Mexican and US Taxes
Expats are required to file US expat taxes no matter where they live. But how will taxes be affected if you’ve chosen to live in Mexico? With the proximity to the US, warm weather, and beautiful geography, Mexico is one of the most popular destinations for American expatriates. Understanding how your US tax return will be affected by filing taxes in Mexico for expats, and what US taxes you will be required to pay is essential. Read on for the details you need!
Mexico Tax Rates
On top of your obligation to file and pay US taxes, Mexico has income taxes of its own. For 2021, the national Mexico tax rates for non-resident expats are as follows:
Earnings in Pesos
Rate Applicable to Income Level (%)
0 – 125,900
125,900 – 1,000,000
1,000,000 and above
Nonresidents are taxed on Mexican-sourced income only. Expatriates also pay local taxes to their state in Mexico. These rates are different in each state and generally range from 1% to 3%.
Who Is a Mexican Tax Resident?
You are considered a Mexican resident if you have established your permanent home there. In the case of an expat who has a permanent residence in another country, your residence status is determined by the location of your “center of vital interests.” The “center of vital interests” is considered to be in Mexico when the following is true:
More than 50% of worldwide income throughout the calendar year is earned in Mexico
The core of an individual’s professional activities is located in Mexico
If you are considered a Mexican resident, you will be subject to tax on your worldwide income ranging progressively from 1.92% – 35% depending on income level.
US-Mexico Tax Treaty
The US-Mexico Tax Treaty is useful for defining the terms for situations when it is unclear to which country taxes should be paid. The country that receives the tax payment is usually determined by the taxpayer’s resident status for each country. The treaty is in place to help relieve double taxation of dual citizens, while also being available to explain tax matters that may be unclear.
Mexican Tax Due Date
Similar to the US, the tax year in Mexico is from January 1st to December 31st. US expat taxes need to be filed with the Servicio de Administración Tributaria by April 30th of the following tax year, and no extensions are available.
Employers are required to withhold tax on compensation paid to their employees every month. These payments should be made on or before the 17th of the following month. For Mexican non-residents, it is recommended to pay 15 days after the receipt of income in Mexico.
In addition to the monthly reports, expatriates and Mexican nationals are required to file an annual tax return.
US Citizens Working in Mexico: Taxes for Social Security
Social Security is paid by Mexican employers who have employees on the payroll in Mexico. The responsibility to pay these taxes falls on the employer. For US citizens working in Mexico, taxes for social security should be paid, but it may take a Mexican expert to go over the details of the arrangement and determine to which country social security taxes should be paid.
Residents of Mexico: Taxes for Expats and Foreign Income
If you are considered a resident of Mexico, taxes for expats will be a concern, and you are going to be taxed on your worldwide income, regardless of your nationality or where the income was earned. Non-residents, including Mexican nationals who have residency for tax purposes in a foreign country, are only taxed on their income that is Mexico-sourced. Note that the source of the income is considered to be in Mexico when the service is provided in Mexican territory, regardless of where the agreement is negotiated or where the payment was made.
Other Taxation in Mexico
In addition to income tax on salaries paid, there are other forms of taxation in Mexico.
Tax on Non-Cash Compensation
Non-cash compensation is considered taxable, including benefits or taxes paid on your behalf by your employer. Foreign nationals do not get an exception.
Capital Gains Tax in Mexico
Any capital gains are also subject to capital gains taxes including the selling of shares, property, securities, or other assets. Currently, the rate is 35% for a non-Mexican resident, 25% on the gross amount of the transaction or 30% of the total capital gain. For expatriates, the capital gains tax will depend on the tax cost basis, the type of asset to be liquidated, the sale price, and other factors.
In the event of a significant capital gain, we recommend talking to a Mexican tax advisor. For real estate, you will also be required to pay 2 – 5% of the total transaction in local taxes. If you are a resident, capital gains apply to worldwide income. Otherwise, you will only be taxed on income earned from property in Mexico.
Mexican Inheritance Tax
Mexico does not currently have estate or inheritance taxes in place. Mexico assesses a gift tax on real estate, which is payable by the recipient; however, if you are gifting the property to your spouse or family members, this amount is not taxable.
Saving on Expat Taxes for US Citizens Working in Mexico
With the many various forms of taxation that are applied to US citizens working in Mexico, applying all of the exclusions, deductions, and credits available to you will help you save on your US taxes. Mexico is a relatively appealing country for expatriate taxation, but understanding when and how you will be taxed is important in order to stay compliant with the Mexican authorities.
For more information / reference: https://www.hrblock.com/expat-tax-preparation/resource-center/country/mexico/tax-tips/