U.S. EXPAT TAX GUIDE – MEXICO
Reporting RSUs & Stock Options in Mexico as a US Expat
Yes, US expats must report Restricted Stock Units (RSUs) and stock options as part of their US tax obligations, even if these are provided by a Mexican employer.
All income, including that from equity compensation, must be included in your US tax return, regardless of where you live or where the stock was granted.
Table of contents
What exactly are restricted stock units (RSUs)?
Restricted Stock Units (RSUs) are shares of company stock that an employer gives you as part of your compensation package, but with certain conditions attached.
Unlike traditional stock options, you don’t have to purchase RSUs. Instead, they are granted to you after meeting specific requirements, like staying with the company for a set period or achieving certain performance goals.
When do RSUs “vest” and what does that mean for taxes?
When RSUs “vest,” it means you meet the requirements necessary to claim ownership of the shares. At this point, the fair market value of the shares becomes taxable as ordinary income.
In other words, the value of the RSUs at vesting is added to your taxable income and is subject to both federal and possibly state taxes in the US.
What happens tax-wise when RSUs are sold?
Once your RSUs have vested and you choose to sell the shares, you must report any profit (or loss) from that sale on your US tax return. The taxable portion depends on the holding period between the vesting date and the sale date.
If you hold the shares for less than a year before selling, the gain is taxed at your ordinary income tax rates. If you hold them for more than a year, you may qualify for the lower long-term capital gains tax rates.
What about employee stock options?
Employee stock options work differently than RSUs. They give you the option to buy company stock at a specific price. If the stock price rises, you can buy it at a discount, but you don’t automatically receive the shares like with RSUs.
When you exercise your options—buying the stock—any difference between the exercise price and the stock’s market value at that time is considered taxable income.
How does the holding period of RSUs or stock options impact taxes?
The length of time you hold shares after exercising your options or after your RSUs vest affects how they’re taxed.
- Short-term gains apply if you sell shares within one year of exercise or vesting and are taxed at regular income tax rates.
- Long-term gains apply if you hold the shares for more than one year, in which case they are taxed at a lower capital gains rate.
How do I report the sale of RSUs or stock options on my US tax return?
When reporting the sale of RSUs or stock options, the sale proceeds need to be compared against the “cost basis” (the value at which you acquired the stock, which is often the market value at vesting or exercise).
The difference between the sale price and the cost basis is your taxable gain or loss. You will need to file this on Schedule D (Capital Gains and Losses) of your Form 1040.
What are the ordinary income tax rates for RSUs and stock options?
For 2024, the ordinary income tax rates for single filers are:
- 10%: Up to US$11,600 for single filers and US$23,200 for married filing jointly.
- 12%: US$11,601 to US$47,300 for single filers and US$23,201 to US$94,600 for married filing jointly.
- 22%: US$47,301 to US$97,750 for single filers and US$94,601 to US$195,500 for married filing jointly.
- 24%: US$97,751 to US$190,750 for single filers and US$195,501 to US$364,200 for married filing jointly.
- 32%: US$190,751 to US$231,250 for single filers and US$364,201 to US$462,500 for married filing jointly.
- 35%: US$231,251 to US$578,100 for single filers and US$462,501 to US$693,750 for married filing jointly.
- 37%: Over US$578,100 for single filers and US$693,751 for married filing jointly.
What are the capital gains tax rates?
For long-term capital gains, the 2024 rates are as follows:
- 0%: Up to US$47,025 for single filers and US$94,050 for married filing jointly.
- 15%: US$47,026 to $518,900 for single filers and US$94,051 to US$583,750 for married filing jointly.
- 20%: Over US$518,900 for single filers and over US$583,750 for married filing jointly.
These lower tax rates apply if you sell shares after holding them for more than one year.
Can I avoid paying taxes when RSUs vest?
No, the IRS requires that you pay taxes when RSUs vest, as their value is considered part of your income at that point.
However, if you choose not to sell the shares immediately, any future appreciation in value will be subject to capital gains tax instead of ordinary income tax, which can provide some tax savings.
What is the Section 83(b) election, and should I consider it?
Section 83(b) allows you to pay tax on the value of RSUs when they are granted, instead of when they vest. This can be advantageous if you expect the value of the shares to increase significantly by the time they vest.
By paying taxes upfront, you avoid paying ordinary income tax on the potentially higher value at vesting and can instead pay capital gains tax when the shares are sold. However, making this election is a risk, as you will have to pay taxes on the shares even if they don’t vest.
How can I properly calculate the cost basis for stock sales?
When you sell shares, your cost basis is the amount of income you included when the RSUs vested or the stock options were exercised.
For example, if your RSUs vested when the stock was worth US$50 per share and you received 100 shares, your cost basis would be US$5,000. If you sell the stock for US$7,000, you would have a US$2,000 gain to report on your tax return.
What are the risks of not reporting RSUs and stock options correctly?
Failing to properly report RSUs or stock options could lead to IRS penalties. You may also face additional taxes if you underreport your income. If you’re unsure how to handle the tax reporting for these forms of compensation, it’s best to seek help from a tax advisor to avoid potential issues down the road.
How do I keep accurate records for RSUs and stock options?
It’s crucial to keep detailed records of all your equity compensation, including grant dates, vesting schedules, exercise prices (for stock options), and sale prices. These records will help you accurately calculate your cost basis and report capital gains or losses when you sell the shares.
When should I consult a tax advisor?
If you find yourself confused about the tax treatment of RSUs, stock options, or other forms of equity compensation, consulting a tax advisor who understands both US and Mexican tax systems can help. They can provide guidance on how to manage your taxes efficiently and ensure you remain compliant with IRS regulations.
Why partner with a specialist Expat accountant?
Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in Germany. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.
