Expat's Guide to US and Mexican Taxes

Navigating US tax requirements can be challenging for expats living in Mexico, as they must balance compliance with both US and Mexican tax regulations. Understanding the essential forms, deadlines, and credits available to expatriates can make this process easier and help reduce the risk of double taxation. This article covers everything US citizens residing in Mexico need to know, from the basics of filing IRS Form 1040 to leveraging benefits like the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC) and understanding the necessary Mexican tax obligations. With the right knowledge and strategies, expats can ensure they meet both their US and Mexican tax obligations while optimizing their financial situation abroad.

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US Tax Requirements for Expats Living in Mexico

For US citizens living abroad, including those residing in Mexico, navigating the intricacies of tax obligations can be a challenge. Here’s a detailed look at the key US tax forms and credits that expatriates in Mexico need to be aware of, from filing requirements to strategies for reducing double taxation.

• Filing Deadline: The typical due date for US taxes is April 15th, but for US citizens living abroad, an automatic extension is granted until June 15th. Expats can also request a further extension until October 15th if needed.

IRS Form 1040: Individual Income Tax Return

Form 1040 is the standard US individual income tax return that every US citizen must file, irrespective of where they live. This requirement applies whether you are in the US, Mexico, or anywhere else in the world.

• Worldwide Income: As a US citizen, you are required to report your worldwide income on this form, even if you are paying taxes in another country like Mexico.

Foreign Earned Income Exclusion (FEIE)

The Foreign Earned Income Exclusion (FEIE) is a key benefit for US expats, allowing them to exclude a certain amount of their foreign-earned income from US taxation.

• 2024 Exclusion Amount: For the 2024 tax year (filed in 2025), expats can exclude up to $126,500 of foreign-earned income.
• Active Income Only: This exclusion only applies to active income such as salary, wages, or self-employment income earned while working abroad. It does not cover passive income, including investment income, rental income, pension income, and capital gains, which remain fully taxable.
• Qualifying for FEIE To claim the FEIE, expats must prove that their tax home is in a foreign country. This can be done using one of two tests:
  • Physical Presence Test: Requires staying in a foreign country for at least 330 days out of any 365-day period. The days do not have to be consecutive, and this period can start or end on any day of the year.
  • Bona Fide Residence Test: Requires being a resident of a foreign country for an entire calendar year and maintaining substantial social and financial ties, such as having a residence permit or citizenship.
• Form 2555: Expats must use Form 2555 to claim the FEIE.

Foreign Housing Exclusion

Expats who qualify for the FEIE can also claim the Foreign Housing Exclusion, which allows them to deduct certain housing expenses incurred while living abroad.

• Eligible Expenses: The exclusion covers expenses like rent, utilities, and other housing-related costs.
• Form 2555: The Foreign Housing Exclusion is claimed using Form 2555, the same form used for the FEIE. You must be eligible for the FEIE to claim this exclusion.

Sticky States: State Tax Considerations for Expats

Some US states, often referred to as sticky states, do not recognize the FEIE, making it challenging to sever tax ties when moving abroad. These include California, Hawaii, Massachusetts, New York, and South Carolina.

• Maintaining Residency: These states may continue to consider you a resident if you maintain connections like property ownership, state driver's licenses, bank accounts, or voter registration.
• Potential Double Taxation: If you are still considered a resident of a sticky state, you might need to pay state taxes on income sourced from that state, potentially leading to double taxation.
• Avoiding Sticky State Taxes: To avoid this, expats are advised to move to a state with no state income tax before relocating abroad and cut all ties to the former state.

IRS Form 8938: Statement of Specified Foreign Financial Assets (FATCA)

The Statement of Specified Foreign Financial Assets, or FATCA, must be filed using Form 8938 if you own non-US financial assets exceeding a certain threshold.

• Filing Requirement: The reporting threshold varies based on your filing status and whether you qualify as a bona fide resident of Mexico. For instance, single filers with assets valued above $200,000 at year-end are required to file.
• Attachment to Form 1040: Form 8938 must be attached to your Form 1040.

FBAR: Foreign Bank Account Report

The Foreign Bank Account Report (FBAR) is a separate reporting requirement for US citizens with financial assets in foreign accounts.

• Reporting Threshold: If the aggregate value of your foreign financial accounts, including Mexican bank accounts, exceeds $10,000 at any point during the year, you must file an FBAR.
• Filing Process: FBAR is filed electronically using FinCEN Report 114, which is separate from your federal tax return.

Foreign Tax Credit (FTC)

The Foreign Tax Credit (FTC) allows US expats to offset taxes paid to foreign governments against their US tax liability, helping to reduce double taxation.

• Dollar-for-Dollar Credit: The FTC can be claimed dollar-for-dollar for taxes paid to the Mexican government.
• Form 1116: To claim the Foreign Tax Credit, use Form 1116. This is especially useful for expats who have income that is not eligible for the FEIE, such as rental income or investment returns.

Navigating US Tax Obligations as an Expat in Mexico

For US citizens living in Mexico, understanding these key tax forms and exclusions is essential for compliance and optimizing your tax situation. By taking advantage of the FEIE, FTC, and other benefits, you can minimize the risk of double taxation and ensure that your financial obligations are met in both the US and Mexico. Always consider consulting with a tax professional who is experienced in expatriate tax issues to ensure that you are fully compliant and taking advantage of all available benefits.

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Mexican Tax Requirements for Expats Living in Mexico

For US citizens living in Mexico, understanding and navigating the complex tax obligations in their new home is essential to staying compliant with both US and Mexican tax authorities. This guide covers the key aspects of Mexican tax requirements, including income tax, capital gains tax, real estate taxes, and more. It will also outline how to determine your tax residency status in Mexico and how to ensure you meet all local deadlines.

Determining Your Tax Residency Status in Mexico

The first step for expats in Mexico is determining whether they qualify as tax residents. This status significantly affects how much of their income is taxable in Mexico.

• Physical Presence Test: If you spend more than 183 days in Mexico (consecutive or non-consecutive) in a calendar year, you are generally considered a tax resident.
• Economic Ties Test: Even if you do not meet the physical presence threshold, you may still be classified as a tax resident if you have significant economic ties to Mexico. This could include owning a home, operating a business, holding employment, or having a spouse or dependents who are Mexican tax residents.

Tax Implications:

• Residents: If you qualify as a resident, you are required to report and pay taxes on your worldwide income to the Mexican authorities.
• Non-Residents: If you do not qualify as a resident, you only need to report and pay taxes on income derived from Mexican sources.

Additionally, if your income exceeds MXN 400,000 per year, you will need to file a Mexican tax return, regardless of your residency status.

Mexican Income Tax for Expats

Mexican income tax is structured differently for residents and non-residents, making residency status critical for determining tax liability.

• Tax Rates for Residents: Mexican residents are taxed based on their worldwide income. The exact tax rates are progressive and vary depending on income levels.

Earnings in MXN	Tax Rate Applicable to Income Level
$0.00 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%
$1,127,926.85 to $1,503,902.46	32%
$1,503,902.47 to $4,511,707.37	34%
Over $4,511,707.38	35%

• Tax Rates for Non-Residents: Non-residents are only taxed on income from Mexican sources. These sources could include employment in Mexico, rental income from properties located in Mexico, or income from a business in the country.

Earnings in MXN	Tax Rate Applicable to Income Level
$0.00 to $125,900.00	Exempt
$125,900.01 to $1,000,000.00	15%
Over $1,000,000.01	30%

State and Local Taxes in Mexico

Expats in Mexico should be aware of additional tax obligations at the state and local level:

• Local State Taxes: In addition to federal taxes, expatriates are required to pay local state taxes, which vary between 1% and 3% of income, depending on the state they reside in.
• Non-Cash Compensation: Mexico considers non-cash compensation (such as benefits provided by an employer or taxes paid on an employee's behalf) as taxable. This applies to foreign nationals as well, with no exemptions.

Capital Gains Tax in Mexico

Capital gains tax is applied to a range of transactions, including the sale of shares, securities, and real estate. Both residents and non-residents are subject to capital gains tax, but the rates and rules differ.

• Residents: The tax rate on capital gains for residents is variable and depends on factors such as the cost basis, type of asset, sale price, and other considerations.
• Non-Residents: Non-residents have the option to pay a flat rate of either 25% of the gross amount of the transaction or 30% of the total capital gain.
• Real Estate Sales: When selling real estate in Mexico, an additional local tax of 2% to 5% is applied to the total transaction.

Real Estate Property Tax and Rental Income

Expats who own property or earn rental income in Mexico need to be aware of specific property-related taxes:

• Real Estate Property Tax: Mexican municipalities levy taxes on the ownership of real estate property. This tax varies based on the location and value of the property.
• Rental Income: Rental income from properties in Mexico is subject to income tax and IVA (value-added tax). This applies to both residents and non-residents.

Corporate Tax in Mexico

For expats involved in business activities, Mexico has specific rules for corporate taxation:

• Corporate Tax Rate: Mexican corporations, partnerships, and foreign entities with a permanent establishment in Mexico are subject to a flat corporate tax rate of 30%.

Social Security Contributions

Social Security contributions depend on the length of your stay in Mexico:

• Short-term Residents (5 years or less): These expats continue to pay US Social Security taxes.
• Long-term Residents (more than 5 years): These expats must contribute to the Mexican Social Security system.
• Pension Income: Expats receiving US pension income while living in Mexico are generally not subject to additional Mexican taxes on that income.

Value-Added Tax (VAT)

Mexico imposes a value-added tax (VAT) on most goods and services purchased within the country.

• Standard VAT Rate: The standard VAT rate is 16%, applicable to retail goods, professional services, and various other transactions. Expats should factor this into their cost of living.

Filing Tax Returns in Mexico

Before filing a tax return in Mexico, expats must obtain a Registro Federal de Contribuyentes (RFC) number, which serves as a tax identification number.

• Tax Year: Mexico’s tax year runs from January 1st to December 31st.
• Tax Return Deadline: The deadline for filing a tax return with the Servicio de Administración Tributaria (SAT) is April 30th of the following year. If filing electronically, the deadline extends to May 31st.
• Monthly or Quarterly Payments: Expats may also need to make monthly or quarterly tax payments, which are due by the 17th of the month following the reporting period.
• Additional Deadlines: Business owners should also be aware of other tax deadlines, such as filing payroll tax returns or making VAT payments.

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Key Takeaways

• Balancing US and Mexican Tax Compliance: US citizens living in Mexico must navigate both US and Mexican tax systems. Understanding filing requirements, deadlines, and applicable credits helps avoid double taxation.
• Essential US Tax Forms: Expats need to file IRS Form 1040, reporting worldwide income, and may also need to file additional forms like Form 2555 for the Foreign Earned Income Exclusion (FEIE), Form 1116 for the Foreign Tax Credit (FTC), and Form 8938 for foreign financial assets.
• Foreign Earned Income Exclusion (FEIE): This exclusion allows expats to exclude a portion of foreign-earned active income from US taxes. Expats must meet either the Physical Presence Test or the Bona Fide Residence Test to qualify.
• Foreign Tax Credit (FTC): The FTC helps offset US tax liabilities with taxes paid to Mexico, providing relief from double taxation on income not covered by the FEIE.
• Mexican Tax Residency and Obligations: Determining tax residency in Mexico is critical, as residents must report worldwide income, while non-residents are only taxed on Mexican-sourced income. Mexican tax obligations include federal, state, and property taxes.
• Capital Gains, Real Estate, and Corporate Tax in Mexico: Expats involved in property sales or business activities in Mexico should understand applicable capital gains taxes and corporate tax rates, as well as VAT on goods and services.
• Consulting with a Tax Professional: Given the complexity of international taxation, seeking advice from a professional well-versed in both US and Mexican tax laws can ensure compliance and maximize available benefits. Expat Insurance would like to recommend two solutions for your expatriate tax needs that our clients have found beneficial:
  • Expat File – Similar to TurboTax but specifically designed for expatriates, it offers a smoother process for filing taxes independently.
  • Online Taxman – This is our company’s Certified Public Accountant (CPA). They are professionals specializing in more complex international tax situations, such as foreign income and tax planning for executives abroad.