Mexico is starting to tighten the noose around tax ivasion.
MEXICAN INDIVIDUAL INCOME TAX LAWS AS APPLIED TO U.S. CITIZENS LIVING IN MEXICO
(Please consult a Mexcan Contadore, C.P.A. or tax accountant for specific advice)
By Don D. Nelson, Attorney at Law
Certified Public Accountant,
(licensed to Practice in California, USA)
Method of Reporting
Husbands and wives must report their income separately. Income from personal services must be reported entirely by the individual rendering the services. Married individuals that do not have a marriage contract, must report all other items of income in equal amounts. Unlike the U.S., there is not standard deduction. However you can take personal allowances and credits as state in a table provided by the Hacienda. Quarterly estimated taxes must be paid based on this years income apply the net taxable income percentage shown in the previous year's tax return.
Taxation of Resident Gringos
Full time resident individuals (even U.S. Citizens) are taxed on their worldwide income, but can claim a credit for taxes paid in other countries against their Mexican income tax. A person who establishes their permanent residence in Mexico for over 183 days is considered a tax resident. Taxation of income from outside of Mexico earned by a U.S. citizen permanently residing in Mexico is currently not often enforced or followed in many areas of Mexico.
Taxation of Dividends
Dividends from a Mexican corporation are not included in your personal income, but are taxed at corporate level. Interest paid to individuals by Mexican banks need not be declared on your Mexican tax return. The bank withholds the tax.
Taxation of Interest
The gain on the sale of your personal residence is exempt from tax if you lived in it and owned it for two years and have a resident visa. The gain on the sale of other investment or rental real property is calculated based on original cost less depreciation adjusted by an inflation factor. If you sell personal property that is normally not depreciated such as yachts and airplanes, the entire sales price will be considered gain without deduction for the original cost.
Taxation of Capital Gains/Losses
Capital gains are taxed using an income averaging concept. The gain is divided by the number of years the asset is held (up to a maximum of 20 years) with the resulting amount added to the other taxable income. The graduated marginal tax rates are applied to this total. An average tax rate is calculated and applied towards the balance of the capital gain
Unused capital losses on stock sales and real estate may be carried forward for three years to offset capital gains from sale of shares, or real estate, respectively. Sales of Mexican securities at a profit are not subject to tax if sold on the Mexican stock exchange. Your personal primary residence is exempt from Mexican tax if you live in it for at least 184 days or more, and it is your main residence. There are other rules concerning the exemption of your residence sale gain from Taxation which also must be followed. You should consult a Mexican accountant if you wish to take advantage of this rule.
Tax Return Personal Deductions
Resident individuals are allowed the following deductions on their personal tax return:
Medical, medical insurance, dental and hospitalization costs.
Payments for school bus transportation for dependent children.
Funeral expenses with some limits
Certain gifts to charitable or welfare institutions and promoters of art and culture.
Voluntary contributions to personal retirement accounts or mandatory employer retirement systems, within certain limits.
Home Mortgage Interest
Unincorporated Individual Business Income
Individuals with businesses can deduct related expenses. Fixed assets must be depreciated using the approved rates. The straight line method must be used with no deduction for salvage value. Subject to specific limitations, it is sometime possible to deduct the entire cost of a fixed asset, equipment, etc. in the year it is acquired. The total deduction for business expenses cannot exceed the gross receipts. No loss carry forward is allowed. Business entertainment and most business meals are not deductible.
Usually estimated tax payments must be made monthly to the Hacienda.
Rental Income
If you have rental income, instead of deducting the actual expenses incurred, you can claim a deduction of 50% of the rental income if it is used for housing and 35% for all other types of rental income. You can depreciate your rental property at 5% per year of the building cost, indexed for inflation. Value Added Tax must be paid on all rental income.
Tax Rates
The yearly tax rate runs from 3% to 34% with adjustments made regularly for inflation. Recent tax law changes have reduced the top rate to 32% in a few years. All tax rates are indexed for inflation, also.
Employee Fringe Benefits Required from Employers
The following fringe benefits must be supplied by employers to individuals who are actually employees of the employer:
Profit sharing equal to 10% of employers pre-tax earnings
Christmas bonus equal to 15 days pay
Vacation bonus equal to 25% of normal pay during the vacation period
Contribution of 7% of employee's salary to a retirement savings fund bank account
Tax Return Due Dates
Corporate tax returns are due March 31st and Individual tax returns are due April 30th for the previous calendar year.
Imputed Income On Audit by Hacienda
When individuals spend more than the income shown on their tax returns during a calendar year, the Hacienda are empowered to consider the excess of such expenses over reported income as additional taxable income. The taxpayer must prove that the excess of expenses was not taxable income within 45 days.
We you have us prepare your US Tax Return, we work closely with Mexican accountants to make certain you are paying the lowest possible US and Mexican taxes and to coordinate the two countries tax systems. All the Mexican tax law descriptions set forth here are very general and nature. We recommend you retain a Mexican accountant to assist you with your taxes in Mexico and perform tax planning in advance.
Taxes in Mexico: Individual Income Tax
Resident individuals are subject to Mexican income tax on their worldwide income, regardless of their nationality. Non-residents, including Mexican citizens who can prove residence for tax purposes in a foreign country, are taxed only on their Mexican source income.
The Federal Tax Code provides that a foreign individual will be considered a resident of Mexico for tax purposes when he has established his home in Mexico, unless he has been physically present in a foreign country for more than 183 days, consecutive or not, in one calendar year, and is able to prove residence for tax purposes in that other country.
Individuals holding immigration papers as temporary or permanent immigrants are usually considered residents, unless the foreigner enters Mexico during the last half of the calendar year, in which case he would have been outside the country for more than 183 days and should probably be taxed only on this Mexican source income during that first calendar year.
Foreigners working in Mexico under a visitor's permit should probably not be considered as residents until they have established some type of physical home in Mexico and have remained in the country for at least 183 days in a calendar year.
Employment income
Income from personal services (earned income) includes salaries, commissions and allowances of all types, including those for housing, living expenses, education, foreign-service, tax reimbursements, and amounts received as employee profit sharing.
Certain benefits may be considered as taxable income of the individual even if they are not a deductible expense for the employer.
Living expenses can be absorbed free of tax to the employee only in the case of short-term visits and if supported by receipts from third parties. A per diem rate is treated as a taxable allowance. Reimbursements of expenses of a spouse or dependants usually represent taxable income to the employee.
Business travel expenses, other than those supported by receipts from third parties and limited to maximum deductible amounts, must, in general, be added to salaries for income tax purposes.
Investment income
Residents are required to include investment income in their annual returns, except for: (a) interest from the Mexican banking system and government obligations, which is either subject to a final withholding tax of 20% on gross interest (or a portion thereof) or is exempt; (b) dividend income from Mexican corporations or investment funds; and (c) capital gains on transactions carried out through the Mexican stock exchange, which are exempt.
Capital gains
Gains on the disposition of real property or shares of capital stock receive favorable income tax treatment in that historical costs may be increased by factors (based on the number of years the asset had been held) to adjust them for inflation, and in the case of shares of capital stock also by amounts intended to partially cover net retained earnings, whether capitalized or not. The resulting net gain for tax purposes is taxed under a formula favorable to the taxpayer, again depending on the number of years the asset was held before sale. Gains on sales of securities through the Mexican stock exchange, when the securities are classified as available to the general public, are exempt from tax.
Gains from the sale of the taxpayer's principal residence are exempt, provided the taxpayer occupied it as such during the two years before the sale.
Residents of Mexico are taxed on their worldwide capital gains, whereas non-residents are only subject to Mexican tax on gains arising from sales of real property located in Mexico or non-exempt sales of shares of Mexican companies, regardless of where the sale takes place.
Business Deductions
Employees are allowed no business-related deductions, although reimbursements of properly supported moving and travel expenses that are deductible to an employer do not represent taxable income to the employee.
Non-Business Expenses
A resident is allowed to deduct un-reimbursed medical, dental or funeral expenses for himself and dependants, as well as certain charitable donations.
There are no standard deductions, except that an individual may deduct 50% of residential rental income instead of actual expenses and depreciation of the property.
Personal Allowances
Residents are also allowed to deduct an amount equal to 30 days minimum wage if they receive an annual bonus from their employer.
Tax Rates
Taxable income is taxed in accordance with a progressive table of rates from 3% to a maximum marginal rate of 35%, reproduced in Exhibit 3. It should be noted that this top marginal rate is reached very rapidly.
Tax Credits
A resident may obtain a credit to reduce his Mexican tax, payable for any foreign income tax paid on foreign source taxable income, and subject to certain limitations.
A non-refundable low-income credit (subsidy) designed to reduce the tax burden of taxpayers with lower income is granted. This credit is phased out if the taxpayer receives tax-exempt benefits from the employer. For lower levels of income, it may reduce the taxpayer's burden by up to 50% of the tax.
In addition to the low-income credit, there is a refundable credit, which is capped at NPs520.56 for salaries above four times the minimum wage. This credit substitutes the 10% of minimum wage credit applicable up to October 1.
Social Security Taxes
Contributions to the Mexican Social Security Institute are withheld from employees at the rate of 5.15% of covered salaries up to a maximum of 25 times the minimum wage in the Federal District (10 in the case of old age, death and disability insurance), resulting in a maximum employee contribution of around $1,650 dollars per annum.
Local Taxes on Income
A few Mexican states levy a relatively low rate of tax on salaries (but not on income in general), which in most cases is payable by the employer (e.g., the Federal District imposes a 2% payroll tax, payable by the employer).
Tax Returns
All resident individuals receiving income during the calendar year are required to file an annual tax return no later than April 30 of the following year in certain instances, such as individuals earning Mexican bank interest only—regardless of the amount thereof. In the case of salaries, the employer is required to compute the annual tax on behalf of the employee unless the employee notifies the employer he will file an annual return.
Payment of Tax
Any unpaid balance of tax is payable upon filling the return. The full tax on salary income and certain interest income is withheld at source.
However, in the case of salaries received by resident individuals from non-resident employers, the law requires such individuals to file monthly advance tax returns to pay an amount equal to the tax withholdings applicable to these wages. The monthly returns are due by the 17th day of the following month
MEXICAN INDIVIDUAL INCOME TAX LAWS AS APPLIED TO U.S. CITIZENS LIVING IN MEXICO
(Please consult a Mexcan Contadore, C.P.A. or tax accountant for specific advice)
By Don D. Nelson, Attorney at Law
Certified Public Accountant,
(licensed to Practice in California, USA)
Method of Reporting
Husbands and wives must report their income separately. Income from personal services must be reported entirely by the individual rendering the services. Married individuals that do not have a marriage contract, must report all other items of income in equal amounts. Unlike the U.S., there is not standard deduction. However you can take personal allowances and credits as state in a table provided by the Hacienda. Quarterly estimated taxes must be paid based on this years income apply the net taxable income percentage shown in the previous year's tax return.
Taxation of Resident Gringos
Full time resident individuals (even U.S. Citizens) are taxed on their worldwide income, but can claim a credit for taxes paid in other countries against their Mexican income tax. A person who establishes their permanent residence in Mexico for over 183 days is considered a tax resident. Taxation of income from outside of Mexico earned by a U.S. citizen permanently residing in Mexico is currently not often enforced or followed in many areas of Mexico.
Taxation of Dividends
Dividends from a Mexican corporation are not included in your personal income, but are taxed at corporate level. Interest paid to individuals by Mexican banks need not be declared on your Mexican tax return. The bank withholds the tax.
Taxation of Interest
The gain on the sale of your personal residence is exempt from tax if you lived in it and owned it for two years and have a resident visa. The gain on the sale of other investment or rental real property is calculated based on original cost less depreciation adjusted by an inflation factor. If you sell personal property that is normally not depreciated such as yachts and airplanes, the entire sales price will be considered gain without deduction for the original cost.
Taxation of Capital Gains/Losses
Capital gains are taxed using an income averaging concept. The gain is divided by the number of years the asset is held (up to a maximum of 20 years) with the resulting amount added to the other taxable income. The graduated marginal tax rates are applied to this total. An average tax rate is calculated and applied towards the balance of the capital gain
Unused capital losses on stock sales and real estate may be carried forward for three years to offset capital gains from sale of shares, or real estate, respectively. Sales of Mexican securities at a profit are not subject to tax if sold on the Mexican stock exchange. Your personal primary residence is exempt from Mexican tax if you live in it for at least 184 days or more, and it is your main residence. There are other rules concerning the exemption of your residence sale gain from Taxation which also must be followed. You should consult a Mexican accountant if you wish to take advantage of this rule.
Tax Return Personal Deductions
Resident individuals are allowed the following deductions on their personal tax return:
Medical, medical insurance, dental and hospitalization costs.
Payments for school bus transportation for dependent children.
Funeral expenses with some limits
Certain gifts to charitable or welfare institutions and promoters of art and culture.
Voluntary contributions to personal retirement accounts or mandatory employer retirement systems, within certain limits.
Home Mortgage Interest
Unincorporated Individual Business Income
Individuals with businesses can deduct related expenses. Fixed assets must be depreciated using the approved rates. The straight line method must be used with no deduction for salvage value. Subject to specific limitations, it is sometime possible to deduct the entire cost of a fixed asset, equipment, etc. in the year it is acquired. The total deduction for business expenses cannot exceed the gross receipts. No loss carry forward is allowed. Business entertainment and most business meals are not deductible.
Usually estimated tax payments must be made monthly to the Hacienda.
Rental Income
If you have rental income, instead of deducting the actual expenses incurred, you can claim a deduction of 50% of the rental income if it is used for housing and 35% for all other types of rental income. You can depreciate your rental property at 5% per year of the building cost, indexed for inflation. Value Added Tax must be paid on all rental income.
Tax Rates
The yearly tax rate runs from 3% to 34% with adjustments made regularly for inflation. Recent tax law changes have reduced the top rate to 32% in a few years. All tax rates are indexed for inflation, also.
Employee Fringe Benefits Required from Employers
The following fringe benefits must be supplied by employers to individuals who are actually employees of the employer:
Profit sharing equal to 10% of employers pre-tax earnings
Christmas bonus equal to 15 days pay
Vacation bonus equal to 25% of normal pay during the vacation period
Contribution of 7% of employee's salary to a retirement savings fund bank account
Tax Return Due Dates
Corporate tax returns are due March 31st and Individual tax returns are due April 30th for the previous calendar year.
Imputed Income On Audit by Hacienda
When individuals spend more than the income shown on their tax returns during a calendar year, the Hacienda are empowered to consider the excess of such expenses over reported income as additional taxable income. The taxpayer must prove that the excess of expenses was not taxable income within 45 days.
We you have us prepare your US Tax Return, we work closely with Mexican accountants to make certain you are paying the lowest possible US and Mexican taxes and to coordinate the two countries tax systems. All the Mexican tax law descriptions set forth here are very general and nature. We recommend you retain a Mexican accountant to assist you with your taxes in Mexico and perform tax planning in advance.
Taxes in Mexico: Individual Income Tax
Resident individuals are subject to Mexican income tax on their worldwide income, regardless of their nationality. Non-residents, including Mexican citizens who can prove residence for tax purposes in a foreign country, are taxed only on their Mexican source income.
The Federal Tax Code provides that a foreign individual will be considered a resident of Mexico for tax purposes when he has established his home in Mexico, unless he has been physically present in a foreign country for more than 183 days, consecutive or not, in one calendar year, and is able to prove residence for tax purposes in that other country.
Individuals holding immigration papers as temporary or permanent immigrants are usually considered residents, unless the foreigner enters Mexico during the last half of the calendar year, in which case he would have been outside the country for more than 183 days and should probably be taxed only on this Mexican source income during that first calendar year.
Foreigners working in Mexico under a visitor's permit should probably not be considered as residents until they have established some type of physical home in Mexico and have remained in the country for at least 183 days in a calendar year.
Employment income
Income from personal services (earned income) includes salaries, commissions and allowances of all types, including those for housing, living expenses, education, foreign-service, tax reimbursements, and amounts received as employee profit sharing.
Certain benefits may be considered as taxable income of the individual even if they are not a deductible expense for the employer.
Living expenses can be absorbed free of tax to the employee only in the case of short-term visits and if supported by receipts from third parties. A per diem rate is treated as a taxable allowance. Reimbursements of expenses of a spouse or dependants usually represent taxable income to the employee.
Business travel expenses, other than those supported by receipts from third parties and limited to maximum deductible amounts, must, in general, be added to salaries for income tax purposes.
Investment income
Residents are required to include investment income in their annual returns, except for: (a) interest from the Mexican banking system and government obligations, which is either subject to a final withholding tax of 20% on gross interest (or a portion thereof) or is exempt; (b) dividend income from Mexican corporations or investment funds; and (c) capital gains on transactions carried out through the Mexican stock exchange, which are exempt.
Capital gains
Gains on the disposition of real property or shares of capital stock receive favorable income tax treatment in that historical costs may be increased by factors (based on the number of years the asset had been held) to adjust them for inflation, and in the case of shares of capital stock also by amounts intended to partially cover net retained earnings, whether capitalized or not. The resulting net gain for tax purposes is taxed under a formula favorable to the taxpayer, again depending on the number of years the asset was held before sale. Gains on sales of securities through the Mexican stock exchange, when the securities are classified as available to the general public, are exempt from tax.
Gains from the sale of the taxpayer's principal residence are exempt, provided the taxpayer occupied it as such during the two years before the sale.
Residents of Mexico are taxed on their worldwide capital gains, whereas non-residents are only subject to Mexican tax on gains arising from sales of real property located in Mexico or non-exempt sales of shares of Mexican companies, regardless of where the sale takes place.
Business Deductions
Employees are allowed no business-related deductions, although reimbursements of properly supported moving and travel expenses that are deductible to an employer do not represent taxable income to the employee.
Non-Business Expenses
A resident is allowed to deduct un-reimbursed medical, dental or funeral expenses for himself and dependants, as well as certain charitable donations.
There are no standard deductions, except that an individual may deduct 50% of residential rental income instead of actual expenses and depreciation of the property.
Personal Allowances
Residents are also allowed to deduct an amount equal to 30 days minimum wage if they receive an annual bonus from their employer.
Tax Rates
Taxable income is taxed in accordance with a progressive table of rates from 3% to a maximum marginal rate of 35%, reproduced in Exhibit 3. It should be noted that this top marginal rate is reached very rapidly.
Tax Credits
A resident may obtain a credit to reduce his Mexican tax, payable for any foreign income tax paid on foreign source taxable income, and subject to certain limitations.
A non-refundable low-income credit (subsidy) designed to reduce the tax burden of taxpayers with lower income is granted. This credit is phased out if the taxpayer receives tax-exempt benefits from the employer. For lower levels of income, it may reduce the taxpayer's burden by up to 50% of the tax.
In addition to the low-income credit, there is a refundable credit, which is capped at NPs520.56 for salaries above four times the minimum wage. This credit substitutes the 10% of minimum wage credit applicable up to October 1.
Social Security Taxes
Contributions to the Mexican Social Security Institute are withheld from employees at the rate of 5.15% of covered salaries up to a maximum of 25 times the minimum wage in the Federal District (10 in the case of old age, death and disability insurance), resulting in a maximum employee contribution of around $1,650 dollars per annum.
Local Taxes on Income
A few Mexican states levy a relatively low rate of tax on salaries (but not on income in general), which in most cases is payable by the employer (e.g., the Federal District imposes a 2% payroll tax, payable by the employer).
Tax Returns
All resident individuals receiving income during the calendar year are required to file an annual tax return no later than April 30 of the following year in certain instances, such as individuals earning Mexican bank interest only—regardless of the amount thereof. In the case of salaries, the employer is required to compute the annual tax on behalf of the employee unless the employee notifies the employer he will file an annual return.
Payment of Tax
Any unpaid balance of tax is payable upon filling the return. The full tax on salary income and certain interest income is withheld at source.
However, in the case of salaries received by resident individuals from non-resident employers, the law requires such individuals to file monthly advance tax returns to pay an amount equal to the tax withholdings applicable to these wages. The monthly returns are due by the 17th day of the following month