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.
how about an article on taxable pension income, IRA/401k/etc and reporting requirements, the most under-discussed expat subject
Hi Roger,
Thank you for suggestion. We will prepare a blog post about it. Keep an eye on our blog updates!
I’m in the dark about how US STATE taxes are calculated if living abroad. For instance, should I move to NV (no state taxes) before moving to MX or just move from California (LOTS of taxes)? Do states tax you on capital gains, SS, interest, etc even if you don’t live in the US anymore? In other words, does it matter which state you were last a resident of before moving abroad? Thanks.
Hi Kirk,
California has some safe harbor rule (to treat you as a non-resident), but it’s not the most generous out there. Yes, a resident would be taxed on his/her worldwide income.
It would therefore be preferable to establish residency in Nevada as soon as practical – ideally prior to moving overseas.
Warm regards,
Olivier
my previous request applied to Mexico
Does a non resident alien of Mexico need proof of insurance to be claimed as a dependent on a us tax return
Hi Judy,
No, you don’t need to have a proof of insurance for that.
I have been living in Mexico and am a dual citizen. I haven’t submitted a U.S. tax return in “a long time” earning a very low salary in Mexico (under the U.S. poverty threshhold for one adult and three dependent children) while paying Mexican taxes.
I would like to get my tax situation in the U.S. in order, since I’m interested in pursuing a career with the State Department. At the same time, I’m concerned I would get hit with significant fines that I would be unable to pay.
All advice is welcome!
Thank you
Hi Michael,
We emailed you. Please, check your inbox.
Thanks!
Hi! I work full-time in Mexico. I file both with Mexico and the US. This summer I was asked to work in the US. If I collect taxable income in the US, how will this affect my income taxes with the US in 2020?
Hi Kait,
Salary is sourced where the work is performed, thus you will be paying taxes on this income in the US (assuming you’re moving back to the US).
I am a permanent resident living in Mex. US citizen. My source of income is Ca state
pension. In my case it is disablity which is not taxed in US., Is this income subject to taxation in Mex, i.e. Mex income tax? Thanks, mg
Hi Mike,
We sent you an email.
Thanks.
I am a ca resident. I will have a pension is the tax situation better in Mx or should I consider Florida
Hi Wendy,
Florida is a good choice. There no personal income tax.
Hi,
We are permanent residents (visa)living in Mexico full time. We purchased a condo here late last year. We also maintain residency in Florida. Mexico is now where we have our permanent residence.
We have no income source in Mexico. Our US income is my Social Security payments, plus about $5,000 US in interest income. With respect to US income tax, we are below the threshold for paying any tax on this income (for 2019).
If you know, do we need to file and pay income tax to Mexico on either of these US income sources?
Thank you.
Hi George! Practically speaking, Mexico wouldn’t tax this income. Even if you were to file a Mexican tax return, the foreign tax credit (for taxes paid to the US) would offset any Mexican tax owing.
As a permanent resident of Mexico and a US citizen my worldwide income is taxable by the Mexican government. What does Mexico consider to be taxable income? Are Social Security payments and traditional IRA distributions included? What about Roth IRA distributions? Thanks in advance.
Hi Norm! Practically speaking, Mexico wouldn’t tax this income. Even if you were to file a Mexican tax return, the foreign tax credit (for taxes paid to the US) would offset any Mexican tax owing.
Thanks, Olivier. I think you are correct. I have scoured the internet and cannot find any mention of paying taxes on these income sources to the Mexican government.
Hi Norm! I’m happy to help!
I am 67 and get $28,000 per year social security.
I also get $10,000 per year interest on my 401k that
I take out as a distribution every year without
touching the principal.
I pay zero …. $0 IRS taxes here in the USA on this
$38,000 income due to social security taxation “rules”
along with standard deduction.
Are you saying I will pay $0 Mexican income tax
on this income if I become a Mexican resident ???
Hi Philip! If you spend over 183 days a year in Mexico, you would be a Mexican tax resident and you would report that incoem to Mexico. I can not advise you on Mexican tax issues. It is however my undertsanding that the enforcement of tax laws in Mexico is not at par with what is done in the US, as such many people in your situation do not file Mexican tax returns.
Hola,
My wife and I have been working on securing a temporary residence visa which would allow us to stay in Mexico up to 4 years and provide full time residence beyond that. We have been reserching the Mexico tax rules for when we reside in Mexico but would like to clarify what our options are. We both receive retirement pensions from a business that we worked for in the USA and pay the annual IRS taxes each year on what we receive. We understand the USA and Mexico have a treaty which provides the ability not to pay double tax. Looking through the treaty We are not sure if we come under “Categories of compensation related tax-exempt income” (Pension & Retirement benefits, including Social Security retirement benefits and Severance payments. We also see Appendix E Double-taxation agreements has The USA listed dated 26/10/1995 (b)= Modification.
We would like to know if our pension income is exempt or if we would need to pay taxes on our pension in Mexico and if so what amount would that be?
Hola! I would usually refer to article 19 but in this specific case, it didn’t answer my question (if I read correctly, paragraph 1) a) addresses people who still live in the country in which they accrued pension benefits).
As a matter of fact, I know that many retirees in Mexico don’t file Mexican tax returns, not that it is necessarily the right approach.
So, we will revert to the taxation under Mexcian law from https://www.oecd.org/finance/private-pensions/42574964.pdf “[…], while benefits are exempt up to nine times the annual minimum wage and the remainder is taxed at standard income rates”.
As such, if your benefits are more than nine times the annual minimum wages (of the Mexican state you’re in), you would have a Mexican tax liability, which you would then be able to offset using the foreign tax credit on the Mexican side, and most likely you still wouldn’t have any actual Mexican tax owing.
Hi Olivier,
I am 60 years old. I have been in Mexico since November 2018, traveling to the U.S. only to renew my tourist visa. I move around in a motorhome, from place to place. I am a self-employed digital nomad, and all my clients are in the U.S. I am also a Florida resident (domiciled only, no property).
I make under $50K a year. I pay quarterly taxes, and I have claimed the Foreign Earned Income Exclusion which makes my taxable income in the U.S. zero, but I still pay thousands of dollars in SE tax to the U.S.
I have no investment income or any other income. I have zero assets.
How will a temporary residency visa in Mexico affect my tax situation? I was told I must pay income tax to Mexico if I file the FEIE.
I am also planning to take a six month trip to south America this fall. How will this affect my tax situation? I have no plans to be a permanent resident anywhere, ever.
How do I determine what I need to pay to Mexico? To which country should I pay the SE tax? To keep my taxable income in the U.S. as low as possible, can I still claim FEIE along with a foreign tax DEDUCTION (as opposed to a foreign tax CREDIT)?
Hi Kevin! You would still pay SE tax to the US. Yes, the SE tax is separate from income tax, you would still use the Foreign Earned Income Exclusion. By having a Mexican residence permit., you would be in a better position to use the Bona Fide Residence Test, whereas until then, you would have to use the Physical Presence Test
Hi Oliver
My husband and I are retired, have rental income in California from an office building we own, Social Security and investment income from interest and dividends in our investment portfolio. We also own a house in Mexico. We are considering applying for a permanent resident visa (Retired Visa) vs entering and exiting Mexico every 180 days on a Tourist Visa. We will continue to file US Federal tax returns and California State income tax returns. Will we be required to file in Mexico as well? Also, if we sell stock in our portfolio, will we be required to pay capital gains tax in Mexico (quite steep 30%) if we become Permanent Residents. Our situation is a bit complicated. Thanks for your response.
Hi Susan! Yes, if you become a permanent resident of Mexico, you will be subject to the Mexican tax system. You can use the foreign tax credit to offset your US tax liability.
Hi – My husband has an opportunity to possibly get a job in Mexico City. We were wondering if we pay taxes in both Mexico and the United States for the work done in Mexico. It all seems very confusing to file in both countries even though the income would come only from Mexico
Thanks
Hello Karen,
While he would report the income to both countries, he would most likely (if either his income is less than $106,000 or the Mexican tax rate is higher than the US one) not have any tax owing to the US as he would use either the Foreign Earned Income Exclusion or the Foreign Tax Credit.
Warm regards,
Couple of questions here. We live and work in the U.S. If we retire to Mexico specifically Puerto Vallarta, do we need to go for the permanent residence in Mexico? If we get the permanent residence, do we need to pay the Mexican government taxes for our income or capital gain we have from our US investments? US Investments are mutual funds div/cap gains, cap gains from sale of stocks or real estate all in the U.S., rental income from a US rental, Social Security, etc… I am hearing you do not need to pay the Mexican Government for taxes on these investments/income. I hope that is true. Let me know. Thank you. Jerry
You can only stay for 6 months at a time as a tourist.
You can’t get permanent resident status right away. I would recommend getting temporary residence (I believe it’s called FM 2) and after 4 years, you can get permanent residence (FM 3).
Practically speaking, you would not pay tax to Mexico, but even if you did, you would get a foreign tax credit in the US for the taxes paid to Mexico and at the end of the day you would pay the same amount, albeit to a different country.
Mexico does have residency-based taxation, but not only is the enforcement not the same but they would make it harder to get into compliance. Things are different over there. In a practical matter, they have a territorial based taxation system, even though that’s not in the books.
I’ll let you contact my friend Jorge regarding your immigration questions:
Jorge Gonzalez
Mexico Visa Specialist
Cell: 619-512-7537
SanDiegoLeisure.com
MexicoGreenCard.com
Hi , we are trying to avoid the high taxes we pay in California, can we do that by spending most of our time in Mexico, or are we better off moving to Nevada? Thanks
You should do both:
– Establish ties with a state that doesn’t have an income tax system
– Even so, the FTB would still see you as a California resident if you actually live in California, I recommend you actually live in Mexico
Then, yes, you would no longer file a State tax return
Hi,I’m I just turned 62 years old in November and I’ll be taking an early Social Security retirement and I’ll be moving to Mexico in June 2021.Just found out that I have dual citizenship Mexican/American my question is when I move to Mexico I’ll be using the Mexican passport how would that affect my income taxes in the USA?
Your pension is US-sourced income. As such, your US tax return will not change at all after moving to Mexico.
Hi Oliver. Quick question on the US vs Mexico tax issue (s). I understand that my federal retirement, my social security and my Schwab managed investments will be subject to US taxes (no state though, I’m in Texas). I understand if I get a permanent resident card for Mexico ( my wife is a Mexican national) that I’ll owe Mexican taxes. So, with deductions, etc in US I may be paying taxes on say an 18% rate. I may be paying Mexican taxes at a 35% rate. Am I correct in my thinking here. If so, my tax liability could almost double, even when applying the credit. I know Costa Rica doesn’t tax foreign income. Mexico could attract more “gringo” money if they were similar to Costa Rica. Thanks for your comments.
That’s correct. You would get a foreign tax credit for taxes paid to the US, but if the Mexican tax rate was 35% and the US one 18%, you would indeed pay the difference (17%) to Mexico.
Hola. I am considering getting a FM3 visa in Mexico and living there year round. I am retired and my income consists of Social Security, a small pension annuity, and annual IRA distributions. Total annual income is about $60,000. I know I will have to continue to pay U.S. income taxes, but would I also be subject to Mexican taxes? Also I am married, currently filing as married filing jointly. If My spouse chooses to remain in the would I need to change my filing status to married filing separately? Her only income is Social Security.
Spouse would remain in the U.S.
Practically speaking, there are many people in your situation and they don’t file Mexican tax returns.
I don’t know how to file Mexican tax returns in this situation, but even if you did, since your income is US-sourced, you would get a foreign tax credit for taxes paid to the US, as such, you still wouldn’t owe taxes to Mexico.
Hello – I am 32 and not ready for retirement but can meet the financial criteria for account balance for the permanent resident status not just the temporary resident status. Can I continue to work in the USA and qualify for the permanent resident status (not just the temporary one) based on my account balance or do I actually have to be “retired”? Thanks.
I am not sure what you’re referring to. It seems that you are asking an immigration question, but even so, I would need to know which country you’re referring to. Please clarify and I’ll get back to you.
Hi Oliver. I own a business in the US but want to live in Mexico. My fiancé and I are about to purchase a condo there. I have recently retired early as well.
Would we have to pay taxes to Mexico on the money we earn from our businesses in the Us?
I’m assuming our taxes we pay to US would remain?
Thanks for your help
Hi Angelica,
Practically speaking, you would only pay tax to the US and not report to Mexico.
Technically speaking, you should be mindful not to have a “permanent establishment” in Mexico as you would have to file a Mexican tax return once you meet that threshold.
All the best,
Olivier
Thank you for the article Oliver.
I have been in Mexico for all of 2020 (minus 2 weeks), on back-to-back FMM tourist visas (renewed through LaPaz Immigration, due to Covid travel restrictions). Does the 183-day rule still apply since I did not hold a job or own property in Mexico? I work as a digital nomad with ties to the US.
Thanks!
Hi Felicia,
Yes, in theory, you would be a Mexican resident if you spent 183 days in Mexico. It can be overridden with article 4 of the tax treaty.
In practice, most people in your situation don’t file Mexican tax returns. And it might be the correct outcome if you don’t have a “permanent home available to you” in Mexico (for residency purposes) and you don’t have a “permanent establishment” in Mexico (for business income taxation purposes).
Warm regards,
Olivier
My husband and I are in our late 50s, retired and moving to Mexico next month. I qualified financially for permanent residency, and my husband chose temporary so he can bring his car but we plan to live there for at least a few years. We both receive pensions totaling $51,000 a year, electronically deposited to US banks. In all of our research, we have never heard about retirees to Mexico filing tax returns there. You mentioned many US retirees do not. Will we be required to do that? What happens if you don’t?
Nothing would happen. As I mentioned, practically speaking few people in that situation file a Mexican tax return. In addition, your income is US-sourced, as such, you would pay tax first to the US. even if you filed a Mexican tax return, you would get a foreign tax credit for taxes paid to the US which would offset your Mexican tax owing presumably bringing it down to zero.
Hola, I have a quick question. I am going to buy a home/condo in Mexico, soon. I am planning to be working virtually with clients in the US, getting funds deposited to US Bank.
So from what I read in the thread, I am assuming I will have to pay taxes in Mexico on the money earned virtually in the US since I will be living more than 183 days in Mexico. Also if I live in Mexico, I would have no US State tax liability? I am asking because I live in a high tax state on East Coast.
Yes, you would become a Mexican tax resident after 183 days, although the enforcement is different south of the border.
New York has the 548 days rule and would treat you as a non-resident if you spend at least 548 days in a foreign country.
Hi Oliver, do you have any recommendations for a Mexican tax “expert” or two who can clarify some of what you suggest, specifically the piece about how “practically speaking”, the Mexican government isn’t enforcing it’s tax code/law on expats living in Mexico.
I have heard anecdotal stories of SAT auditing expats living in Mexico who haven’t paid their Mexican taxes, and would like to get more clear information on what the real risk is of this happening.
Hi Lee,
I don’t have a referral to a Mexican tax accountant. I do know an immigration attorney who would be able to advise you on this issue:
Jorge Gonzalez
Mexico Visa Specialist
Cell: 619-512-7537
SanDiegoLeisure.com
MexicoGreenCard.com
All the best,
Olivier
Hello –
I’m in the early stages of thinking about moving to Mexico City (also considering Medellin). I really like the temporary and permanent resident options in Mexico, but I’m concerned about the possibility of owing taxes. When I retire in 12 years (age 62), I will receive approximately $120k/yr combined in pension payments (NY and PA), plus Social Security (about $24k/yr) – These pension payments will not be subject to state taxes, but it seems like they might be subject to Mexican taxation. Thoughts?
Yes, they might. I think that as a practical matter, many retirees don’t file Mexican tax returns. If you do file a tax return, you would get a credit for taxes paid to the US, and only pay the difference to Mexico.