How Living in Mexico Affects US Expats (When it Comes to Taxes)

Mexico, the southernmost country in North America is famous around the world for its food, beaches and archaeological sites. It was once home to the ancient Aztec civilization.

If you are planning to become a U.S. expat in Mexico, or have been one for a while, it’s important to know the tax laws of the country and the potential impact on your U.S. tax return. Expat taxes can get complicated. Fortunately, we have outlined the key points below.

Photo by: Sebastien Paquet

How Living in Mexico Impacts US Taxes

As a U.S. citizen or permanent resident (Greencard), you are required to file U.S. taxes even if you live in Mexico. Plus, if you have assets in foreign financial accounts (e.g., foreign banks), there are informational reports you may be required to file. For example, U.S. Expats Living in Mexico with $10,000 or more in foreign banks must file the FBAR (now known as FinCen 114).

Fortunately, the U.S. government provides various forms of tax relief that can lower or eliminate U.S. tax obligations

• The Foreign Earned Income Exclusion – It allows you to exclude a certain amount of income earned outside the U.S.
• The Foreign Housing Exclusion/Deduction – This one relates to additional income that can be excluded for household-related expenses tied to living abroad.
• The Foreign Tax Credit – It allows you to offset foreign taxes paid against U.S. tax obligations.

In most cases, the foreign earned income exclusion is preferable to the foreign tax credit if you live in a country with a lower tax rate than the U.S. (assuming your income is not above the applicable threshold). However, it’s a good idea to speak with an expat tax specialist to discuss the best application of these tax reliefs.

Taxation in Mexico

Let’s start by understanding the basics of the tax system in Mexico. Residents are taxed on worldwide income. You are considered a resident for tax purposes if:

• You have established your home in Mexico; or
• You have permanent residence in another country, but >50% of your income is derived from Mexican sources; or
• The center of your professional activities is located in Mexico.

Non-residents are taxed on Mexico-source income only.

The income tax rate system in Mexico is progressive, peaking at 30%.

Mexico and the U.S. have an income tax treaty in-place. International tax treaties clarify tax jurisdiction. These treaties can provide U.S. citizens and residents with reductions in foreign income taxes. However, a reduction in U.S. taxes is generally not available under these treaties as a result of “tax saving” clauses that allow the U.S. government to impose taxes on U.S. expats as if there were no treaty.

Mexico and the U.S. do not have a social security tax agreement in-place. Therefore, certain U.S. expats will be required to pay into both social security programs.

FATCA and Mexico

The U.S. government is increasingly interested in knowing about the foreign assets held by its citizens and residents. As a result, it has been busy inking deals with other countries whereby foreign financial institutions (FFIs) will be required to:

• Identify accounts of U.S. persons;
• Report certain information to the IRS regarding those accounts;
• Withhold a 30% tax on certain payments to non-participating FFIs and account holders unwilling to provide the required information.

As of the publication of this article, roughly 100 countries have either signed intergovernmental agreements with the United States or are in discussions. It’s important to know that Mexico does have a FATCA agreement in-place with the U.S.

If you have any questions regarding your U.S. expat taxes, contact us today. We are here to help.