• Though most foreign assets are reportable on various specialized forms filed with your US tax
return,. If you own foreign real estate and title is in your own name (or a Fideicomiso) and do not
rent out the property, there is no reporting required on your US tax return or for that matter any other reporting due the US Government.
• Foreign mutual funds (and most foreign money market funds) require filing of another special form with your tax return. If you do not file this form and make elections to report the income each year, you are penalized with higher taxes and interest when you finally sell your foreign mutual fund. These rules were put in many years when Congress was convinced by US Mutual Fund companies that there business would be hurt unless investment in foreign mutual funds was made unfavorable for tax purposes.
• The 2015 the $100,800 US foreign earned income exclusion applies to earned income (wages or self employment) income earned abroad if you meet the physical presence test or bonafide resident test. You can see if you qualify in IRS Publication 54. It is not automatic and can only be claimed on your US tax return. The IRS can deny this exclusion if you file your return more than 18 months late. This exclusion does not apply to rental income, dividends, interest or capital gains or any income other than earned income. If you are self employed, the exclusion does not apply to US self employment tax (social security and medicare tax).
• You must report your rental net income in Mexico from your Mexican real estate on your US return and you also owe taxes on it in Mexico even if you are not a resident. In Mexico you must pay Mexican income taxes on it and also pay IVA tax. If you are renting for only a short time, you may also owe local lodging excise taxes. The Mexican income tax can be claimed as a credit directly offsetting any US income tax you owe on the rental income. The IVA and lodging taxes can be deducted on your US tax return as rental expenses.
• If you own 10% or more of a Mexican corporation you may have to file form 5471 with your US tax return if required by the rules governing that form. Failure to file that form in a timely manner may result in the IRS assessing a $10,000 US penalty for failure to file even if you owe no taxes.
• The US has a tax treaty with Mexico. It also has in the past year entered into an OECD agreement where the two countries have agreed to exchange income tax information with the other. At some point in the future what you do in Mexico will not stay in Mexico and visa versa.
• If as a US Citizen you have lived and worked in Mexico for a while and not filed your US tax return, the IRS currently has a “streamlined program” that may allow you to catch up by filing only the past 3 years US tax returns and past six year FBAR (foreign bank account reports). They will not penalize you under that program for failing to file FBAR forms or other foreign reporting forms. They have stated they may discontinue this program at any time. Now is the time to surface with the IRS and avoid potentially huge penalties.
• FBAR (foreign bank account reporting forms) must be filed each year with US Treasury if at any time during the calendar year your combined highest balances in your foreign financial accounts exceeds $10,000 US. This form must be filed on line. Foreign accounts include foreign pension plans, cash surrender value in foreign insurance, foreign broker’s accounts, and even gold if held for you in a foreign country a custodian. Failure to file this form or filing it late can result in penalties of $10,000 US or more.
Don D. Nelson is a US tax attorney who has been assisting Americans in Mexico for over 25 years with their US tax returns and tax planning. He is also a partner in Kauffman Nelson LLP, Certified Public Accountants. His website is located at www.TaxMeLess.com. He has 2 tax blogs with the lastest tax developments of interest to those in Mexico located at www.usexpatrate.blogspot.com and www.us-mexicantax.blogspot.com His email address is firstname.lastname@example.org. He can be reached at his US phone number 949-480-1235.