US Expat Taxes Explained: Filing Taxes as an American Living in Mexico
You are going to be required to file US expat taxes no matter which country you live in, but how will they be affected if you’ve chosen to live in Mexico? With the familiar language, close proximity to the US, warm weather and beautiful geography, Mexico is the most popular destination for American expatriates. It is important to understand how your US expat taxes are going to change with your move to Mexico, and what US expat taxes you will be required to pay. On top of your obligation to file and pay US expat taxes, Mexico has taxes of its own.
US Expat Taxes in Mexico
If you are a citizen or permanent resident of the United States, then you are obligated to file US expat taxes with the US federal government each year no matter the country in which you reside.
In addition to the regular income tax return, you could also be required to file an informational return on your assets held in foreign bank accounts with Foreign Bank and Other Account Reporting (FBAR) Form 114, in addition to Form 8938 Statement of Specified Foreign Financial Assets.
While the US is one of the few governments that tax the international income of their citizens and permanent residents who reside overseas, it does have special provisions to help protect them from double taxation including:
- The foreign earned income exclusion allows you to decrease your taxable income on US expat taxes by the first $108,700 for 2021 ($107,600 for 2020) earned as a result of your labors while a resident of a foreign country.
- A foreign tax credit that could allow lower your tax bill on your remaining income by certain amounts paid to a foreign government, and
- a Foreign Housing Exclusion that allows an additional exclusion from income for certain amounts paid for household expenses that occur as a consequence of living abroad.
With proper planning and quality tax preparation, you should be able to take advantage of these and other strategies to minimize or even eliminate your US expat taxes. Please do note that even if you do not believe that you owe any US income taxes you will, most likely, still be required to file a return.
Mexico Income Tax Rates
The national income rates for expats from Servicio de Administración Tributaria are as follows:
|Earnings in Pesos (Mex$)||Rate Applicable to Income Level (%)|
|125,900 – 1,000,000||15%|
|1,000,001 and above||30%|
Note that expatriates are also going to be responsible for local taxes to each state. These rates are different in each state and generally range from 1% to 3%.
Who is a Mexico Resident?
In Mexico, you are considered a Mexican resident if you have a permanent home. 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
- When the core of an individual’s professional activities are located in Mexico
Due to the US – Mexico Tax Treaty, it is important to read through the details to determine where taxes should be paid. Also, take note that there is a 183-day exemption period (consecutive or non-consecutive) within a consecutive 12 months before you become responsible for income taxes in Mexico as an expat.
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. It is in place to help relieve double taxation of dual citizens while also being available to explain any tax matters that may be unclear.
Mexico Tax Due Date
The tax year in Mexico is, like the US, from January 1st to December 31st. Tax returns need to be filed with the Servicio de Administración Tributaria April 30th of the following tax year.
However, taxes are also to be reported monthly, and the employers are to withhold the respective taxes that are due on a monthly basis. These payments should be made on or before the 17th of the following month. For expatriates, it is recommended to pay 15 days after the receipt of income in Mexico.
In addition to the monthly reports, expatriates and Mexican national are required to file an annual tax return.
Social Security in Mexico
Mexico does have Social Security taxes in place, which range between .25% and 20.4%, depending on the benefits covered by the Social Security Law. Social Security taxes are paid by Mexican employers who have employees on 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, it is advised that you get in touch with a Mexico tax expert to go over the details of the arrangement and determine where Social Security taxes need to be paid.
Is Foreign Income Taxed Within Mexico?
If you are considered a resident in Mexico, 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.
Taxes in Mexico
In addition to income tax on salaries paid, there are other forms of income that are taxed in Mexico.
Non-cash compensation is considered taxable, including benefits or taxes paid on your behalf by your employer. There are no exceptions for foreign nationals.
Any capital gains are also going to be 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 large capital gain, it would be wise to talk to a Mexican tax advisor. For real estate, you will also be required to pay 2-4% 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.
Mexico does not currently have estate or inheritance taxes in place. There is 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, it is important that you apply all of the exclusions, deductions and credits to your US expat taxes. Mexico is a relatively appealing country for expatriate taxation, but understanding when and how you will be taxed is important to staying compliant with the Mexican authorities.