U.S. EXPAT TAX GUIDE – MEXICO
Do US citizens need to file a tax return while living in Mexico?
Yes, US citizens living in Mexico are still required to file a US tax return if their income meets the threshold for filing.
This is because the US taxes its citizens on their worldwide income, regardless of residency.
Table of contents
What income thresholds apply to different filing statuses?
The income thresholds vary by your filing status. For instance:
- Single (under 65): US$14,600
- Married filing jointly: US$29,200
- Married filing separately: US$5
What if I’m married to a non-US citizen?
If you are married to a non-US citizen in Mexico, you should typically file as “married filing separately.”
Filing as “single” is incorrect and could lead to issues with the IRS.
There are situations where you may be able to file jointly, but this requires meeting specific criteria.
Do I need to file if I have self-employment income?
Yes, if you have over US$400 in self-employment income, you must file a US tax return, even if you don’t meet the general income threshold for your status.
For example, if you earned US$500 through freelancing, you’re required to file.
Why is it important to choose the right filing status?
Filing under the correct status ensures you comply with IRS rules. Choosing the wrong filing status, like filing as “single” instead of “married filing separately,” can result in penalties and fines.
Does Mexico have a tax treaty with the US?
Yes, Mexico has a tax treaty with the US.
This treaty helps US citizens avoid double taxation by clarifying how income is taxed in both countries and allowing tax credits or exemptions on specific types of income, such as pensions or dividends.
What forms do US citizens in Mexico need to file with the IRS?
- Form 1040: This is the basic US individual income tax return that must be filed annually.
- Form 2555: This form is used to claim the Foreign Earned Income Exclusion (FEIE), which allows you to exclude a portion of foreign-earned income from US taxes (up to US$126,500 in 2024). You must meet either the Bona Fide Residence Test or the Physical Presence Test to qualify.
- Form 1116: This form allows expats to claim the Foreign Tax Credit (FTC). You can offset the taxes paid to Mexico against your US tax liability, reducing double taxation.
- Form 8938: If you hold foreign financial assets above certain thresholds, you are required to file this form under the Foreign Account Tax Compliance Act (FATCA). The threshold is higher for those living abroad—US$200,000 on the last day of the year or US$300,000 at any time during the year for single filers.
- FBAR (FinCEN Form 114): If the aggregate value of your foreign financial accounts (including Mexican bank accounts) exceeds US$10,000 at any point during the year, you must file an FBAR to the Treasury Department.
- Form 5471: If you own at least 10% of a foreign corporation, this form is required to disclose your interest. This is common for expats involved in businesses in Mexico.
- Form 3520 and 3520-A: If you have financial transactions with a foreign trust or have received certain foreign gifts, these forms must be filed to report such activities.
- Form 8858: US persons who own foreign disregarded entities or have interests in foreign branches may need to submit this form.
What deductions are available for US expats living in Mexico?
- Foreign Earned Income Exclusion (FEIE): For 2024, you can exclude up to US$126,500 of foreign-earned income from US taxation. You qualify by either passing the Bona Fide Residence Test (where you live abroad for an entire tax year) or the Physical Presence Test (where you are present in a foreign country for at least 330 full days during a 12-month period).
- Foreign Tax Credit (FTC): By using Form 1116, you can claim a dollar-for-dollar credit for the taxes paid to Mexico, which helps reduce your US tax liability.
- Housing Exclusion/Deduction: If you qualify for the FEIE, you may also be able to exclude housing costs such as rent, utilities, and insurance from your taxable income. This can add up significantly, especially in higher-cost areas of Mexico.
- Standard Deduction: The standard deduction is automatically available to all filers. For 2024, it is US$14,600 for single filers and US$29,200 for married couples filing jointly.
- Itemized Deductions: If your itemized deductions, like medical expenses, mortgage interest, and charitable donations, exceed the standard deduction, it may be beneficial to itemize on your US tax return.
- Education Expenses: If your dependents are studying abroad, you may be able to deduct certain education-related expenses, such as tuition.
- Retirement Contributions: Contributions to IRAs or other qualified retirement accounts may be deductible on your US return, lowering your taxable income for the year.
- Charitable Contributions: Donations to eligible charities can be deducted if you itemize, providing you a tax benefit while supporting good causes.
- Medical and Dental Expenses: If your medical and dental expenses exceed 7.5% of your adjusted gross income, the amount above this threshold can be deducted if you itemize your deductions.
- Business Expenses: For self-employed individuals, business-related expenses such as travel, office supplies, and advertising can be deducted, which can significantly reduce your taxable income.
Why partner with a specialist Expat accountant?
Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in Germany. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.
