U.S. Tax of Mexico Income & Reporting (IRS Mexico Tax Guide)
We represent numerous clients each year, with unreported income, accounts, assets and investments from Mexico.
Whether it is a Foreign Person who relocated to the United States with Mexican assets, or a U.S. Person investing in Mexico – we can help.
Common Questions involving Mexico and U.S. Tax/Reporting:
- Are Pension Funds Taxable in the U.S.?
- Is there a Tax Treaty with Mexico?
- Is there a FATCA Agreement with Mexico?
- Do I report interest income or dividends from Mexico?
- Do I report Rental Income from Mexico?
- Is my Mexico Company Reportable in the U.S.?
- 1 U.S. Tax of Mexico Income
- 2 U.S. Tax Treaty with Mexico
- 3 Worldwide Income
- 4 Mexico and FATCA
- 5 Foreign Account Reporting – Bank, Investment & Retirement
- 6 FBAR vs. FATCA
- 7 FBAR (Treasury Department Form FinCEN 114)
- 8 Estate Tax Treaty
- 9 Foreign Insurance – U.S. Tax
- 10 Mexico Retirement Funds
- 11 Foreign Trusts
- 12 Common Corporate Structures – De Facto
- 13 Foreign Real Estate
- 14 Profit vs. income
- 15 Did You Recently Give Up Green Card?
- 16 Are You Out of Compliance with the IRS?
- 17 Golding & Golding: About our International Tax Law Firm
U.S. Tax of Mexico Income
With the implementation of FATCA (and the signing of the FATCA Agreement by Mexico) the U.S. government is taking a deeper interest in ensuring reporting and disclosure compliance of individuals and businesses involving Mexico.
Specifically as to Mexico, the FATCA agreement was in force since 2014.
U.S. Tax Treaty with Mexico
United States and Mexico do have an income tax treaty in place. The main purpose of a tax treaty is to ensure proper tax treatment of monies earned by US citizens, Mexican citizens, ex-pats and residents of each other’s country.
It allows for tax deferred treatment and tax preferences based on various factors, such as the type of income, source of income, etc.
You can access the U.S. and Mexico dual tax treaty here.
The requirement to file U.S. tax returns (unless a person is otherwise exempted or excluded) is a requirement that comes along with being a US citizen and/or legal permanent resident. Under U.S. tax law, the United States taxes U.S. taxpayers on their worldwide income.
That means that even if you are a U.S. Expat and earn the money outside of the United States (Whether you are a resident of the U.S or not), you are required to file a U.S. tax return, report the income, and usually pay tax on the money (Unless the Foreign Tax Credit or Foreign Earned Income Exclusion applies).
Mexico and FATCA
FATCA is the Foreign Account Tax Compliance Act. It is a global law developed by the United States for the purpose of cracking down on international tax fraud in offshore tax evasion. More than 110 countries have agreed to enforce FATCA and many thousands of foreign financial institutions have agreed to report US account holders to the United States. For more information on FATCA, Click Here.
Mexico was one of the earlier countries to sign the FATCA Agreement.
As a result of the signing of this agreement, the window of opportunity to get into compliance before it is too late is closing fast. If a Foreign Financial Institution reports your information to the United States and you are audited or examined before you have an opportunity to get into compliance, penalties can be very steep…reaching upwards of 100% value of your foreign account.
Foreign Account Reporting – Bank, Investment & Retirement
There is a lot of misinformation and confusion online regarding requirements report foreign bank accounts, foreign retirement accounts, foreign investment accounts and the interplay between foreign account reporting for individuals and FATCA.
FBAR vs. FATCA
FBAR (report of foreign bank and financial account) and FATCA are two acronyms that are used synonymously, but they are different.
FBAR (Treasury Department Form FinCEN 114)
The FBAR aka FinCEN 114 is a form, which is required to be filed by any US taxpayer who has an annual aggregate total of more than $10,000 overseas. It does not matter whether the money is in one bank account or scattered over numerous bank accounts; moreover, it does not matter if your account has $10,000 in it – it is important to remember that the threshold requirement is more than $10,000 in total of all your foreign accounts.
*Whether or not a Country has entered into a FATCA agreement has no bearing on whether you as an individual or business are required to report your foreign accounts.
The following is a brief summary of FBAR Reporting, in general:
If you, your family, your business, your foreign trust, and/or PFIC (Passive Foreign Investment Company) have more than $10,000 (in annual aggregate total at any time) overseas in foreign accounts and either have ownership or signatory authority over the account, it is important that you have an understanding of what you must do to maintain FBAR (Report of Foreign Bank and Financial Accounts) compliance.
There are very strict FBAR filing guidelines and requirements in accordance with general IRS tax law, Department of Treasury (DOJ) filing initiatives, and FATCA (Foreign Account Tax Compliance Act). Filing FBARs and ensuring compliance with IRS International Tax Laws, Rules, and Regulations is extremely important for anyone, or any business that maintains:
- Foreign Bank Accounts
- Foreign Savings Accounts
- Foreign Investment Accounts
- Foreign Securities Accounts
- Foreign Mutual Funds
- Foreign Trusts
- Foreign Retirement Plans
- Foreign Business and/or Corporate Accounts
- Foreign Life Insurance Policies
- Foreign Accounts held in a CFC (Controlled Foreign Corporation); or
- Foreign Accounts held in a PFIC (Passive Foreign Investment Company)
- FATCA (IRS Form 8938)
As described above, the goal of FATCA is to reduce offshore tax fraud and evasion. Like the FBAR, whether or not a foreign country has entered into a FATCA Agreement has no bearing on whether a FATCA form 8938 has to be filed. While there are many aspects and facets to FATCA, for individual taxpayers the main issue is form 8938. To learn more about the FATCA Form 8938, please Click Here.
Unlike the FBAR that has been unwavering threshold for filing, the threshold requirements for an 8938 vary, and are based on whether a person is married or single and/or whether they reside in the United States or outside of the United States
Estate Tax Treaty
The United States and Mexico do not have an Estate Tax Treaty in place. This may significantly impact your U.S. Estate Tax liability.
You should speak with an estate planning attorney prior to executing (or amending) an estate plan, if you are a US person with assets in Mexico.
Foreign Insurance – U.S. Tax
Foreign life insurance is a source of confusion for many individuals – rightly so, since the IRS has been unclear regarding the reporting requirements. Essentially, if the foreign life insurance policy has a surrender value, then it must be reported on an FBAR and/or 8938 (if the individual otherwise meets the threshold requirements).
In addition, if the insurance policy is a hybrid policy/annuity that generates current income such as interest, bonus or dividends than that income must be reported as well. It generally does not matter if the income is not actually distributed and/or whether you paid foreign tax on the earnings already.
Mexico Retirement Funds
Retirement plans from overseas countries is another bone of contention for many individuals required to file and/or pay US tax. Why? Because there may be both FBAR and FATCA Reporting requirements if the retirement fund has an individual account number. Depending on the type of retirement, there might also be an 8621 (PFIC) reporting requirement that is beyond the scope of this article.
More than just reporting the account information, taxpayers may also have to pay current tax on earnings of the retirement fund even though none of the money has been distributed, and even though the fund is growing tax-free overseas.
In other words, even though a foreign retirement fund may obtain tax deferment status until distributed in the foreign country of origin, from the US tax perspective it may not receive that same tax-deferred treatment such as a 401(k). Therefore, the individual with a retirement account is required to pay current tax on earnings that were not distributed.
If a person is required to pay current tax on the undistributed earnings they will generally receive a tax credit against any US tax due in the future once the money is distributed.
If you are a foreign national or US person with a foreign trust that is based in Mexico, it is important to ensure you have had your state tax plan reviewed by US international tax attorney.
Depending on whether the trust is a grantor trust and if it is currently funded, there could be immediate tax consequences and liabilities to the owner/grantor of the trust and/or the beneficiaries as well. Click Here to Learn More About Foreign Trusts.
Common Corporate Structures – De Facto
The United States has very strict rules when it comes to foreign corporations. In order to circumvent the very comprehensive reporting requirements necessary to get into tax compliance for foreign corporations, the IRS has laws in place to allow “disregarding of the entity.”
On a very basic level what that means is that if you have an entity such as an LLC, you may be able to disregard the entity for tax purposes. Thus, while you still have LLC protection for your business (if for example it was sued), you do not have to go through the rigorous reporting requirements of the LLC as if it was a corporation. Rather, you can simply disregard the entity and report all of the income, taxes, deductions etc. directly on your 1040 tax return form/schedule C.
When it comes to foreign businesses, certain businesses must file in the United States as a corporation. In other words, even if it is a one-person business that may seem similar to a U.S. single member LLC (SMLLC) – which would otherwise qualify for being disregarded – the IRS will not allow certain for business structures to be disregarded.
At the current time, Mexico is listed in IRC (Internal Revenue Code) as having a De Facto Corporate Status for all “Sociedad Anonimas.”
We deal with the issue of Sociedad Anonimas often, and you can read more here.
Foreign Real Estate
If a person is a “U.S. Person” and is required to file a tax return (1040) in that they are either considered to be a US taxpayer for income tax purposes and/or meet the threshold requirements for filing, then the United States taxes individuals on their worldwide income.
As such, it does not matter if the money is earned in Country that under Mexican law the earnings may be below the threshold reporting requirements for filing and paying taxes in Mexico.
As a US person, the United States taxes individuals on their worldwide income — including foreign rental income
Profit vs. income
Another very important distinction that is common is when a taxpayer has foreign property that earns rent income, but at the end of the day once expenses and foreign taxes are factored in there is no “profit.” Just because there is no profit does not mean there is no tax reporting requirement.
Rather, a person is required to report the gross income as well as the expenses on a Schedule E. Moreover, it is important to keep in mind that under US law the deductions and exclusions a person takes for their rental property may be different than in the country in which the property is located (for better or worse) – so just because there is no profit under foreign tax law does not mean there is no profit under US tax law.
Did You Recently Give Up Green Card?
Unfortunately, that does not mean you are out of the clear just yet…
Just because you recently gave up your Green Card does not mean you are automatically exempt from filing U.S. Tax Returns. If you are a Long-term Green Card Holders may still have tax filing, reporting and liability to the U.S. Whether a person meets the definition of “Covered Expatriate” is a complex analysis that requires the assistance of an experienced International Tax Lawyer.
Are You Out of Compliance with the IRS?
If you are out of compliance with the IRS, you may consider getting into compliance by using one of the approved Voluntary Disclosure/Tax Amnesty programs.
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.