Expat Tax USA, US Federal Tax Liability

theyucatantimes.com

When moving overseas, one of the biggest questions many have concerns Expat Tax. Unfortunately, America is one of a handful of countries that vigorously pursues taxes worldwide – so don’t expect to avoid a U.S. tax debt by moving overseas. As a matter of fact, you’re not even allowed to give up your U.S. citizenship to eliminate a tax obligation.

Be aware that America has tax treaties with over 42 countries where the IRS and the foreign tax agencies exchange tax data on their residents. Many Americans think because they’re earning money in another country – and paying that country’s taxes – they have no liability when it comes to their home country and that they are not required to pay expat tax USA. That’s totally not the case. You still should file a return with the U.S. every year, whether you have income or not. You are not legally required to do so if you don’t owe U.S. taxes, but it’s an important preventative measure as there is a Statute of Limitations on tax disputes. If there is a dispute over back taxes, you start running out the clock on the Statute of Limitations if you file. If you don’t, the IRS can conduct a personal audit at any time in the future and you’ll be liable if they decide against you.

The IRS provides a tax guide for citizens living abroad, this can be found here. There are also some basic facts you need to know about taxation in 2012.

---

Expat Tax USA: Exclusions

Earnings thresholds

The latest threshold for tax-free earnings for US citizens is $95,100 of foreign earned income for the 2011/2012 tax year. The key words here are earned income. Rental income, dividends, interest, capital gains etc. are not classified as earned income and will be subject to taxation. This exclusion is only applicable if you file your tax return.

Housing limits

In addition to earnings exclusions, some expatriates may be eligible for tax breaks based upon their housing costs. It is possible for US citizens to exclude a portion of the money they spend on rental or property costs. The foreign housing exclusion allows expats to offset some of their living costs against their tax payment. In order to be eligible for this you need to demonstrate that you are a bone fide resident in your host country. This means proving that you were resident in the same foreign country the entire year and that you were physically absent from the US for 330 days of any 365-day period.

The foreign housing exclusion is calculated by deducting the “base amount” from your qualified foreign housing expenses. The base amount is 16% of the maximum foreign earned income exclusion amount, which is $15,216 for 2011/2012. There is also a limitation on the maximum amount of qualified housing expenses. This limit for most cities is 30% of the foreign earned income exclusion ($28,530 for 2011/2012). Please note that there are numerous exceptions (cities with higher limits). These exceptions can found in IRS Notice 2011-8.

---

Claiming Exclusions

You need to claim these exclusions on your Form 1040 for that year – they are not automatic – and the exclusions only apply to earned income, not rental income, interest or dividends or any income that’s not a result of your work efforts. You will need to fill out and attach IRS Form 2555 (which you can access here) to your 1040 to take advantage of these exclusions – the instructions at http://www.irs.gov/instructions/i2555/index.html are very helpful in this regard. The form will also help you to determine what you do and do not qualify for in terms of being eligible for the exclusions. Year-to-year, Form 2555 will also provide what the latest caps on what those exclusions are.

Calculating your Tax Payments

Any income that is over and above the exclusion amount, after housing allowances have been applied, will be taxed. The tax rates and breaks for 2011/2012 are as follows:

Tax Rate	Married Couple Filing Jointly	Single Filer
10%	Not exceeding $17,400	Not exceeding $8,700
15%	$17,400 – $70,700	$8,700 – $35,350
25%	$70,700 – $142,700	$35,350 – $85650
28%	$142,700 – $217,450	$85,650 – $178,650
33%	$217,450 – $388,350	$178,650 – $388,350
35%	Over $388,350	Over $388,350

---

Self-Employment Tax

Another important aspect to be aware of when it comes to Federal taxes is the U.S Self-Employment Tax. If you’re an employee of a foreign company (which could, in fact, be your own foreign corporation) and have payroll taxes from that country taken out of your pay, you don’t have to also pay social security taxes to the U.S. If you are self-employed, however, acting as an independent contractor, then you must file a Schedule C with your U.S. Tax return and pay the appropriate U.S. payroll taxes on your net earnings. The self-employment tax rate is 15.3% and the foreign income exclusion mentioned before does not reduce this liability.

If you do have your own foreign corporation, or have more than a 10% interest in one, you must file a special form, Form 5471, reporting that ownership stake. If that foreign corporation is making profits, you may owe taxes on its earnings. Find out more about the form at http://www.irs.gov/pub/irs-pdf/i5471.pdf. Basically foreign income from any source must be reported to the IRS, including trusts, capital gains, royalties, etc.

If you are still living abroad as of April 15th of any year, the IRS grants you an automatic extension until June 15 to file your return for the previous calendar year. You can, as you could in America, file more extensions to push your filing date forward all the way to October 15th – just know that, just like if you were still living in America, you are still liable to interest and penalties if you haven’t paid all your estimated taxes by the original April 15th deadline. These extensions are completely necessary if the country you’re living in has a different financial year. New Zealand, for example, closes out its financial year on April 30th instead of December 31st, which means you won’t have your final tax information until after the initial U.S. filing deadline of April 15th!

Facts to know about Taxation when renting your condos, houses or villas in Mexico

theyucatantimes.com

“Paradise”…..a land where life is worry-free and simple. We all seek a place where all responsibilities are left behind, where having-to is forgotten and replaced with not-having to.

Many foreigners found this “Paradise” in the beautiful country of Mexico where they find pleasant surroundings, affordable living and a wonderful lifestyle!

Several years ago the Mexican Federal Government made it possible for foreigners, non-Mexicans, to acquire the “rights of ownership” for properties in the “forbidden zone” opening the door to the coastal regions where many a foreigner has purchased his “Own piece of Paradise”.

Many of these “property owners” partially subsidize their “Paradise” by renting their property to visitors in tourist areas who desire a vacation rental over the traditional hotel experience. The rental income helps offset the cost or “ownership” and provides a great incentive for having the property while also using it personally. All seemed well with this arrangement until a recent issue on rental income tax requirements began to surface.  While the Mexican Federal Government welcomes foreigners to purchase the “rights of ownership” on properties in Mexico, it also expects the “owners” to abide by the Mexican laws governing these “rights”. The pressure is on to get these “owners” legal and paying taxes as the law requires.

The current situation in Mexico is that many foreign “owners” are not complying with the laws either due to not knowing about them, getting bad advice about them or choosing to ignore them altogether. Regardless of the reason, lack of compliance is risky at best.

Many “owners” who rent their properties personally say they claim the income in their “home” country because that is where they receive the money for the rent. Others claim they are not obligated to pay taxes in Mexico because the property is a second or third residence and the income is under 51% of their total income which means they do not need to declare it in Mexico. Many have been making good money on rentals and keeping the bulk of it after expenses and are used to the huge return on investment. Not being legal and paying taxes is a mistake that “owners” do not want to think about or accept.

The law in Mexico is simple; any income from a rental property located in Mexico is taxable in Mexico….period!

The international accounting firm, Deloitte, recently gave a seminar to AMPI agents on the subject of renting Mexican properties and the reporting of income. For years, some owners of homes and condos in Mexico, both foreigner and national alike, have not reported their rental income. The law has become more formal over the years and the procedures the country has now to seek and find those not reporting income, has become more strict and encompassing.

Pedregal Escapes Manager, Kathinka Roesiger in Cabo San Lucas, Baja Sur says, “There are some very serious facts to know about taxation when renting your condos, houses or villas in Mexico and she has provided a few alternatives for those foreigners who wish to do so legally.

It is important to know that in accordance with Mexican law, at the moment of acquiring property and the rights to use and enjoy it, if via fideicomiso or another title, (regulated by the Secretaria de Relaciones Exteriores, SRE) you will be considered Mexican in every respect concerning the fideicomiso. In case of any failures to comply with Mexican laws, you may lose your rights as the holder of a fideicomiso and the related property, to the Mexican Government as beneficiary (so it is ruled under the Second Title of the Foreign Investment Law and Regulations). The SRE gives permission to foreigners to be holders of a fideicomiso this allows foreigners to acquire property in any zone. This brings with it the obligation to comply with all laws concerning the property as the object of the fideicomiso.

So what law governs taxes on rental income?

 LEY DEL IMPUESTO SOBRE LA RENTA

CÁMARA DE DIPUTADOS DEL H. CONGRESO DE LA UNIÓN

Secretaría General

Secretaría de Servicios Parlamentarios

Centro de Documentación, Información y Análisis

Última Reforma DOF 27-04-2010 1

LEY DEL IMPUESTO SOBRE LA RENTA

Nueva Ley publicada en el Diario Oficial de la Federación el 1º de enero de 2002

TEXTO VIGENTE

Última reforma publicada DOF 27-04-2010

What does the law say about rental income?

RENTAL AND TAX OBLIGATIONS – If you rent the property you have purchased in Mexico you do have tax obligations in Mexico. Many people believe that if they rent rooms in Mexico but receive the money in the US or Canada that they do not have any tax obligations in Mexico. This is not true. If you rent a property that is located in Mexico, the income generated by this rental is taxable in Mexico.

The Mexican tax authority is getting tougher each year and recently has been reviewing the internet (web pages) to determine what properties are being rented. If you rent your property and do not pay taxes you are running the risk of having the tax authority put a lien on your property or worse.

A lot of our clients tell us “well if the tax authority comes to the house I will just tell them I have not rented my property to anyone”. The bad news is that if you show no rental income or very little, the tax authority will use
its “discretional” powers to determine that you are not properly reporting income. They will use as a market indicator the occupancy of the hotels in your area (some times as high as 80%) and multiple this times your rate per night. Yes we have seen cases where the tax authority has determined huge fines and penalties based on “perceived” rental income using estimated rates of occupancy.  If you rent property, contact a certified public accountant, get registered and start filing and paying taxes. It is not worth losing having your property encumbered for a tax debt and having to pay an attorney to defend you.

David Connell has been living and working in Mexico for over 16 years. He is a licensed Mexican attorney and the managing partner of the firm Connell & Associates with offices in Mexico City, Ixtapa/Zihuatanejo and Puerto Vallarta. Mr. Connell sits on the board of several organizations and corporations including non-profit and charitable organization, real estate and development companies, Home Owner Associations, hotel, time-share and fractional companies.

An excerpt from Harriet Cochran Murray for Cochran Real Estate offers:

What property applies to the current law? 

All properties which are rented and generate an income for their owners are income properties for the length of time they are rented.  When the owners are occupying them personally, and not charging their guests, it is not rented.

Does it matter if the money goes directly to a foreign country?

No, rental income on a Mexican property requires taxes paid, regardless of where the money is sent.  The income generator is the property itself and where it is located is the jurisdiction of where the first tax is due and payable.

What tax is due?

 IVA tax is due, which is like a sales tax.  It is 15% in the Bay of Banderas, and some border states charge 10% IVA. So the IVA tax is due on the gross amount of the rent charged for the rental term.  In addition, income tax is owed. US citizens may elect to pay 25% of the gross or 28% of the net.  Expenses can be deductible with the correct receipt or factura.  Canadian citizens pay 25% of the gross.  With proof of the purchase with a proper invoice, the net basis can be used.

What is deductible against income?

It is wise to get a list from your Mexican accountant, but basically expenses which are part of the normal cost to do business are in the deductible category: utilities, repairs, cleaning supplies, staff salaries,  management charges, property taxes and trust payments and replacement of equipment.

Does it matter what kind of receipt I receive as long as the type of expense is allowable?

Absolutely it matters!  An acceptable receipt has 10 characteristics to it, including a permit to be printed, an expiration date, and a stamp of the tax ID of the property or tax payer.  The term used most often is “factura”.  Get to understand what makes a factura different from a credit card receipt, etc.

If I rent my own home out personally and don’t use an agent or a rental company, aren’t I exempt from paying taxes?

Absolutely not! You still owe IVA and tax on adjustable income after expenses.  In fact, the expense of the agent commission or the management company is a deduction you will want to include in your expenses.

What about developers who manage their Home Owners Association or rental pools for their owners within their development?

Compliance of the tax laws is an important factor and applies to these developers, as well.

How do I pay taxes?  Many American or Canadian accountants don’t know how to do this.

You must register with Hacienda or Mexican IRS after you have notified Immigration that your home is earning income.  Immigration will give you permission to rent and will issue you a permit.  You will need then to go to Hacienda and make application to be within their tax structure and receive an RFC or tax ID number.

What do I do then? 

You will need to use a Mexican accountant or an accountant qualified to file your returns and pay your taxes or learn to do this yourself.

What if I decide not to get involved with a tax number and payment of these taxes?

If Hacienda finds out your situation and determines you are renting the property illegally, you can be fined and charged for unreported income back 5 years at a rental rate established by the government tax authority.

How would Hacienda find out? 

The same way we know IRS operates in the US. If you are advertising in any printed material or on the internet, you are vulnerable.  If someone knocks on your door and asks who the people are who are occupying the property, they can determine these are renters.

What does the recent law on bank accounts in Mexico mean exactly?

If you have an account in your name in a bank (and soon to be investment houses), you have to prove if you asked,  the income in that account has already paid tax from the country where it was earned.  If your bank account has money from your foreign income after taxes, you will have to prove it with acceptable tax returns and a “trail” of the money flow.  The burden of proof is on you.

Do I have to report and pay additional taxes in my home country on my Mexican income?

The US has a treaty with Mexico whereby the taxes paid in Mexico can be applied as a credit toward taxes due in the US. You must get your American accountant to work with you on this. Canadians don’t have the same treaty with Mexico, so it is wise to check this out while you are doing your fiscal planning.

Why is all of this tax important?

It is important for many reasons, but you already know what they are.  Modern governments raise money to run the country by taxing income.  You have a responsibility to the country where you use the goods and
services and benefits of income derived from the amenities of your property and location.  You are also receiving a benefit of the net income to pay your operating expenses of your property and keep it in good repair. You also may be receiving an economic return on your investment. It is really a win-win situation. You are a partner with the country where you receive these benefits.

How is the tax rate on rental income calculated?

ON RENTAL INCOME:

There are two ways to calculate tax on rental income:

1. The blind deduction of 35% of total income, without deductions with tax of 35% paid on the remaining amount;

2. A 30% tax on income, less allowable deductions which include property tax, maintenance, interest on loans for construction expenses, insurance, salaries of employees and commissions paid to rental agents and property managers.

3. IVA tax is charged on lodgings, hotel rooms and furnished homes which are rented. As of January 1, 2010, this tax has been increased from 15% to 16% in the interior of the country and from 10% to 11% in the border zones.

Hacienda is paying more attention to Internet advertising and is beginning to inquire into the income of those who are renting their homes. It makes sense to become legal since penalties for non-compliance can be considerable. Reprinted from an article by Linda Neil – settlement-co.com

January 17, 2010 entitled,” Tax Obligations for Foreigners in Mexico – Death and Taxes… Both are Inevitable.”

Rental income generated in Mexico is taxed at regular income tax rates, after deducting actual expenses or a blind deduction of 35%, whichever is greater. This provision applies to residents. Non-residents pay a flat 25% on the gross income. Both residents and non-residents may be required to charge valued added taxes and may also need to charge a 2% hotel tax, depending on the circumstances. While it has been relatively easy to avoid taxes on Mexican rental income, some jurisdictions, for example in San Miguel de Allende, are cracking down on those persons who are not paying income taxes on rental income.

From an article by Raul Rodríguez-Walters, CFP ® is the founding partner of Mexico Advisor, the only company in Mexico offering financial management, legal, tax and title services under one roof, to English-speaking foreigners wanting to live, retire or set up a small business in Mexico.

What are the potential consequences of not paying taxes on rental income in Mexico?

What are the consequences for those who evade the fiscal obligations?

A) Anyone who generates income MUST declare to SAT and if one decides not to he faces FINES AND JAIL as per the law.

B) In the case where this is a foreigner, the DEPARTMENT OF IMMIGRATION will apply sanctions up to expulsion from the country.

C) The Secretary of Economy (Secretaria de Economia) will also apply fines.

D) If an FTD contract (Contrato de Fideicomiso Translativo de Dominio)  is the document providing Rights on the property the person could lose said Rights because of the fraud and non-respect of the obligations one has in said contract.

E) The property can be seized and put on the block for sale.

Lic. J.E. Beaulne, LL.B.

Abogado / Avocat / Attorney at Law,
Cedula profesional # 0086,
Miembro del Colegio de Abogados de B.C.S.
Member of the Lawyer’s College of B.C.S.
Plaza Cerralvo, Suite 6
Alvaro Obregon #1665
La Paz, B.C.S., Mexico C.P. 23000

What are the options to legally comply with the law on rental income in Mexico?

Various options and alternatives of commercial and fiscal strategies exist to stay on top of tax regulations. For example, one can create a Mexican corporation as a vehicle for such tax payments. Needless to say, this alternative brings with it an additional cost of hiring approved accountants and lawyers and other obligations such as quarterly and yearly fiscal reports.

Another alternative could be to comply with fiscal obligations as the holder of the fideicomiso as a physical person or foreigner. However in this case, it would be necessary to register the fideicomiso at the
Mexican Tax Office, Secetaria de Hacienda y Credito Publico. The third and probably easiest alternative would be to hire a company specialized in the administration of rentals, which would then take
care of all fiscal obligations for the holder of the fideicomiso, who wants to rent his property.

Of course the reliability and seriousness of this company is of upmost importance, as they will be in charge of the complete payment of all taxes and will be obliged to produce the necessary documents to prove the correct payment of such for the fideicomiso.

In addition to that, a treaty to avoid double taxation exists between Mexico and the United States of America, which in its article 8 establishes that the taxation of rental profits will be treated as if the foreigner was a Mexican. However, if this tax is not paid, this will be treated as non-fulfillment of fiscal regulations and is thus as a fiscal evasion in both countries.

With all that being said, it may not be what foreign property “owners” in Mexico want to hear but I am only the messenger and please do not shoot the messenger. It makes sense that taking the risk of facing a huge fine or
possibly losing your property over failure to pay taxes is not a safe gamble.

There are ways to comply with the law, eliminate the risks and minimize the amount of taxes you will pay allowing you to keep more of your rental income while enjoying that worry-free and simple life in “Paradise” we
talked about in the beginning. So contact us to get the facts and ……get legal!

US Expat Living in Mexico? Expatriate Tax Preparation: Information You Can’t Miss!

Ready to Rent? Know what you can afford (and stick to it)

trulia.com

katiemorell

July 29th, 2014

Not sure how much you should spend on rent? Most financial analysts will tell you that rent and utilities should be no more than 30% – 40% of a household’s income. Depending on how much money you make, this could narrow the geographical market for your rental possibilities quite a bit.

Last month, Trulia’s Rent Monitors showed that rent increases outpaced wage increases in all of the 25 largest metros, including Miami, Oakland, San Francisco, San Diego, and Denver. In places like Chicago, rent percentage of income rose to 36%, which is a 7.3% increase in rent prices, year-over-year. That can make affordability pretty tight!

Calculate your costs before signing

No matter how incredible an apartment may seem, it is always important to take the time to evaluate whether or not your bank account will allow you to sign on the dotted line. This seems pretty obvious, but when you’re out on the hunt, it’s easy to lose sight of what you can comfortably spend. Don’t worry—we’ve got your back. Each Trulia rental listing includes an affordability calculator that asks four questions to help determine if you can afford it:

– Your monthly income (less tax)

– Your monthly debt payments (cars, loans)

– Your monthly expenses (groceries, entertainment, etc.)

– Your payment type or tolerance (conservative, moderate or high)

Trulia uses that info to give you an estimate of how much you can afford, telling you whether or not that place is in your budget.

How to make ends meet in an expensive market

While trying to make ends meet in these tough markets, it is important to remember that all is not lost when it comes to renting. There are many ways to save money, even if you live in an expensive market. Here are a few:

– Consider splitting your rental payments with roommates. These days, more and more people are opting for roommate situations to cut down on expenses, even if they are living with their spouses. Extra tip: split the grocery bills and divvy up cooking responsibilities for even more cost savings.

– Try negotiating with your landlord before you sign your lease. Depending on your location (this could be difficult in places like New York City and San Francisco), the landlord may be up for making a deal.

– Forget living in a city’s center and opt for a nearby suburb instead. You will most likely save quite a bit per month, even if you are forced to commute.

– Watch your utilities. Turn off lights when you leave a room, open a window instead of using air conditioning and get a few extra blankets for the winter.

Happy renting!

Funding retirement with rental income

By Bankrate.com

If you're willing to take the plunge, rental properties offer a rare opportunity to generate extra cash in post-work life. Indeed, a well-located unit in a middle-class neighborhood can produce an extra $200 to $1,000 per month after expenses.

"Real estate can be a wonderful asset to have in retirement, because when you have tenants, you have money coming in every month and, if you don't have pensions, that's important," says Barbara Pietrowski, a Certified Financial Planner in Roanoke, Va., who specializes in rental real estate.

Pros and cons of rental properties

Pros	Cons
Generates income each month Tax advantages  (e.g., depreciation) Increasing rents over time Ability to fix mortgage costs	Expenses and upkeep Deadbeat tenants Risk of empty units Illiquid asset

According to author and landlord Andrew McLean, you may not need to produce a profit right away to make the purchase of an income-producing property worthwhile, especially if you are secure financially and have the right time horizon to retirement.

"Rents are always going to go up, the value of your property is almost always going to go up and most of your costs are going to stay the same, particularly if you assume a fixed mortgage rate," says McLean, who has written the books "Investing in Real Estate" and "Making Money in Foreclosures."

"Eventually, even if you're only making a little in the beginning, you will watch your income climb over the years."

McLean, who owns three rental properties, spent $18,000 two years ago converting a workshop behind his house into a rental house.

It generates $1,000 in income each month, which pays the note on his entire property.

"It's an ideal way to supplement my income," he says.

Another big plus of income-producing properties is that the Internal Revenue Service lets you depreciate the building portion of your property (minus the land) over 27.5 years, which means much of your cash flow will be tax-deferred, Pietrowski says.

"You'll have to recapture that depreciation when you sell, but if you never sell it and you own the property when you die, all that depreciation goes away," she says. "Your heirs don't have to pay it."

The downside

 

Rental properties, however, also come with risks.

For starters, they're expensive.

Banks typically require a larger down payment and charge higher interest rates for rental property than they do for owner-occupied homes.

Real estate in general is also an illiquid asset.

Should you be forced to suddenly sell, you may find yourself in the midst of a down market (as is currently the case across most of the country) and unable to unload your home for a reasonable price -- if at all.

At the same time, you may not find renters when you need them, which would force you to cover the mortgage yourself.

Walter Molony, spokesman for the National Association of Realtors, notes investors in income-producing property should keep at least six months worth of reserves on hand in the event they fail to find a renter.

The other downside of rental property is that it turns you into a landlord, complete with deadbeat tenants and 3 a.m. calls to fix the broken boiler.

Not everyone is up to the task.

You can pay a property management company to handle the dirty work for you, but you'll have to pay them between 7 percent and 10 percent (higher in some resort locations) of your monthly rent for their trouble.

What to look for

 

If you're looking to purchase a rental property, McLean says you should focus on single-family homes in a good school district, since those are the two most important criteria for future tenants.

Also, buy a property large enough to accommodate future additions or renovations, he says.

"Get the largest piece of land you can for future development," he says.

Average investors should focus on properties that generate positive cash flow of at least 6 percent (above costs) and should be prepared to buy and hold, especially in today's spotty market, according to Pietrowski.

"You have to be in it for the long haul," she says. "One thing you don't want to do in a market like this is overextend yourself. Those who do eventually get a bad tenant and end up losing their house. Those who don't can wait it out."

Perhaps the most important point is to buy a place close to home. That way, you can keep tabs on your investment, even if you choose to use a property management company.

"You run into problems if you go too far away, particularly out of state," McLean says. "I've heard of cases where an unscrupulous management company told the owner that the property was vacant when it wasn't, and kept the monthly rent for themselves."

However, in some cases, taking the risk of buying and renting in another town may pay off. For example, if you're 10 to 15 years away from retirement and you know where you'd like to live, it's potentially wise to purchase a rental property in your future town, Pietrowski says.

"That is a very viable strategy," she says. "Buy a house now, get it mostly paid for before you retire using income from the renter and when you sell your current house and move, pay off the rest of the mortgage."

Elements of a good buy

• Single-family home
• Good school district
• Enough land for future renovations
• Close to landlord's main home
• Generates positive cash flow of at least 6 percent (above costs)

Do your homework

 

Before you buy anything, hire an inspector to rule out any big-ticket potential repairs, like problems with the foundation, roof or structure of the home.

Also, do some research to determine expected monthly costs, including insurance, taxes, mortgage and maintenance fees.

Local real estate agents (and the newspaper classifieds) can tell you how much comparable rental homes command in the area, how long properties are staying vacant between renters and how quickly similar properties are appreciating -- in case you need to sell.

Always consult a tax adviser for any tax implications rental property may have.