Mexico and US Taxes: What American Expats Need to Know

Mexico's top federal income tax rate is 35%, and a comprehensive US-Mexico tax treaty has been in place since 1994, covering wages, pensions, dividends, royalties, and real estate income. The Foreign Tax Credit generally covers most or all of the US tax on Mexican wages given the comparable rates, though the exact outcome depends on your income level and the deductions Mexico allows. The US and Mexico have a totalization agreement, so most employed US citizens in Mexico pay into the Mexican social security system (IMSS) rather than US Social Security. Mandatory Afore retirement accounts are funded by employer and employee contributions under the IMSS system, and those contributions and the account itself have US reporting obligations under FBAR. Mexico does not tax the sale of a primary residence that has been owned and used for at least five years, but the US still taxes the gain subject to the $250,000/$500,000 home sale exclusion, and currency gains on the sale may also be taxable separately.