Taxes for Expats – The United States – Mexico Tax Treaty

Taxes for Expats – The United States – Mexico Tax Treaty

The US-Mexico tax treaty was signed in 1992, with a protocol added in 2003. The purpose of the treaty is to prevent double taxation for Americans living in Mexico and Mexicans living in the US, however due to the inclusion of a ‘Saving Clause’ in Article 1 (paragraph 3), which states that the US can tax its citizens as if the rest of the treaty didn’t exist, the treaty doesn’t prevent US expats living in Mexico from having to file US taxes.

US taxes for expats in Mexico

The US tax system is based on Citizenship, meaning that all US citizens and green card holders with worldwide income over $12,000 a year, or just $400 of self-employment income, are required to file an annual US tax return, including expats.

US tax system is based on Citizenship, meaning that all US citizens and green card holders with worldwide income over $12,000 a year, or just $400 of self-employment income, are required to file an annual US tax return, including expats.

The US tax system is based on Citizenship, meaning that all US citizens and green card holders with worldwide income over $12,000 a year, or just $400 of self-employment income, are required to file an annual US tax return, including expats.

Mexico on the other hand only requires Mexican residents to file Mexican taxes. An American typically qualifies as a Mexican tax resident if they have a permanent home in Mexico, or if more than 50% of their worldwide annual income is generated in Mexico, or if the core of their professional activities is in Mexico.

This leaves many US expats living in Mexico having to file two tax returns though, and also puts them at risk of double taxation.

Expats receive an automatic filing extension for their US taxes until June 15th, and they can request a further extension until October 15th if they need to, giving them plenty of time to file their Mexican taxes first.

US expats in Mexico may also have to file a Foreign Bank Account Report (FBAR), if they have over $10,000 in total in non-US based bank and investment accounts at any time during the year (including any that they have signatory authority or control over, even if not in their name).

“Americans have voted Mexico the best place in the world to live outside the U.S. in the way that really matters – with their feet.” – Global News

The United States – Mexico Tax Treaty

The United States – Mexico Tax Treaty covers double taxation with regards to income tax and capital gains tax, however, as mentioned earlier, due to a Saving Clause, the benefits are limited for Americans expats in Mexico. The treaty does ensure though that no one will pay more tax than the higher of the two tax systems, and it also defines where taxes should be paid , which normally depends on where the income arises.

The way for US expats to avoid double taxation on their income arising in Mexico is to claim US tax credits to the same value as Mexican income taxes that they’ve already paid.

For income arising in the US, Americans in Mexico can claim Mexican tax credits against income US taxes paid to the IRS.

To claim US tax credits against Mexican taxes paid, expats must file form 1116 when they file their federal tax return. By doing this, the vast majority of US expats in Mexico won’t end up owing any US income tax.

Alternatively, expats can claim another exemption called the Foreign Earned Income Exclusion by filing form 2555, which simply allows them to exclude the first around $100,000 of their earned income from US taxation. Which exemption is most beneficial depends on each expat’s circumstances (e.g. their types of income, residency status, income levels, where their income originates etc). It is also possible to claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit, although they can’t both be applied to the same income.

The US-Mexico Tax Treaty also has a clause that allows the Mexican government to send US expats’ Mexican tax information directly to the IRS, as well as their Mexican bank and investment account balances. Furthermore, the Mexican government can collect fines on behalf of the IRS, and penalties for not filing US federal returns and FBARs can be steep.

To claim a provision in the United States – Mexico Tax Treaty (other than claiming US tax credits), expats should use IRS form 8833.

Furthermore, the IRS doesn’t fully exempt capital gains from selling a primary residence. As such, US expats in Mexico should always consult with a US expat tax specialist to ensure that they understand the implications of buying or selling their home or Mexican investments.

Catching up

Expats in Mexico who are behind with their US tax filing because they were unaware of the requirement to file from abroad can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS contacts them about it.

Register now, and your Bright!Tax CPA will be in touch right away to guide you through the next steps.

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