us taxpayers moving to mexico.ppt - taxconnections...itemized deductions • mx mortgage interest is...

U.S. Taxpayers Moving to Moving to

Mexico

Presented by:Presented by:

Global Executive ManageMent Solutions

1260 Olympic Drive

Oxford, GA 30054Oxford, GA 30054

(678) 625-7641

www.GEMMS.us

info@GEMMS.usinfo@GEMMS.us

Prepared November 2010 v. 1.2

Q&A anytimeQ y

i i45 min presentation

15 min open discussion

I encourage asking questions as we go along.

If you are thinking it, someone else is thinking it tooelse is thinking it too…

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Disclaimer• This presentation is not intended to be the tell all

and know all of all situationsand know all of all situations.

• The purpose of this presentation is to provide the p p p pU.S. audience with the major topics and issues regarding moving to and owning property in a non-US locationnon-US location.

• Seek a competent tax advisor to discuss the pspecifics of your particular situation.

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Audience?

• How many present today?• How many present today?• How many US Citizens?• How many Non-US Citizens?How many Non US Citizens?• How many MOVING to Mexico?• How many Investing in Mexican Property?

• How many Renting the Property?• How many Using the Property as 2nd home?

• Other?• Other?

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What am I?• Business or Vacation Traveler

• Short Term < 1 yearShort-Term - < 1 year

• Expatriate p• Long-Term - > 1 year • Moving to Mexico indefinitely or at least greater than 1

year.year.

• Expatriation • Permanent• Giving up US Citizenship.

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U.S. Short–Term Travelers

• Business expenses Sch A / Form 2106• Business expenses – Sch A / Form 2106• Personal expenses – Non-Deductible

• No Different than working in NEW Mexico or any other state.

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U.S. Taxable Income

Before we discuss Expatriate or Expatriation we Before we discuss Expatriate or Expatriation we must understand that the U.S. taxes all income from all sources. E.g.:

• Wages from Mexico or anywhere else, f S i l d• Interest from Switzerland

• Dividends from Germany• Rental Income from Africa• Rental Income from Africa• Etc….

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U.S. Long–Term Expatriatesg p• Use 3 things to avoid double taxation:

• Foreign Earned Income and Housing Exclusion

• Foreign Tax Credits

• TreatyTreaty

• Primarily for reduction of wage type income and l t d trelated taxes.

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U.S. Expatriation - PERMANENTp• Obtain Mexican citizenship

• Give up US citizenship

• IRC Section 877IRC Section 877• Mark to Market – all assets DEEMED sold and gain

calculated on day BEFORE expatriation.

• Form 8854 – Initial and Annual Expat Info Stmt• File 5 more years of returns

• CONTACT an Attorney to review in depth!!!!

S i T L T E i fi• Suggestion: Try Long-Term Expatriate first.

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Non-US Home Ownershipp

• So what?• So, what?

• Just like owning a US home, right?Just like owning a US home, right?

• Actually, YES…. Pretty similar!!!! Only a few nuances…

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Good News … Bad News …

• Bad news: U S is one of only countries that taxes • Bad news: U.S. is one of only countries that taxes their taxpayers on all Worldwide income earned.

• Good news: Worldwide expenses and losses are often deductible – especially for real property.

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Itemized Deductions

• MX Mortgage Interest is deductible on Sch A• MX Mortgage Interest is deductible on Sch A

• MX Real estate taxes are deductible on Sch AMX Real estate taxes are deductible on Sch A

• BUT Mortgage Interest has limits (just like a US home):• Can only deduct Main and 2nd Home• Debt limited to $1 MillionDebt limited to $1 Million• Home Equity limited to $100,000• And the dreaded foreign mortgage gain (more later)

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Rental Propertyp y• Mortgage Interest = deductible (and maybe even Section 469(j))

• Real Estate Taxes = deductible

• MX Income Taxes = deductible (generally on Form 1116)

• Insurance = deductible

• Repairs and Maintenance = deductiblep

• Trips to maintain and repair = deductible

• Depreciation

• Just about everything else deductible on Sch E

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Depreciationp

• Loss of value due to time• Loss of value due to time.

• Straight line over 40 yearsStraight line over 40 years

• Depreciation Recapture at time of sale or disposition

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Passive Activity Lossesy

• Rental losses can be used to offset other income• Rental losses can be used to offset other income.

• However losses are limited.However losses are limited.• $25,000 per year• Phased out at $150K AGI

• Sale of property frees up unused losses

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Personal USE

• If you decide to rent the property AND use it for • If you decide to rent the property AND use it for personal use, be sure to track your days.

• Total days available for rent• Total days rented• Total days used for personal use• Total days used for personal use

• Unless you are cleaning and repairing ….

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Exchange Ratesg• US Return denominated in US dollars

• All payments and receipts must be exchanged to US dollars for inclusion on your return.

• Technically, should be exchanged on date of transaction.

i ll h d i h f h • Practically, exchanged using average exchange rate for the entire year.

• www.Oanda.com (historical rates)

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Foreign Mortgage Gaing g g• In a word - Yuck!!!!

• Occurs when MX Mortgage is “substantially” bought down (i.e. paid off…)

• Calculate the sales price by multiplying the mortgage times exchange rate on date mortgage taken.

• Calculate basis by multiplying each mortgage payment y p y g g g p ytimes exchange rate on date payment made.

• Difference between SP and Cost = Gain or Loss

• Gains are taxable.• Losses are NOT deductible

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Qualified Business UnitQ

• A way around the Foreign Mortgage Gain• A way around the Foreign Mortgage Gain

• Basically – adjust the depreciable value every year Basically adjust the depreciable value every year AND note that the asset is a “QBU” on the return.

• Risky – only Ernst and Young LLP uses this approach.

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Incorporate the Rental?p• IRS considers corporations, partnerships, etc as

separate tax entities which require their own tax separate tax entities which require their own tax return filings.

• Form 5471 – Mexico Corp with US individual investor

• Form 8858 – Foreign Disregarded Entity

• Form 8865 – Foreign Partnership

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Foreign Bank Account Returng• Likely require a Mexico Bank Account

• Simple ownership with less than $10K requires Check Box on bottom of Sch B

• If aggregate value of all non-US bank accounts exceed $10K at any time during year = required filing.

• Form TDF 90-22.1

• Due June 30th – NO extensions

• Failure to file results in penalties as much as jail time…p j

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Health Care Law• ALL Corporate tax issues, except:

• Adoption credit increasedAdoption credit increased• Tax Free Reimbursements – Over Counter Drugs

• Individual taxpayers to feel effect through corporations passing the cost down and changes, like:like:• Increase time children remain on parents plan• Reporting of insurance on Form W-2• Annual Fees for Branded Rx Co’s• Tax Breaks eliminated for Health Orgs

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Closingg• Although complicated and confusing for the average

taxpayer, this is common practice for a competent tax taxpayer, this is common practice for a competent tax advisor.

F th i ht t d i d ith th i ht l i • For the right tax advisor and with the right planning, none of this presented information is troubling.

• Best advice is to seek a competent International Tax Consultant to review your specific case in detail PRIOR to year end.to year end.

• Historian or Consultant?

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QUESTIONS Q

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What is G E M M S ???

Expatriate / Inpatriate:

• Tax,Tax,

• Payroll, and

• Human Resource Solutions

Chuck.Heyde@GEMMS.us (678) 625-7641

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