Does a US Citizen Living in Mexico Pay US Taxes? 

Living abroad may seem tempting – with so many opportunities to explore a new culture, taste new cuisine, meet new people – but this decision comes with its share of pitfalls as well. Americans who move overseas or across the border to Mexico still have to deal with the Internal Revenue Service and its army of tax collectors, and the process of filing a return and paying the associated taxes can be much more complicated as an expat. Still, there are many U.S. citizens who believe that leaving the country will relieve them of their obligations to the IRS; even if you know that you have to file, you may not know the many steps it takes to submit a federal income tax return for expats. If you live in Mexico and would like to know how to file your taxes with the U.S. government, keep reading as the experts at U.S. Tax Help provide some answers. 

Filing and Paying Taxes as a US Citizen in Mexico 

Given its proximity to the U.S., Mexico can seem like a convenient place for relocation; from the bustling culture of Mexico City to the beautiful beaches of Cancun, there are many places an American could enjoy. However, even crossing the border and establishing a life in a new country doesn’t exempt a U.S. citizen from their American tax obligations, since the U.S. taxes based on citizenship instead of country of residence – making America one of only two countries in the world to do so. 

If you are a U.S. citizen living in Mexico, make sure to fill out and file the usual IRS Form 1040, U.S. Individual Income Tax Return, just as if you were still in the United States. Most of the information on this form will be the same regardless, though there is one important difference that Americans should know: U.S. expats living abroad are eligible for an automatic two-month filing extension, making the effective deadline June 15 for Americans living in Mexico. One important caveat, however: This deadline only applies to filing an expat tax return, not to paying what you owe, so any payments you must make will begin accruing interest starting April 15. 

There are other extensions available to expats as well, though these also only apply to filing your paperwork, not sending your payments. Expats can add four months to the automatic extension mentioned above for a total of six extra months to file, and in special circumstances, it’s even possible for some U.S. citizens living abroad to get an additional two months, making their final filing deadline December 15. 

Tax Breaks for U.S. Expats Living in Mexico 

Though the tax return filing process is certainly more complicated for expats living in a foreign country, there are some advantages to this situation as well. One of the biggest benefits of living in another country is that the U.S. allows you to exclude a significant portion of your income from taxation by the IRS, part of the effort to avoid double taxation on expats – a situation in which the same income is taxed twice by two different governments. The two biggest tax provisions that address this issue – and help expats reduce their U.S.-based taxes – are the foreign earned income exclusion (FEIE) and foreign tax credit (FTC). 

Foreign Earned Income Exclusion 

If you earn a wage in another country in which you are effectively a resident, you can likely reduce or even eliminate your taxable income by using the foreign earned income exclusion. To take advantage of this provision of the U.S. tax code, you must first pass either the bona fide residence test – which requires that you are a resident of another country for at least one full tax year – or the physical presence test – which requires that you be physically present in another country for at least 330 full days over the course of a 12-month period. 

If you pass one of these tests, you can exclude more than $100,000 of your foreign earned income from taxation by the IRS. Keep in mind that this only applies to wages, salaries, and other amounts earned by providing professional services; money earned through passive sources, such as the collection of rent, is not eligible for exclusion under the FEIE. Use IRS Form 2555, Foreign Earned Income, to claim this exclusion, no matter if you work for a company or are a self-employed U.S. expat. 

Foreign Tax Credit 

The foreign tax credit is a tool that allows U.S. citizens who paid taxes to a foreign government and are subject to U.S. taxation on that same income to claim a credit and effectively reduce their taxable income by that amount. For instance, if you fail to qualify for the FEIE but earned income in Mexico and must pay taxes there, you can avoid double taxation by taking advantage of the foreign tax credit. However, you should note that you cannot take a foreign tax credit on income that you already excluded under the FEIE or another provision like the foreign housing deduction; doing so may lead to the loss of both tax advantages. 

International Tax Accountants Serving U.S. Citizens in Mexico 

Whether you recently moved to Mexico and are wondering about the tax implications or have been in Mexico for some time and would like assistance handling your U.S. tax obligations, the experts at U.S. Tax Help can provide the guidance you need. Our experienced international tax accountants can help with foreign financial account reporting – an important consideration that can lead to serious penalties if left unaddressed – and ensure full compliance with the law while minimizing your financial obligations. To learn more about all the services we provide or to set up your first consultation, visit U.S. Tax Help online or call (541) 362-9127 today.