What U.S. citizens in Mexico need to know about their tax obligations?

Are you one of the more than 1 million expats living out your golden years in Mexico? Social Security and pension checks certainly go far in this tropical paradise, but there are two important things for US expats in Mexico to remember to do in the spring of each year: file a US tax return, file a Mexican tax return. You want to stay tax compliant no matter where you choose to spend your time.

Pro tip 1: Don’t delay! File your taxes before June 15th if at all possible. If you won’t file until later in the Spring, make a payment of taxes owed to avoid penalties and interest.

Foreign Tax Credit or Foreign Earned Income Exclusion?

The hard truth is that US citizens and Green Card Holders worldwide need to file US tax returns each year. Like in other countries, US expats in Mexico have the option to claim the Foreign Earned Income Exclusion (FEIE) only if they file taxes on time- an excellent reason not to delay! You get an automatic extension to June 15th as an expat living abroad, but this is a filing extension, not a tax owed extension so be sure to make any necessary payments on taxes owed before April 15th to avoid penalties and interest.

You may be eligible to take a deduction or credit for the income taxes paid to a foreign country or U.S. possession. A deduction would reduce your U.S. taxable income, while a credit would reduce your U.S. tax liability. It is always important to contact a professional tax preparer to look at your personal situation, however, in most cases, the credit will be the best option. To claim the Foreign Tax Credit, file Form 1116 (corporations will need to file Form 1118). Bear in mind that the amount of tax credit claimed is not always the same as the amount paid due to various income tax treaties.

Mexico is also required to comply with the FATCA, or Foreign Account Tax Compliance Act. Yo will likely report them to the US Treasury any assets you have in a Mexican financial institution. Be sure to include any foreign earned interest on your US tax return documents.

Mexican income tax and available credits

Permanent residents of Mexico who are in the country over 183 days become tax residents. If you are a full-time resident of Mexico, you will be taxed on your worldwide income. The good news is that you can claim a credit for any taxes that you pay to another country against your Mexican income tax.

Do you earn money in Mexico either through work or investment? Mexico follows a progressive personal tax rate system with top earners paying 35% and the poorest paying less than 2%.

Unlike in the U.S., Mexican tax reporting laws require that spouses report their income separately. Furthermore, there is no standard deduction. However, it is possible to take personal allowances and credits. Currently, these include:

  • Home mortgage interest
  • Contributions to accounts/systems
  • Medical costs
  • Funeral expenses
  • Education costs for dependent children

Tax calendars in Mexico are similar to the U.S. ones. Individual tax returns are due April 30th for the previous year but don’t wait until tax season to pay your taxes. For those who do not have taxes withheld by an employer, estimated taxes must be paid quarterly.

Pro tip 2: Check the calendar and determine if you are tax resident in Mexico. Did you spend more than 183 days in the country last year?

What should tax residents in Mexico know?

So you want to move to Mexico? Great! But it is important to have your documents in a row. You should start by gaining legal status to be in the country. You can enter the country and stay as a tourist with the Mexican Tourist Card, formerly called FMT, obtained at the port of entry for about $20 for only 180 days. If you intend to be around longer, there are two types of Mexican residence visas for you to consider.

Residente Temporal, formerly called FM2, is a temporary resident. This is for people who have a job offer in the country, a person who can prove financial independence or people with a marital link to a Mexican citizen or another resident. You will need to complete paperwork to prove financial independence. If you have a job offer or a pension you will need to show that you have income greater than 400 days of the Mexican minimum wage, currently $88.36 MXN daily. That comes out to about ~ $1,400 USD given current exchange rates. People who have liquid assets may qualify to show that they have maintained an average balance of 5,000 times the minimum wage (for 2018 it is 88.36 pesos) or 441,800 pesos or $22,808 US dollars using 2018 exchange rate. You can prove it with 12 months bank statements. You can hold a temporary visa for up to four years after which time you can either leave Mexico or switch to a permanent visa. 

What about permanent Mexican visas?

Residente Permanente, formerly called FM3, is a permanent resident status. This is ideal for a retired person, someone who owns property in Mexico, or a person with investments in Mexico. Again, as with the temporary resident visa, you will need to show financial stability by proving an income of 20,000 days. This is an open-ended visa and you can hold it for as long as you continue to qualify. 

To qualify for the permanent visa they must show a monthly income of 500 times the minimum wage (for 2018 it is 88.36 pesos) or 44,180 pesos or $2,281 US dollars using an exchange rate of 19.37 to 1 (using January 3, 2018 exchange rate). Present documents with 6 months bank statements to prove your financial situation. Alternatively, you can show an average monthly account balance equivalent to 20,0000 times of the Mexican minimum wage, about $91,233 USD. Provide 12 months bank statements to the embassy as a proof. These amounts are for a single person, those with a partner will need to increase the amounts by about 50%. 

Whichever you choose to obtain, you must start the process at a Mexican Consulate in your home country. It is common for most people to start with the Residente Temporal for 4 years. Later some of them decide to get the Residente Permanente, and then possibly move on to Mexican citizenship. Both can be applied for on your own, or you can employ the help of an immigration specialist.

Not sure which visa to apply for or how to handle your US expat taxes, contact us! We can help you decide which route is financially the best for your situation.

 

FREE U.S. tax guide for Americans abroad

FREE U.S. tax guide for Americans abroad

The only e-book about U.S. international taxation, which you need to read as U.S. expat:

1. Foreign Tax Credit vs. Foreign Earned Income Exclusion

2. What is the danger of holding a Controlled Foreign Corporation?

3. Why more and more people are renouncing U.S. citizenship?

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