Mexico Income Tax for US Expats: Do You Need to Pay?

Mexico Income Tax for US Expats Do You Need to Pay

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Mexico is a popular destination for U.S. expats.

However, once you move to this new country and start earning money, you need to learn how to file your U.S. and Mexico taxes.

Although paying taxes may not be something to look forward to, it is important to fulfill this yearly legal obligation.

Whether you are retired in Mexico, own a business, earn a salary from an employer, or own property in Mexico, you have to file taxes. This guide shows you how to do that and much more.

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Do You Have to Pay Taxes in Mexico?

You have to pay income tax in Mexico if any of the below applies to you:

  • you have a job
  • you run a business
  • you own property that you are renting out
  • you hold an interest-bearing bank account

In other words, if you earn money of any sort in Mexico, that income is subject to be taxed. For the above cases, you have to file a Mexican tax return by April 30 of each year.

However, income taxes in Mexico varies.

Your tax rate is determined by how much you earn, including any deductions. The Mexican individual income tax rate ranges as little as 1.92 percent to 35 percent.

For non-residents, the tax rate mainly depends on how much and what type of income you earn.

Income Tax Guide for Non-Residents

Non-residents are individuals that do not consider Mexico their home.

If an you split your time between Mexico and the U.S., you’re considered a non-resident if less than 50 percent of your total income in the calendar year comes from Mexican sources.

In other words, as long as your main center for professional activities is based outside of Mexico, you are considered a non-resident for Mexican tax purposes. 

Below is a table showing the income tax brackets for non-resident salaries in Mexico.

Taxable Income (in MXN)Tax Rate (for Non-Residents)
Up to 125,900Up to 125,900 MXN = exempt
125,900 to 1,000,00015 percent
1,000,000 and above30 percent

In addition to the salary above, non-residents are also subject to other types of income tax at a different rate based on the activity.

Any income earned from dividends will be taxed 10 percent; income earned from property leasing will be taxed 25 percent; and income earned from real estate sales will be taxed 25 percent.

Non-residents are only taxed on income earned in Mexico.

Income Tax Guide for Residents

An expat is considered a tax resident in Mexico if he or she establishes a home in Mexico.

If you have a home in another country as well, you’re considered a resident of Mexico if a) 50 percent or more of your year’s total income comes from Mexico, or b) Mexico is the main country for your professional activities.

Before moving onto the tax brackets for residents, it must be mentioned that if you’re a Mexican resident, you are taxed on your worldwide income, regardless of whether you’re Mexican or American.

Meaning if you earn part of your income in the U.S., that amount is subject to Mexican income tax as well.

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So, in order to understand which tax bracket you fall under, you should calculate any other income source outside of Mexico as well.

Here are the income tax rates for residents in Mexico.

Taxable Income (in MXN)Tax Rate (for Residents)
Up to 7,7351.92 percent
7,735.01 – 65,651.076.40 percent
65,651.08 – 115,375.9010.88 percent
115,375.91 – 134,119.4116 percent
134,119.42 – 160,577.6517.92 percent
160,577.66 – 323,862.0021.36 percent
323,862.01 – 510,451.0023.52 percent
510,451.01 – 974,535.0330 percent
974,535.04 – 1,299,380.0432 percent
1,2999,380.05 – 3,898,140.1234 percent
3,898,140.13 and above35 percent

For more information about income tax rates in Mexico, you can check out the PWC tax guide for Mexico and peruse Santander’s Mexican tax summary.

Other helpful articles:

What Time of Year to File Taxes

The Mexican fiscal year runs similarly to the U.S., from January 1 to December 31. However, for residents, the annual Mexican tax return is due on April 30 of each year.

So ideally, you should file your tax return in the month of April, or before if possible. If you can’t submit your tax return in time, this may result in fines. Unfortunately, Mexican tax laws don’t allow extensions for the deadline of annual tax returns, so get it done on time.

Your employer should also be withholding tax from your income every month. This payment should be made on the 17th of the following month. For non-residents, you pay 15 days after you receive your Mexican income.

For non-residents, the taxation dates work slightly differently as well. The tax year is a 12-month period, starting with the month that the non-resident is subject to tax.

How to File Taxes in Mexico

Expats in Mexico should file a tax return every year. You should submit this no later than April 30 of each year.

Before you can begin paying taxes and eventually get a tax return, you first need a taxpayer identification number (RFC). You can get an RFC by contacting the Tax Administration (SAT) office. They should be able to help you get ready to pay taxes.

Taxes are filed monthly and annually. The monthly declarations are provisional. If you have an employer, your employer should withhold this tax from your monthly income. The annual declaration is filed with the tax authorities.

These annual tax returns are filed online, so in order to do so, you need to get an electronic code (contraseña) or an electronic signature. This tax return should include information about your total income, including any rental income, dividends, and interest earned. 

It might be worth filing your first annual tax return with the help of a professional. Once you understand how to file it, it will be easier to do it next year by yourself.

You can also file taxes as a non-resident, but the tax rates are generally higher.

If you have multiple or complicated revenue streams, it’s worth hiring an accountant and paying them a monthly fee in order to take care of your finances. By the time tax return season comes about, it’s easier to have a professional by your side.

If you would like to do some more research on paying taxes in Mexico, the best source of information is from SAT themselves. Check out their website and contact them if you have any questions.

Tax Deductions

It’s certainly possible to decrease your taxes. In Mexico, this is done by getting personal deductions.

These personal deductions have been quite limited in recent years and, as of recent times, the general limit is 15 percent of the overall annual income of the taxpayer or equal to or lower than five annual UMA (up to MXN163,467) – whichever is less. 

However, contributions to charity, retirement, and education have a limit separate from the general limit. Medical expenses may also not count toward this limit as long as you have a medical certificate from a government health institution.

So what are some of the purchases and contributions that are tax-deductible? Let’s take a look.

Charity

Contributions made to authorized charities are deductible with a limit of 7 percent of the previous year’s income.

Medical Expenses

Uncompensated or non-reimbursed medical, dental, psychologist, and even funeral expenses can be deducted for a taxpayer and their dependants. Unfortunately, these expenses are not deductible if paid in cash.

Retirement Accounts

Contributions to retirement accounts, whether to a private one or the Mexican social security system, are tax deductible. On the flip side, any income withdrawn from these accounts is taxable.

Education

Education expenses are deductible for you or your dependents including your spouse, parents, and children.

Children’s transportation to school can be tax-deductible as well. Depending on the level of education, the amount deductible ranges from MXN12,900 to MXN24,500. These limits are adjusted for education every year.

Unfortunately, university-level education is not considered deductible at this time. 

Home Mortgage Interest

Home mortgage interests are also deductible, but there are certain limits for this as well. For more information about this, feel free to check out the Mexican Federal Tax Administration website

If you can get a tax deduction, how do you go about getting one? You have the right to add this information when you file your taxes in April. More on how to file your tax returns below.

How to Deal with Double Taxation in the US and Mexico

U.S. citizens have to file federal tax returns and pay taxes no matter what country they live in.

Therefore, it comes at no surprise to hear that one of the most major concerns U.S. expats have when moving to Mexico is how to deal with taxes. After all, the last thing you want to do with your hard-earned money is to have to pay double taxes.

Thankfully, U.S. expats working and living in Mexico may be able to reduce any taxable income by applying for the Foreign Tax Credit on Form 1116. You should file the Form 1116 when you file your federal tax returns.

As U.S. taxes are generally due on April 15, many choose to file their U.S. tax returns first. However, as long as you file both your Mexican and U.S. tax returns, it doesn’t matter which one you do first – it’s up to you.

Once you have claimed that, the foreign (in this case, Mexican) tax credit paid can be used as a credit on your U.S. tax returns.

In this way, you can avoid double taxation to the best of your ability, though you may not always be able to fully avoid paying taxes in both countries.

The above is possible through the United States – Mexico tax treaty. This treaty ensures that no individual pays more tax than what is the higher of the two tax systems. It also states that taxes should generally be collected in the country where the income is earned.

Through this, as described above, U.S. citizens can avoid paying double taxes while living in Mexico.

The tax treaty also makes it so that the Mexican government can send your Mexican tax information to the IRS in the U.S. This makes it easier for you to have a more streamlined process when it is time for you to file your returns.

That said, due to this direct line between the Mexican government and IRS, the Mexican government can also collect fines on behalf of the U.S.

If any expats want to claim a provision in the U.S. – Mexico Tax Treaty (besides U.S. tax credits), they should file Form 8833 along with their federal tax returns.

Other helpful article: The Complete Guide to Filing US Taxes from Abroad

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Taxes on Pension

It’s no secret that Mexico is a popular destination for retirees. Your retirement income stretches much farther in Mexico than it would in the U.S.

According to the cost of living averages, Mexico’s cost of living is 65 percent less than the U.S. So for this reason, many retirees not only head to these warmer shores for vacations, but some even opt to permanently live there.

If you are a part of the latter, it is important to know how this affects your taxes.

Note that even if you choose to retire abroad as a U.S. citizen, you still are required to file a tax return and report any income. You would do this yearly just as you would if you retired in the U.S.

This means that if your retirement income is completely based in the U.S., you won’t owe any income taxes in Mexico. So, if you are solely living in Mexico on your retirement income, there’s no need to file a Mexican tax return.

Of course, this doesn’t mean you won’t be paying other types of taxes such as the IVA (tax on purchases) or any real estate taxes (if applicable). Otherwise, if you are not earning any income in Mexico, you are exempt from income taxes.

If you have a Mexican pension or retirement account, once you are past retirement age, you can freely withdraw money without the need to pay taxes. However, the U.S. still requires you to report this income as a foreign mutual fund.

Taxes for Additional Income

Besides salary, many people have other types of income that are taxed. This can range from rental property, dividends, and even interest earned from bank accounts.

Rental Property

Many Americans have vacation homes in Mexico that they rent out when they are not living there. There are also others who live in Mexico using rental properties as their main source of income.

Although this may be an awesome way to make passive income, you should be aware that this means filling out more forms come federal tax return time.

Depending on your personal situation, you would file out a Schedule C or E in addition to Form 1040 along with your federal tax return. However, if your situation is a bit more complicated, it would be worth consulting an expert.

Taxes on your Mexican property shouldn’t differ too much from those in the U.S., but there may be exceptions. So, if you are unsure of your situation, consult a tax advisor or accountant who will be able to best advise you.

Now onto paying taxes in Mexico.

For non-residents, expect to pay 25 percent of the gross rental income. In addition to that, you will collect 16 percent VAT (value-added tax) from the renter, leading to a total of 41 percent tax.

For residents, on the other hand, you will pay between 2 percent and 10 percent of tax on rental income plus 16 percent VAT.

Dividends

Mexican residents are also subject to paying tax on dividends from any investments received from Mexican corporations. In order to do this, the individual must include it in their income tax returns.

The dividend is taxed at either the individual’s personal tax rate or the corporate income tax (CIT) rate of 30 percent, whichever is lower. There is also a 10 percent tax on the net dividend that is withheld by the Mexican company. This 10 percent is in addition to the tax paid when the annual tax return is filed.

Interest

Any interest earned from accounts you hold in Mexican banks should be reported in your annual tax return.

Certain accounts with small balances may be exempt from this rule. If you are a non-resident, interest and bonds are fully taxable.

Now, on to You

One of the last things you want to think about is taxes when you move to Mexico, but figuring out how taxes work is important.

This not only helps you keep track of your finances, but if you are able to deduct in some way or other, it can also work to your benefit.

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Lev is a writer passionate about inspiring more people to travel and explore the world. He left his Texas home in 2016 to see the world. He has been to over 30 countries and has now immigrated to New Zealand permanently. Lev enjoys summer weather, outdoor activities, and good food.