U.S. TAX GUIDE IN MEXICO
When living in Mexico, what do US expats need to report to the IRS?
US citizens and Green Card holders living in Mexico must report their worldwide income to the IRS.
Some people mistakenly believe that only US-sourced income must be reported, but that’s not true. Unless specifically exempted, all income must be reported.
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What can I do to minimize taxes paid?
One way is the Foreign Earned Income Exclusion (FEIE), which allows US expats to exclude a certain amount of their foreign-earned income from US taxes. For the 2024 tax year, the maximum amount is US$126,500.
However, to qualify, you must meet the physical presence test, which requires you to be present in a foreign country for at least 330 full days during any 12-month period.
How does the physical presence test work?
The physical presence test means you have stayed outside the US for at least 330 full days within 12 months.
For example, you meet this requirement if you live in Mexico and have only visited the US for short trips totaling less than 35 days within the year.
Can housing expenses be excluded?
Yes, besides the US$126,500 income exclusion, you can exclude some of your housing expenses, including rent, utilities, and other housing costs.
How is the housing exclusion calculated?
The housing exclusion involves a calculation based on the maximum and minimum amounts the IRS allows for different locations.
For Mexico City, the maximum housing expense is US$47,900. However, you need to deduct a base amount, typically around US$19,000 (US$19,200 for 2024), from your actual expenses. Up to the maximum limit, the difference can be added to your income exclusion.
Here is an example calculation:
If you spend US$39,000 on housing in Mexico City:
- Maximum amount: US$47,900
- Base amount: US$19,000
- Eligible housing exclusion: US$39,000 – US$19,000 = US$20,000
So, you can add this US$20,000 to your US$120,000 income exclusion, totaling US$140,000.
What other deductions are available?
Besides the FEIE and housing exclusion, you can also claim standard or itemized deductions. The standard deduction for 2023 is US$27,700 for married filing jointly and US$13,850 for single filers. Itemized deductions may include mortgage interest, medical expenses, charitable contributions, and state taxes.
However, for 2024, it’s US$14,600 for single filers and US$29,200 for married filing jointly.
It’s important to remember that choosing between standard and itemized deductions depends on which provides the greater benefit. If your itemized deductions exceed the standard deduction, itemizing can lower your taxable income more effectively.
Additionally, for itemized deductions, medical expenses are only deductible above a certain percentage of your adjusted gross income (AGI). This can complicate the decision between standard and itemized deductions.
What should I do if I’m unsure about my deductions?
If you need help deciding whether to take the standard deduction or itemize, it’s best to consult with a tax advisor. They can help calculate the most beneficial option based on your specific situation.
Remember to maintain detailed records of all income and expenses. This includes documentation of your foreign-earned income, housing expenses, and other deductible expenses.
Accurate records can ensure you can substantiate your claims for exclusions and deductions, helping avoid issues during an IRS audit.
How do you become a resident in Mexico as a US expat?
To become a resident in Mexico as a US expat, you need to follow these steps:
- Determine the Type of Visa: Decide whether you want a temporary resident visa (good for up to four years) or a permanent resident visa (for indefinite stay).
- Apply at a Mexican Consulate: Submit your visa application at a Mexican consulate in the US. You will need to provide documents such as a passport, proof of income or financial solvency, health insurance, and sometimes a letter of invitation or proof of property ownership in Mexico.
- Receive Your Visa: If approved, you will receive a visa sticker in your passport, which you must use to enter Mexico within six months.
- Register with INM: After entering Mexico, you have 30 days to visit the National Immigration Institute (INM) to complete the process. This includes filling out additional paperwork, providing biometric data, and receiving your resident card.
- Obtain a CURP: Once registered, apply for a CURP (Clave Única de Registro de Población), which is a unique identification number required for many services in Mexico.
What is the Income Tax difference for residents and non-residents in Mexico?
The income tax rates in Mexico differ between residents and non-residents.
Status | Tax Basis | Income Range | Tax Rate |
Resident | Worldwide income | Up to MXN7,735 | 1.92% |
MXN7,735 – MXN65,651 | 6.40% – 10.88% | ||
MXN65,651 – MXN115,375 | 16.00% | ||
MXN115,375 – MXN134,119 | 17.92% | ||
MXN134,119 – MXN160,577 | 21.36% | ||
MXN160,577 – MXN323,862 | 23.52% | ||
MXN323,862 – MXN510,451 | 30.00% | ||
MXN510,451 – MXN974,535 | 32.00% | ||
MXN974,535 – MXN1,299,380 | 34.00% | ||
Over MXN1,299,380 | 35.00% | ||
Non-Resident | Mexican-sourced income | Up to MXN125,900 | 15.00% |
Over MXN125,900 | 30.00% |
What is Mexico’s VAT?
Mexico’s Value Added Tax (VAT), known as IVA (Impuesto al Valor Agregado), is a consumption tax applied to most goods and services sold in the country.
The standard VAT rate in Mexico is 16%. This tax is applied at each stage of the production and distribution chain, from the manufacturing process to the final sale to consumers.
However, certain items, such as basic foodstuffs, medicines, and books, are taxed at a reduced rate of 0%. Businesses that collect VAT from customers are responsible for remitting it to the Mexican tax authorities (SAT), and they can often reclaim the VAT they pay on business-related expenses.
In addition to the standard and reduced rates, Mexico’s VAT system includes exemptions for specific goods and services. For instance, exports of goods and services are typically zero-rated, meaning that the VAT charged is 0%, allowing businesses to recover the VAT paid on inputs used to produce these exports.
