u.s. expat tax guide – mexico
Do US citizens need to file taxes while living in Mexico?
Yes, even if you’re living in Mexico, US citizens must still file a tax return with the IRS if their income exceeds the minimum threshold. This is because the US taxes its citizens on their worldwide income, regardless of where they reside.
What are the income thresholds for filing?
The amount you need to earn before being required to file a US tax return depends on your filing status:
- Single (under 65): US$14,600
- Married filing jointly: US$29,200
- Married filing separately: US$5
If you earn more than these amounts, you’ll need to file. It’s important to note that even if you’re living abroad, these thresholds apply based on your worldwide income.
How does it work if I’m married to a non-US citizen?
If you’re married to a non-US citizen (often called a “non-resident alien”), you typically file as “married filing separately.” Filing as “single” isn’t correct, as the IRS still recognizes your marital status.
In certain circumstances, you can choose to file jointly with your non-US spouse, but this involves meeting specific requirements, such as obtaining an Individual Taxpayer Identification Number (ITIN) for your spouse.
What if I’m self-employed while living in Mexico?
Self-employment adds a layer of complexity. If you earn more than US$400 through self-employment, even if it’s a small side job or freelance work, you’re required to file a US tax return.
This rule applies regardless of your other income or whether you meet the general filing threshold.
So, even if you made just US$500 from freelance work, you’d need to report it.
Why is filing status so important?
Filing with the correct status is crucial because it impacts how much tax you owe and which deductions or credits you qualify for.
For example, filing as “single” when you’re actually married (to a non-US citizen) could lead to mistakes, penalties, and delays with the IRS. Ensuring your status is accurate keeps you on the right side of US tax laws.
Can the US-Mexico tax treaty help avoid double taxation?
Yes, the US-Mexico tax treaty is designed to prevent you from paying tax on the same income twice—once in the US and once in Mexico. You can claim either the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC) to reduce your US tax bill based on the income that has already been taxed in Mexico.
What forms do US expats in Mexico need to file?
Filing from abroad means dealing with several specific forms. Here’s a quick overview:
- Form 1040: The standard US tax return form.
- Form 2555 (FEIE): This allows you to exclude up to US$126,500 (2024) of foreign-earned income from US taxes, provided you meet certain residency tests.
- Form 1116 (FTC): Claim a credit for taxes paid to Mexico, reducing what you owe to the IRS.
- Form 8938 (FATCA): Required if your foreign financial assets exceed US$200,000 for single filers, or US$300,000 for joint filers.
- FBAR (FinCEN Form 114): You must file an FBAR if the combined value of your foreign accounts, including those in Mexico, exceeds US$10,000 at any time during the year.
- Form 5471: Required if you own at least 10% of a foreign corporation, common if you run a business in Mexico.
- Form 3520/3520-A: Used to report foreign gifts or financial dealings with foreign trusts.
- Form 8858: Filed if you own a foreign disregarded entity or have interests in foreign branches.
What tax benefits can US expats in Mexico claim?
Several deductions and exclusions are available to help lower your tax bill:
- Foreign Earned Income Exclusion (FEIE): Exclude up to US$126,500 of foreign-earned income from your US taxes if you meet the Bona Fide Residence Test (living in Mexico for an entire tax year) or the Physical Presence Test (being present in Mexico for at least 330 days out of a 12-month period).
- Foreign Tax Credit (FTC): By claiming the FTC using Form 1116, you can offset your US taxes with the taxes you’ve already paid in Mexico.
- Housing Exclusion/Deduction: If you qualify for the FEIE, you can also exclude a portion of your housing costs (like rent and utilities) from your taxable income. This can be particularly valuable in high-cost areas of Mexico.
- Standard Deduction: For 2024, the standard deduction is US$14,600 for singles and US$29,200 for married couples filing jointly.
- Itemized Deductions: If your itemized deductions (such as medical expenses, mortgage interest, and charitable donations) exceed the standard deduction, it may be worth itemizing.
- Retirement Contributions: Contributions to IRAs or other qualified retirement accounts may still be deductible, helping to lower your taxable income for the year.
- Business Expenses: If you’re self-employed, you can deduct business-related expenses like travel, office supplies, and advertising, significantly reducing your taxable income.
When are US tax returns due for expats in Mexico?
If you’re living outside the US, you automatically get a two-month extension—until June 15—to file your US tax return. However, any taxes you owe are still due by April 15. If you need more time to file, you can request an additional extension to October 15 by submitting Form 4868.
How does Mexico handle social security for US expats?
Mexico has its own social security system, and after living there for more than two years, your contributions generally go towards the Mexican system, not the US Social Security program.
Thanks to the Totalization Agreement between the US and Mexico, this means you won’t have to pay into both systems. The agreement ensures that contributions in Mexico count towards your retirement benefits, so you won’t lose out on future Social Security benefits.
