Mexico Living – Do You Know the Foreign Tax Laws?

March 28, 2012 by  Filed under: Taxes 

Did you know that as a citizen of the United States living in Mexico, you must still file a U.S. income tax return each year?

The U.S. has tax treaties with 42 countries. This means that the IRS and foreign taxing authorities will exchange information on U.S. citizens living in their country. Mexico is one of the countries with a tax treaty with the United States.

In regard to these tax treaties, the operative phrase is ‘world-wide income’. If you are earning income of any kind in a foreign country, in this case Mexico, and not filing taxes with the U.S., the statute of limitations will not run out and you may find yourself owing, with penalties, for all the years you did not file a return in the U.S.

On the flip side, there are benefits resulting from these tax treaties offering U.S. citizens credits if they are also paying foreign taxes.

Here is a short list of facts you need to know and some benefits of which you may be entitled.

1. If you are living in Mexico and paying taxes on your “world-wide income”, you must fill out a form with U.S. IRS. Many times your foreign taxes paid with allow you enough credit to wipe out any taxes owed to the U.S., if any.

2. You can claim an exclusion for foreign earned income if you have a full-time residence in Mexico for a full calendar year with a visit to the U.S. lasting no more than 35 days in one calendar year. The exclusions can only be claimed if you file your income tax return with the IRS. Check with the IRS for the maximum amount of income exclusion.

3. Another benefit is the ability to deduct expenses of rent, utilities, etc., for your residence in Mexico. Again, check with the IRS for the amount you need to exceed in your living expenses for deduction benefits.

4. If you are employed by a Mexican company, or own your own company, local foreign law considers you an employee. With that, if you are paying Mexico social security deductions from your income, you do not need to pay into the U.S self employment tax (social security) fund. In Mexico, it is mandatory to deduct taxes for IMSS (Mexican Social Security) for registered employees and registered business owners.

U.S. taxes on worldwide income include:

  • Rental income earned outside of the U.S.
  • Pension income collected from a foreign country.
  • Foreign capital gains or losses on stocks, bonds, etc. (Mexico does not have a capital gains tax)
  • Royalties earned from a foreign company.
  • Dividends earned from foreign investments.
  • Foreign income of any kind.

Automatic Extension:

If, by April 15th of the present year, you are living as a permanent resident in Mexico, you get an automatic extension to file your taxes for the prior year. Your extension date is June 15th of the present year.

Important Note:

Before you move to Mexico, or if you have already relocated to Mexico, you must check with the U.S. state from which you expatriated for their specific tax laws.

In some state, if you have U.S. license plates or maintain a U.S. bank account and still have a U.S. mailing address, you may have to pay income tax or capital gains tax in the U.S.

And the Good News……

Presently the U.S. will allow expats to report previously earned foreign income and take appropriate deductions with little to no penalties, but don’t let too much time lapse.

It is understood than many expats don’t know the rules, so the U.S. is offering some consideration to those who have made the error of not reporting their foreign income immediately.

Diligence is the best defense. Knowing your tax responsibilities can save you many years of back taxes and thousands in penalties.

For more detailed information on the Mexico and United States tax treaty visit the IRS website, and put into the search area: Treaty with Mexico. You will get all the information you need including any recent updates to the tax treaty with Mexico.

We are experienced baby-boomer expats who have been living in Mexico and experiencing the transition from one country to another with ease. Collectively, we represent 20 years of experiencing Mexico living in various parts of the country.

To make your search and reading experience more valuable, we are imparting our knowledge to you directly from Mexico, where we continue to search for the best information available to help you discover Mexico living now.
For more detailed information about living or retiring in Mexico, visit

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