Having the opportunity to relocate to a foreign country can create a greater financial positioning for you and your family. It lends to experiencing a different culture, simpler living habits and, in most cases, lowering your cost of living. But like anywhere else in the world, paying taxes is not something you can avoid. When your country of origin is the United States, you will still have to pay income taxes in Mexico and the USA. America is one of the very few countries that requires its citizens to pay taxes even if they don’t reside in the country. There is an upside, however, if you select Mexico as your permanent residence. You can get some relief from both sides of the border.
Understanding Your Taxes in Mexico and the US
The following information will be based on certain criteria that might or might not fall within your specific situation. These are just some suggestive ideas to the individual(s) who have set up small businesses or earn additional income in the country they reside in – specifically Mexico. if you feel that your particular circumstances reach beyond the mentioned tax structure(s) or are more complicated than you care to handle, we recommend you hire a tax service that specializes in international tax laws.
Living outside the USA can be very beneficial in lowering your cost of living. But you still need to file a US Federal Income Tax Return along with an FBAR (Foreign Bank Account Reporting), Form 114. The US requires its residents to report all revenue generated nationally and internationally, regardless of where they live. But you must also pay your taxes in Mexico. Here are some simple tax laws that you might want to take a look at:
The Foreign Earned Income Exclusion (FEIE)
This tax law allows you to decrease your labor income up to $104,100 USD while being a resident of a foreign country. This amount can and most likely will change every year.
A Foreign Tax Credit
You can use the Foreign Tax Credit to lower any remaining taxable income after implementing the FEIS, paid to your resident foreign country and credited to your US income tax filed.
A Foreign Housing Exclusion
As an owner of real estate in Mexico you may deduce taxes for living abroad. This includes payment (rent) and other household expenses that occur while living in a foreign country.
With proper planning and good record keeping, the above credits could advantage your taxable annual income in so many ways. You have to remember that if you think you don’t owe any income taxes you, as a US citizen, must still file a tax a return.
Mexico’s National Income Tax
The Servicio de Administracion Tributaria (SAT, for its initials in Spanish) has the following schedule (for 2017 – and has not been updated, but it could change at any given time). Please note that these tax rates for expats do not include local taxes owed to the resident state and could range from 1 to 3 percent.
Earnings in Pesos | Rate Applicable to Income Level (%) |
0 – 125,900 | Exempt |
125,900 – 1,000,000 | 15% |
1,000,001 and above | 30% |
Who is a Mexico Tax Resident?
The government considers you a resident if you have established a permanent home in Mexico. If you are an expat that has a residence in another country, your residence status is determined by what is called The Center of Vital Interest. The following applies:
- More than 50% of your worldwide income is generated in the country of Mexico in one calendar year.
- When the major part of your business involves the country of Mexico in a majority way including earned wages for products and services sold and/or rendered.
US – Mexico Tax Treaty
The treaty between the US and Mexico governments is very useful when determining who needs to pay and how much taxes need to be paid. It is sometimes unclear who should get what amount. The country that receives the taxes owed is where the taxpayer declares permanent residence. This will help individuals who have dual citizenship from paying double taxes.
Tax Day in Mexico
Much like the US, Mexico’s tax year goes from January 1st to December 31st. All Mexico residents must have their tax returns filed to the Servicio de Administracion Tributaria no later than April 30th of the following year. Please note that, unlike the US, Mexico does not allow extensions.
Employers must withhold taxes on any wages/compensation and must be submitted to the Mexico government on a monthly basis. They must make the payments on or before the 17th of each month. For non-residents, taxes must be paid no less than 15 days after receiving income. Again, there are no tax extensions permitted for any reasons.
Social Security Taxes in Mexico
Employers pay social security taxes to the government. The employer is solely responsible for making these payments. If you are an expat and work for a foreign company that has absolutely no Mexico government ties and/or a relationship, it is highly advised to consult with a Mexico tax expert.
Foreign Income Tax Paid in Mexico
You must pay income tax on earned income from abroad if you are considered a resident of Mexico. Regardless of your origin or where you earned the income, it will be taxable income to the Mexico government. If you are a non-resident or a Mexican national in another country, you only pay taxes on earned income that is considered being from a Mexico source – no matter if the income comes from a foreign company. You must pay taxes to the Mexican government if the payment(s) are for services or products made in Mexico.
Additional Taxes in Mexico
Mexico does assess taxes on other income, gains and compensations. They are as follows.
- Non-cash compensation benefits or other miscellaneous awards paid on your behalf by the employer. There are no exceptions to expats or nationals.
- Any Capital Gains made on the selling of ownership shares, securities, property or any other appreciating assets.
- There is a gift tax on real estate/real property that the receivership is responsible for. If the recipient is a spouse or immediate family, the gift is exempt from taxes.
Note: The tax rate on capital gains range from 25 to 30 percent depending on the gross amount or total payment. The expat’s capital gains tax payment percentage depends on the type of asset liquidated, the sale price and other factors determined by Mexico tax laws. We, again, highly recommended to consult with an expert in taxes in Mexico when considering the sale of property.
Saving on Taxes in Mexico as an Expat
There are various types of taxations when you are working or collecting retirement pay as a foreign expat/resident national. Knowing all the exclusions, deductions and exemptions will help you decrease your tax burden with the United States’ IRS. Keeping records of all your household income and possible deductions are a must. It is also very important to stay compliant with Mexico’s tax laws, as well.
Other Necessary Tax Forms
You must fill out Tax Form 5471 for the IRS if you are a shareholder, officer and/or director in certain foreign corporations. This particular form satisfies the reporting requirements for sections 6038 and 6046.
Two other very important forms that you need to fill out when going from a US to a Mexico corporation is Form 6166. You will also need to fill out Form 8802, which allows an expat/foreign national to request benefits under the Income Tax Treaty or the Value Added Tax (VAT).
Summary
The above information provides only a broad overview regarding dual citizenship, being a resident of Mexico with an origin starting in the United States. When your status changes, you need to go to the United States IRS website and read the United States – Mexico Income Tax Convention.  You will need it when filing out your Federal Tax Return. You need to this every year no matter what country you reside in. As mentioned throughout the article, seeking help regarding Mexico’s and United States’ tax returns by a professional is highly recommended. Having a faulty tax return in Mexico or the US can cost you lots of money and possible jail time.
And remember, at Top Mexico Real Estate…we make it happen!