US taxes for Americans in Mexico

Front-loaded answerAs a US citizen in Mexico you keep filing with the IRS on worldwide income every year, because the US taxes by citizenship. The US–Mexico income tax treaty (1992, with a 2003 protocol), the Foreign Earned Income Exclusion, and the Foreign Tax Credit are what keep almost all Americans from paying tax twice — but two foreign-account reports and a never-ratified Social Security agreement trip people up.

Your US filing doesn't go away — but double tax usually does

Two tools do the heavy lifting: the Foreign Earned Income Exclusion (FEIE) for earned income, and the Foreign Tax Credit (FTC) for tax you've already paid Mexico. You qualify for the FEIE one of two ways — the bona fide residence test, or the physical presence test (at least 330 full days abroad in any 12 consecutive months).

• !The FEIE never covers pensions, annuities, or Social Security — retirees rely on the Foreign Tax Credit instead
• !When Mexican tax on the same income exceeds the US tax, the Foreign Tax Credit often wipes out the US bill entirely

FBAR & FATCA — the reports that catch Americans out

Opening a Mexican bank account triggers two US disclosures. These are information reports, not extra taxes — but the penalties for skipping them are severe.

The Mexico side & Social Security

Mexico sideYou become a Mexican tax resident by establishing a permanent home in Mexico — under Article 9 of the Federal Tax Code (CFF) it's a home / center-of-vital-interests test, not a simple 183-day count. Once resident, Mexico taxes your worldwide income on a progressive schedule running from 1.92% up to a top marginal rate of 35% (on income above roughly MX$5.1 million/year).

Watch outThe US and Mexico signed a Social Security totalization agreement back in 2004 — but it never entered into force, and still hasn't. So unlike Americans in many other countries, you can't lean on a totalization agreement to coordinate US and Mexican social-security contributions; plan for the two systems separately.

• !Mexican tax residency can be triggered by your home and ties, not just days spent — get advice before assuming you're still only a US taxpayer
• !Get a preparer who specializes in US–Mexico returns before your first filing abroad — the treaty, FTC ordering, and FBAR/FATCA are not DIY territory

Frequently asked

Is there a US–Mexico Social Security totalization agreement?

A totalization agreement was signed in 2004 but never entered into force, so the US and Mexican Social Security systems are not coordinated. Plan for Mexican social-security rules separately from your US obligations.

What are the FATCA Form 8938 thresholds if I live in Mexico?

Living abroad, you file Form 8938 if your foreign assets exceed $200,000 at year-end ($300,000 any time during the year) filing single, or $400,000 / $600,000 married filing jointly. FBAR is separate, triggered at $10,000 aggregate.