Skip to content

u.s. expat tax guide – mexico

Do US Citizens Need to Report Mexican Pensions to the IRS?

Yes, if you have a pension or retirement account in Mexico, you must report it to the IRS. The type of account and how it’s funded determine your reporting requirements. This applies to both employer-sponsored and private pensions.

What types of Mexican pension plans need to be reported?

Several types of pension plans in Mexico must be reported, such as government or employer-sponsored plans. Some of these could be considered Passive Foreign Investment Companies (PFICs) by the IRS, requiring more detailed reporting on your tax return.

How do Mexican pensions affect your US taxes?

If your pension is classified as a PFIC, you’ll face more complex tax filings. You might have to report income from the plan even if you haven’t received any distributions. This can lead to extra taxes and the need to file forms like Form 8621, which details income from foreign investments.

What is a foreign pension plan?

A foreign pension plan refers to any retirement account held outside of the US, including government-sponsored plans like Mexico’s social security or private employer-sponsored accounts. They are treated differently from US-based pensions, with distinct reporting rules.

How do PFICs complicate tax reporting for US taxpayers?

If your Mexican pension is classified as a PFIC, you must report income earned, even if you haven’t received distributions. This adds complexity to tax filings and could result in higher tax liabilities. Reporting failures can also lead to stiff penalties.

What should Americans know about PFIC compliance?

If you invest in or hold a foreign pension plan, seek tax advice. PFICs carry strict IRS reporting rules, and failing to comply can lead to heavy penalties. Consulting a professional will ensure you report these accounts properly and avoid unexpected taxes.

How do you report the sale of a rental property in Mexico?

Selling rental property in Mexico requires reporting both rental income and the sale to the IRS. You need to calculate your cost basis, account for depreciation, and determine any gains or losses. All of this must be included in your US tax return.

What is depreciation recapture?

Depreciation recapture occurs when you sell your rental property. The IRS taxes you on the depreciation deductions you’ve claimed over the years. Essentially, the amount deducted is added back to your taxable income when you sell.

What expenses are deductible when selling property?

You can deduct costs directly related to selling the property, such as:

  • Agent commissions
  • Legal fees
  • Closing costs
  • Marketing expenses

These deductions lower the taxable gain from the sale.

Does the sale of a main home differ from rental property?

If you’re selling your main home in Mexico, where you’ve lived for at least two of the past five years, you may qualify for an exclusion. The IRS allows you to exclude up to US$250,000 (US$500,000 for married couples) of the gain from taxes.

How does the principal residence exclusion work?

If the property was your main home, the IRS lets you exclude a significant portion of the gain from taxes. For example, if you sell your home for a US$300,000 gain, you can exclude up to US$250,000 (or US$500,000 if married) from taxable income.

Can you use the Foreign Tax Credit for Mexican taxes?

Yes, you can claim the Foreign Tax Credit (FTC) for taxes paid to Mexico on the sale of a property. This credit prevents double taxation, reducing your US tax liability based on what you’ve already paid in Mexico.

Do you pay taxes in both Mexico and the US?

In some cases, you may owe taxes in both countries. While the Foreign Tax Credit helps reduce US taxes, there may still be differences in tax rates and rules between Mexico and the US that result in owing taxes in both places.

How do you report foreign transactions for the IRS?

All income, expenses, and gains must be reported in US dollars. You’ll need to convert foreign currency at the correct exchange rate, either using the annual average rate or the rate at the time of the transaction. The US Treasury provides exchange rates for IRS reporting.

Why should you hire a tax professional for foreign property sales?

Reporting income from Mexican property sales can be complex. A tax professional will help you navigate the rules for depreciation, exclusions, and the Foreign Tax Credit, ensuring you’re compliant with both US and Mexican tax laws while avoiding penalties.

Table of contents