If you are planning to move to Mexico—whether temporarily or longer term—and work while there, needlessly falling foul of the Mexican authorities is, presumably, fairly low on your list of things to do. Therefore, it is a good idea to have some knowledge of Mexican income tax law and what you might be required to pay before you make your move. This article details some of the key basic aspects of Mexican income tax law and how they could affect you.
Are You Required to Pay Income Tax in Mexico?
If you are living in Mexico and the income you are earning derives from within Mexico, you can safely assume your income is taxable under Mexican income tax law. For tax purposes, many countries, including Mexico, categorize the people within their borders as either residents or non-residents. Whether you are classified as a resident or a non-resident is the most important distinction affecting the income tax in Mexico that you will pay.
Regardless of citizenship, if you are classified as a resident of Mexico, you are liable to pay income tax on all of your earnings under Mexican income tax law. This applies regardless of whether or not your earnings originate in Mexico. Residents of Mexico of every nationality are therefore required to pay Mexican income tax on all of their earnings whether the source of their income(s) is located in Mexico or abroad.
Non-residents broadly consist of those staying in Mexico for a short, specified duration of time. While foreigners make up the majority of non-residents, it is also possible for a Mexican citizen who has registered as a resident in another country but is temporarily residing in Mexico to be classified as a non-resident. What Mexican income tax law defines as a non-resident’s taxable income depends upon where the Mexican authorities deem the location of a non-resident’s “center of vital interests.” If a non-resident’s center of vital interests lies outside of Mexico, the non-resident is only required to pay tax on wages earned in Mexico. If, however, a non-resident owns a home in Mexico, or 50% or more of their income originates in Mexico, then it is likely that Mexico would be considered their center of vital interests. A non-resident would then carry the same income tax obligations as a resident.
What is Taxable income in Mexico?
Wages are only one instance of income that is taxed in Mexico. Other sources of income that Mexican income tax law specifies as taxable include: income generated from rent, profit from investment and dividends, and money made from capital gains. The rate of tax paid on these sources of income, however, is often calculated on a circumstantial basis. The same rules of residency and non-residency apply. You will only be taxed on income generated abroad if you are a resident, or a non-resident whose center of vital interests is deemed to lie within Mexico. To get an idea of how much tax you would likely be required to pay for income generated by non-wage related sources of income, we would recommend speaking to a professional Mexican tax advisor.
Under Mexican income law, any costs saved by individuals as a result of company benefits are also considered a taxable income. Be aware, therefore, that if, say, the company you work for pays the rent for your apartment, you will be required to pay income tax on the money that you save in consequence. Inheritance, on the other hand, is tax-free.
Double Tax Agreements
A resident of one country with a source of income deriving from another may find him or herself in a situation in which that income is taxed in both the country of its source and the resident’s country of residence. This is known as “double taxation.” Double tax agreements are bilateral international agreements agreed between two counties to prevent residents incurring double taxation.
Mexico has double tax agreements with the following countries:
- Czech Republic
- Hong Kong
- Korea (Rep.)
- New Zealand
- South Africa
- United States
Mexican Income Tax Rates
In Mexico, the more you earn, the progressively higher the rate of income tax you pay. The total Mexican income tax rate you pay will also depend upon any deductions that you may or may not be entitled to. As is also the case in the US, the Mexican tax year runs from January 1st to December 31st.
The 2019 Mexican tax year’s resident tax rates for Mexican income tax are:
Taxable income (MXN) up to Basic tax rate %
3,498,600.12 and above 35.00
The tax rate for non residents of Mexico consists of just three brackets.
In the 2019 tax year, these three brackets are:
Taxable income (MXN) up to Basic tax rate %
1,000,000 and above 30
Mexican Income Tax Rate Deductions
In Mexico, payments for educational expenses, medical fees, and charitable donations can all be deducted from your taxable income. Total deductions, however, are limited to 15%, of your total income for that tax year. Medical expenses are one exception to this 15% cap, but you will require an official certificate from a government health institution in order to validate medical deductions. Mexican income tax law also permits deductions for certain business and self-employment expenses. Calculating deductions isn’t always straightforward. If you think you are entitled to deductions it is best to seek advice from a Mexican tax advisor before making your claim.
How to Pay Income Tax in Mexico
If your income derives solely from wages paid by an employer based in Mexico, it is likely that all the income tax you owe will have been deducted from your wages directly via the “pay as you earn” system. If your wages are deducted directly, you need not worry about making any additional payments when you submit your tax declaration. Check, though, if you are uncertain. For non-residents, income tax payment can be more complex. A non-resident’s tax year, rather than running from January 1st to December 31st, may instead run from the month of their arrival in Mexico to the same month the following year. Non-residents with sources of income deriving outside of Mexico may find that they are required to fill in a tax return each month. Again, if you are unsure of when or what you are required to pay or how to pay income tax, it is best to seek the advice of a Mexican tax advisor.
Extra Considerations for US Expats Living in Mexico
No matter what country you reside in, if you are a citizen or permanent resident of the USA you are required to file US taxes annually. In most cases, however, US citizens and US permanent residents living and working outside the US can reduce their US income tax bill to either to a bare minimum or else negate it entirely. This can be achieved with careful planning and knowledge of The Foreign Earned Income Exclusion, foreign tax credit, and foreign housing exclusion, all of which are designed to prevent American citizens and permanent residents from incurring double taxation when living and working abroad.
We hope that this article has given you a clearer idea of what income you can be expected to be subject to tax in Mexico, and how much you might be likely to have to pay. To reiterate, the most important distinction that will impact what Mexican income tax law will require you to pay is whether you are classified as a resident or a non-resident. For a more detailed, personal overview of your income tax obligations in Mexico, we would recommend seeking professional advice from a Mexican tax advisor.
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