By Don D. Nelson, Attorney at Law
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:
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.
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.
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:
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.