by Orlando Gotay, Tax Attorney
Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies. His love of things Mexican has led him to devote part of his practice to the tax matters of U.S. expats in Mexico. He can be reached at email@example.com.
Most Americans know that a donation made to a “501(c)(3)” organization can result in a deduction against federal income tax. Few know, that under the U.S.-Mexico tax treaty, a U.S. person may be able to take a U.S. deduction for contributions made to some Mexican charities. I’m not talking U.S. charities that do charitable work in Mexico…I’m talking Mexicana charities.
Here’s an opportunity for you to significantly expand the scope of your charitable activities, and be rewarded with an income tax deduction by Uncle Sam and possibly Mexico, too.
The U.S. Tax Treaty specifies that Mexican authorities can designate, from among their own list of charities, those that essentially meet the U.S. 501(c)(3) requirement and can be considered as if they were U.S. charities.
The SAT (Mexican equivalent of the IRS) publishes a regularly updated list of its approved Mexican public charities. As a subsection lists the Mexican charities designated as equivalents under the Treaty. And that’s the magical word. For a Mexican entity to be eligible to receive your U.S. deductible donation, it must be on the special section that specifically lists the entity as eligible for “Foreign donations”. As of January 2015, there were only 40 entities in all of Mexico that were eligible.
This is important, because claiming a U.S. deduction for a charitable contribution to a Mexican organization that is not authorized to do so will lead to a denial of the deduction.
Once you have ascertained your organization is on the list, there’s a couple more hoops to go through to get the deduction: Your donation cannot exceed your Mexican source income, plus one has to meet all the regular U.S. income tax limitations on charitable contributions. Consult your tax advisor or IRS Pub. 526.
You have Mexican source income, right? Rental income, income from a trade or business carried on in Mexico, or even the sale of real property in Mexico are examples of income that is sourced in Mexico…but there can be many others. Do you earn Mexico royalties from a book you wrote?
Please note: There are many Mexican organizations that are charities for regular Mexican tax, and very likely one is allowed a Mexican deduction against Mexican income tax for donations made to them. Just know there is a difference…a big difference indeed.