Tax Planning for Expats in Mexico | Taxes In Mexico

Tax Planning for Expats in Mexico  | Taxes In Mexico

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Disclaimer: The information in this video should not be considered tax, financial, investment, or any kind of professional advice. Only a professional diagnosis of your specific situation can determine which strategies are appropriate for your needs. Entrepreneur Expat can and does not provide advice unless/until engaged by you.

Transcript

0:36

Did you know that no matter where you live in the world, you still need to declare and usually pay taxes to Uncle Sam. If you are a US citizen, one of the most complicated things to sort out when living overseas is taxes. Specifically, where do I report taxes and how much do I pay to which country? In this video, we're gonna talk about international tax planning basics for US expats in Mexico. Welcome to Entrepreneur Expat. On this channel, we talk about everything to do with living overseas, generating income remotely, and building the life of your dreams abroad. If that's something you're interested in, definitely check out the free resources below this video, including our Moving to Mexico Guide, and you can also get a consultation. With our team, absolutely for free, if you qualify by going to entrepreneur expat.com/consult, and we'll put that below the video for you as well. And as always, this is not to be constituted as any sort of professional, legal, or tax advice. Always, always, always make sure that you do your own due diligence and consult with a tax professional in whatever country you're in. Like a lot of those professionals that we have in our network. And if you'd like to get more information on our international tax planning sessions with those certified professionals, as well as other white glove relocation services that we offer. And get your own plan set up. Make sure that you go to that URL, and that again is entrepreneur expat.com/consult. So first we're gonna talk a little bit about the most common questions that we get, which are how do taxes work in the US if I'm a US citizen, but I am living overseas in Mexico. How do I file my US taxes? Uh, how do I optimize my US taxes? And how does all of that work? So first and foremost, US citizens, regardless of where they are in the world, must file taxes every single year. There are a few small exceptions. Like if your income is super, super low, um, like under a few thousand dollars a year, then maybe you can get away with not doing it. Um, but there's also caveats where if you've got certain other types of income, like passive income, you still do have a filing requirement. So with very few exceptions, you've gotta file. And usually pay to the US government every single year, and we'll get into some of the different, um, exclusions and other benefits that you can reap as an expat. But it's important to note that just living outside of the US, even if you're permanently living outside of the us, uh, does not exclude you from reporting and filing on that global. Income. And unfortunately the US kind of has their reach all over the world in terms of being able to see, uh, where you bank, what kind of income you have coming in, whether that's active income or passive income. And it's one of only two countries in the world, including RIA and Africa, uh, that actually goes after, uh, their citizens for worldwide income, even when they're not even living in the country. So there's two main ways that you can, uh. Make money as an entrepreneur in the US and those ways are, you've got either a corporate structure such as an S corp, which is a little bit more tax advantageous for people making over a hundred k per year in net profit. The reason is because with this S Corp structure, you only have to pay your FICA tax or your Social security and Medicare tax, um, on the portion. That is considered your salary, like your owner's salary, and typically you can split your net profit, so to speak, right? Like what your company. Makes minus what the actual company expenses are between a reasonable salary that you pay yourself, which might be 40 or 50 or 60% of that remainder of your revenue. Uh, and then the rest of it can be attributed to dividends. And on dividends you typically do not have pay that F tax. So that's one of the highest taxes you'll pay at 15.3%. And yes, you do get some benefit from it at the end of the day, like when you do decide to take Social security, I. If it still exists when you retire? I'm not sure if it will by the time I'm ready to, to quote retire, but, uh, it's not like you get nothing for that. You do do at least get something. It goes towards social security, it goes towards Medicare. So you do have some practical benefit at the end of the day. But typically what people want to do is renew, reduce that to a reasonable amount. If you're at that level where you're making a hundred K or more, then it might be advantageous to set up a structure like that. One thing that I'll interject here as well, uh, that a lot of people ask us about is state tax. And if you're in a, a state that has state tax such as California, um, or Oregon or Arizona or many other states that do. Uh, that do levy a state income tax. You do also want to de domicile yourself, which might mean getting a mailbox in a state like Texas or Florida and essentially telling that high tax state that you're leaving, that you're no longer part of that state, and that all US based communications and things will go to somewhere in a state that is not. Uh, going to tax you on that income. So that's also very important because we've had clients that unfortunately we've had to help, you know, retroactively go and fix some of these things where they may be left to Mexico and they were even able to exclude the income tax, uh, on the federal, basically the federal income tax portion through things like the 400 income exclusion. But they were still domiciled in a state. That did levy that state tax. So you, you want to absolutely take that into consideration. So the other way of receiving your income as an entrepreneur in the US because your US or Canada, which which is similar in some regards to what we're talking about here. Um, if you're, if your base of clients is in the US or Canada, typically you'll still want to have. Some type of corporate structure set up there because it's easier for clients to pay and whatnot. Um, or at least have payment processing and things like that in, in your home country because your clients may not want to pay a Mexican company and have to send wires or do things that are a little bit more, more complicated, um, in terms of just your, your branding and, and, uh, how you relate to your clients. So the other way to do it, if you're planning on receiving less than a hundred K per year in. Net income or net profit is, you can always set up an LLC if you'd like. And the benefit of the LLC is it does provide some protection in terms of like liability protection, uh, asset protection of your personal assets and things like that. The downside is an an LLC is a disregarded entity for tax purposes Similar to an S-corp, but without a lot of the S-corp benefits, like being able to take a certain portion of your income as distributions versus salary. So with an LLC or with a regular 10 99, uh, style of receiving income where you pay, uh, tax. Essentially you're paying in both of those methods, you're paying that fica. That Social Security Medicare tax on the entire amount. If you have the LLC route, then you have a little bit of liability protection. If you don't have an LLC and you're purely, um, reporting all of that income on your Schedule C with no, um, with no corporate structure, then in both of those cases you're gonna be paying FICA. And without the LLC, you've got a little bit less liability protection. Now all you really wanna do here is kind of weigh the pros and cons, so. If you're making under a hundred k in most cases, it might not be worth the administrative burden of having to do more advanced bookkeeping, potentially have bookkeeping software, uh, pay your CPA or your enrolled agent to file separate corporate returns for you, things like that. Um, on the flip side though, an S-corp is a lot less likely to get audited, so there are some potential benefits there. It's not a huge difference in terms of what you're paying. It's kind of like a. For administrative costs and things, it's, it's sort of a plus or minus one or$2,000 per year, maybe a little bit more. Um, but not, not typically much more than that. Um, so if you're like, Hey, I'm serious about business, we're probably gonna be making a hundred thousand, 200,000, a million dollars a year or more. Then just structure wise, you are going to be, uh, benefited by the S corp. Or even if that's going to happen in the, in the near or midterm, it might still help to structure as that. And just in terms of like mindset, I find that having some type of corporate structure and also separating bank accounts from personal to business helps a lot because you think of your business as its own entity versus, Hey, I'm just. You know, a consultant now, it's actually a real business to me that that helped significantly when I was just getting started thinking about it as, as really its own thing. Like, I've got my marketing, my sales, I've gotta pay myself, you know, adequately make sure there's actual profit being generated, et cetera. So those are a bunch of different things to consider there, uh, when you're thinking about the corporate structure and the best way to do it. And again, as I said at the beginning of this video. Whether, you know, you're making money as an independent contractor, whether you're making money, even selling tacos on the street in Mexico, or you're, you're out here performing on, uh, you know, on the, on the boardwalk, on the Malecon in, in Vallarta, and playing your guitar. Technically letter of the law is you have to report all of that income to the United States, and we'll get into how it works for Mexico as well in a second. But Uncle Sam is tracking what you do absolutely everywhere. They have, uh, other reporting requirements like FATCA and F Bar that require actually filing reports for bank accounts and investments that have more than a certain amount. Of money, obviously consult your CPA. And they, they can help you get into the details of that. But the US government has astounding power of being able to track what you do worldwide, um, no matter what. So that's something to be aware of and you always, always, always want to file and pay in the us Now let's get to Mexico. So Mexico is one of those countries where it's a relatively high tax country, even compared to the us. But most people in Mexico don't really pay taxes, especially if they're, if they're freelancers or if they're working for, um, let's say a foreign company and they're expats. Realistically speaking, there's a huge difference between what the letter of the law says and what's actually happening on the ground. But we'll get into the details now of what the law says you are supposed to do and how to be compliant and all of that. Um, but take some of those things with a grain of salt. First, if you're a non-resident, then you only pay tax on Mexico based income. For example, Airbnbs businesses with clients physically in Mexico that are requiring electronic invoices or uras as we call them here, you're definitely going to pay taxes on that. Even if you're a non-resident, but as a non-resident, which means that your central of vital interest is not in Mexico. Maybe you, you have a second home here, you're living here a couple months out of the year, but your central vital interest like businesses and main, main bank accounts and everything else are outside of Mexico. Then you're typically considered a non-resident for tax purposes. But when any of those criteria that I mentioned above apply, uh, IE you've got your principal center of influence here. Uh, you've got a home purchased here that you actually use for your primary residence. You've got a business here, or again, any of these can be true or you're spending 183 or more days per year. In Mexico then typically you are considered a tax resident and there is a progressive tax in Mexico of up to at the highest tier. It's a marginal tax system, very similar to the us. It's up to around 35% and that is on worldwide income. If you are a shareholder and you're receiving distributions from a foreign ore. Mexican based corporation. They also do tax you 10% on the distributions. Now to be clear, it's 10% on the net of what you already, uh, declared as your net income minus that ISR tax, which is that up to 35% ISR, which uh, stands for ITOs. So. So Renta here is essentially your, your income. It's a little confusing not to be confused with the rent that you're paying. Um, so whatever your net income was that you declared, minus a credit for whatever you paid under the ISR regime, you're getting an additional 10% dividend tax on that amount because it's essentially categorized as passive income or shareholder income. Uh, now. First of all, uh, we'll, we'll talk here about one of the things that can help you, even if you are paying and declaring taxes in both countries because you are a tax resident and you haven't been advised that maybe there are some loopholes or ways around it, um, by your, your specific, uh, tax, pr, prepare, or tax, uh, accountant here in Mexico. There are, there are exclusions, there are treaties, there are certain things like that. So first and foremost. You're not gonna be double taxed. In both countries, there is a tax treaty between the US and Mexico. So let's say as an example, you're paying$10,000 per year in total tax in Mexico. I. And that$10,000 a year is likely going to be, depending on the the income, right? Let's assume that it's more than the tax you would pay in the us. So if the tax on your given income is$10,000 per year in Mexico, but it would've only been$8,000 per year in the us. You're not paying$18,000 combined tax. Instead that$8,000 of tax in the US is offset by the tax that you would pay in Mexico. Uh, likewise, if for whatever reason in the US or in your home country, I. The total tax due to the government would've been higher than what you would owe in Mexico. Well, you can still claim that credit. So you, you're not gonna also be double taxed in Mexico. That's something, uh, that is, is worth noting. And in most cases you can kind of choose and say, you know what? I'm going to, to pay like my, uh, my federal income tax in the us and then you can just pay the difference. To Mexico. Um, there are some nuances there. Again, you wanna make sure that you. Consult with a qualified tax professional in both countries. Um, remember, you can always go to entrepreneur expat.com/consult and you may, uh, qualify for a free consultation, or we can actually actually connect you to some of those people in our network that are, that are gonna help look at your individual. Unique situation and tell you what you need to do. Now, in most cases, another benefit of of let's say retiring to Mexico is for the most part, that retirement fund, like that pension that you're receiving here, is not going to be taxed in Mexico, at least below, uh, a certain amount. So. The tax advisor can help you with the specific details of that, but typically they're, they're looking more for active income that you're actually working and you're receiving or dividend income where you're getting a return on some type of capital investment. Like I said at the beginning of this video, there are a lot of gray areas here in the tax code in Mexico. And the enforcement from what, what we've heard, right? This is not legal advice of any kind, but after talking to dozens of attorneys, accountants, expats, most expats in Mexico are not being forced to pay or are not typically declaring foreign income on their Mexican tax returns, or in most cases, if they don't have income. Inside of Mexico, like the businesses locally here, like the Airbnb or rental property income, most of them are just kind of not declaring taxes and they're sliding under the radar. And some of them have been able to go five, 10 plus years and not have any issues. But it's important, again, to check your specific situation because you never know when enforcement might get a little bit, uh, more. Strict when they might change the regulations. And frankly, the, the sat, which is the Mexican equivalent of the IRS, does have a lot of resources. So, uh, they, they do have resources electronically to see what your bank accounts have in the US because of different information sharing agreements between the US and Mexico. They have the ability to look at your investment accounts, your potentially your tax returns, everything like that. And also even see what types of investments and properties you own in other countries around the world. So do they have the resources to go after expats? No, uh, at least not at this point because they haven't done it. Do they want to lose the, the base of. Other revenue that those expats are bringing into the country by going after them for taxes or back taxes? Probably not. Are we going to see them going after expats for foreign hundred income at some point in the, in the near future, in the next, let's say two to five years? Most likely not from what we've heard, but it's always good to know what, what your liabilities are and try to stay, uh, at least as compliant as possible whenever you can be. Now, I'll tell you guys about another way to save on taxes while staying fully compliant in Mexico, especially if you're here long term. And that is called the or re ficto, which means that you only pay one to 2.5% tax on gross income in Mexico. In addition to gross income outside of Mexico, while you are a tax resident here, that one to two per uh, that one to 2.5% tax is on all of your gross receipts. You're not able to use any deductions. But the cool thing is if you're making under$200,000 a year, at least in gross receipts, and your expenses are not super high, let's say you're a consultant, especially if you're working with Mexican businesses here, well, you're gonna end up paying. At the end of the day, significantly less tax than if you were to go through the normal ISR regime. But you, you should also note that you have to pay and declare taxes on all of your global income in the us, but you can still use the foreign to earn income exclusion in the US because in that case, if you're using that reco regime, you're probably gonna pay a small amount in Mexico and a slightly larger amount in the us, but you can offset. In, in most cases, the majority of what you would, would, uh, end up paying in the US through that foreign earned income exclusion. And in most cases you still will have to pay social security and Medicare taxes just as if you are making money in the us. But your total tax bill, if you're able to qualify for das l, is likely gonna be lower than if you were paying into the US tax system plus the standard ISR in Mexico. One very important thing to note, and again. There are differences between the letter of the law and the enforcement here, but according to the rules of reco, you have to completely, um, not have a single shareholding interest in any company in the Mexico, uh, within Mexico or foreign company if you want to be able to qualify for that simplified tax regime. So it would mean that you weren't, would not be able to have, let's say, an LLC or an S-corp in the us. If you wanted to qualify for that because they're, they're looking to tax you on that one to 2.5% on your, your gross income or your gross receipts. And if you were receiving that, let's say as a contractor from a company that you own, well, you could always claim all of the deductions in the US and then also say, well, I'm only gonna pay that aco, uh, lower tax regime in Mexico doesn't really. Like that, you would essentially have to bill your clients as a independent contractor, as a 10 99 type of contractor, not have any corporate structure, and you could not have any shares or controlling influence over a company in Mexico or anywhere else in the world. And like I mentioned before, um, when you, when you look at just Mexico generated income, the Airbnb income, the uh. Restaurant income, maybe you open a cafe, you, you buy or sell property here, you're definitely going to be responsible for taxes on that. That is very well tracked. There's absolutely no other way around it. So if you are, let's say, working for a Mexican employer, or you're working for a US employer and they've got everything set up. Uh, with a tax system here in Mexico, which legally they would be required to have. If you are working remotely full-time from Mexico, well, typically you're either directly in the tax system, uh, with Uras either receiving or sending those electronic invoices. They have data over exactly what you're doing. And you are absolutely obligated to file and pay. Uh, and there's very little way around it. If you're working for an employer that is registered in Mexico, then they're typically remitting those taxes directly to the government. Now, there's also another tax in Mexico that you should be aware of, and this is how, frankly they make. Most of the revenue here, uh, because most Mexicans do not pay income tax or at least income tax on the majority of money they're actually making. So they decided to add what's called eva, which is a value added tax, and that is taxed on all goods and services, not just physical products that you purchase here in Mexico except for food and medicine. And it also applies to most imports for things bought online and sent physically into Mexico. Even including, Hey, I bought some stuff on eBay. Had it sent to, in this case, you know, Amanda's parents' house in Miami and they forward it to me. I still have to declare a value on those items and still pay that eva. And in some cases, because it's being sent from out of the country, there are also, uh, different duties that are applied to that as well. So you might, if you have to buy things from outside of the country and have them shipped in, you typically are paying eva and in some cases even duties on top of that. So in total you might pay that 16% Eva plus. Five, 10, 15% duties depending on the category. And, um, yeah, that, that combined amount might be as high as like 25 or 30%. So that's something to be aware of. One thing though that is, is kind of helpful is that most, uh, establishments here, whether that's a shop, whether that's a restaurant, or even if you buy things online, let's say from Amazon, within Mexico, from their Mexican website or other online retailers, typically they go, they're going to have that EVA included as well as any. Duties that they've paid to import those goods into the country, they're gonna have that actually baked into the price. So when you go to a restaurant here and you see. A price of 200 pesos for a meal. It's not that they're gonna charge you sales tax on top of that, like they do in the us. You might see like a seven to 10% sales tax or even slightly more depending on the county that you're in, in the US and the state. Um, here, all of it's baked into the price. So this was a. Definitely not comprehensive guide to taxes for us expats living in Mexico, but as comprehensive as I could make it for the, the, the venue that we have here and the time and space. Um, obviously if you want more information, you definitely should schedule a consult with our team. You can apply@entrepreneurexpat.com. Slash consult will pop that on the screen and below this video as well, and we can help you get started with your entire plan to move to Mexico, how you can optimize taxes between potentially multiple countries. Uh, what ways are to, for example. Live a certain number of days in one country, live a certain number of days in another country, and not fit into the tax net of any country. Uh, there those are some advanced strategies that we talk about during our relocation consult, as well as when we, um, work with you on a one-on-one basis to optimize your tax strategy, your relocation strategy. Get your second residence, your second passport. So book that below@entrepreneurexpat.com. And as always, thank you so much for being a subscriber of this channel. Uh, it's, it's really you guys that, that motivate us to produce all of this content and, uh, get this all out to you. So we're, we're doing our best to be as informative as possible and help you as much as you can. Uh, like this video, it helps us a ton with the algorithms. And if you're not already subscribed. Please subscribe as well, and don't forget to book that consult below. Thank you so much, and we will see you again next time.