Expats are required to file US expat taxes no matter where they live. But how will taxes be affected if you’ve chosen to live in Mexico? With the proximity to the US, warm weather, and beautiful geography, Mexico is one of the most popular destinations for American expatriates. Understanding how your US tax return will be affected by a move to Mexico and what US taxes you will be required to pay is essential. Read on for the details you need!
US Taxes for Americans in Mexico
If you are a citizen or permanent resident of the US, you are obligated to file US taxes each year, no matter the country in which you reside. In addition to the regular income tax return, you may also be required to file an informational return – called Foreign Bank Account Reporting (FBAR) – on your assets held in foreign bank accounts, via FinCEN Form 114.
How to Avoid Double Taxation in Mexico
The US is one of only two governments (Eritrea is the other) that tax the worldwide income of their citizens and permanent residents who reside overseas. Fortunately, the US does have special provisions to help protect Americans from double taxation, including:
- The Foreign Earned Income Exclusion allows you to decrease your taxable income on 2019 US expat taxes by the first $105,900 earned as a result of your labor ($107,600 for 2020) while a resident of a foreign country,
- A foreign tax credit that could lower the tax bill on your remaining income by certain amounts paid to a foreign government, and
- A foreign housing exclusion that allows an additional exclusion from income for certain amounts paid for household expenses that occur as a consequence of living abroad.
With proper planning and quality tax preparation, you should be able to take advantage of these and other strategies to minimize – or even eliminate – your US taxes. Please note that, even if you do not believe that you owe any US income taxes, you will most likely still be required to file a return. To learn about all the ways to save on your US expat taxes, check out our tax guide for Americans working overseas.
Mexican Income Tax Rates
On top of your obligation to file and pay US taxes, Mexico has income taxes of its own. For 2019 and 2020, the national income rates for non-resident expats are as follows:
|Earnings in Pesos||Rate Applicable to Income Level (%)|
|0 – 125,900||Exempt|
|125,900 – 1,000,000||15%|
|1,000,000 and above||30%|
Nonresidents are taxed on Mexican-sourced income only. Expatriates also pay local taxes to their state in Mexico. These rates are different in each state and generally range from 1% to 3%.
Who Is a Mexican Tax Resident?
You are considered a Mexican resident if you have established your permanent home there. In the case of an expat who has a permanent residence in another country, your residence status is determined by the location of your “center of vital interests.” The “center of vital interests” is considered to be in Mexico when the following is true:
- More than 50% of worldwide income throughout the calendar year is earned in Mexico
- The core of an individual’s professional activities is located in Mexico
If you are considered a Mexican resident, you will be subject to tax on your worldwide income ranging progressively from 1.92% – 35% depending on income level.
US-Mexico Tax Treaty
The US-Mexico Tax Treaty is useful for defining the terms for situations when it is unclear to which country taxes should be paid. The country that receives the tax payment is usually determined by the taxpayer’s resident status for each country. The treaty is in place to help relieve double taxation of dual citizens, while also being available to explain tax matters that may be unclear.
Mexican Tax Due Date
The tax year in Mexico is, like in the US, from January 1st to December 31st. US expat taxes need to be filed with the Servicio de Administración Tributaria by April 30th of the following tax year, and no extensions are available.
Employers are required to withhold tax on compensation paid to their employees every month. These payments should be made on or before the 17th of the following month. For Mexican non-residents, it is recommended to pay 15 days after the receipt of income in Mexico.
In addition to the monthly reports, expatriates and Mexican nationals are required to file an annual tax return.
Social Security in Mexico
Social Security is paid by Mexican employers who have employees on the payroll in Mexico. The responsibility to pay these taxes falls on the employer. If an expatriate is in Mexico with a foreign company and there is no relationship with a Mexican company, then you should get in touch with a Mexican tax expert to go over the details of the arrangement and determine to which country social security taxes should be paid.
Is Foreign Income Taxed Within Mexico?
If you are considered a resident of Mexico, then you are going to be taxed on your worldwide income, regardless of your nationality or where the income was earned. Non-residents, including Mexican nationals who have residency for tax purposes in a foreign country, are only taxed on their income that is Mexico-sourced. Note that the source of the income is considered to be in Mexico when the service is provided in Mexican territory, regardless of where the agreement is negotiated or where the payment was made.
Other Taxes in Mexico
In addition to income tax on salaries paid, other forms of income are taxed in Mexico.
Tax on Non-Cash Compensation
Non-cash compensation is considered taxable, including benefits or taxes paid on your behalf by your employer. Foreign nationals do not get an exception.
Capital Gains Tax in Mexico
Any capital gains are also subject to capital gains taxes including the selling of shares, property, securities, or other assets. Currently, the rate is 25% on the gross amount of the transaction or 30% of the total capital gain. For expatriates, the capital gains tax will depend on the tax cost basis, the type of asset to be liquidated, the sale price, and other factors.
In the event of a significant capital gain, we recommend talking to a Mexican tax advisor. For real estate, you will also be required to pay 2 – 5% of the total transaction in local taxes. If you are a resident, capital gains apply to worldwide income. Otherwise, you will only be taxed on income earned from property in Mexico.
Mexican Inheritance Tax
Mexico does not currently have estate or inheritance taxes in place. Mexico assesses a gift tax on real estate, which is payable by the recipient; however, if you are gifting the property to your spouse or family members, this amount is not taxable.
Saving on US Expat Taxes
With the many various forms of taxation that are applied to foreign nationals working and residing in Mexico, applying all of the exclusions, deductions, and credits available to you will help you save on your US taxes. Mexico is a relatively appealing country for expatriate taxation, but understanding when and how you will be taxed is important in order to stay compliant with the Mexican authorities.
Need Help With Your US Expat Taxes in Mexico?
Our team of dedicated CPAs and IRS Enrolled Agents will work with you to make filing your US expat taxes a more hassle-free experience. Contact us today! Ready to get started on your tax prep? Get started now.