# Negative 'real' interest



## lat19n (Aug 19, 2017)

In Mexico (where we live) we receive an annual form from our banks/investment accounts kind of in the theme of a US 1099 form. But here the form really only has three values : Nominal interest, Real Interest, and Taxes Paid (taxes already withheld). 

Well I understand that the US does not acknowledge the 'real' interest - so on my US return I report nominal minus taxes paid as interest earned.

But in Mexico (where we do not even have an RFC (kind of like a SS number) - we would be required to get an RFC and file an annual return if we either a) had earned income OR b) unearned 'real' interest > 100,000 pesos (like 5200 USD). Well we have an account where we earned much more than that in 'nominal' interest - BUT the real interest is reported as a NEGATIVE number. 

So - making up a scenario in dollars - it is as if we had 10,000 USD nominal, -5,000 real and 5,000 interest already withheld.

Can anyone speculate why the real is negative. Is it as simple as - even though the nominal was substantial - in reality we still lost money due to inflation ? I asked the institution earlier this week and I am still waiting for a reply.

Any thoughts appreciated.

edit : actually to better understand my scenario, change that 10,000 USD to more like 30,000 USD.


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## lat19n (Aug 19, 2017)

Self reply :

I asked this question of the financial institution (which is basically the bank of mexico) and received the following response...

"- Real Interest:

Corresponds to the nominal interest difference minus the adjustment for inflation that corresponds in the period of the investment. It can also be considered that measures the degree of inflation. For tax purposes, article 134, paragraph 5, subsection I of the Income Law ("LISR") in effect for the fiscal year of 2018, establishes that, "When inflation is greater than nominal interest and therefore the real interest is negative, the latter should be considered as a loss for such purposes. Said loss may be deducted and / or reduced from other income; with the exception of those that correspond to salaries, as well as to business and / or professional activities ".

Which is truly very generous of them. The nominal interest we receive is more than my wife's social security. In fact it is so good we have opened a second account (they are capped). Our negligible property taxes are LOWER this year than last. Our big 'inflation' hits are gas for the cars and food. Plus - if you are over 60 Mexico gives you discounts on many things (up to 50% off) - which includes property taxes...

Now if only we didn't have to pay taxes to the US on all that nominal interest. But we are within a month of having our Mexican citizenship and we have already met with an international tax accountant here who says we shouldn't be paying the US taxes on that unearned income....


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## Bevdeforges (Nov 16, 2007)

> Now if only we didn't have to pay taxes to the US on all that nominal interest. But we are within a month of having our Mexican citizenship and we have already met with an international tax accountant here who says we shouldn't be paying the US taxes on that unearned income....


Um, I'd be wary of that response. Technically there is no exclusion or exemption for "unearned income" on your US taxes. But you ARE supposed to invoke the Foreign Tax Credit to reduce the double taxation. Perhaps there is some sort of specific mention in the US Mexico tax treaty, but I've never heard of that before.
Cheers,
Bev


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## lat19n (Aug 19, 2017)

Bevdeforges said:


> Um, I'd be wary of that response. Technically there is no exclusion or exemption for "unearned income" on your US taxes. But you ARE supposed to invoke the Foreign Tax Credit to reduce the double taxation. Perhaps there is some sort of specific mention in the US Mexico tax treaty, but I've never heard of that before.
> Cheers,
> Bev


Here is a scenario for you - We live full-time in Mexico and our house here is our only house. On the unearned interest income we make in Mexico - we have been totally open and honest with Mexico - and we have been taxed on the monies earned in Mexico. We have met our taxation requirements in Mexico. Now - perhaps we are subjecting ourselves for double-taxation if we subsequently pay the US on those same monies ??

Edit : and I can appreciate the Foreign Tax Credit - and currently I take it - but maybe I should be taking MORE of it. Perhaps it should be equal to the TOTAL monies we have been taxed on in Mexico.


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## Bevdeforges (Nov 16, 2007)

Yes you are subjecting yourselves to double taxation - at least if you are not using the income taxes paid to Mexico as Foreign Tax Credits to take against whatever US tax liability you incur. The 1116 form (for taking the FTC) is a bit fiddly to fill out, but that's the way you have to play the game if you want to avoid double taxation.
Cheers,
Bev


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## lat19n (Aug 19, 2017)

Bevdeforges said:


> Yes you are subjecting yourselves to double taxation - at least if you are not using the income taxes paid to Mexico as Foreign Tax Credits to take against whatever US tax liability you incur. The 1116 form (for taking the FTC) is a bit fiddly to fill out, but that's the way you have to play the game if you want to avoid double taxation.
> Cheers,
> Bev


Perhaps I am splitting hairs (and if so I apologize) - BUT - if I have unearned income in Mexico AND I have MET all my Mexican tax obligations on those monies - do I have tax obligations in the US - OVER AND ABOVE - what I have already settled with in Mexico, on the very same monies ?

Put another way - if I earn 1000 dollars (for simplicity) in Mexico and I pay Mexico every cent they want in taxes (let's say 50 dollars) - do I then need to report the same 1000 dollars to the US and claim 50 dollars FTC - OR - is the FTC really 1000 dollars ?


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## Bevdeforges (Nov 16, 2007)

Basically, no. There is no "co-ordination" between the tax authorities on this sort of thing. Your US tax obligation is completely distinct from your Mexican tax obligation. (The US is the only country that actually expects its citizens resident elsewhere in the world to declare and pay taxes on income earned outside the US. Well, other than Eritrea.)

Let's say you have $1000 in bank interest from Mexico. What is supposed to happen is that you file your Mexican taxes and pay whatever taxes Mexico wants on this amount, say $50. 

When you file your US taxes you are supposed to declare the $1000 in interest income from Mexico, and then you take a credit for the $50 in income tax you have already paid to the Mexican government. 

If your US taxes on that interest amount to $150, then you only have to pay the IRS $100 because of the foreign tax credit. (Yeah, I know - not such a great deal if you're in a country where the tax rate is significantly lower than the US tax rate.) Worse is when your resident government promotes "tax free" savings account to encourage savings, because then there IS no foreign tax to credit against whatever US taxes you wind up owing on your interest income in a "tax free" account.

One of the joys of being a US citizen, I'm afraid. Unless you renounce (cost: $2350) or unless you are willing to bear the risks of just not reporting that income on your US returns.
Cheers,
Bev


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## lat19n (Aug 19, 2017)

Thanks. To be honest it makes me want to figure out a way to OVERPAY my Mexican taxes - to the point they would equal those of the US - so that the people (country) that is really entitled to the taxes, receives them. At this point the US is not offering us ANY services. I'm sure the money would go a lot further in Mexico than in the US.


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## lat19n (Aug 19, 2017)

My wife will never renounce her US citizenship so that is a no go - but for me $2350 would probably be worth it. BUT - I wonder how you settle out all your US accounts etc. Just for arguments sake, let's say you are receiving $2000/month social security, have about $500,000 in various retirement accounts, another $100,000 in various bank/investment accounts. How does all that settle out if you renounce ? Do you have to liquidate everything and pay a one time tax ? Is the tax on social security withheld at time of payment ? If you renounce - are you still required to file US taxes ?


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## Bevdeforges (Nov 16, 2007)

You can still receive US social security if you are no longer a US citizen. BUT (and it's a big "but") you would have to check the US-Mexico tax treaty for details.... Unless your country of residence claims the right to tax your US based pension/SS, you would then automatically have the NR tax (at 30%) withheld from your benefits (well, 85% of your benefits) before it is paid out to you. As far as I know, this also applies to IRAs, 401Ks and other government defined "deferred tax" retirement plans.

You wouldn't need to file US tax returns, but the 30% rate applies to just about all payments to non-residents who are not US citizens.
Cheers,
Bev


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## lat19n (Aug 19, 2017)

And I assume there is no way to recoup that 30% withheld ?

Even today - as US non resident citizens - if we were to move monies from an IRA to a Roth they will withhold 10% (I believe) on the rollover. But I guess a person looking to renounce would move their 401ks, IRAs etc into a Roth Ira beforehand. Surely money in a Roth is not subject to additional taxation ?? I also assume that if you wanted to renounce you would convert any annuities into immediate annuities.

Then you would want to move whatever monies out of US banks so as not to accrue further US income.


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## Bevdeforges (Nov 16, 2007)

As with all things - it depends.

The 30% withholding generally isn't recoupable. The one exception might be if you had a business in the US (on which you would owe taxes even as a non-resident, non-citizen) and had already paid in certain withholdings on that. Needless to say, it's complicated.

However, the matter of the Roth IRA is another "it depends" thing. And that one depends on the tax treaty between the US and Mexico. Just be aware that they will withhold more than just 10% on a rollover. If you change a regular IRA to a Roth, you have to pay the regular income taxes on the "distribution" all in one lump.

Some countries' tax treaty grants your country of resident the right to tax distributions from an IRA or Roth. Others grant only the US the right to tax distributions from those retirement vehicles. And still others make no mention of IRAs, Roths and 401Ks, so you're on your own there. With the caveat that on distribution, your financial institution will send a 1099 to the IRS, including on the rollover.

The other risk is that, for countries where the taxation is left to your country of residence, they may expect you to report the interest/earnings on a Roth account each year as regular old interest. 
Cheers,
Bev


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