Ultimate Tax Guide for US Expats Living in Mexico

Mexico is a top destination for US expats looking for an affordable and vibrant lifestyle abroad. One of the most significant advantages of living in Mexico as a US expat is the low cost of living. Compared to many areas in the US, the cost of living in Mexico is significantly lower, helping expats (many of whom are our clients at Greenback Expat Tax Services) enjoy a high standard of living without breaking the bank.

As a US expat living in Mexico, you’re subject to tax obligations in both countries. Mexico taxes worldwide income, meaning you must file tax returns and pay taxes in the US and Mexico.

Of course, living in Mexico as a US expat comes with challenges. One of the biggest challenges is language. While many Mexicans speak English, expats must learn Spanish to immerse themselves in the local culture and communicate effectively. 

If you’re thinking about moving to Mexico as a US expat, you’ll have to be prepared to navigate tax laws in both the US and Mexico. And remember, you don’t have to learn it all yourself — you can hire a US tax expert to help you prepare your taxes, making the journey much easier for you.

Mexico at a Glance

What Are Taxes like for Americans Living in Mexico?

Most expats living in Mexico first want to know whether they should file their taxes with Mexico or the US. In most cases, the answer is both. This is because:

• Most expats living in Mexico will have at least some local tax obligations.
• Every US citizen is required to file an annual US tax return no matter where they live.

To help clarify precisely what taxes you may owe, here’s an overview of how Mexican and US taxes impact Americans living abroad.

Who Has to File Taxes in Mexico? 

Mexico’s complex tax system requires specific individuals and entities to file yearly tax returns. Understanding who must file taxes in Mexico is essential for anyone living or doing business there. 

Mexican citizens and foreign nationals who work or do business in Mexico must file a tax return if they earn any income. However, there are some exceptions and exceptional circumstances that may affect whether or not someone has to file taxes in Mexico. 

Individuals who are tax residents in Mexico are required to file a tax return on their worldwide income. A tax resident is someone who has spent more than 183 days in Mexico in a given year or who has established a permanent residence in the country. 

Non-residents who earn income in Mexico must also file taxes on that income. Foreign nationals who work in Mexico and individuals who earn income from Mexican sources, such as rental or investment income, are included. 

Businesses and other entities are also required to file taxes in Mexico. Mexican corporations, partnerships, and foreign entities with a permanent establishment in the country must file tax returns each year. 

It is important to note that there are penalties for failing to file taxes in Mexico. If you are required to file a tax return and fail, you may face fines and other legal consequences. 

Generally speaking, if your income exceeds MXN 400,000 per year, you will need to file a Mexican tax return. However, the details of your return will vary based on your residency status.

• If you qualify as a resident, you must report and pay taxes on your worldwide income.
• If you don’t qualify as a resident, you will only need to report and pay taxes on the income you received from a Mexican source.

Who Qualifies as a Tax Resident in Mexico?

Determining tax residency is an essential part of understanding Mexican tax law. If you are considered a tax resident in Mexico, you must pay taxes on your worldwide income. However, not everyone who spends time in Mexico will be considered a tax resident. So, who exactly qualifies as a tax resident in Mexico? 

According to Mexican tax law, there are two ways to qualify as a tax resident: The physical presence test and the economic ties test. If you meet either of these requirements, you will be considered a tax resident and will be required to file taxes in Mexico. 

• Physical presence test. This is the most straightforward way to qualify as a tax resident in Mexico. You will be considered a tax resident if you spend more than 183 days in Mexico during a calendar year. This includes consecutive and non-consecutive days, so if you frequently travel in and out of Mexico, you may still meet the physical presence test. 
• Economic ties test. This one is a bit more complex. Even if you do not meet the physical presence test, you may still be considered a tax resident if you have significant economic ties to Mexico. This can include owning a home, having a business or job in Mexico, or having a spouse or dependents who are tax residents. 

It is important to note that if you are considered a tax resident in Mexico, you must pay taxes on your worldwide income, including income earned outside of Mexico. However, if you are a US citizen or resident, you may be able to claim a foreign tax credit on your US tax return for taxes paid to the Mexican government.

What Types of Taxation Does Mexico Have?

One benefit of living in Mexico is that there are several forms of taxation the Mexican government doesn’t impose. For example, Mexico has no inheritance, estate, gift, wealth, or stamp tax.

But what taxes does Mexico impose on different types of income, and what rates can you expect to pay? Let’s go over the most common types of Mexican taxation.

Income Tax

As mentioned above, residents of Mexico are taxed on their worldwide income, while non-residents are only taxed on Mexico-source income. Below, you can see tables with the progressive rates for both tax purposes. All amounts are given in MXN. The rates for each category differ, as well.

Mexico Income Tax Rate for Residents

Mexico Income Tax Rate for Non-Residents 

Expatriates must also pay local state taxes to whatever Mexican state they live in. These taxes typically range from 1% to 3%.

Non-cash compensation is considered taxable in Mexico, including any benefits or taxes paid on your behalf by your employer. Foreign nationals do not get an exemption.

Capital Gains Tax

Capital gains are also subject to taxation in Mexico. This includes gains made from selling certain assets, including (but not limited to):

• Shares
• Property
• Securities

As with the income tax, the capital gains tax is impacted by your residency status. If you are a resident of Mexico, you will be taxed on your worldwide capital gains. If you are a non-resident, you will only be taxed on capital gains from a Mexican source.

For residents, this tax rate will depend on the tax cost, the type of asset liquidated, the sale price, and other factors. Non-residents can elect to pay a flat rate of either 25% of the gross amount of the transaction or 30% of the total capital gain.

In the case of a real estate sale, you will also be required to pay a local tax of 2% to 5% of the total transaction.

Corporate Tax in Mexico

Mexico imposes a corporate tax at a flat rate of 30%.

Real Estate Property Tax

Mexican municipal authorities levy a tax on the ownership of real estate property.

In Mexico, rental income is subject to various taxes, including income tax and IVA (value-added tax), for all landlords earning rental income from properties within the country. These taxes must be paid regardless of whether the landlord resides in Mexico or not.

Value-Added Tax

Mexico imposes a value-added tax (VAT) on nearly all retail goods and services. When making purchases, you’ll typically see this tax added to the bottom of sales receipts just as you would a sales tax in the US. 

In most of Mexico, the VAT rate is 16%.

Social Security

Like the US, Mexico has a Social Security system that Mexican employers and employees must contribute to out of their salaries. Because there is no US-Mexico totalization agreement, US expats employed in Mexico will likely have to contribute to both countries’ systems. This is one area where those living abroad in Mexico may face double taxation.

If you receive income from a pension product based in the US while living in Mexico, you generally won’t face extra taxes. The IRS will tax your pension earnings, but the Mexican tax authorities typically do not impose additional taxes on this income.

Tax Deadline in Mexico

If you are living or doing business in Mexico, it is crucial to be aware of the tax deadlines there. Missing a tax deadline can result in penalties and other legal consequences. Here’s what you need to know about the tax deadline in Mexico. 

The tax year in Mexico runs from January 1st to December 31st, and taxpayers must file their tax returns Servicio de Administración Tributaria by April 30th of the following year.

Note that tax deadlines in Mexico may be extended in some circumstances. For instance, if you’re filing your tax return electronically, you may have until May 31st to file. Nevertheless, it’s advisable to file your tax return by the initial deadline of April 30th to prevent any possible problems.

Apart from the yearly tax return deadline, if you’re living or conducting business in Mexico, you must know about other tax deadlines. Monthly or quarterly tax payments are due by the 17th of the month following the reporting period.

As a business owner, you may also have additional tax deadlines, such as filing payroll tax returns or making VAT payments. It is essential to stay informed about these deadlines and ensure you promptly meet all your tax obligations. 

Does the US Have a Tax Treaty with Mexico?

Yes, the US and Mexico have a tax treaty in place. The treaty was first signed in 1992 and has been updated several times. The treaty aims to prevent double taxation and promote economic activity between the two countries. 

Under the treaty, US citizens living in Mexico may take advantage of certain tax benefits. For example, the treaty provides a foreign tax credit, allowing US citizens to offset their US tax liability with taxes paid in Mexico. This can help to avoid double taxation of the same income. 

The US-Mexico Totalization Agreement covers business income taxation, including cross-border sales of goods and services, and eliminates certain taxes on dividends, interest, and royalties.

It is important to note that the US-Mexico tax treaty is complex, and its provisions can be challenging to understand. If you are a US citizen living in Mexico or doing business there, it is advisable to seek the advice of a tax professional or tax service familiar with the treaty’s provisions.

Does the US Have a Totalization Agreement with Mexico?

A Totalization Agreement is a bilateral agreement that coordinates the Social Security systems of two countries to help ensure that workers do not pay Social Security taxes to both countries on the same earnings. 

So, does the US have a Totalization Agreement with Mexico? The answer is yes. The US-Mexico Totalization Agreement has been in effect since 2004. It helps simplify the Social Security tax process for US citizens living and working in Mexico and Mexican citizens working in the US. 

Under the agreement, US citizens who work in Mexico and are subject to Mexican Social Security taxes may be able to count their contributions towards US Social Security benefits. Similarly, Mexican citizens who work in the US and are subject to US Social Security taxes may be able to count their contributions towards Mexican Social Security benefits. 

The agreement provides a certificate of coverage that proves a worker’s coverage under one country’s Social Security system and exempts them from Social Security taxes in another country, helping prevent double taxation and ensuring they receive entitled Social Security benefits. 

It is important to note that the Totalization Agreement between the US and Mexico is complex, and its provisions can be challenging to understand.

US Tax Forms for Expats in Mexico

As a US expat living in Mexico, you’ll still have to file at least one US tax form and possibly more. Here are the most common forms.

IRS Form 1040: Individual Income Tax Return

Form 1040 is the standard US individual income tax return. All US citizens must file this form regardless of whether they live in the US, Mexico, or anywhere else.

The due date to file Form 1040 is typically April 15th, but in the case of US expat taxes, that due date is automatically extended to June 15th. You can also request a further extension to October 15th.

IRS Form 8938: Statement of Specified Foreign Financial Assets (FATCA)

If you own non-US financial assets valued above certain thresholds, you must file a FATCA report. The specific financial threshold will depend on your filing status and whether you qualify as a bona fide resident of Mexico.

If you have to file a FATCA report, fill it out, attach it to your Form 1040, and file it simultaneously.

What Tax Deductions Are Available for Expats Living in Mexico?

Because of the US-Mexico tax treaty, most Americans living in Mexico are already exempt from double taxation. However, the IRS also provides several other potential tax credits and deductions for American expats, such as:

Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion, or FEIE, is a tax credit that lets expats exclude a certain amount of foreign-earned income from US taxation. The exact amount of foreign income you can exclude changes from year to year, but it is currently set at $126,500 for the 2024 tax year, filed in 2025.

If you qualify for the Foreign Earned Income Exclusion, you can claim it by filing IRS Form 2555.

Foreign Tax Credit

Using the Foreign Tax Credit, expats can deduct the income taxes paid to foreign governments from their US tax bill, dollar for dollar. This helps reduce the possibility of double taxation.

If you qualify for the Foreign Tax Credit, you can claim it by filing IRS Form 1116.

Foreign Housing Exclusion

The Foreign Housing Exclusion lets expats deduct certain foreign country housing-related expenses from their US tax bill.

If you qualify for the Foreign Housing Exclusion, you’ll have to claim it using Form 2555, as this exclusion is only available if you also claim the Foreign Earned Income Exclusion.

Navigating Tax Filing as a US Expat in Mexico

Filing taxes as a US expat in Mexico can be a complex process with all of the potential tax implications, but it is manageable with the proper knowledge and resources. The tax system in Mexico is unique, and US expats need to understand their obligations and options when it comes to filing taxes.
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