Taxes on non-Mexican income for residents

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Taxes on non-Mexican income for residents


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Old 6th February 2020, 10:28 PM
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Default Taxes on non-Mexican income for residents

Hi. I'm considering retiring to Mexico from the U.S. in a few years, and I was wondering how people who have done so handle their income taxes.

As I understand it, anyone who is a resident in Mexico for more than 183 days/year is a resident for tax purposes, and must pay Mexican income taxes on all income from whatever source, including income from non-Mexican sources. That would include things like Social Security, interest from U.S. bank accounts, freelance income, etc.

I also understand that some or all Mexican income tax payments may be used as a credit on U.S. taxes because of a treaty between the two countries.

This all sounds very complicated, and potentially expensive.

So my question is how it works out in practice, and how most expats in Mexico, especially retired ones, handle all of this.

Thanks.

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Old 7th February 2020, 04:17 PM
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Originally Posted by Future Retiree View Post
Hi. I'm considering retiring to Mexico from the U.S. in a few years, and I was wondering how people who have done so handle their income taxes.

As I understand it, anyone who is a resident in Mexico for more than 183 days/year is a resident for tax purposes, and must pay Mexican income taxes on all income from whatever source, including income from non-Mexican sources. That would include things like Social Security, interest from U.S. bank accounts, freelance income, etc.

I also understand that some or all Mexican income tax payments may be used as a credit on U.S. taxes because of a treaty between the two countries.

This all sounds very complicated, and potentially expensive.

So my question is how it works out in practice, and how most expats in Mexico, especially retired ones, handle all of this.

Thanks.
What is the basis of your understandings ? Could you possibly provide sources ?
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Old 7th February 2020, 04:47 PM
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This is a really good question and is one of those questions that get every possible answer from don't worry about it to you're a criminal if you don't file.

I don't know the answer, but I *think* because of the tax treaty between the US and Mexico, taxation of US citizens (all foreigners with no income generated in Mexico?) is not enforced by the Mexican government, because Mexico would not gain any significant money from doing so.
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Old 7th February 2020, 04:56 PM
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Originally Posted by lat19n View Post
What is the basis of your understandings ? Could you possibly provide sources ?
Yes, certainly. I apologize for not including references in my original post.

Note that I realize that I may be entirely wrong. I am not an attorney, tax law is complicated in any country, and more so when it's a country with whose legal system one is not familiar.

There is also the fact that sometimes the way things are on paper and the way things are in practice don't correspond 100%. But I prefer to follow the letter of the law, and taking risks on something this important would worry me forever. (I am known among my friends as a worrier.)

So I would be more than happy for someone with more knowledge to tell me I'm wrong, but here is my current understanding:

1. Taxes on Mexican residents.

According to taxsummaries.pwc.com/ID/Mexico-Individual-Taxes-on-personal-income:

Resident individuals are subject to Mexican income tax on their worldwide income, regardless of their nationality.

So that doesn't appear to be in doubt. The question, then, is what constitutes Mexican residency. The same website says:

The Federal Tax Code provides that a person is a resident for Mexican tax purposes when that person establishes a home in Mexico. If the individual has a home in another country, then the individual is a resident of the country where the individual’s centre of vital interests is located.

I'm really not sure just what that means, but it sounds as though a person from another country (say, the U.S.) who has sold their home and moved to Mexico permanently could at least in theory fall into that category.

Another website, escapeartist.com/mexico/live/taxation-expats-mexico:

In most cases, you’re a resident for tax purposes if Mexico is your primary home (your home base) and you spend more than 183 days in the country.

I have seen similar information on several other websites.

Again, I would be more than happy to be told I don't know what I'm talking about.

PS: Sorry; as a new user, I can't post live links.

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Old 7th February 2020, 05:12 PM
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This is a really good question and is one of those questions that get every possible answer from don't worry about it to you're a criminal if you don't file.
Thanks. That has been my experience, as well.

I'm not too comfortable with the "don't worry about it" approach. If I sell all my stuff and move my whole life to Mexico (and I'm not going to be financially able to keep a home both places) and then one fine day I find out that my income is going to be reduced by 30%, well, that would be a problem.

(There are also apparently lots of people who live in Mexico on one 180-day tourist card after another. It has worked for years; apparently now, not so much. I can see how the tax thing could become an analogous situation, but with much higher stakes....)

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Old 7th February 2020, 06:04 PM
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This should give you some idea of the US-Mexico tax treaty: https://www.irs.gov/businesses/inter...eaty-documents
Normally the "technical explanation" documents are somewhat more readable than the actual treaty.

Quote:
The question, then, is what constitutes Mexican residency.
That, you'll have to get from the Mexican authorities. The 183 day thing is normally just a "rule of thumb" - but the PWC document you cite includes the common "centers of interest" clause.

If you move to Mexico, have your "main home" there, you will probably be considered "tax resident" from day one.

But take a look, too, at IRS Publication 54 on Overseas Taxpayers, too. As a US citizen, you never lose your obligations to the IRS no matter where you live. https://www.irs.gov/forms-pubs/about-publication-54

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Old 7th February 2020, 06:21 PM
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I was in the process of writing this long response but then noticed that Bevdeforges had chimed in. You, 'Future Retiree', should probably post your tax related questions to ;

https://www.expatforum.com/expats/expat-tax/

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Old 7th February 2020, 08:17 PM
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This post is in good timing as my wife and I are moving permanently to Mexico this year.

In my research, I found this link to offer straight forward information on this subject, https://www.expatsinmexico.com/tax-t...ats-in-mexico/.

My observations and takeaways:
As a US citizen, you must file with the IRS no matter where you live. An exception could be if you're living solely off of Social Security.
State tax filing requirements will depend on what state you are moving from. We'll be moving from Oregon. We will (eventually) file as an Oregon non-resident having no domicile in the state and no income derived within the state, leaving us with a zero state tax bill.
I've not had a chance to assess our eventual Mexico tax liability. From what I can tell, our US-based income (Social Security, IRAs, ...) is not taxed by the Mexican authorities. Initially, we have no plans to do anything that would generate income within Mexico that would be taxed by Mexico or the US.*
As usual, consult your financial and tax advisors.

*Long term it makes sense (at least to me) that if you are living permanently in Mexico but derive all your income from US-based equities, you ought to hedge your bets on currency swings by having some income derived from a peso based investment such as Mexican federal government treasury bills like Cetes. If someone is familiar with Cetes (or other federal bonds) I'd love to get your take.

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Old 14th February 2020, 06:09 PM
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There is more information directly from SAT (Servicio de Administracion Tributaria) on this page: HOW TO PAY TAXES. Difficult to read or understand. My "impression" from the summaries published by the Big 4 accounting firms is that "all" income earned by permanent residents of Mexico is taxable, but the SAT page seems focused only on income (of whatever type) earned in Mexico. Banamex withholds from the puny interest earned on my savings account with them and gives me a 1099 in English with the amounts converted from Mxn pesos to US$. Anyone who sees it differently, feel free to chime in.

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Old 14th February 2020, 06:53 PM
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My "impression" from the summaries published by the Big 4 accounting firms is that "all" income earned by permanent residents of Mexico is taxable.
That is absolutely my impression. In fact, I have seen it so many times from so many authoritative sources that I don't think there is much doubt about it.

Still, I can't help wondering about a few things.

1. Maybe I'm wrong, but I just can't believe that all (or even most) of the gringos viejos who live around Lake Chapala or San Miguel de Allende are filing all the paperwork with the SAT to pay taxes on their U.S. social security and pensions. The SAT has to know that that is happening. Have they made a decision (formal or informal) not to go after people in that situation?

2. The definition of "permanent resident" seems vague. For example, if a U.S.-based freelancer puts her stuff in storage and rents an AirBnB for 9 months, does that make her a permanent resident? Some sources suggest that probably so, since she will be in Mexico for more than 183 days. Other sources suggest that if her "center of vital interests" remains elsewhere, perhaps not.

Thanks to all who have read and replied, and to anyone who has further comments. Some of my friends call me a worrywart, but I respect Mexico and want to obey the country's laws, and I also don't want to have my financial situation upended at a point in my life when it would be hard to regroup.
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