It is important to note that the authors are not accountants, and this article does not constitute financial advice. This information is intended as general guidance for individuals considering whether to consult a U.S. expat tax specialist. After reading, readers should gather any relevant financial documents and consider scheduling a consultation with a qualified U.S. expat tax specialist to obtain personalized advice tailored to their specific situation.
For those USA expats who are living solely on a Social Security Pension and earn below the minimum, it is a moot point since no tax is due. For those who are earning income in the USA. taxes all income regardless of where it is earned. The rest of this article is for those earners.
Where the taxes should be paid depends on the individual’s income, residency, and source of earnings, but generally, Mexico’s progressive tax rates can be lower for moderate incomes, while the U.S. has higher top rates but offers deductions, like the Foreign Earned Income Exclusion, to reduce the U.S. tax burden for expats. This means many expats pay significantly less U.S. tax and potentially just Mexican tax on local earnings. The U.S.-Mexico tax treaty helps prevent double taxation by allowing U.S. citizens to claim credits for taxes paid in Mexico. As a result, taxes paid in Mexico can be credited against their U.S. tax liability. However, it is important to remember that U.S. citizens must still file annually, even if they owe nothing.
Key Differences
Top Rates: Mexico’s top individual rate is 35%, while the U.S. top individual rate is 65% (plus potential state taxes).
Tax Brackets: Mexico’s rates start low (around 1.92%) and increase, with significant jumps.
US Tax System for Expats: The U.S. taxes citizens on worldwide income but provides mechanisms like the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC) to avoid double taxation. For example, consider an expat living in Mexico who earns $80,000 annually. They can use the FEIE to exclude up to a certain amount of their foreign earnings from U.S. taxation. Additionally, if they paid $10,000 in Mexican taxes, they can apply that credit against their U.S. tax liability through the FTC, effectively and often significantly reducing their U.S. tax burden.
When Mexico Might Be Better
Moderate Income: Individuals earning moderate income in Mexico may remain within lower Mexican tax brackets, potentially resulting in a lower overall tax burden than if fully taxed in the U.S.
Local Earnings: Income generated and taxed in Mexico can often offset U.S. tax liability due to the tax treaty and Foreign Tax Credit (FTC).
When the U.S. System Might Be Better (or Less Onerous)
High U.S. Income: For individuals with primarily U.S.-sourced, high income, the Foreign Earned Income Exclusion (FEIE) may exclude a significant portion, but some U.S. tax will likely still be owed.
Simplicity: The U.S. system, while complex for expatriates, has well-defined rules (such as FEIE and FTC) that can significantly lower tax liability when applied correctly.
Important Considerations
Residency: Tax obligations hinge on residency status in each country. In the U.S., an individual is generally considered a tax resident if they pass the substantial presence test, which takes into account the number of days spent in the country within a calendar year. In Mexico, tax residency is determined by whether an individual has established a home in the country or has spent over 183 days in Mexico during the year. Understanding these criteria can help readers assess their tax obligations and ensure compliance with the laws of both countries.
Filing Requirements: U.S. citizens are required to file U.S. taxes regardless of country of residence.
Professional Advice: Cross-border tax situations are complex; consulting a U.S. expat tax specialist is recommended.
