Mexico is an attractive destination for US expats due to its lower cost of living, vibrant culture, and affordable lifestyle. However, living in Mexico also comes with specific tax obligations, as US expats are required to file taxes in both the US and Mexico. Understanding how both countries’ tax laws interact is key to avoiding double taxation and ensuring compliance.
Mexico at a Glance:
- Primary Tax Form: Declaración Anual de Impuestos sobre la Renta (Annual Income Tax Return) filed using Forma 22
- Tax Year: January 1st to December 31st
- Tax Deadline: April 30th for individuals, March 31st for businesses
- Currency: Mexican Peso (MXN)
- Population: Approximately 130 million
- US Expats in Mexico: Over 1 million
- Capital City: Mexico City
- Primary Language: Spanish
- Tax Treaty: Yes
- Totalization Agreement: Yes
Taxes for Americans Living in Mexico
As a US expat in Mexico, you are required to file tax returns in both countries. Mexico taxes residents on their worldwide income, and the US requires all citizens to file an annual US tax return, regardless of where they live. Here’s what you need to know about how these systems impact expats.
Who Must File Taxes in Mexico?
In Mexico, anyone earning income is generally required to file a tax return, whether they are a resident or non-resident. Mexican tax residents, which include individuals spending over 183 days a year in Mexico or those with permanent ties to the country, must file taxes on their global income. Non-residents only need to file taxes on income earned from Mexican sources.
If your annual income exceeds MXN 400,000, you must file a Mexican tax return, and the details will vary depending on whether you are considered a resident or non-resident:
- Residents: File and pay taxes on worldwide income.
- Non-Residents: File and pay taxes only on income from Mexican sources.
Determining Tax Residency in Mexico
You are considered a tax resident of Mexico if you meet either of the following criteria:
- Physical Presence Test: Spending more than 183 days in Mexico during the calendar year qualifies you as a tax resident.
- Economic Ties Test: If you have significant economic connections, such as owning property or having a business in Mexico, you may qualify as a resident even if you don’t meet the physical presence test.
What Taxes Does Mexico Impose?
Mexico does not have certain taxes that are common in other countries, such as inheritance, estate, or gift taxes. However, there are several types of taxes you need to be aware of:
Income Tax
Mexico’s income tax system is progressive for residents, meaning the tax rate increases with higher income levels. Here are the income tax rates for residents:
| Earnings (MXN) | Tax Rate (%) |
| 0 to 8,952.49 | 1.92% |
| 8,952.50 to 75,984.55 | 6.4% |
| 75,984.56 to 133,536.07 | 10.88% |
| 133,536.08 to 155,229.80 | 16% |
| 155,229.81 to 185,852.57 | 17.92% |
| 185,852.58 to 374,837.88 | 21.36% |
| 374,837.89 to 590,795.99 | 23.52% |
| 590,796.00 to 1,127,926.84 | 30% |
| Over 1,127,926.85 | 35% |
Non-residents face different rates, including a 15% rate on income between MXN 125,900.01 and MXN 1,000,000 and a 30% rate on income over MXN 1,000,000.
Capital Gains Tax
Residents are taxed on capital gains from worldwide sources, while non-residents are taxed only on capital gains from Mexican sources. Non-residents can pay either a flat 25% of the gross amount or 30% on the net gain.
Value-Added Tax (VAT)
Mexico applies a VAT of 16% on most goods and services.
Corporate Tax
Mexico has a flat corporate tax rate of 30%.
Real Estate and Rental Income Taxes
Real estate property taxes vary by region, and rental income is subject to income tax and a VAT.
Social Security
Mexican employers and employees contribute to the social security system. While there is no US-Mexico Totalization Agreement, which means you may need to contribute to both countries’ systems, you might be able to claim tax credits on your US return to avoid double taxation.
Tax Filing Deadlines in Mexico
- Annual Returns: Due April 30th for individuals and March 31st for businesses.
- Monthly/Quarterly Payments: Due by the 17th of the following month for the reporting period.
US-Mexico Tax Treaty
The US-Mexico Tax Treaty helps prevent double taxation, allowing US citizens living in Mexico to claim foreign tax credits. For example, taxes paid to Mexico can offset your US tax liability. The treaty also covers the taxation of business income, dividends, interest, and royalties.
US Expat Tax Forms
As a US expat in Mexico, you must continue to file US tax forms, including:
- IRS Form 1040: Standard individual tax return due by April 15th, with an automatic extension to June 15th for expats.
- IRS Form 8938: FATCA reporting for foreign assets over a specific threshold.
- FinCEN Form 114 (FBAR): Report of foreign bank accounts if combined balances exceed $10,000 at any point during the year.
US Tax Credits and Deductions for Expats in Mexico
Foreign Earned Income Exclusion (FEIE)
The FEIE allows you to exclude up to $126,500 (2024 limit) of foreign-earned income from US taxation. You must meet either the Physical Presence Test or Bona Fide Residence Test to qualify.
Foreign Tax Credit
Expats can offset US taxes with the Foreign Tax Credit, which provides a dollar-for-dollar reduction based on taxes paid to the Mexican government.
Foreign Housing Exclusion
This exclusion allows you to deduct housing expenses such as rent and utilities if you claim the FEIE.
Navigating US and Mexican Tax Obligations
Filing taxes in both the US and Mexico can be complex. Ensure that you understand your tax obligations and take advantage of tax credits, deductions, and the benefits provided by the US-Mexico tax treaty to minimize your tax liability. If needed, consult a tax professional who specializes in expat taxes.
For specific advice tailored to your situation, you can always consult an expat tax expert who can guide you through the process of staying compliant with both countries’ tax laws.