QUESTION:
A friend of mine is doing some consultancy to businesses in Mexico.He lives
in hotels when there;does not own any real estate.
Is it true that his annual income is exempt from Income taxes until $80K.
I read on US Income Taxes Group on MSN abot an American who was working in
a Mexican resort and the taxpreparer said he does not need to reporthis
income from Mexico.
Thank you very much for your cooperation!
Sincerely:
----------------------------------
david ingram replies:
US citizens are taxable on their world income anywhere in the world.
This includes interest, dividends, royalties, wages, self-employed income,
rentals, gambling winnings, lotto winnings and most insurance settlements,
housing allowances and just about anything else out there.
For wages and self employed earnings, there is a US exemption amount of up
to $80,000 per year by filling in form 2555.
There is also no such thing as not reporting the Mexican Income. It must be
reported but there may be an exemption.
There are two ways to qualify.
The preferred method is to establish a bona fide residence in the other
country. This means that you have set up a residence with phone, heat (or
air conditioning), light, rent or ownership, etc for an entire calendar year
meaning from Jan 1 to Dec 31st of one year. Interestingly, if one was to go
to another country on Sept 1 of year one and establish a residence, be there
for the whole of year two and leave on May 15th of year three, they would
qualify for all three years but the $80,000 for the first and third years
would be pro-rated by the number of days.
The second method requires the US citizen to be physically out of the US for
330 out of 365 days and this is the one which is always used when someone
leaves on July 1st of one year and is coming back June 30th of the next
year. In these cases, it is imperative that the US citizen does not return
to the US for more than 35 days. If he or she does, no exemption and the
form 2555 asks for the days and dates spent in the USA.
Your friend would not qualify under bona fide residence but may qualify
under physical presence although I doubt it from your description. He does
not seem to have a permanent establishment in Mexico and certainly does not
seem to have a bona fide residence.
Assuming that your friend is operating as a business providing independent
personal services in Mexico (maybe illegally if he does not have an FM2 or
FM3 visa), he would be exempt from Mexican tax on his consulting fees if he
has no permanent establishment under Article XIV of the US / Mexico Income
Tax Convention. (you can read for yourself at:
http://www.irs.gov/pub/irs-trty/mexico.pdf). However, the same article has
him paying tax to Mexico if he is there more than 183 days in any
circumstances.
So, he does not get his cake and eat it too. To qualify for the physical
presence, he has to be out of the US for 330 out of 365 days, To escape
Mexican tax he has to be in Mexico less than 183 days.
I guess that with perfect timing, he or she could go to Mexico from July
10th one year and back to the US on June 20th the next year. In that case,
he or she could conceivably escape Mexican tax and qualify for a little less
than $80,000 tax free in Mexico by claiming about $39,500 in the first year
and the same amount for the second year.
Glad to do the returns if the need arises.
There is nothing unusual in not paying tax under this system by the way.
All the oil workers in Saudi Arabia and Kuwait and Qatar (as examples) the
income is tax free because there is no local tax. It is of no benefit for
Libya on the other hand because their tax is higher than the US.
As a matter of interest, David Holroyd is in Guadalajara Mexico and we have
been talking about opening an office there for Mexican Tax returns. If
your friend needs help, he can contact David at the above email address
If your friend has to pay Mexican Tax, he can claim credit for it on his US
tax by filing form 1116 as someone working in Libya would do.
You should go to www.centa.com and read the US/Canada Income tax for ideas
on what US citizens have to do for income tax when out of the USA.
Answers to this and other similar questions can be obtained free on Air
every Sunday morning.
Every Sunday at 9:00 AM on 600AM in Vancouver, I, david ingram am a
permanent guest on Fred Snyder of Dundee Wealth Managers' LIVE talk show
called "ITS YOUR MONEY"
Those outside of the Lower Mainland will be able to listen on the internet
at
www.600AM.com <http://www.600am.com/>
Call (604) 280-0600 to have your question answered. BC listeners can also
call 1-866-778-0600.
Callers to the show and questioners on this board can also attend the
Thursday Night seminars on finance and making your Canadian Mortgage
Interest deductible.
David Ingram's US/Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
Home office at:
4466 Prospect Road
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Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325
Calls welcomed from 9 AM to 9 PM 7 days a week (please do not fax or phone
outside of those hours as this is a home office)
email to taxman at centa.com <mailto:taxman at centa.com>
www.centa.com <http://www.centa.com/> www.david-ingram.com
<http://www.david-ingram.com/>
Disclaimer: This question has been answered without detailed information or
consultation and is to be regarded only as general comment. Nothing in
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