Mexico is the most popular destination for US expats, due to its proximity to the States, relatively low cost of living and large community of expats. In addition, Mexico’s sunny beaches also make it a popular retirement destination for many Americans. Whether you are living in Mexico for a year, or retiring in Mexico, every American needs to be aware of his or her tax responsibilities while living abroad.
Every American is require to file a US tax return every year. In addition, all Americans who have over $10,000 in foreign financial accounts are required to file an FBAR, Foreign Bank Account Report, with the US Treasury. While there is no tax liability associated with the FBAR, there are large penalties for not filing. These penalties can be as high as $10,000 per account.
Retirement in Mexico
While retiring south of the border does have financial perks, such as a lower cost of living, it is important to remember all your US tax obligations. While the US tax liability may limit some liability due to the Tax Treaty, other retirement plans such as an IRA still may be taxable in the US even if you are living in Mexico.
While the US income tax return, Form 1040, is due on April 15th, there is an automatic extension for any American who is out of the country on that date. However, this is only an extension to file – the due date for payment of taxes due is still April 15th. In addition, anyone can apply for another 4 month extension which will extend the time available to file a return to October 15th. If an expat is unable to file a return in time, then form 4868 should be filed to request the extension.
Mexico also has a December 31st year end, and taxes are due on April 30th. Payments for employers are due monthly, by the 17th of the following month. For those residing south of the boarder, earning income in Mexico, or conducting business abroad, it is recommended to consult with a Mexican tax professional. If you are unable to find one, email us at email@example.com and we can help you find a Mexican tax advisor.
US Mexico Tax Treaty
The US Mexico Tax Treaty helps to reduce the burden on double taxation on citizens of one country who are residing in another country. In addition, the treaty helps to define unclear situations.
Unites States/Mexico Totalization Agreement
In addition to the Tax Treaty, the US also has a totalization agreement with Mexico to help ensure that US citizens living in Mexico and Mexican citizens living in the US can avoid double social security tax. The burden of double social security tax can be heavy. Therefore the agreement between the two counties helps limit that burden. The agreement was enacted on June 29th 2004, which makes the agreement relatively new, compared to some of the other totalization agreements. Not all tax professionals are aware of the agreement with can save the taxpayer lots of money. See http://universaltaxprofessionals.com/2016/01/20/what-is-a-social-security-totalization-agreement/ for more information about the totalization agreement.
If you are already living in Guadalajara or Tijuana, or thinking of moving abroad, give us a call or send us an email at firstname.lastname@example.org, and we can help you plan your US taxes while living abroad.