If you are among the more than 1-million USA citizens who are currently living out their golden years in México on social security and pension benefits, your dollars can certainly afford you a better lifestyle than you might enjoy in the USA. However, you must pay the price for living in this beautiful paradise. Each year, you must file two tax returns; one each for the USA and México. Yes, México wants their share of your tax dollars. And, unlike in the USA, Méxican tax reporting laws require that spouses report their income separately.
If you are considered to be an expatriate resident of México (not a Méxican national resident), you are taxed on your worldwide income in México. An expatriate can be considered a resident for tax purposes if;
- Your primary residence is in México
- You spend more than 183 days a year in México
If you spend less than 183 days a year in México, you may still be considered a resident if SAT (known as Hacienda) believes that México is your “center of vital interests” which means in most cases you work or own a business in México;
- More than 50 percent of your total income received during the calendar year is derived from Méxican sources.
- When your main center of professional activity is located in México.
- You have earned income from work performed in México
An auditor for SAT may consider that you fall under the third “center of vital interest” clause if you are living in México and earning money from an online source of income or working for a foreign-based business from home. In most cases, if you’re living and working in México for more than 183 days a year, you’re a tax resident. For example, an expatriate who is an author, living in México, but has an income from the sale of their books sold online is taxable. Or, an expatriate who lives in México, but earns a living from teaching English online is taxable. If you are an expatriate who earns income from an investment in México, you will be taxed on that income.
Also, if you’re a resident of México, income earned from a foreign company or for work performed outside of México is taxable in Mexico. Likewise, you’ll pay Mexican tax on any capital gains or passive income earned abroad. As a México resident, you are subject to be taxed on your worldwide income no matter where it was earned. In other words, any personal service or work rendered in México is considered a Méxican sourced income and is thus taxable in the country.
One other fact you should know is that México is also required to comply with the Foreign Account Tax Compliance Act. (FATCA). México will report to the US Treasury any assets you have in a Mexican financial institution. Be sure to include any foreign earned income on your US tax return documents.
Now for some good news…
México is among a handful of countries in which U.S. citizens can reside and are exempt from taxes on their Social Security benefits. México does not tax your income derived from Social Security payments. If you have no other income than your USA Social Security income, you won’t owe any taxes to México, but you still have to file a return in México.
The good news is that you can claim a credit for any taxes that you pay to another country against your Mexican income tax. If you paid foreign taxes on foreign-sourced income in another country, you may receive a foreign tax credit, which is available to eliminate double taxation.
If you’re not a resident of México, you only pay tax on your Méxican sourced income. For example, you’re living in the U.S. and work 30 days in Mexico for a Mexican corporation. This income is Méxican source and taxable in México. Non-residents pay 15% or 30% tax on their Méxican sourced income. However, the first 125,900 pesos (USD $6,665.90 on January 1, 2020) is exempt in most cases.
México follows a progressive personal tax rate system with top earners paying 35% and the poorest paying less than 2%.
Furthermore, there is no standard deduction. However, it is possible to take personal allowances and credits. Currently, these include:
- Home mortgage interest
- Contributions to accounts/systems
- Medical costs
- Funeral expenses
- Education costs for dependent children
Tax calendars in México are similar to those in the USA. While, as a USA expatriate, you have until June 15th to file your taxes in the USA but that is just a filing exemption. In México, individual tax returns are due April 30th for the previous year and must make a payment of taxes owed in México on June 15th to avoid any penalties or interest from occurring. For those who do not have taxes withheld by an employer, estimated taxes must be paid by the employer quarterly. If you are an employee of a Méxican company be sure that you receive a copy of paperwork certifying the taxes withheld on your behalf.
Foreign Tax Credit or Foreign Earned Income Exclusion
You may be eligible to take a deduction or credit for the income taxes paid to México. A deduction could reduce your U.S. taxable income, while a credit could reduce your U.S. tax liability. It is always important to contact a professional tax expert who is familiar with the USA tax code to look at your personal situation.