BRIEF  GENERAL DESCRIPTION OF
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.

 
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This information is not intended to be legal or tax advice on Mexican tax law. You must consult a Mexican Contadore (accountant) and give him the facts of your individual situation in order make certain Mexican tax law is properly applied to your personal situation.