U.S. Expat Taxes in Mexico — What Americans Need to Know
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
U.S. expat taxes in Mexico involve a comprehensive income tax treaty, Mexican worldwide taxation for residents, and — unusually among major expat destinations — no Social Security totalization agreement in force. Retirees living on U.S. income, remote workers, and owners of beach property each hit a different part of the system. The U.S. return follows all of them; the Mexican side depends on residency.
On this page
- When does Mexico tax me as a resident?
- Which U.S. tool prevents double tax?
- Is there a Social Security agreement?
- How does the fideicomiso affect my U.S. return?
- What about Mexican accounts, funds, and retirement plans?
- What about Mexican corporations?
- Where do U.S.–Mexico files go wrong?
- Frequently asked questions
- Next step
When does Mexico tax me as a resident?
Mexico treats you as a tax resident when your home is in Mexico, or when your center of vital interests is there — generally more than half your income from Mexican sources or your main professional activities in Mexico. Residents are taxed on worldwide income at progressive rates. Many Americans living in Mexico on temporary or permanent residency visas are Mexican tax residents whether or not they've registered; many have not registered, which is a Mexican compliance issue rather than a U.S. one.
Which U.S. tool prevents double tax?
For salary or business income earned in Mexico, the foreign earned income exclusion usually covers most of it, with the foreign tax credit for Mexican tax on income above the limit. For retirees, there is no earned income to exclude: U.S. Social Security, pensions, and IRA withdrawals are taxed in the U.S. as always, and the treaty decides whether Mexico also taxes them — U.S. Social Security paid to a Mexican resident is generally taxable only in the U.S. under the treaty, while private pensions and IRA withdrawals follow the pension article.
Is there a Social Security agreement?
No. A totalization agreement was signed two decades ago but never entered into force. A self-employed American resident in Mexico owes U.S. self-employment tax in full and may also owe Mexican contributions; an employee of a Mexican company pays Mexican contributions and earns no U.S. credits for those years.
How does the fideicomiso affect my U.S. return?
Property in the restricted zone — within roughly 50 kilometers of the coast or 100 of the border — is held by foreigners through a fideicomiso, a Mexican bank trust. The IRS has ruled that a fideicomiso holding residential property is not a trust for U.S. tax purposes, so no Form 3520 or 3520-A is required; you report the property as if you owned it directly. Rental income goes on Schedule E, a sale is a capital gain computed at peso exchange rates, and the home-sale exclusion applies to a principal residence. Property outside the restricted zone is owned directly. Property held through a Mexican corporation, by contrast, does trigger Form 5471.
What about Mexican accounts, funds, and retirement plans?
Mexican bank and brokerage accounts count toward the FBAR and Form 8938 thresholds. Mexican mutual funds and the funds inside AFORE retirement accounts and personal retirement plans are passive foreign investment companies for U.S. purposes. Interest on Mexican bank deposits is taxable U.S. income with Mexican withholding creditable. The peso's movements against the dollar make currency effects material on property sales and on any peso-denominated loan.
What about Mexican corporations?
Americans running businesses in Mexico often hold them in a sociedad anónima or similar company: Form 5471 annually, the controlled-foreign-corporation rules, and Mexican corporate tax creditable against the inclusion. The disregarded-entity election is available for a sociedad de responsabilidad limitada (S. de R.L.) but not for a sociedad anónima, including an S.A. de C.V., which U.S. regulations treat as a corporation per se.
Where do U.S.–Mexico files go wrong?
- Retirees assuming Mexican residency ends U.S. filing, or that Mexico's non-taxation of their U.S. pension means the U.S. also doesn't tax it.
- Self-employment tax missed by freelancers and digital nomads.
- Fideicomiso property wrongly reported on Form 3520 — or property held in a Mexican corporation with no Form 5471.
- Mexican funds and AFORE accounts left off reporting.
- Peso mortgage currency effects ignored at sale.
Frequently asked questions
Does Mexico tax my U.S. Social Security?
Under the treaty, generally no — it is taxable only in the United States for a Mexican resident.
Do I file a Form 3520 for my fideicomiso?
Not for a standard residential fideicomiso, under the IRS's published ruling. The property is reported as directly owned.
I work remotely from Mexico for U.S. clients. What applies?
The exclusion on your earned income if you meet the tests, full U.S. self-employment tax, and Mexican residency and tax if you've become a resident there.
Does Mexico report my accounts to the IRS?
Mexico has a FATCA agreement with the U.S.; Mexican banks identify and report U.S. account holders.
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. If you live in Mexico — retired, working remotely, or running a business — our team can set up the U.S. return around the treaty, your property, and your Mexican accounts. See pricing or book a free fit call.
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