Here’s what you need to know about expat taxes in Mexico. Nothing written here is formal tax advice, and the facts might have changed since we wrote this article.
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Expats must file US expat taxes regardless of where they live. But what about taxes if you want to reside in Mexico? Mexico is a favorite destination for American expatriates due to its closeness to the United States, mild weather, and stunning terrain. Understanding how filing taxes in Mexico will effect your US tax return and what US taxes you will be expected to pay is critical for expats. Continue reading for more information!
Income Taxes for American Expats in Mexico
There is also extra information regarding Mexico that you should be aware of; income taxes may differ from what you think. If you are a US citizen or permanent resident, you are required to submit US taxes each year, regardless of where you live. In addition to your ordinary income tax return, you may be required to file an informative report on your assets kept in overseas bank accounts, known as Foreign Bank Account Reporting (FBAR), using FinCEN Form 114.
Avoiding Double Taxation in Mexico
The United States is one of only two nations (the other being Eritrea) that tax their citizens and permanent residents who live abroad. Fortunately, the United States has unique procedures in place to shield Americans from double taxation in Mexico, which include:
- The Foreign Earned Income Exclusion allows you to reduce your taxable income on US expat taxes in 2021 by the first $108,700 earned as a consequence of your labor while a foreign resident.
- A foreign tax credit that may reduce your tax payment on your remaining income if you pay specific sums to a foreign government, and
- A foreign housing exclusion allows for an extra income deduction for specific amounts paid for household expenditures incurred as a result of residing abroad.
You should be able to use these and other ways to reduce – or even eliminate – your US taxes with appropriate planning and professional tax preparation. Please keep in mind that you will almost certainly be obliged to submit a return even if you do not feel you owe any US income taxes. Check out our tax guide for Americans working abroad to learn about all the ways you may save money on your US expat taxes.
Mexico Tax Rates
- 0 – 125,900 pesos annual earning: exempted from tax
- 125,900 – 1,000,000 pesos annual earning: 15%
- 1,000,000-peso and above annual earning: 30%
Nonresidents are solely taxed on income earned in Mexico. Expatriates in Mexico must additionally pay municipal taxes to their home state. Each state’s rate varies, although they commonly range from 1% to 3%.
Who is a Tax Resident in Mexico?
If you have made Mexico your permanent home, you are called a Mexican resident. Your resident status as an expat with a permanent residence in another country is established by the location of your “center of vital interests,” which is regarded to be in Mexico if the following conditions are met:
- More than half of all global income throughout the calendar year is earned in Mexico
- Mexico is the center of an individual’s professional activity.
If you live in Mexico, you will be liable to a tax on your international earnings that ranges from 1.92 percent to 35 percent, depending on your income level.
US-Mexico Tax Treaty
The US-Mexico Tax Treaty is important for clarifying words in instances when it is unclear which nation should receive tax payments. The taxpayer’s residence status in each nation generally determines which country receives the tax payment. The treaty is in place to enable dual nationals avoid double taxation while also providing clarity on tax issues that may arise.
Mexican Tax Due Date
Mexico’s tax year runs from January 1 to December 31st, same like in the United States. By April 30th of the next tax year, US expat taxes must be filed with the Servicio de Administración Tributaria, and no extensions are granted.
Every month, employers must deduct tax from employee remuneration. These payments must be made by the 17th of the month or earlier. Paying 15 days after receiving income in Mexico is suggested for non-residents of Mexico.
Expats and Mexican citizens are also obliged to complete an annual tax return in addition to the monthly reports.
Social Security Taxes for US citizens working in Mexico
Employers in Mexico who have employees on the payroll pay Social Security. The employer is responsible for paying these taxes. Social security taxes should be paid by US nationals working in Mexico, but it may take a Mexican expert to look over the facts of the agreement and establish to which country social security payments should be paid.
Taxes on Expats and Foreign Income for Mexican Residents
Taxes for expats will be a worry if you are deemed a resident of Mexico, and you will be taxed on all of your international income, regardless of your nationality or where the income was obtained. Non-residents, such as Mexican nationals who hold a tax residency in another country, are solely taxed on income earned in Mexico. Note that regardless of where the agreement was negotiated or where the payment was received, the source of revenue is considered to be in Mexico when the service is given on Mexican territory.
Mexico’s Other Taxation
Other kinds of taxes exist in Mexico, in addition to the income tax on salary earned.
Non-Cash Compensation Tax
Non-cash remuneration, such as perks or taxes paid on your behalf by your employer, is taxed. There are no exceptions for foreign nationals.
Mexico’s Capital Gains Tax
Capital gains taxes apply to any gains made through the sale of shares, property, securities, or other assets. For a non-Mexican resident, the rate is currently 35% on the gross value of the transaction or 30% on the entire capital gain. Capital gains tax for expatriates is calculated using the tax cost basis, the sale price, the type of asset to be liquidated, and other considerations.
We recommend consulting with a Mexican tax professional if you have a big capital gain. In the case of real estate, municipal taxes will range from 2 to 5% of the overall transaction. Capital gains tax is applied to all income if you are a resident. You will only be taxed on income derived from property in Mexico if you do not have any other assets.
Inheritance Tax in Mexico
There are presently no estate or inheritance taxes in force in Mexico. The receiver of real estate in Mexico must pay a gift tax; however, if you are transferring the property to your spouse or other family members, this sum is not taxable.
Expat Tax Savings for US Citizens Working in Mexico
Applying all of the deductions, exclusions, and credits available to you can help you save on your US taxes, given the numerous different kinds of taxation that are applied to US nationals operating in Mexico. Mexico is a relatively attractive location for expatriate taxation, but knowing when and how you will be taxed is critical for staying in compliance with Mexican authorities.
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