Expat Taxes for Americans in Mexico

With its close proximity to the U.S., laid back attitude, and ranking as one of the best places to settle down for U.S. citizens, it’s no wonder so many Americans are making their way across our southern border and choosing Mexico as their permanent home. While living in Mexico may seem like all sunshine and ocean breeze, there are still a few things to consider as a citizen living outside of the U.S., and one of the most important is taxes. The team at Evolution Tax and Legal is breaking down the tax requirements for Americans in Mexico, so you’ll be prepared to conquer this tax season.

U.S. Expat Taxes in Mexico

As a citizen or Green Card holder in the U.S., you are still required to file a U.S. tax return even if you live and work in Mexico. You must file your tax return based on any taxable foreign income, which includes wages, interest, dividends, and rental income. If you meet certain requirements, you may be required to file additional forms as an expat. If you have a foreign bank account, in Mexico or another country, that has more than $10,000 or had more than $10,000 at any point throughout the tax year, you will be required to file a Foreign Bank Account Reporting form, or the FBAR. If you have any foreign assets, such as a home or business, that are worth more than $200,000 combined, you are required to file FATCA Form 8938. Both of these additional forms are required to increase international income transparency and allow the IRS to keep track of citizens’ incomes throughout the world.

Mexico Tax Rates

In addition to filing your U.S. taxes and any required forms, you also may be required to pay Mexican taxes. Whether or not you are required to file is based on your residency status in Mexico. If you are required to file taxes, the tax rates are based on the income earned within Mexico.

  • If you earned anywhere from 0 pesos to 125,900 pesos, you are not required to pay any taxes on the earned income.
  • If you earned 125,901 pesos to 1,000,000 pesos, you are required to pay a 15% tax rate on the income earned.
  • If you earned 1,000,001 pesos or more, you are required to pay a 30% tax rate on income earned.

Similar to the U.S., in addition to the federal taxes included above, there are also state income taxes based on the state in which you reside. These taxes generally range from 1% to 3% of your income, depending on which Mexican state you settle in.

Who Qualifies as a Resident of Mexico?

If you have established your permanent home in Mexico, you are considered a resident of the country. If you are an expat who has a permanent residence in another country, your residency status is determined by using your income and professional activities. If more than 50% of your worldwide income is earned within Mexican borders and the core of your professional dealings happens in the country, you will be considered a Mexican resident, regardless of permanent residence.

U.S.-Mexico Tax Treaty

The U.S.-Mexico Tax Treaty was put in place to help citizens and residents avoid double taxation, and it can be a useful tool to determine which country taxes should be paid to in an unclear situation. A general rule is that the country that receives the tax payment is usually determined by the taxpayer’s residency status for each country.

When Are Mexican Taxes Due?

Mexico follows a similar tax structure to the U.S.: their tax year follows the calendar year, from January 1st to December 31st. The taxes for the tax year must be filed with the Servecio de Administracion Tributaria by April 30th, and no extensions are available.

Mexican employers are also required to withhold tax on any compensation paid to employees on a monthly basis, and these payments are typically due on the 17th of each month. For non-residents, it is recommended they make these payments within 15 days of receiving any income in Mexico.

Social Security in Mexico

Mexican employers fund social security through their taxes, based on the employees they have on payroll within Mexico. For U.S. citizens who work in Mexico, it is necessary to pay social security, although it is beneficial to speak with a seasoned international tax expert to determine the right amount to pay and which country the social security benefits should be paid to, in order to avoid double taxation.

Does Mexico Tax Foreign Income?

If you are considered a resident of Mexico, regardless of nationality, you will be taxed on all income earned worldwide, including any income earned outside of Mexico. If you are a non-resident, you will only be taxed on income that is earned within the country.

Other Taxes in Mexico

In addition to state and federal income taxes in Mexico, there are other tax requirements that you should be aware of, as an expat living in the country.

Capital Gains Tax in Mexico

Any capital gains earned are subject to taxes, including the selling of stocks, property and assets. For a non-resident, the current capital gains tax rate is 35%, 25% on the gross amount of the transaction and 30% on the total capital gain. For Mexican residents, the tax rate depends on the tax-cost basis, the type of asset that was sold or liquidated and other factors.

Mexican Inheritance Tax

Mexico currently does not have an inheritance tax in place. The country does have a gift tax on real estate, which is to be paid by the recipient, in the event that the property is not gifted to a spouse or a family member.

File U.S. Taxes With Evolution Tax and Legal’s U.S. Expat Tax Services

Our team of seasoned expat tax attorneys understand the intricacies of filing expat taxes, and have experience serving U.S. citizens filing taxes in Mexico. We are here to help you optimize your tax returns and avoid double taxation, while ensuring you are in compliance with U.S. and Mexican tax standards. Contact the team to get started filing your expat taxes in Mexico today.

January 7, 2022

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