Tax guide for Americans in Mexico

Who can be considered a resident of Mexico

How do you know if you are a tax resident in Mexico? It comes down to a few key rules:

1. Physical presence

• If you spend more than 183 days in Mexico during a calendar year, you are usually a tax resident.
• These days do not have to be consecutive.

2. Center of vital interests

• This is where your life really happens.
• If your main job, business, family or personal ties are in Mexico, the taxman will probably call you a resident.

3. Permanent home

• Do you have a home in Mexico? That matters.
• But if you also have a home somewhere else, Mexico looks at where your true center of life is to decide.

4. Mexican citizenship

• Being a Mexican citizen tipped the scales in favor of residency.
• However, it is not automatic - other factors also count.

FREE

Don’t overpay the IRS! Discover 15+ key tax breaks for US expats

Enter your email to get the guide

Get free guide

By completing this form, you agree to the TFX terms of service

 

Types of taxes in Mexico

Mexico's tax system includes several types of taxes, each with its own set of rules and rates.

Understanding these taxes is essential for anyone living or doing business in Mexico, especially US expats who must navigate both the Mexican and US tax systems.

Personal income tax rates (2025)

Let's break down how Mexico will tax personal income in 2025. The system is progressive - meaning the more you earn, the higher your tax rate.

For non-residents, the tax rates are as follows:

Value Added Tax

VAT is a consumption tax levied on the sale of goods and services in Mexico. It is an indirect tax, which means it is collected by businesses on behalf of the government and included in the price of goods and services.

Key aspects of VAT in Mexico include:

1. Standard rate: The standard VAT rate in Mexico is 16%. This rate applies to most goods and services.
2. Reduced rate: In some regions, particularly near the border, a reduced VAT rate may apply.
   This is part of Mexico's strategy to remain competitive with neighboring countries.
3. Exemptions and zero rates: Certain goods and services are exempt from VAT or taxed at a zero rate.
   Basic foodstuffs, medicines, and educational services are examples of items that may fall into these categories.

Businesses can claim credit for the VAT paid on their inputs, which helps to prevent the cascading effect of taxation.

Wealth tax

There is currently no specific wealth tax levied on individuals in Mexico.

Inheritance tax

Mexico is notable for having no inheritance tax. When an individual inherits property or assets in Mexico, they do not have to pay tax on the value of the inherited assets.

This is a significant difference from many other countries where inheriting assets can often result in a significant tax burden.

Estate tax

Similar to inheritance tax, there is no estate tax in Mexico upon the death of an individual.

Gift tax

Gifts in Mexico are generally considered part of the recipient's taxable income. This means that if you receive a gift, its value may be subject to income tax, depending on certain conditions and exemptions.

There are exemptions based on the relationship between the giver and the recipient.

For example, gifts between close family members may not be taxable.

Property tax

Known as 'Impuesto Predial', it is paid annually and is based on the assessed value of the property.

The rate of property tax varies according to location and municipality. It is generally a small percentage of the assessed value of the property.

Payroll tax

In Mexico, payroll taxes are mainly levied by the states on salaries, although they do not apply to income in general.

Most Mexican states levy a relatively low tax rate on salaries. Mexico City, for example, levies a 3% payroll tax.

This tax is usually paid by the employer, not the employee.
For employers, the payroll tax is a tax-deductible expense that can be included in their overall business tax calculations.

Tax rate in Mexico compared to the US

When comparing tax rates in Mexico with those in the United States, there are several key differences:

Mexico tax deadlines

Living or doing business in Mexico? Keeping track of tax deadlines is a must. Missing one can lead to penalties - and a lot of unnecessary stress. Here is a quick rundown:

• Fiscal year: January 1-December 31 
• Annual filing deadline: April 30 of the following year 
• Where to file: Servicio de Administración Tributaria (SAT)

If you file electronically, you may get an extra month until May 31, but it's safer to stick to the April 30 deadline to avoid problems.

Other deadlines to remember:

• Monthly or quarterly payments: Due by the 17th of the month following the reporting period 
• Business taxes: If you own a business, you may also need to file payroll tax returns and pay sales tax - often on a monthly basis.

The tax treaty between the USA and Mexico

The United States and Mexico have a tax treaty designed to prevent double taxation for individuals and companies operating in both countries.

This treaty covers various forms of income and provides specific taxation rules.

Benefits of tax treaties

1. Avoid double taxation: The main benefit of a tax treaty is to ensure that income earned in one country is not taxed in both countries.
   It provides mechanisms for tax relief through credits, exemptions, or reduced tax rates.
2. Clearer withholding tax rates: The treaty provides for reduced rates or exemptions for certain types of cross-border payments, such as dividends, interest, and royalties.
3. Residence determination: The treaty helps determine the tax residency of individuals and companies, which is crucial for understanding tax obligations.
4. Mutual agreement procedure: The treaty provides a framework for resolving tax disputes between the two countries, offering a clearer path for taxpayers facing double taxation issues.

Most popular tax forms for US expats

For US expats living in Mexico, it is important to comply with both US and Mexican tax laws. This includes understanding and correctly completing various tax forms.

Some of the most common tax forms for US expats include:

1. Form 1040: The standard IRS form for US citizens and residents to file an annual income tax return.
2. Form 2555 (Foreign Earned Income Exclusion): This form is used to claim the Foreign Earned Income Exclusion, which allows US expats to exclude a certain amount of their foreign-earned income from their US taxable income.
3. Form 1116 (Foreign Tax Credit): For those paying taxes in Mexico, this form is used to claim a credit for income taxes paid to a foreign government, helping to avoid double taxation.
4. FBAR (Foreign Bank and Financial Accounts Report): US expats with foreign bank accounts that exceed certain thresholds must file an FBAR electronically using FinCEN Report 114.
5. Form 8938 (Statement of Specified Foreign Financial Assets): This form is required for US citizens with specified foreign financial assets that exceed the reporting threshold.

Mexico tax forms for US expats

US expats in Mexico need to be familiar with Mexican tax forms, especially if they have sources of income or assets in Mexico.

Some of the most important forms are:

1. Declaración Anual (Annual Tax Return): This is the primary form used for filing individual income taxes in Mexico.
2. Declaración de Pagos Provisionales (Declaration of Provisional Payments): For those who make monthly provisional tax payments, this form is used to report and pay these taxes.
3. Aviso de Compensación (Notice of Compensation): Used to report any tax offsets or compensations.
4. Various VAT forms: For those involved in activities subject to VAT, specific forms are required for reporting and payment.