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How Do Taxes Work for Americans Living in Baja?

how do taxes work for american

How Do Taxes Work for Americans Living in Baja?

Who Is Considered a Tax Resident in Mexico?

  • Residency Status: You are considered a tax resident in Mexico if you have established your primary home (habitual abode) in Mexico.
  • Presence Test: If you spend more than 183 days in Mexico in a calendar year, you may be deemed a tax resident.
  • Center of Vital Interests: If more than 50% of your total income originates in Mexico or your main professional activities are in Mexico.
How Do Taxes Work for Americans Living in Baja California?
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Income Tax Rates

  • Progressive Tax Rates: Ranging from 1.92% to 35%, depending on your income level.
  • Monthly Reporting: Mexican tax residents must file monthly tax returns, with an annual declaration in April.

Sources of Income

  • Mexican-Sourced Income: Income earned within Mexico, such as employment, business activities, or rental income.
  • Foreign-Sourced Income: Income from outside Mexico, which is also taxable if you are a tax resident.

Deductions and Credits

  • Personal Deductions: Certain expenses like medical bills, education, and mortgage interest may be deductible.
  • Business Expenses: If self-employed, you can deduct legitimate business expenses.

Non-Residents

Mexican Taxation

Worldwide Income Reporting

  • IRS Requirement: Report all income, including that earned abroad.
  • Filing Thresholds: Vary based on filing status and age but generally start at $12,400 for single filers.

Foreign Earned Income Exclusion (FEIE)

  • Exclusion Amount: For 2021, up to $108,700 of foreign earned income can be excluded.
  • Eligibility:
    • Physical Presence Test: Be present in a foreign country for at least 330 full days during a 12-month period.
    • Bona Fide Residence Test: Reside in a foreign country for an uninterrupted period that includes an entire tax year.

Foreign Tax Credit

  • Avoid Double Taxation: Claim a credit for foreign taxes paid on income also taxed by the U.S.
  • Limitations: Credit is limited to the amount of U.S. tax attributable to foreign income.

Reporting Foreign Bank Accounts

  • FBAR (FinCEN Form 114): Required if you have foreign financial accounts exceeding $10,000 in aggregate at any time during the year.
Tax Obligations

Key Provisions

  • Tax Credits: Allows tax paid in one country to be credited against tax liability in the other.
  • Residency Tie-Breaker Rules: Determines residency status when both countries consider you a resident.
  • Exchange of Information: Facilitates cooperation between tax authorities.
Double Taxation

Property Taxes

  • Predial: Annual property tax, usually low compared to U.S. standards.
  • Payment: Often due in the first few months of the year, with discounts for early payment.

Value-Added Tax (IVA)

  • Rate: Generally 16% on goods and services.
  • Applicability: May affect self-employed individuals and business owners.

Capital Gains Tax

  • Real Estate Sales: Taxed on the gain from the sale of property.
Tax Obligation

Hire a Tax Professional

Keep Detailed Records

  • Income Documentation: Maintain records of all income sources.
  • Expense Receipts: Necessary for deductions and credits.

Stay Informed

  • Tax Law Changes: Tax regulations can change; stay updated.
Managing Taxes

U.S. Social Security Benefits

  • Taxation in Mexico: Generally not taxable by Mexico for non-residents.
  • U.S. Taxation: May still be subject to U.S. taxes.

Mexican Pensions

  • If Employed in Mexico: Contributions may be required to Mexican social security (IMSS).
Social Security

U.S. Taxes for Americans Living Abroad – Understand your U.S. tax responsibilities.

Imagine embracing the beauty and culture of Baja California without the stress of tax uncertainties.

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