country for the tax year; or
• Not a U.S. citizen, not a U.S. national, and not an alien lawfully present in the U.S.

To read about the other exemptions  from the US ACA health care law, and tax read the following link  http://www.irs.gov/Affordable-Care-Act/Individuals-and-Families/ACA-Individual-Shared-Responsibility-Provision-Exemptions

We are ready to help you with these complex rules. www.TaxMeLess.com   We offer a mini consultation to give you answers to all of your expat and international tax questions. We also offer a service to review self prepared expat returns or foreign tax forms which is much less costly than having us prepare the returns.  Email. ddnelson@gmail.com 

Deducting Mexican Hurricane Losses on Your US and Mexican Tax Returns

NOTHING GOOD ABOUT THE ODILE HURRICANE?  WELL THERE ARE AT LEAST SOME MEXICAN AND US TAX BENEFITS

By Don D. Nelson, US Attorney & CPA  and  Santiago Solorzano, Mexican International Tax Attorney

If you have had to spend a lot  of money after Odile to repair and fix up your personal or business real estate and other property in Baja Sur,  there are both US and Mexican tax benefits that might partially relieve the   pain with tax savings and other benefits.  A brief summary of those rules are provided here:

US Income Tax Deductions May Be Available:

If you are a US Citizen, on your 2014 tax return you may be able to get a deduction for the costs of repairs and replacements of the damages you incurred arising from  Odile. These are available if the damage was to your vacation home, permanent residence, rental, or business. The rules are different for personal use property versus business use property

Personal Losses on real estate, furniture, and other property on your US return

Using form 4864 attached to your 2014 form 1040 you can deducted the lesser of the reduction in fair market value to you hurricane ravaged property or its adjusted basis (cost minus any depreciation).  The reduction in fair market value is best determined by a professional  appraisal of the property’s value before and after the hurricane.  The IRS will  often, though not always, allow the reduction in fair market value to be determined by the cost of repairs and replacements to bring your property up to the same condition it was before the disaster.  You will need written receipts to prove these repair and replacement costs.

To arrive at the  final deductible personal casualty loss which is  deductible on your tax return you must deduct $100 from the cost of repairs and also deduct 10% of your adjusted gross income for 2014 (that is the bottom line of page 1 of your form 1040).  You must also reduce the tax  loss by any reimbursement received from your insurance company.  

Business Casualty Losses on Your US tax return

This  would include damages to  real and personal property used in your sole proprietorship business, or rental property in Mexico.  If you business is operated through a Mexican corporation this rule does not apply unless you have for US tax purposes elected with the US IRS  to treat it as a disregarded entity on your US tax return.  These also apply to rental properties held in Fideicomisos also.

Again, you can deduct the lesser the reduction in fair market value of the business property or your adjusted basis in the real or personal property (cost minus depreciation taken for tax. This purposes).  The final deduction is arrived at by reducing the total of this figue by $100 plus any amount you have received as insurance reimbursement for the damage.

If your insurance reimbursement exceeds the amount of loss, you must report the excess amount received as a capital gain on your tax return.  For both both business and personal casualty losses no deduction is allowed for any amounts used to make improvements to the property to a better condition than it was in prior the hurricane.

You must use take the casualty deduction on Schedule A and itemized your deductions to write of your losses  as determined from the formulas above.

You can additional information and instruction in IRS publication 547 which can be downloaded at www.irs.gov.

Mexican Tax Advantages and Tax Return Deductions

Within days after Hurricane "Odile" hit Baja California Sur, a number of tax incentives were published, both at the Mexican Federal and State level. At the Federal level, the most important were the deferral of the monthly income tax advance payments and withholding taxes on wages, the immediate deduction of certain investments -in force until 31st March, 2015- and the establishment of a streamlined procedure for Value Added Tax refund.

At the State level, exemptions of the Lodging Tax -August through to December, 2014- and the unpaid Tax on the Ownership or use of Vehicles were published, along with a deferral in the payment of the payroll tax.

As regards the writing off  of losses derived from hurricane "Odile", companies and individuals taxed under the "Entrepreneurial Activities" regime are allowed the deduction of the undepreciated portion of the lost assets, provided  the original investment fully complied with the Mexican tax laws and regulations at the time it was carried out. It should be noted, however, that all amounts recovered by the taxpayer as a result of insurance payments, should be included as taxable income in the tax year they are received"

Both the US and Mexican tax rules are complex. Therefore, to achieve the maximum tax benefits available a consult a  tax expert should.

__________________________________

Don D. Nelson, Attorney, CPA is a US Tax Attorney who has been preparing returns and assisting with US tax planning for Americans living in Baja Sur for over 23 years.  His website is at www.TaxMeLess.com.  His email address for questions is ddnelson@gmail.com.  US phone 949-480-1235  and Mexican Phone in Los Cabos 624-131-5228

Santiago Solorzano.International Tax Attorney, Master's Degree in Taxation, LL.M. In International Taxation (Vienna),  Ph. D. Candidate (Pompeu Fabr La University, Barcelona), Tax Partner at Lexadvisors.  Email: Santiago@lexadvisors.com.mx , Ph. 624 142 5453     www.lexadvisors.com.mx

TAXATION OF AMERICANS (GRINGOS) UNDER MEXICAN TAX SYSTEM

Review and download this excellent PWC book on taxation of nonresidents in Mexico.  HERE  If you need help filing or planning for your US income Taxes while living, working or operating your business in Mexico contact us at www.TaxMeLess.com or email ddnelson@gmail.com