BNC Tax founder Cindy DuChateau has been a U.S. tax preparer for Americans living abroad since 2009. In this video, Cindy is interviewed by Risa Morimoto from the YouTube channel Dream Retirement in Mexico, and she shares important tax information for 2024 that Americans living, working, or making money in Mexico need to know.
What follows is a summary of the topics covered in the video.
Americans Who Live Abroad Must Still File A U.S. Tax Return Every Year
There are approximately 9 million Americans living outside the United States, but many of them don’t realize that they are still obligated to file a U.S. tax return every year.
“There are certain exceptions, but generally speaking, if you’re a U.S. citizen or U.S. green card holder, you’re required to file your U.S. taxes every year, for life. The United States is one of only two countries in the world that requires filing on worldwide income rather than residence. That is a big surprise to a lot of people – finding out that when they move out of the U.S. they do not lose their tax filing obligation,” Cindy said.
“Unfortunately, a lot of American expats are getting bad advice from friends, neighbors, relatives, or the internet, indicating that they no longer need to file U.S. tax returns because they live abroad, and this is false. The only way to get rid of your U.S. tax filing obligation is to renounce your citizenship.”
“In our practice we see clients who either receive letters from the IRS, or they get into transactions where they have to produce tax returns, and all of a sudden they find out that they are not in compliance with U.S. law, and then they panic,” she said.
Expats may qualify for certain tax credits, which can be applied upon filing, but they are not automatically granted. In conclusion, American expats must continue to file tax returns with the IRS to stay in compliance and avoid future problems.
Retirees’ Tax Returns Are Similar
Retirees living in Mexico generally have no change in their U.S. tax filing.
Retirees need to report their Social Security income, maybe their pension income if they have one, maybe some interest income. U.S. tax returns that retirees file while living in Mexico will be nearly the same as their tax returns that they would file if they were living in the United States.
Use a U.S. Mailing Address
At BNC tax, we recommend using a U.S. mailing address on your U.S. tax return if you have somewhere in the U.S. where you can receive mail. The reason is that the mail service in some parts of Mexico is not reliable.
“It’s problematic for some people. Other people seem to get mail here,” Cindy said. “We encourage people to use a U.S. address on their U.S. tax return if possible, so you will be more likely to receive mail from the IRS.”
The IRS doesn’t call or email taxpayers, they send letters via physical mail. So you need to be able to receive letters from the IRS in case you overpay, underpay, or have some other issue. If the IRS sends you a letter and you don’t receive it because it gets lost in the mail, you could end up with a big tax bill or penalty and not be aware of it.
File An FBAR If You Have $10,000 USD In Foreign Banks
Mexican banks are paying high interest right now, so a lot of people are moving money to Mexican banks to capture those interest payments. However, they might not be aware of the FBAR filing requirement.
“If you have more than $10,000 USD equivalent in a bank account or bank accounts, aggregate of all bank accounts in foreign countries, you have to file what’s called an FBAR,” Cindy said. “So that’s a little bit different than what you would be filing if you lived in the United States, and that’s something to be aware of if you are opening a bank account in Mexico.”
“Also, most banks in Mexico pay interest. They collect taxes on that interest and they pay that tax over to the Mexican government. But you still have to report both the interest and the taxes on your U.S. tax return,” she said.
Mexico Has Changed The Way It Collects Sales Tax On Vacation Rentals
AirBNB, VRBO, and other rental platforms are now collecting and paying sales tax to the Mexican government on behalf of rental property owners.
“In the past many people moved to Mexico, bought investment properties, started renting them out, and did not collect the 16% sales tax (IVA) and pay it to the Mexican government,” Cindy said.
“People who do not live in Mexico permanently might not have a Mexican tax ID, which would make it impossible for them to collect and pay sales tax in Mexico. So the Mexican government has put that burden on AirBNB and the other online rental platforms. They are now required to automatically withhold sales tax from owners’ accounts and pay that to the Mexican government.”
“Rental property owners who have a Mexican tax ID can enter it into AirBNB and the other rental platforms, and the platform will not withhold the sales tax. In that case, owners will be responsible for filing their own Mexican returns and paying the tax directly to SAT (the Mexican version of the IRS).”
“I’m not a Mexican accountant or tax preparer,” Cindy said, “I’m not giving Mexican tax advice, but I work with these issues every day, and I work with a lot of people who own rental properties, so I’m familiar with the laws. I encourage anyone who owns a rental property in Mexico to consult with a Mexican accountant or tax preparer as well.”
Report Income From Rental Properties or Work
“The automatic tax withholding on AirBNB and other online rental platforms only applies to the Mexican sales tax, which is called IVA, and it’s 16% of each booking,” Cindy said. “Owners also have an obligation to report their Mexican-sourced income to the Mexican government.
“That’s another misconception that a lot of people have. They believe that the source of the income is the bank account that the money goes into, and that is not true. The source of the income is where the property is physically located or where you are physically located.”
“So if you’re working in Mexico, even if you’re working online, the source of your income is Mexico because you’ve earned it in Mexico. If you are physically located in the United States while you’re working, the source of the income is the United States. If your property is in Mexico, the source of the rental income is in Mexico. Even if you get paid in your U.S. bank account, it doesn’t make any difference. The source of the income is where the property is located or where you are working from. So for many people, this means they are required to file a Mexican tax return, in addition to a U.S. tax return.”
You need to have your temporary or permanent residency to get a Mexican tax ID. The Mexican tax ID number is called an RFC.
Owners who don’t have residency in Mexico should expect online rental platforms like AirBNB to collect the sales tax and pay it to the Mexican government. The platform will send you a statement at the conclusion of each rental, or at the end of the year showing the amount of sales tax they collected on your behalf and paid to the government of Mexico, and any other fees that are associated with that rental.
You will need to give that information to your tax person. Or if you’re doing your taxes yourself on TurboTax, you’ll need to do the calculation yourself to figure out how much is the rental income, versus how much is the the IVA tax that was collected, versus how much were your expenses.
This is happening all over the world, not just in Mexico, and not just with AirBNB. Lots of online platforms are now collecting sales tax and paying it to respective world governments on behalf of users. It’s a way for governments to close the tax gap for money they are entitled to collect.
Paypal Will Start Sending 1099s
This change will affect U.S. citizens who receive payments via PayPal or other online payment platforms.
In the past online remittance platforms such as PayPal did not send 1099s. The law was written such that unless you had $20,000 of transactions or 200 transactions, whichever was greater, you would not be required to receive a 1099 from platforms like PayPal.
However in 2022, the United States Congress changed the law so that now those platforms must abide by the regular 1099 rules, which state that anyone who receives $600 or more per year as an independent contractor gets a 1099 at the end of the year.
The new law is now being enforced, so anyone who receives money via PayPal or other online payment services will receive a 1099 if they have received $600 USD or more on the platform in 2023.
If you received payments via PayPal or other online payment platforms that were not taxable income (such as gifts) you’ll need to provide your tax preparer with a spreadsheet detailing which payments received through your account were taxable income, and which were not.
Read more on this topic in our blog post.
The Tax Jobs and Cuts Act of 2017 sparked some changes in enforcement of international tax issues, and one of those was Form 8858.
Form 8858 is a report of what’s called “foreign disregarded entities” or “foreign branch income.” It was originally designed for U.S. companies that have branches in other countries. The income and expenses generated in the foreign branch need to be reported separately on a tax return, on Form 8858.
The Tax Jobs and Cuts Act of 2017 expanded that reporting requirement to include rental properties and sole proprietorships.
There’s been a lot of arguing within the CPA community and the IRS, trying to interpret if they really meant to drag those two items in.
In June of 2023 the IRS came out with formal guidance saying yes you must report your foreign property and your foreign Schedule C income on Form 8858.
So this means that people who work in Mexico or have rental properties in Mexico must now fill out Form 8858.
It’s a messy form. It requires a balance sheet. In the past, Schedule C and Schedule E rental properties have not reported balance sheet items like cash on hand, accumulated depreciation, the value of the asset liabilities, debt, etc., but now the balance sheet must be included with Form 8858.
So that means that if you have a rental property or a business in Mexico, you need to make sure your bookkeeping is updated before tax time, and share your balance sheet with your tax preparer.
This reporting requirement went into effect in 2022, so BNC Tax is catching up our clients for 2022, in case they did not file Form 8858 in 2022. The IRS is not going to go back and penalize taxpayers for 2018 through 2021, but they started enforcing this filing requirement with this last tax season.
Penalties For Failure To File
U.S. citizens who live abroad risk huge penalties for not filing international tax forms such as FBAR, Schedule C, Schedule E, Form 8858, and others on time and correctly. If taxpayers forget to file certain forms, if they submit their tax returns late, or if their tax returns are substantially incomplete, the fines can be up to $10,000 USD per year.
There are amnesty programs you can go into, but if you get a letter from the IRS before you join the amnesty program, then you’re ineligible.
So the risk is really not worth it. For example, if you have a rental property in Mexico that generates a small profit every year, or even loses money each year, but you fail to report it to the IRS, you could be facing onerous fines for money you never even collected.
So it’s really important that people who are either working or doing some kind of transactions in in a foreign country, even if they live in the United States and it’s all being done remotely, that they have a good tax person who understands international law, international tax law, knows what forms they’re required to file, and prepares them correctly.
Keep Good Records
Records are king, so we highly encourage everyone to get on top of their recordkeeping. Start thinking now about what’s going to happen when you start getting these 1099s from places like PayPal. Are you going to have a problem or not? What about your rental income and expenses? Do you have proper balance sheets for your rental properties? These are issues that American expats may need to think about.
If you have a Mexican rental property, make sure to keep all of your reports from AirBNB or other rental platforms, because you’ll need to see the income earned, and the Mexican taxes paid through the platform.
We are looking at things that you can defer to next year or income that you can pull into this year. You know, none of that ever really changes.
The Standard Deduction is a lot higher now, so most people are no longer itemizing their expenses on their tax returns, but we still look at whether it would be better for tax purposes to receive certain income and pay certain expenses before the end of the year or in the new year.
This especially applies to retirement withdrawals, required minimum distributions, and deferment of tax laws that are in effect that the IRS is being a little more lenient on.
I advise everyone to take a look at the SECURE Act 2.0 because there are a lot of things that the IRS has been changing in the area of how and when you’re taxed on retirement savings.
There’s a new ten year rule on inherited IRAs that is going to be important to people who have inherited IRAs.
The age has also increased for required minimum distributions, so you may not have to take a required minimum distribution. If you’re in your seventies, if you’re right there between 70 and 72, the rules have changed.
Read our blog post to learn more about the SECURE Act 2.0 and how it affects retirement accounts.
Bnc Tax Is Unique Because We Are Expats Ourselves
One thing that makes BNC Tax unique is that we are expats. We currently have 13 tax preparers, and all but two of those preparers are expats ourselves. We live in Mexico, France, Prague, and The Netherlands.
We also have a large expat client base. We still do taxes for U.S. residents as well, but many of our clients are U.S. citizens living abroad.
To American expats living outside of the country, we’d like to say: we’ve lived it! And we can help you navigate through that strange world of living in a foreign country.
We can give some guidance on non-tax issues as well, based on our experience in immigration, real estate, car registration, utilities, banking, and many other things that expats need to know.
We offer relocation consultants to answer your tax and non-tax related questions about moving to Europe or moving to Mexico. You can schedule a consultation at https://www.bnctax.com/appointment/