Tax Planning for Expats in Mexico | Taxes in Mexico

Living abroad comes with many perks, but it also brings new responsibilities—especially when it comes to tax planning for expats and taxes in Mexico. In this guide, we’ll break down the essentials of navigating U.S. filing requirements and Mexican obligations, so you can focus on building your dream life overseas in Mexico without surprises at tax time.

Understanding U.S. Filing and Tax Planning for Expats

U.S. citizens must file a federal tax return each year, no matter where they reside. Through tax planning for expats, you can leverage benefits like the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit to minimize double taxation. Key points include:

• Filing threshold: Most expats must file unless your global income falls below the minimum threshold (a few thousand dollars).

• FEIE and Foreign Tax Credit: Exclude up to ~$120,000 of foreign-earned income or claim credits for taxes paid abroad.

• FATCA & FBAR: Report foreign bank and investment accounts over certain balances to avoid penalties.

Choosing Corporate Structures with Tax Planning for Expats in Mind

Selecting the right entity for your U.S. based company can make a big difference in what you pay. Common options:

1. S Corporation

   • Pay Social Security and Medicare taxes only on your salary (typically 40–60% of profits).

   • Remaining profits are dividends, exempt from the 15.3% FICA rate.

   • Ideal if net profit exceeds $100K.

2. LLC (Disregarded Entity)

   • All profits subject to self-employment tax.

   • Provides liability protection without S-corp election.

3. Sole Proprietorship (Schedule C)

   • Simple bookkeeping.

   • All income subject to self-employment tax.

Evaluating these through the lens of tax planning for expats helps you balance administrative costs against potential savings.

State Residency and Taxes in Mexico

Even if you exclude federal U.S. taxes, many states still consider you a resident. To avoid unexpected bills:

• Domicile change: Establish residency in a no-income-tax state (e.g., Texas or Florida).

• Mail forwarding: Use a mailbox service and update official addresses.

• Documentation: Maintain proof of non-residency in high-tax states.

When comparing U.S. obligations and taxes in Mexico, a clear record of both sets of filings is crucial.

Residency Rules and Taxes in Mexico

Mexico determines tax residency by any of these criteria:

• Spending 183+ days per year in Mexico

• Having your “center of vital interests” in Mexico (home, family, business)

• Owning a primary residence

As a tax resident, you pay Mexican ISR (Impuesto Sobre la Renta) on worldwide income, with a progressive rate up to ~35%. Non-residents owe tax only on Mexican-source income, such as Airbnb revenue or local services.

Avoiding Double Taxation: Treaties and Credits

Thanks to the U.S.–Mexico tax treaty, you won’t pay full tax twice on the same income:

• Offset: Mexican tax paid reduces your U.S. liability dollar-for-dollar.

• Credit claim: File Form 1116 to claim foreign tax credits.

• Exclusions: FEIE still applies even if you file under Mexico’s regime.

Proper tax planning for expats ensures you claim every benefit available.

Simplified Tax Regime: RESICO and Lower Rates

Mexico’s RESICO (Régimen Simplificado de Confianza) allows qualifying individuals to pay 1–2.5% on gross receipts, regardless of expenses:

• Eligibility: Gross income under 4 million MXN ($200K USD) and no shareholding in companies.

• Trade-off: You forgo deductions in exchange for a lower flat rate.

• Combined strategy: Use FEIE in the U.S. to minimize total tax.

Incorporating RESICO into your tax planning for expats toolkit can lead to substantial savings on taxes in Mexico.

Beyond Income Tax: VAT (IVA) and Import Duties

Mexico’s value-added tax (IVA) is 16% on goods and services (excluding most food and medicine). Online imports also incur IVA and possible customs duties, pushing total taxes on purchases up to 25–30%. Remember:

• Retail pricing: IVA is included in posted prices, so you rarely see it added at checkout.

• Customs declarations: Always declare imports to avoid penalties.

Next Steps in Your Tax Planning for Expats Journey

Effective tax planning for expats is about more than filing forms—it’s a strategy to protect your hard-earned income. To take action:

1. Audit your current structure: Evaluate entity choice, residency, and filings.

2. Consult professionals: Work with U.S. enrolled agents and Mexican CPAs.

3. Leverage free resources: Visit Entrepreneur Expat for guides and a free consultation at entrepreneurexpat.com/consult.

By mastering both U.S. obligations and taxes in Mexico, you can enjoy the peace of mind that comes from a compliant, optimized tax strategy—so you can truly embrace the expat lifestyle.