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u.s. expat tax guide – mexico

Are RSUs and stock options from a Mexican employer taxable in the US?

Yes, US expats must report Restricted Stock Units (RSUs) and stock options from a Mexican employer on their US tax returns. All income, including equity compensation, is subject to US tax laws even if earned outside the country.

How do RSUs work, and when are they taxed?

RSUs are shares of stock given as part of your compensation, but they only become yours once they vest. 

Vesting typically depends on staying with the company for a specific period or hitting performance targets. When the RSUs vest, their value is considered taxable income, which you need to report to the IRS.

What happens when you sell vested RSUs?

Once RSUs have vested, and you decide to sell the shares, the profit from the sale becomes taxable. If you sell the shares within a year of vesting, the gains are taxed at ordinary income rates. 

However, if you hold them for over a year, the profit is taxed at lower long-term capital gains rates.

What are employee stock options, and how are they taxed?

Employee stock options let you purchase shares at a specific price, known as the exercise price. When you exercise your options (buy the stock), the difference between the exercise price and the market value is taxable as ordinary income. 

If the stock price increases after you exercise your options, any additional gain will be subject to capital gains tax when you sell the shares.

How does the holding period affect tax rates?

The time you hold your shares after vesting or exercising stock options affects the tax rates. If you sell the shares within a year, gains are taxed as ordinary income. Hold them for more than a year, and you qualify for lower long-term capital gains tax rates.

What forms are needed to report stock options and RSUs?

You’ll need to include the sale of RSUs or stock options on Schedule D (Capital Gains and Losses) of Form 1040. The cost basis of the shares—usually the market value at vesting for RSUs or at exercise for options—must be compared to the sale price to determine your taxable gain or loss.

What are the 2024 tax rates for RSUs and stock options?

Ordinary income from RSUs and stock options will be taxed at rates that range from 10% to 37%, depending on your income. Long-term capital gains tax rates (applying to shares held for over a year) are lower, at 0%, 15%, or 20%, depending on your income level.

Can you avoid taxes when RSUs vest?

No, the IRS requires that you pay taxes when RSUs vest, as they are considered part of your income. However, by holding onto the shares, any future gains will be taxed at lower capital gains rates instead of higher ordinary income tax rates.

What is Section 83(b), and when should you use it?

Section 83(b) allows you to pay tax on the value of RSUs at the time they are granted, not when they vest. This can be beneficial if you expect the stock value to increase, as you’ll pay taxes on a potentially lower value upfront. However, this comes with risk because you’ll owe taxes regardless of whether the RSUs vest.

How do you determine the cost basis for your shares?

The cost basis is the value of the RSUs when they vest or the value of stock options when exercised. For example, if your RSUs vest when the stock is valued at US$50 per share and you receive 100 shares, your cost basis is US$5,000. When you sell the stock, any gains will be taxed based on the difference between the sale price and the cost basis.

Why is accurate reporting of RSUs and stock options important?

Failing to properly report RSUs and stock options can lead to IRS penalties. Underreporting your income or capital gains may result in additional taxes, fines, or audits. 

If you’re unsure about how to report equity compensation, it’s best to consult a tax advisor to avoid potential issues.

What records should you keep for RSUs and stock options?

It’s important to keep detailed records of your equity compensation, including grant dates, vesting schedules, and the prices at which you buy or sell shares.

When is it a good idea to consult a tax professional?

If you’re unclear about the tax implications of RSUs, stock options, or other equity compensation, consulting a tax advisor is wise. They can guide you through the complexities of US and Mexican tax laws, ensuring compliance and helping you manage your taxes efficiently.

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