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Are US Social Security payments taxable in Mexico ?

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YellowTail
5/14/2018 15:03 EST

I had some eye opening discoveries this past weekend.

We are permanent residents seeking Mexican citizenship. We have always been 100% honest with the IRS regarding our finances - but it looks like we may have erred on the side of being honest with the US to the detriment of Mexico. We paid 100% of the taxes on our income to the US - less the small interest they (Mexico) pull from our Mexican accounts as things mature,

Having said all that - does a US person, who is a tax resident/dual national of Mexico have to pay taxes to Mexico on their SS disbursements ?

Thanks

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mormor01
5/15/2018 15:39 EST

The only thing I can add to this post is personal experience. I am not a tax expert. My spouse is retired and receiving SSI and files form 1040 US Income Tax Return every year (we do this when we make the trip back to the states.) My understanding is that we are not required to file or pay income tax in Mx as we have no income in Mx. Am I wrong about that? We are both US citizen and as I said we file US returns annually. However he is also a Mexican citizen (now retired, with no earned income, nor any income from sources in Mexico) with dual citizenship so my question is does he need to file a return in Mexico for his SSI income from abroad? I did not think so, but really don't know the correct answer.

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YellowTail
5/15/2018 15:51 EST

We live here (Mexico) virtually always, We have only one house and it is in Mexico. I am just coming to learn this ... We are 'tax residents' of Mexico. I was knocking myself out being overly honest with the US, I'm coming to believe that our primary 'taxer' is Mexico. There are apparently tax treaties between countries to assure you are not double taxed etc. Some of those treaties exclude things such as SS and IRA accounts etc from being reported. But As I write this I am coming to believe that Mexico is entitled to the income we make on our US investments and then we would claim a 'tax credit' on our US return. I continue to investigate...

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RVGRINGO
5/15/2018 18:48 EST

If you are a US citizen, simply file your US tax return for US income.
If you have no income earned in Mexico, there is no need to file.

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YellowTail
5/15/2018 18:53 EST

That is the sort of advice we have been following for the last six years or so - but I no longer believe that is good advice. If you reside in Mexico your primary tax 'requirements' are with Mexico not the US - regardless if you are a US citizen or not.

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giershift43
5/15/2018 18:57 EST

Is Foreign Income Taxed Within Mexico?

If you are considered a resident of Mexico, you are going to be taxed on your worldwide income, regardless of your nationality or where the income was earned. Non-residents, including Mexican nationals who have residency for tax purposes in a foreign country, are only taxed on their income that is Mexico-sourced. Note that the source of the income is considered to be in Mexico when the service is provided in Mexican territory, regardless of where the agreement is negotiated or where the payment was made. (The above is what I found.)

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YellowTail
5/15/2018 19:10 EST

I think your mentioning Mexican nationals living outside Mexico is not particulary germane,

But - and I'll grant you that not many expats abide by the rules (but are certainly subject to the consequences) - If you live in Mexico 'full-time' it would appear that you need to file a Mexican tax return - and adapt your US tax return accordingly.

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mormor01
5/15/2018 20:42 EST

Good discussion. I think what applies to our specific situation is "Non-residents, including Mexican nationals who have residency for tax purposes in a foreign country, are only taxed on their income that is Mexico-sourced." So, as our residence is still in the US (and all income) it appears we are OK. Thanks to all for the discussion.

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mormor01
5/15/2018 20:55 EST

YellowTail, I'll be very interested to learn the correct answer for your tax situation as you stated "We live here (Mexico) virtually always . . . [and] are 'tax residents' of Mexico". Thanks for raising this issue. Hopefully someone more knowledgeable can respond.

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giershift43
5/16/2018 07:31 EST

Expert Tip: If you have operations in Panama and Mexico, income should go into Panama and Mexico should bill the Panama corporation for services rendered. If income goes into Mexico, the SAT can deny the corresponding deduction when you make a transfer to Panama. If income goes to Panama, Mexico has nothing to say about the inbound transfer.

Taxation of Expats in Mexico

Keep in mind that this article is intended for expats living in Mexico, not Mexican nationals. The laws for citizens are different than for foreigners.

Mexico taxes expat residents on their worldwide income. In most cases, you’re a resident for tax purposes if Mexico is your primary home (your home base) and you spend more than 183 days in the country.

It’s also possible to be classified as a resident if you spend less than 183 days a year in Mexico. If SAT believes Mexico is your “center of vital interests”, they will classify you as a resident of for tax purposes.

Mexico may be your center of vital interests if:

More than 50 percent of your total income received during the calendar year is derived from Mexican sources.
When your main center of professional activities is located in Mexico.
These are the two primary tests for vital interests. An auditor may also consider the total facts and circumstances and find you to be a resident if neither of the above is true.

In most cases, if you’re living and working in Mexico for an entire year, you’re a tax resident. Also, any income earned for work performed in Mexico is taxable in Mexico.

If you’re a resident of Mexico, income earned in a foreign corporation or from work performed outside of Mexico is taxable in Mexico. As a resident, you’re taxed on your worldwide income no matter where earned. If you paid foreign taxes on that foreign sourced income, you will receive a tax credit.

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Cozumeldeb
5/16/2018 08:15 EST

No, SS is not taxable in MX, there are many tax accountants on both sides of the border you can confirm this with.

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NA
5/16/2018 11:18 EST

Are US pension payments taxable in Mexico?

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YellowTail
5/16/2018 12:05 EST

Regarding pension, annuities etc I came across this article...

https://scholar.smu.edu/cgi/viewcontent.cgi?article=1580&context=lbra

"Article 19 of the Treaty provides three basic rules. First, private pensions and annuities
in consideration of past employment can be taxed only by the country of residence of the
recipient.'5 9 Second, social security benefits or other public pensions paid by a government of one Contracting State to a resident of the other Contracting State may be taxed
only by the Contracting State paying the pensions. 160 Because this rule prevents a
Contracting State's taxation of its own residents, it is an exception to the general savings
clause of Article 1(3). Finally, alimony and child support payments may only be taxed by
the country of residence of the payor. 16 1 This rule also is an exception to the savings clause."

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RVGRINGO
5/16/2018 12:06 EST

If you did not receive payment in Mexico, there is no tax liability in Mexico for US citizens, who file and pay taxes in the USA. The tax treaty prevents double taxation.
So, for a US expat in Mexico, who is not working or othewise earning money in Mexico, there is no liability.
If you have a Mexican bank account, the tax on interest is deducted automatically. IVA (sales tax) covers about everything else.

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YellowTail
5/16/2018 12:55 EST

As I wrote yesterday - until very recently I would have agreed with you. But as I write this I believe that if a US expat owns a home and lives in Mexico more than 183 days - Mexico gets first dibs on whatever profits the expat earns (interest, dividends etc) on the expat's US holdings. The expat would then file for foreign tax credits to avoid double taxation.

But - we have an appt for a free consultation this Friday with a very large international tax accounting firm.

This quote is from the same link I posted earlier...

"2. Taxation of Mexican Resident Individuals
Mexico imposes an income tax at graduated rates of up to 35% on the worldwide
income of individuals who are residents of Mexico. 223 "Resident" is presumed to include all
Mexican nationals, subject to proof to the contrary. The income tax also includes foreign
nationals who maintain a home in Mexico, unless they are resident in another country for
more than 183 days and can prove tax residence in that other country."

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mormor01
5/16/2018 14:03 EST

Yellowtail, this is so important! Thanks for raising the issue. And, we appreciate if you will continue to post as more information is available to you.

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raulbendera
5/18/2018 15:33 EST

No, Any SS or ANY pension income is ONLY taxable to the state the source is coming from. In other words, US pension income is ONLY taxable in US. Any mexican pension income is ONLY taxable in Mexico...That is the rule.

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YellowTail
5/18/2018 16:11 EST

We had a sit down with a CPA from a very large international tax accountant today. I pointed out that we do not have Mexican RFCs and have never filed a Mexican return. We have never had any Mexican 'earned' income. I showed him that we have reported ALL our interest income for both Mexico and the US on our US returns. I mentioned that I file for a foreign tax credit for whatever ISR is withheld inside Mexico.

His responses : No we do not need RFCs - even when we become Mexican citizens and even if/when we sell our Mexican home. As long as we have no Mexican 'earned' income. No we do not need to file Mexican returns because we have no earned income in Mexico. He also said that I should not have reported our Mexican interest income to the US. In fact he was very interested in our letting him claw back the interest we had shown the US - which on last years return was enough to buy a nice new car.

I am just an old man who searches for answers on the internet. I am not a professionally trained accountant. What we were told today disagrees with what I have read - but hey - maybe we should just keep doing what we have been doing (right or wrong).

He did promise to come to our rescue should SAT ever come knocking on our door.

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giershift43
5/18/2018 16:34 EST

This supports what I have read repeatedly from separate sources.

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NA
5/18/2018 21:29 EST

Regarding RFCs, according to my bank, I will not be able to do any more transfers to pay others if I do not provide an RFC number by July 1st. This was a result of a recent change in the law.

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giershift43
5/19/2018 07:09 EST

What is an RFC?

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NA
5/19/2018 09:52 EST

Registro Federal de Causantes (RFC): It is your tax ID.

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giershift43
5/19/2018 13:16 EST

Thanks

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Delaware26
9/22/2018 18:24 EST

Thanks for your research. Will the CPA assessment (SS benefits not taxed by Mexico) still apply if you become a Mexican citizen, as you mentioned it was your intent on your earlier post? Are you currently a permanent resident?
Thanks.

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YellowTail
9/22/2018 20:06 EST

I am going on the assumption that we would/will only have a tax liability with Mexico if we a) renounce our US citizenship and no longer file taxes with them b) we get jobs/start a Mexican business and have Mexican earned income or c) we receive more than a cumulative 100,000 pesos of 'real' interest. I believe none of that changes if we are permanent residents or Mexican citizens.

We are in the final moments of the Mexican citizenship process. We visited SRE recently when our status changed to 'document to be issued - waiting on printing'. The very helpful girl said that she thought she would have our letters by the end of the month.

In anticipation of becoming Mexican citizens we made an appointment and visited with SAT in late August. It was our intention to ask for Mexican RFC's and I brought along our Mexican 1099 equivalent forms. The girl had a 'bible-like' rule book and yet she did not know how we should handle negative real interest. She also had a lot of trouble completing the online forms for our RFCs since we were not Mexican citizens - and at one point I became concerned and asked her to stop the process. We will get real RFCs after we become citizens. BUT - even if you have an RFC you do not need to file a Mexican return - even if you sell your Mexican house.

My wife began receiving US social security in August and we opted to go through the FBU group at the Embassy and have her payments deposited into one of our Mexican banks (where I am the titular and she is the co-titular). The very first payment was rejected by our Mexican bank and we were told they would only accept the monies into an account where she was the titular. SO - we opened another account in her name. When we returned home - that very same day - the US treasury had reissued the payment and it was accepted into MY bank account.

Since a checking account in Mexico earns zero interest, I like to have my bank monies in a 'money market' like investment which currently earns 6% and from which I can withdraw money daily as needed. Well now we had my wife's new account and I wanted to do the same with that account. We have had my account for quite some time and the rules have changed (I am grandfathered in). Today - if you do not have a real SAT issued RFC you can only invest in fixed term bank CD like investments which earn much less than 6% and are not nearly as liquid.

Back to the topic of negative real interest for a moment. In Mexico inflation comes into play on your '1099 forms'. I wrote the Bank of Mexico and asked them how we handle negative real interest. Apparently it is possible to have VERY sizable 'nominal' interest and yet lose money in their eyes due to inflation, You can earn the equivalent of - say - 30,000 USD and yet your real interest might be -6,000 USD ! You don't need to report your $30,000 to Mexico. Only problem is - the US IRS only deals with nominal interest so you need to report that to them. You can claim a foreign tax credit for whatever ISR taxes you paid Mexico at the bank.

Sorry for rambling on.

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Dano2004
10/24/2018 00:46 EST

If u bank in the states that SS is taxed but as long as it’s not withinn Mexican Banks your OK bc it’s not earned income in Mexico.

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CREnvy
10/20/2020 20:20 EST

YellowTail,

Thank you so much for tracking this down with an international CPA. Except in this one case, it has been impossible to find a straightforward answer on this topic.

We have been Costa Rica residents for nigh on 12 years now, CR does not tax SS benefits (but that's clearly going to change in the near future) and has no totalization agreement with the U.S. (many expats here just assume that will happen, but I'm not so sanguine about that!).

Anyway, your info has removed an obstacle to our planned relocation to Mexico.

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Franklin99
10/21/2020 02:22 EST

You are considered a tax resident if your primary abode is in Mexico AND you work in Mexico (center of your professional activity). So most retired people getting all of their funds from the US would probably not have to file a Mexican return. Even if you did have to file, the taxes paid in the US would offset to a degree any liability you have (tax treaty). I'm not sure if SS or pensions are specifically exempt, but I suspect they are. So, even if you did become a permanent resident that is not the same thing as being a tax resident.

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Mac539
10/29/2020 20:57 EST

No. But I would never have the check sent to a Mexican bank. Keep a bank account in the States for that. Than transfer the money using an inexpensive company such as XE.

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delta90064
11/1/2020 12:47 EST

Article 19(1)(b) of the United States-Mexico Income Tax Convention provides the exclusion from Mexican tax of social security benefits paid by the United States to a citizen of the United States living in Mexico, or to a resident of Mexico, as follows:

"b) social security benefits and other public pensions paid by a Contracting State to a resident of the other Contracting State or a citizen of the United States shall be taxable only in
the first-mentioned State."

To the extent that treaty provisions are in conflict with domestic law, the treaty controls.

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