Taxes in Mexico: What US Expats Need to Know

Taxes in Mexico: What US Expats Need to Know

Mexico’s warm weather, beautiful landscapes, and vibrant culture make it an ideal place for many expats to build a new home. In fact, Mexico is home to more US expats than any other country on earth. But what are Mexican taxes like for US expats? Let’s take a look.

Mexican Taxes at a Glance

  • Currency: Mexican Peso (MXN)
  • Population: 130 million
  • Number of US Expats in Mexico: 1.5 million
  • Capital City: Mexico City
  • Primary Language: Spanish
  • Tax Treaty: Yes
  • Totalization Agreement: No

What Are Expat Taxes like for Americans Living in Mexico?

The first thing most expats living in Mexico want to know is 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 exactly 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? 

Generally speaking, if your income is greater than the value of 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 will have to report and pay taxes on your worldwide income
  • If you don’t qualify as a resident, you will only have to report and pay taxes on the income you received from a Mexican source

Who Qualifies as a Tax Resident in Mexico? 

In Mexico, you are considered a tax resident if any of the following are true:

  • You have established a permanent home in Mexico
  • More than 50% of your worldwide income throughout the calendar year comes from a Mexican source
  • The core of your professional activities take place in Mexico

If you do not meet any of these qualifications, you will generally be considered a non-resident for tax purposes. 

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 tax, estate tax, gift tax, wealth tax or stamp tax.

But what taxes does Mexico impose, 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. The rates for each category differ, as well. Below, you can see tables with the progressive tax rates for both. (All amounts are given in MXN.)

Mexico Income Tax Rate for Residents

Earnings in MXNTax Rate Applicable to Income Level
1–7,735.001.92%
7,735.01–65,651.076.4%
65,651.08–115,375.9010.88%
115,375.91–134,119.4116%
134,119.42–160,577.6517.92%
160,577.66–323,862.0021.36%
510,451.01–974,535.0330%
974,535.04–1,299,380.0432%
1,299,380.05–3,898,140.1234%
3,898,140.13 and above35%

Mexico Income Tax Rate for Non-Residents 

Earnings in MXNTax Rate Applicable to Income Level
0–125,900Exempt
125,900-1,000,00015%
1,000,000 and above30%

Expatriates also have to pay local 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 exception.

Capital Gains Tax 

Capital gains are also subject to taxation in Mexico. This includes gains made from selling:

  • Shares
  • Property
  • Securities
  • and other assets

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, the rate of this tax 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% on 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%–5% of the total transaction.

Corporate Tax in Mexico 

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

Real Property Tax 

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

Pro Tip

You can deduct this tax when calculating the taxable income from renting a property

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 are required to 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 country’s systems. This is one area where Americans living abroad in Mexico may face double taxation

What Is the Deadline for the Mexican Income Tax? 

Just like in the US, the Mexican tax year runs from January 1–December 31. The deadline for filing your annual tax return with the Servicio de Administración Tributaria is April 30. No extensions are available.

In the case of expat employees, income tax is usually withheld by the employer and submitted on the 17th of each month. However, even if your taxes are withheld, you are still required to file an annual tax return.

Does the US Have a Tax Treaty with Mexico? 

Yes, the US has agreed to a tax treaty with Mexico. This means that the two countries have established terms for which government an expat owes taxes to on a given stream of income, helping you avoid double taxation.

Does the US Have a Totalization Agreement with Mexico?

No, there is currently no US-Mexico totalization agreement. As a result, Americans working in Mexico may end up having to contribute to both the US and Mexican social security systems.

What Tax Forms Do Americans Living in Mexico Have to File? 

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 are required to file this form regardless of whether they live in the US, Mexico, or anywhere else.

For most US citizens, Form 1040 is due on April 15, but for expats, that deadline is automatically extended to June 15.

Pro Tip

You can also request a further extension to October 15 for filing this form.

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 threshold for your finances will depend on your filing status and whether you qualify as a bona fide resident of Mexico.

If you do have to file a FATCA report, just fill it out, attach it to your Form 1040, and file them at the same time.

US Tax Forms for Expats in Mexico

IRS Form 1040: Individual Income Tax Return 

Form 1040 is the standard US individual income tax return. Every US citizen is required to file this form regardless of where they live in the world. 

The due date for Form 1040 is typically April 15, but in the case of expats, that due date is automatically extended to June 15. (You can also request a further extension to October 15.) 

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

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

If you are required to file a FATCA report, attach it to your Form 1040 once you’ve completed it and file them together. 

FinCEN Form 114: Report of Foreign Bank and Financial Accounts (FBAR)

If you have at least $10,000 deposited in one or more non-US bank accounts, you’ll need to report it by filing FinCEN Form 114, also known as the FBAR.

Unlike the previous forms, you can’t file the FBAR by mail. You must file it electronically using the FinCEN BSA E-Filing System.

The FBAR is technically due on April 15, but if you miss that deadline, it automatically extends to October 15. You won’t even have to file an extension request.

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 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 you can exclude changes from year to year, but is currently set at $112,200.

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 they 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 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.

Do You Need Help with Your Expat Taxes? 

Hopefully, this guide has given you a better understanding of how Mexico’s tax policies impact US expats. But if you still have questions, we have answers.

10 ways to save BIG on your tax bill as a digital nomad.

Learn where the best tax havens are, common traps, and ways to save money on your US expat taxes.

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