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u.s. expat tax guide – mexico

What do US expats in Mexico need to report to the IRS?

If you’re a US citizen or Green Card holder living in Mexico, you still have to report your worldwide income to the IRS, even if you earn it entirely in Mexico. 

Failing to report foreign income can result in penalties.

How can expats in Mexico reduce their US tax burden?

One way is by using the Foreign Earned Income Exclusion (FEIE). This allows you to exclude up to US$126,500 of foreign-earned income from US taxes in 2024. To qualify, you need to meet the physical presence test or bona fide residence test.

What is the physical presence test?

To pass this test, you must be outside the US for at least 330 full days during a 12-month period. Short visits back to the US are allowed, but they cannot exceed 35 days total in that year.

Can housing costs in Mexico be deducted from your taxable income?

Yes, certain housing expenses—like rent and utilities—can also be excluded from your taxable income in addition to the FEIE. This can help you lower your tax bill.

How do you calculate the housing exclusion?

The IRS sets limits based on where you live. For example, in Mexico City for 2024, the maximum exclusion is US$47,900 in housing costs. You first subtract a base amount of US$19,200 from your total housing expenses, and the difference is the amount you can exclude.

Example:

  • Total housing costs: US$39,000
  • Maximum allowed: US$47,900
  • Base amount: US$19,200
  • Eligible exclusion: US$39,000 – US$19,200 = US$19,800

What other deductions are available to expats?

Besides the FEIE and housing exclusions, expats can also claim the standard deduction. For 2024, it’s US$14,600 for singles and US$29,200 for couples filing jointly. If you have more deductions—like mortgage interest or medical expenses—than the standard amount, you may benefit from itemizing deductions.

Should you take the standard deduction or itemize?

It depends on which option gives you the bigger tax benefit. 

If your itemized deductions are higher than the standard deduction, itemizing can reduce your taxable income further. Keeping detailed records of expenses will help you decide.

How do you become a resident of Mexico as a US expat?

Here’s a simplified process:

  1. Choose a visa: Either a temporary or permanent resident visa based on how long you plan to stay.
  2. Apply at a Mexican Consulate: Submit your visa application with proof of income.
  3. Enter Mexico: After getting your visa, you must enter the country within six months.
  4. Register with INM: Within 30 days of arriving, complete paperwork with Mexico’s National Immigration Institute.
  5. Get a CURP: Apply for a CURP number for identification and access to Mexican services.

How does residency affect taxes in Mexico?

In Mexico, tax rates differ for residents and non-residents:

  • Residents pay taxes on their worldwide income. Rates range from 1.92% to 35% depending on income.
  • Non-residents only pay taxes on their Mexican-sourced income. These rates start at 15% and go up to 30% for higher incomes.

Here’s a breakdown of tax rates for residents:

  • Income up to MXN7,735: 1.92%
  • Income from MXN7,735 to MXN323,862: Ranges from 6.40% to 30%
  • Income over MXN1,299,380: 35%

For non-residents, income up to MXN125,900 is taxed at 15%, and income over this is taxed at 30%.

What is Mexico’s VAT, and how does it work?

Mexico’s Value-Added Tax (VAT) is 16% on most goods and services. Some essential items like basic foods and medicines are either taxed at lower rates or exempt. Businesses can reclaim VAT on their expenses, but they must collect and pay VAT on their sales.

Are there any other tax credits available to US expats in Mexico?

Yes, besides the FEIE, you can also claim the Foreign Tax Credit (FTC) using Form 1116. The FTC allows you to claim a credit for taxes paid to Mexico, reducing your US tax liability dollar for dollar. 

Additionally, if you qualify for the FEIE, you can exclude your housing expenses through the housing exclusion.

Do US expats in Mexico need to file additional forms?

Yes, you may need to file extra forms, depending on your situation:

  • FBAR (FinCEN Form 114): Required if you have more than US$10,000 in foreign financial accounts.
  • Form 8938 (FATCA): For reporting foreign assets exceeding US$200,000 for singles or US$300,000 for couples living abroad.
  • Form 5471: If you own at least 10% of a foreign corporation.
  • Form 8858: Needed if you have foreign branches or disregarded entities.

What’s the best way to stay tax-compliant?

Managing taxes while living abroad can get complicated. Keep track of your income, deductions, and foreign accounts. Also, consult a tax advisor who understands both US and Mexican tax systems to help you file correctly and avoid penalties.

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