US Expat Taxes for Americans Living in Mexico – What You Need to Know
There are an estimated 1,000,000 Americans living in Mexico.
There are plenty of good reasons for moving to Mexico: the climate, the people, the colorful culture, the cuisine, the beaches, the markets, the cost of living… the list goes on and on. As an American expatriate living in Mexico though, what exactly do you need to know regarding filing US expat (and Mexican) taxes?
All US citizens and green card holders are required to file a US federal tax return to the IRS, regardless of where in the world they live or where their income is generated.
US taxes – what you need to know
If your annual income is more than $12,400 (in 2020, or just $400 for self-employed individuals, or just $5 for Americans married filing separately with a foreigner), then you have to file form 1040. While any tax owed is still due on April 15th, expats get an automatic filing extension up until June 15th. This can be extended further until October 15th.
If you have financial assets abroad worth over US$200,000, you should also file form 8938 declaring them.
If you have more than US$10,000 in aggregate in foreign financial accounts, including all of your bank and investment accounts, at any time during the tax year, you should also file FinCEN form 114, better known as an FBAR (Foreign Bank Account Report).
Thankfully, there are several ways in which Americans living in Mexico can reduce their US tax bill (most often to zero). The two primary ones are the Foreign Earned Income Exclusion, which allows you to exclude the first around US$110,000 from US income tax if you can demonstrate that you are resident in Mexico, and the Foreign Tax Credit, which gives you a dollar tax credit for every dollar of tax you’ve already paid in Mexico.
“Residents must pay taxes for their worldwide income, non-residents must pay only for income earned from Mexican sources.” – Santander
The Foreign Tax Credit is typically a good option if you pay more tax in Mexico than you would in the US, as you can carry the excess tax credits forward for use in future years.
Both of these IRS provisions must be claimed by filing the right form though, so if your global income exceeds the minimum IRS thresholds mentioned above, you still have to file a US tax return.
The US and Mexican governments share taxpayer info, and Mexican banks pass on their US account holders’ account info to the IRS, so it’s never worth ducking the issue of filing US taxes from abroad.
If you’re a US citizen or green card holder (including dual citizens) and you have been living in Mexico for some time but weren’t aware you needed to file a US return, don’t worry: there’s a program called the IRS Streamlined Procedure that allows you to catch up on your filing without paying any fines. It’s a good idea to do this soon though, before the IRS comes to you.
Mexican taxes – what you need to know
Mexican tax returns are due on April 30th, while estimated taxes owed should be paid on a monthly basis by the 17th of the month following the date the money was earned The Mexican equivalent of the IRS is called the SAT (Servicio de Administración Tributaria), or it is sometimes known as ‘Hacienda’.
There’s no capital gains tax in Mexico, but if you sell a property your gain after allowable costs is considered income.
Mexican income tax rates range from 1.92% to 35%. An American is considered a tax resident in Mexico if they have a home there, though if they have a home in another country too, where the majority of their income is sourced and the primary place of their business activities will be taken into account.
We strongly recommend that if you have any doubts or questions about your tax filing situation as a US expat living in Mexico, that you contact an expat tax specialist.