LIVING IN MEXICO TAX BENEFITS

Choosing to live in Mexico can offer a US citizen a multitude of tax
benefits. Below is a brief description of how U.S. citizens living in
Mexico could benefit from Mexican Individual Income Tax laws.

REAL ESTATE

Taxation of Interest /Capital Gains/Losses

The gain on the sale of your personal residence is exempt from tax if you lived in it and owned it for two years and have a resident visa. The gain on the sale of other investment or rental real property is calculated based on original cost less depreciation adjusted by an inflation factor. If you sell personal property that is normally not depreciated such as yachts and airplanes, the entire sales price will be considered gain without deduction for the original cost. Unused capital losses on stock sales and real estate may be carried forward for three years to offset capital gains from sale of shares, or real estate, respectively. Sales of Mexican securities at a profit are not subject to tax if sold on the Mexican stock exchange.

Rental Income

If you have rental income, instead of deducting the actual expenses incurred, you can claim a
deduction of 50% of the rental income if it is used for housing and 35% for all other types of rental
income. You can depreciate your rental property at 5% per year of the building cost, indexed for
inflation. Value Added Tax must be paid on all rental income.
Tax Rates
The yearly tax rate runs from 3% to 34% with adjustments made regularly for inflation. Recent tax
law changes have reduced the top rate to 32% in a few years. All tax rates are indexed for inflation,
also.

PERSONAL

Taxation of Resident Gringos

Full time resident individuals (even U.S. Citizens) are taxed on their worldwide income, but can
claim a credit for taxes paid in other countries against their Mexican income tax. A person who
establishes their permanent residence in Mexico for over 183 days is considered a tax resident.
Taxation of income from outside of Mexico earned by a U.S. citizen permanently residing in Mexico
is currently not often enforced or followed in many areas of Mexico.

Tax Return Personal Deductions

Resident individuals are allowed the following deductions on their personal tax return:

Medical, medical insurance, dental and hospitalization costs.
Payments for school bus transportation for dependent children.
Funeral expenses with some limits
Certain gifts to charitable or welfare institutions and promoters of art and culture.
Voluntary contributions to personal retirement accounts or mandatory employer
retirement systems, within certain limits.
Home Mortgage Interest

Method of Reporting

Husbands and wives must report their income separately. Income from personal services must be reported entirely by the individual rendering the services. Married individuals that do not have a marriage contract, must report all other items of income in equal amounts. Unlike the U.S., there is not standard deduction. However you can take personal allowances and credits as state in a table provided by the Hacienda. Quarterly estimated taxes must be paid based on this year’s income apply the net taxable income percentage shown in the previous year's tax return.

CORPORATE & BUSINESS

Taxation of Dividends

Dividends from a Mexican corporation are not included in your personal income, but are taxed at
corporate level. Interest paid to individuals by Mexican banks need not be declared on your Mexican
tax return. The bank withholds the tax.

Employee Fringe Benefits Required from Employers

The following fringe benefits must be supplied by employers to individuals who are actually
employees of the employer:

Profit sharing equal to 10% of employers pre-tax earnings
Christmas bonus equal to 15 days pay
Vacation bonus equal to 25% of normal pay during the vacation period
Contribution of 7% of employee's salary to a retirement savings fund bank account

Unincorporated Individual Business Income

Individuals with businesses can deduct related expenses. Fixed assets must be depreciated using the approved rates. The straight line method must be used with no deduction for salvage value. Subject to specific limitations, it is sometime possible to deduct the entire cost of a fixed asset, equipment, etc. in the year it is acquired. The total deduction for business expenses cannot exceed the gross receipts. No loss carry forward is allowed. Business entertainment and most business meals are not deductible.Usually estimated tax payments must be made monthly to the Hacienda.

Tax Return Due Dates

Corporate tax returns are due March 31st and Individual tax returns are due April 30th for the previous
calendar year.

NOTE: When the US tax return is prepared, it is recommended that the US based
accountant works in coordination with the Mexican accountant in order to reap
the maximum tax benefit possible. All the Mexican tax law descriptions described
above very general and can be further explained by a qualified Mexican tax
attorney.