Many Americans dream of living in sunny Mexico, potentially earning U.S. dollars while spending pesos. In fact, more than 1 million American citizens have already made the move, attracted by the lower cost of living, warm climate, and vibrant culture.
However, making the move comes with important responsibilities regarding taxes for expats in Mexico that can follow you across borders. All American citizens and Green Card holders must file federal taxes each year on worldwide income, regardless of where they live. In addition, Mexico taxes residents on worldwide income and non-residents on Mexican-sourced income.
These overlapping obligations can result in double taxation if you do not manage them correctly. Knowing the rules for Mexico expat taxes before moving can help you stay compliant and protect your income in both countries.
Understanding Tax Residency in Mexico
Determining your tax residency status is the first step in understanding your obligations, as residency dictates whether you are taxed on worldwide income or only on income from Mexican sources:
- You are considered a resident if you spend more than 183 days in Mexico during a calendar year.
- You may also qualify as a resident if Mexico is the center of your vital interests, meaning it is the location of the majority of your income, professional activities, or personal ties.
- Having a permanent home in Mexico can also establish residency if your ties elsewhere are unclear.
- Mexican citizens are presumed to be residents unless they can prove stronger ties abroad.
- Residents are taxed on their worldwide income. Non-residents are taxed only on income sourced from Mexico.
Because residency has significant financial implications, it is essential to keep detailed records of your travel days, income sources, and personal ties to support your status.
Navigating Double Taxation Agreements
To address the issue of double taxation, the U.S. and Mexico established a tax treaty that provides several key benefits for expats:
- The treaty helps prevent the same income from being taxed twice and covers various categories, including business profits, dividends, interest, royalties, and pensions.
- It provides a Foreign Tax Credit, which is a dollar-for-dollar credit for taxes you have paid to Mexico that can be applied to your U.S. tax bill.
- The agreement also offers reduced withholding rates on certain cross-border payments and sets clear rules for resolving cases of dual residency.
To take advantage of these benefits, you must maintain proof of all taxes paid in Mexico and file the relevant forms in both countries.
Filing Taxes as a Foreigner in Mexico
Filing expat taxes in Mexico requires navigating the requirements of both countries, which involves specific forms and deadlines:
- In Mexico, you must file an Annual Income Tax Return (Declaración Anual) by April 30 for the previous tax year.
- Some individuals may also need to make monthly or quarterly provisional tax payments, which are due by the 17th of the following month.
- Your U.S. filing obligation continues, requiring you to report your worldwide income on IRS Form 1040.
- You must file a Foreign Bank Account Report (FBAR) using FinCEN Form 114 if the total value of your foreign financial accounts exceeds $10,000 at any time during the year.
- Under the Foreign Account Tax Compliance Act (FATCA), you may also need to file Form 8938 if the value of your specified foreign financial assets exceeds certain thresholds.
Managing these separate but parallel requirements is key to avoiding penalties and staying compliant in both countries.
Tax Planning and Financial Strategies for Expats
To help manage your U.S. expat taxes in Mexico, consider the following strategies for reducing your American tax liability:
- You can claim the Foreign Tax Credit on Form 1116, which provides a dollar-for-dollar credit for income taxes paid to Mexico to offset your U.S. tax bill.
- The Foreign Earned Income Exclusion (FEIE), claimed on Form 2555, allows you to exclude a significant portion of your foreign-earned income, provided you meet certain eligibility tests. The IRS adjusts this threshold annually — for 2024, it was $126,500.
- A Foreign Housing Exclusion allows you to deduct qualifying housing expenses, such as rent and utilities, from your income if you are also claiming the FEIE.
Beyond these credits and exclusions, strategically timing your income based on your residency status and keeping meticulous records of all taxes paid are essential for optimizing your financial outcome.
Understanding Mexico’s Income Tax Rates
Mexico’s income tax rates vary significantly depending on your residency status and income level:
- For tax residents, Mexico uses a progressive system for 2025, with rates starting at 1.92% on income up to MXN 8,952.49 and increasing to a top rate of 35% on income over MXN 4,511,707.38.
- Non-residents face a simpler structure, with a rate of 15% on income between MXN 125,900 and MXN 1,000,000, and a 30% rate on income exceeding that amount.
Your final tax rate is influenced not only by your residency status but also by your specific income sources — such as wages, investments, or rental income — and any applicable deductions or credits available under Mexican law.
Property Taxes and Real Estate for Expats
Expats who own property in Mexico are responsible for an annual municipal property tax known as “Predial,” which is based on the assessed value of the property. The specific rates and assessment methods for this tax vary by municipality.
Beyond this annual tax, selling a property can trigger a capital gains tax, with rates and potential exemptions depending on your residency status and how you used the property. Furthermore, any rental income from Mexican real estate is subject to income tax and may also require you to collect and remit a Value-Added Tax (VAT).
Conclusion
Managing your tax obligations as a U.S. expat in Mexico requires paying careful attention to the laws of two different countries. Staying informed about residency rules, treaty benefits, and filing deadlines is the most effective way to prevent costly penalties and maximize your financial benefits.
For personalized assistance navigating these complexities, schedule a free consultation with our tax experts to ensure you remain compliant.