It is tax time for American expats in Mexico. April is often the cruelest month because U.S. taxes are due, no matter where you live in the world. The Internal Revenue Service (IRS) casts a wide net beyond the shores of America to ensure that everyone pays their fair share.
We receive questions throughout the year from American expats in Mexico about their tax obligations and other tax-related queries, so we compiled a list and searched for someone who could provide answers.
We contacted Taxes for Expats, a top-rated New York City-based firm that specializes in working with American expats. Ines Zemelman, Founder of Taxes for Expats, provided the company’s responses.
We asked Zemelman a series of tax-related and personal finance questions that expats in Mexico want to know.
Question: If expats maintain a U.S. bank account using a U.S. address, does the U.S. government consider them residents of that state for tax purposes?
Zemelman: In general, if you do not live in the state and have no income in that state, you likely do not have to file. However, some states are more rigorous than others and require you to sever ties “to the satisfaction of the commissioner” of the state. We provide more details in this article.
Question: If expats in Mexico use a mail forwarding service with a U.S. address, will the U.S. government consider them residents of that state for tax purposes?
Zemelman: Yes and most are located in tax-free states. An additional benefit in having a mail forwarding service is the ability to open or maintain a U.S. financial account. You are not, however, required to have a U.S. address on your tax return. You can use your address in Mexico.
Question: If an entrepreneur is a sole proprietor and has a worldwide online business with some revenue from Mexico, must the entrepreneur pay taxes on the income from Mexico?
Zemelman: The entrepreneur will have to report his/her worldwide income to the IRS. If the entrepreneur is incorporated, the recent U.S. tax reform bill will bring about big changes for those with corporations in Mexico.
Question: Should expats in Mexico maintain accounts in both U.S. and Mexico banks?
Zemelman: That is a personal choice, but expats should be aware of the Foreign Bank Account Report (FBAR), or FinCEN 114 filing requirements. If they have more than US$10,000 across all of their non-U.S. financial accounts, there are additional reporting requirements.
Question: Do expats in Mexico who own businesses need to make quarterly payments to the IRS?
Zemelman: If you owed more than US$1,000 in tax, the IRS expects you to make estimated payments for the next year. Failure to do so may lead to a “failure to pay estimated payment” penalty. If you did not owe any tax last year, you do not need to make estimated payments before April 17, 2018. If you owed tax, your tax preparer should have prepared “estimated payments” vouchers for you. By default, these should be 110 percent of your prior year tax liability.
Question: Does the Foreign Account Tax Compliance Act (FATCA) impact all expats?
Zemelman: Yes it does. By this point most expats are aware of both FATCA and FBAR reporting requirements. The biggest thing to be aware of is the impact of the new U.S. tax reforms on those who have foreign corporations abroad, as I mentioned earlier.
(For more information on FATCA, read our article, “FATCA Impacts Expats in Mexico.”)
Question: What is the best way to minimize taxes for expats living in Mexico?
Zemelman: To minimize U.S. taxes, follow the requirements for the Foreign Earned Income Exclusion. If you meet one of two tests, you will be able to exclude up to US$104,100 of wages or self-employment income from your U.S. taxable income. If your earnings are significantly higher, then foreign tax credit (reduction of U.S. income by the amount of tax paid in Mexico) would be a better option to take.
Question: What are the top three tax questions you receive from expats?
Zemelman: The number one question is, “Do I have to file?” The answer, of course, is yes, if you meet the minimum filing requirements. The second most asked question is, “Can I visit the U.S. and still exclude my foreign income?” Yes, if you meet either the Bona Fide Residence Test, or the Physical Presence Test.
Finally, we always get these two questions: “Can I retire in Mexico and receive Social Security payments?” and, “Will I have to file a tax return as a retiree?” Yes, you can retire in Mexico and receive Social Security payments. In fact, Social Security will deposit funds in your Mexican bank account, if you have one. For more information on whether or not you will have to file, read our article, “Do I Have to File as a Retiree?”
Expats In Mexico also received questions about taxes on income received from sources in Mexico. The Servicio de Administración Tributaria (SAT), Mexico’s IRS, lists the cases in which income tax must be paid if you are a foreigner residing abroad and earning income in Mexico or have permanent establishment in the country and earn income.
Here are some of the income sources that are taxed by Mexico:
- Property leasing
- Furniture rental
- Timeshare service contracts
- Financial leasing
- Royalties, technical assistance and publicity
- Dividends, profits and remittances
- Sale of real estate
- Other income from sources of wealth in Mexico
To ensure you are receiving the best possible tax advice, consult a professional tax accountant who works with expats and has expertise in your home country’s tax law and Mexican tax law, if you receive some form of income that is taxed by the Mexican government.