Mexico Expat Tax Advice You Need To Know

US Expat Tax In Mexico

Expat Living In Mexico

Living in Mexico has much to offer and has long been popular with those who live north of the border in the U.S. It provides a great intercultural experience and incredible food – street tacos are one of my favorites and my wife and regularly spend time in Mexico (at least twice a year). It is also a popular retirement destination for Americans due to its close proximity to the US. The country boasts beautiful beaches, fascinating attractions, friendly locals, an all year round good climate, low cost of living and a good quality of life for all who live in Mexico.

Below is a list of our top attractive cities in Mexico for foreigners to reside in (in no particular order):

  • Cabo San Lucas
  • Cancun
  • Chapala / Ajijic
  • Chihuahua
  • Guadalajara
  • Guanajuato
  • Hermosillo
  • Los Cabos
  • Matamoros
  • Mazatlan
  • Merida
  • Mexico City
  • Monterrey
  • Playa del Carmen
  • Puebla
  • Puerto Penasco
  • Puerto Vallarta
  • San Miguel de Allende
  • Tijuana
  • Tulum
  • Veracruz

Guide To US Expat Tax In Mexico

The Tax Samaritan country guide to US expat tax in Mexico is intended to provide a general review of the tax environment of Mexico and how that will impact your U.S. expatriate tax return as a U.S. Expat In Mexico.

As a U.S. taxpayer, all worldwide income is subject to taxation and reporting and for most expatriates you are required to file a U.S. tax return on an annual basis due on April 15 each year (June 15 if you are residing overseas on the April 15 deadline). The tax treatment for different classes of income can vary greatly from Mexico and the U.S. For example, certain benefits may be tax free or excluded from taxable income in the Mexico, but in the U.S. these benefits are likely to be non-qualified benefits that are subject to being included as taxable income in U.S. As such, there are a number of considerations related to US expat tax in Mexico and this brief article will address a few of those considerations.

The U.S. is the only country that has taxation of worldwide income for all of its citizens, no matter where they live and regardless of how long they have been overseas. Well, actually the U.S. is almost the only country. Eritrea has what is known as a “diaspora tax” on its citizens.

If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. With taxation of worldwide income, your U.S. and foreign income is subject to U.S. income tax, regardless of whether you reside in Mexico or elsewhere. It is a citizenship-based income tax.

Elsewhere in the world such as in Mexico, the basic rule is that taxes are based on residency and not on taxation of worldwide income based on citizenship irrespective of country of residency.

The origin of taxation of worldwide income is with the first federal U.S. income tax, enacted in 1861 in the early months of the American Civil War as part of the Revenue Act of 1861. It levied a 3% tax on incomes over $800, but a 5% tax on income earned in the U.S. by “any citizen of the United States residing abroad.”

The aim was to prevent wealthy people ducking their military and civic obligations by fleeing the U.S. in its time of crisis. In 1864, the tax was expanded to include income from all sources, no matter where generated. Scholars say this happened as the proud sense of being a citizen of the U.S. – with all its opportunities and obligations – first flowered out of the battlefields.

Citizenship-Based Taxation

The defense of citizenship-based taxation and taxation of worldwide income rests on the belief that U.S. citizenship confers benefits independently of residence. It is not necessary that the amount of benefit received be reflected precisely in the amount of tax charged. Income tax liability is measured by the ability to pay, not by the amount of services used during the tax year. But benefit is an important consideration in the scope of an income tax. Many overseas taxpayers feel that taxing the income of nonresident citizens is justifiable only if they derive significant benefit from their U.S. citizenship.

Nevertheless, this model of citizenship-based taxation of worldwide income has remained in the U.S. law ever since, even as the rest of the world has gravitated to a different model, one that simply considers where the taxpayer is living at the moment. Over the years, there has been no serious attempt by lawmakers to end the taxation of citizens who do not reside in the U.S. Instead, the focus of the debate has generally been on the extent to which the earnings of Americans working overseas should be taxed – by both the country of work/residency and the United States.

Mexico Expat Income Taxes

Who Is Liable For Income Taxes In Mexico

In Mexico, residents are taxed on worldwide income. Nonresidents are taxed on Mexican-source income only.

Individuals who establish their home in Mexico are considered a resident in Mexico. If individuals also have a home in another country, they are considered a resident in Mexico if their center of vital interests is located in Mexico. An individual’s center of vital interests is considered to be located in Mexico in the following circumstances:

Who Is A Mexico Tax Resident
Individuals who establish their home in Mexico are considered a resident in Mexico. If individuals also have a home in another country, they are considered a resident in Mexico if their center of vital interests is located in Mexico. An individual’s center of vital interests is considered to be located in Mexico in the following circumstances:

  • I More than 50% of the individual’s income in a calendar year is derived from Mexican sources.
  • The center of the individual’s professional activities is located in Mexico.

Individuals who break residency ties with Mexico must notify the tax authorities within 15 business days before such change in their status and no later than a month following the change of residency. For this purpose, they must designate a legal representative in Mexico.

Income tax rates in Mexico are progressive and the maximum tax rate is 35%.

Tax Year In Mexico And Tax Filing And Payment Rules

The tax year in Mexico is the calendar year and tax returns must be filed no later than April 30 of the following year.

For individuals, the fiscal year in Mexico is the calendar year. Annual tax returns must be filed during April, but no later than 30 April of the following year.

Expat Tax Withholding In Mexico

Personal income taxes of employed residents and nonresidents are withheld at source (i.e. from the employer). A resident individual taxpayer may elect to pay the remaining tax due either when the annual return is filed or in installments with interest over a six-month period.

What You Need To Know About Living And Working In Mexico For Your U.S. Expat Tax Return

Tax Samaritan is a firm focused on tax preparation and resolution for both U.S. (federal) and state income taxes. As a firm that specializes only in U.S. taxes, our opinion is that when seeking a firm that can provide expertise in both U.S. and Mexico income taxes, such expertise can only be found in larger international tax firms that have separate tax specialists for U.S. and Mexico. It’s a rare enough to find a tax expert in a single country let alone with expertise in multiple countries.

Such expertise and convenience is extremely cost prohibitive except for taxpayers that have substantial assets and income where such support and value would be needed and warranted. Thus, we recommend that working separately with a local tax professional in Mexico to handle your Mexico income taxes and a separate U.S. tax professional or firm is the best approach. In addition, if you haven’t already moved to Mexico, we recommend that you dig into some tax planning to fully understand your U.S. and Mexico tax impacts prior to your move including the impact of any foreign investments and the establishment of any foreign business.

When dealing with US expat tax in Mexico, there a number of preferential expat tax treatments that may benefit your U.S. expatriate tax return. In fact, for many U.S. expats it will reduce your U.S. taxes to zero.

Some of these preferential tax treatments or benefits for US expat tax in Mexico include the:

  • If you are a U.S. citizen or a resident alien of the United States and you live in Mexico, US expat tax in Mexico is based on your worldwide income and as such must file a U.S. return for all the years that you are residing in Mexico. However, as a U.S. expat you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings that is adjusted annually for inflation ($99,200 for 2014). In addition, you can exclude or deduct certain foreign housing amounts. This is known as the Foreign Earned Income Exclusion and foreign housing exclusion.
  • When it comes to US expat tax in Mexico, most US expatriates worry about “double taxation” – paying taxes to two different countries – the U.S. and Mexico. A U.S. taxpayer working overseas in Mexico may be able to reduce U.S. taxable income and “double taxation” by claiming the Foreign Tax Credit on Form 1116. Should any foreign income not be fully offset by the foreign earned income exclusion, housing exclusion or housing deduction, the foreign tax credit paid or accrued may be used as a deduction or credit on the U.S. tax return. Taxpayers can elect to either deduct the taxes as an itemized deduction on Schedule A or claim a credit against tax. In most cases, it is to your advantage to take foreign income taxes as a tax credit.

A common but dangerous mistake is the assumption that if there are zero taxes owed with these tax benefits that a return for US expat tax in Mexico does not need to be filed. That is not true. If you are working overseas, it is likely that you meet the filing requirements to file a tax return and must do so. It is important to note that the preferential tax treatments, such as the foreign earned income exclusion and foreign tax credit do not apply to the outcome of your tax liability until claimed on a filed tax return.

When faced with US expat tax in Mexico there are many tax items to consider, but the above are by far the most common preferential tax benefits.

Mexico Foreign Bank Account Reporting – The FBAR (FinCen Form 114)

Another important tax deadline that frequently applies to US expat tax in Mexico is in regards to the disclosure of foreign assets on the FBAR (Foreign Bank Account Report – Form 114).

The FBAR filing deadline is April 15th (or the next business day if April 15th falls on a weekend or holiday). Any reports filed after this date (or an extended due date) are considered a delinquent FBAR.

The FBAR must be electronically filed with the Treasury Department (it is not filed with your federal income tax return) whenever you meet the FBAR filing requirements, which in a nutshell is whenever a U.S. person has a financial interest in, or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust or other type of foreign financial account (including an insurance policy with a cash value such as a whole life insurance policy) maintained with a financial institution, with an aggregate value of over $10,000 at any time during the calendar year based on the highest value of each foreign account during the tax year.

If you have bank accounts at Santander, BBVA Bancomer, Banamex, Banorte, HSBC Mexico or at another bank in Mexico or any other foreign country, you may meet the filing requirement to disclosure your foreign accounts on the FBAR. Please don’t hesitate to contact Tax Samaritan to learn more about your filing requirements.

U.S. – Mexico Social Security Totalization Agreement

The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes. These agreements must be taken into account when determining whether any alien is subject to the U.S. Social Security/Medicare tax, or whether any U.S. citizen or resident alien is subject to the social security taxes of a foreign country. As of this time, Mexico has not entered into a Totalization Agreement with the United States thus there is no opportunity to avoid double taxation of social security income for US expat tax in Mexico.

U.S.- Mexico Tax Treaty And Tax Relief For US Expat Tax In Mexico

The U.S. currently has a tax treaty with Mexico. Please click on the link to the U.S. – Mexico Tax Treaty .

Qualified Dividends In Mexico For Your Foreign Corporation or Investment

Since 2003, dividends paid to individual shareholders from either a domestic corporation or a “qualified foreign corporation” are subject to tax at the reduced rates applicable to certain capital gains. A qualified foreign corporation includes certain foreign corporations that are eligible for benefits of a comprehensive income tax treaty with the United States.

Mexico foreign corporations are eligible for this lower “qualified” dividend rate and can be a significant benefit for reduced US expat tax in Mexico.

Frequently Asked Questions (FAQ)

Does the U.S. have tax treaty with Mexico?

Yes, the U.S. has a tax treaty with Mexico.

What is the tax rate in Mexico?

Mexico’s individual income tax rates for are progressive, with the maximum tax rate at 35%.

Does Mexico have income tax returns?

Yes, Mexico does have an annual income tax return. In addition to income tax on salaries paid, there are other forms of income that are taxed in Mexico.

Does Mexico tax foreign income?

Individuals that are considered Mexico residents are subject to Mexican income tax on their worldwide income, regardless of their nationality. Non-residents, including Mexican citizens who can prove residence for tax purposes in a foreign country, are taxed only on their Mexican-source income.

How do taxes work in Mexico?

Similar to the U.S., Mexico has a progressive tax rate that depends on the amount of your earnings, deductions, and other factors. The maximum Mexico tax rate is 35%.

Can I collect Social Security and live in Mexico?

Yes, so long as long as you are eligible for U.S. Social Security payments, you can receive them while living in Mexico.

How much do you need to live comfortably in Mexico?

According to Investopedia, you can live comfortably in Mexico with an average of $2,175 a month, or $26,100 a year.

Do you have to pay income taxes in Mexico?

Yes. Mexico tax residents are subject to Mexican income tax on their worldwide income, regardless of their nationality. On the other hand non-residents, including Mexican citizens who can prove residence for tax purposes in a foreign country, are taxed only on their Mexican-source income.

All About Randall Brody
Randall is the Founder of Tax Samaritan, a boutique firm specializing in the preparation of taxes and the resolution of tax problems for Americans living abroad, as well as the other unique tax issues that apply to taxpayers. Here, they help taxpayers save money on their tax returns.

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