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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.
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:
To help clarify exactly what taxes you may owe, here’s an overview of how Mexican and US taxes impact Americans living abroad.
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.
In Mexico, you are considered a tax resident if any of the following are true:
If you do not meet any of these qualifications, you will generally be considered a non-resident for tax purposes.
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.
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.)
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 are also subject to taxation in Mexico. This includes gains made from selling:
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.
Mexico imposes a corporate tax at a flat rate of 30%.
Mexican municipal authorities levy a tax on the ownership of real property.
You can deduct this tax when calculating the taxable income from renting a property
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%.
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
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.
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.
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.
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.
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.
You can also request a further extension to October 15 for filing this form.
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.
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.)
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.
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.
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:
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.
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.
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.
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.
Learn where the best tax havens are, common traps, and ways to save money on your US expat taxes.