Are You Supposed to File Taxes as An American Living in Mexico?

An important question that eventually reaches everyone’s mind when they’re planning their move to Mexico is “Do I Still File Taxes as A Foreigner?”

I get emailed about it at least a few times a month. And I get it. Tax law is complicated. Most people aren’t CPAs and most people shouldn’t have to understand tax law. But most of us should understand our very basic responsibilities. Even when we leave our home country.

If you’re like the millions of U.S. expats that move to Mexico you’ve probably decided to move for the lower cost of living, the quality and affordability of healthcare, the proximity to the U.S., the weather, and the rich culture. But it’s easy to get caught up in the excitement of the planning stages that we often forget about a very important part in the process.

TAXES

The U.S. Taxes Your Worldwide Income

The first thing to keep in mind if you are moving from the U.S. to Mexico is The United States of America expects you to pay taxes on your worldwide income.

Yes, you read that right. For income generated anywhere in the world- the U.S. expects its cut.

However, the IRS does have a tax treaty in place to help you avoid double taxation. This is known as Foreign Earned Income Exclusion or you may know it as FEIE. I’ll get more into that further down. But before I get into FEIE, I’d like to note there is a minimum income the U.S. requires for the purposes of a tax return.

Minimum Income To File A U.S. Tax Return

This minimum income amount depends on your filing status and age. In 2021, for example, the minimum for single filing status if under age 65 is $12,550.  If your income is below that threshold, you generally do not need to file a federal tax return.

If you have financial assets abroad worth over US$200,000, you should also file form 8938 declaring them.

When you have more than US$10,000 in total in foreign financial accounts, including all of your foreign-registered bank and investment accounts, at any time during the tax year, you should also file FinCEN form 114, better known as an FBAR (Foreign Bank Account Report).

However, even if you made less than the minimum threshold of $12,400 it may still be in your best interest to file a U.S. tax return.

For example, you may get a refund on taxes you’ve already paid. This can be especially true if you’ve had taxes withheld from your social security check. Or if you work abroad and claim the Foreign Earned Income Exclusion, you could receive a partial or full refund of any income tax that was withheld. And finally, for purposes of receiving any future stimulus checks like the ones handed out in 2020.

What is The Foreign Earned Income Exclusion or FEIE?

There are so many digital nomads working from home, and generating an income online nowadays. And there are thousands of people moving to Mexico when they have the flexibility to work from anywhere in the world! Why not enjoy the sunnier weather, lower cost of living, and great quality of life while also reducing your taxes!

You see, when you live in Mexico you are NOT required to pay income taxes in Mexico, UNLESS you earn an income in Mexico. And income in Mexico is considered when the service is provided in Mexico. Regardless of where the payment is made or negotiated. This applies to anyone- not only U.S. citizens.

For example: If you offer consultation services in Mexico, you owe Mexican taxes. Even if someone pays you in U.S. dollars to a U.S. bank account. And if you have an Airbnb in Mexico, you owe Mexican taxes also! If you drive someone around in Mexico for a fee, you owe Mexican taxes.

These are just a few examples. To get educated and do things the right way, we recommend working with our recommended Mexico CPA.Buy the Mexico Relocation Guide- get instant access to our recommended contacts across Mexico.

But, because the U.S. requires you to pay taxes on your worldwide income, they’ve also put in place a program to help you avoid double taxation.

This is known as the Foreign Earned Income Exclusion. For example in 2021, U.S. Citizens and Residents can exclude up to $108,700 of their earned income per person. This can be a significant way to reduce your U.S. taxes and in some cases even eliminate them!

Important Filing Dates

Generally, the last day to file a U.S. tax return is April 15th each year.

However, foreigners living abroad get an automatic extension through June 15th. If you happen to miss the June 15th extension, you can request a further extension until October 15th.

To do so, file form 4868 on or before June 15th. Otherwise, you run the risk of paying interest and late fees to the IRS.

Work With A Knoweldgeable CPA

Now, I also want to add a full disclosure that I am not a CPA nor have I studied tax law in the U.S. or Mexico. However, the information I have shared on this blog post is the same information our recommended U.S. and Mexico CPAs have given me.

Your situation may be slightly different and your outcome too. Therefore, I recommend working with a knowledgeable CPA who understands expat tax incentives in the U.S. and a Mexico CPA that understands taxes in Mexico for expats.

Those contacts can be found in our Mexico Relocation Online Guide. You’ll get a detailed explanation of the Foreign Earned Income Exclusion tax treaty, how taxes work in Mexico, and access to our recommended CPAs.

Mariana Lange

Mariana Lima-Lange was born in Mexico and immigrated to the U.S. when she was a child. She spent every summer visiting family throughout Mexico and is very knowledgeable about Mexican culture, lifestyle, and traditions. She is fluent in both Spanish and English.

Reader Interactions

Comments

  1. Donald says

    Dear Mariana,

    We just read the Taxes Blog and wondering if the Mexico Income Taxes applies differently to Temporary Visa Residence verses the Permanent Residency Visa on World Wide Income?

    How does apply to Non US person; ie Non Resident Canadian?

    Thank you.

    Donald

    • Mariana Lange says

      Hi Donald
      Taxes in Mexico will be collected on worldwide income regardless of temp vs permanent residency.
      A lot of expats living in Mexico just never pay taxes in Mexico because the Mexican government has no way of knowing your income situation.
      I’m not advocating for this , but it’s just the reality.

      To help you from double taxation, you could potentially file for a foreign earned income exclusion for any active income.

      But I am not a CPA- although we do have a list of recommended CPAs for mexico and the US in our online guide https://mexicorelocationguide.com/guide/

      Gracias!
      Mariana

  2. Diane Leroux says

    Hi Mariana,

    I am a Canadian citizen and I will get my permanent residency card next October 2022. I already have an Intercam bank account opened last year.
    My account manager tells me that I can invest in a CEDES certificate of deposit at rates of 2.7 to 7% depending on the duration and the amount invested and that the Mexican government has reduced the tax rate to 0% for this type of deposit. I am wondering about the security of Mexican banks and the validity of tax information. I would like to inform myself to a person who can answer my questions in all neutrality. What do you recommend ? thank you

    • Mariana Lange says

      Hi Diane. I think a good course of action would be to ask the bank for what their security limits are in case of a possible bankruptcy.
      Mexican banks tend to be insured up to a certain amount which is based on a Mexican points system. I think it would be wise for you to talk to a personal banker with whatever bank in Mexico you are trying to open an account in.
      Also If you have more than 10,000 USD in that bank account or its equivalent in Pesos, then you need to file an FBAR if you are a US Citizen.
      Hope this is helpful

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