Mexico is one of the most common destinations for American retirees, remote workers, and digital nomads, and nearly all of them are surprised to learn that moving there does not simplify their tax filing. US expat taxes in Mexico mean two tax authorities can have a claim on the same income: the SAT (Servicio de Administración Tributaria) if you are a Mexican tax resident or earn Mexican-source income, and the IRS on every US citizen and green card holder regardless of where they live. Retirees living on US Social Security and pension income, remote employees on a US payroll, and self-employed digital nomads each face a different version of the problem.
Do US Citizens Living in Mexico Have to File Tax Returns in Both Countries?
Often yes, but the two obligations do not turn on the same test. The United States taxes citizens and green card holders on worldwide income under a citizenship-based system that applies regardless of residence, so a Form 1040 is due every year whether you have lived in Mexico for one month or twenty years. Mexico is different: it taxes worldwide income only once you qualify as a resident, and it taxes nonresidents only on Mexican-source income, generally collected through withholding.
That distinction matters most for retirees. A retiree who splits time between a home in the US and a rental or vacation stay in Mexico, without ever establishing a permanent home (casa habitación) there, generally does not become a Mexican tax resident at all. Since US Social Security, pension, and IRA or 401(k) distributions are US-source rather than Mexican-source income, a retiree in that position may have no Mexican filing obligation, even though that retirement income is still fully taxable on the US return. The US filing requirement never goes away; the Mexican one depends entirely on residency and source.
How Does Mexico Determine Who Is a Tax Resident?
Mexican tax residency under Article 9 of the Federal Fiscal Code turns primarily on where you maintain your home. If your principal home is in Mexico, you are generally a Mexican tax resident and taxable there on worldwide income, the same way the SAT would treat a Mexican citizen.
If you maintain a home in both countries, Mexico applies a center-of-vital-interests test to break the tie, looking at whether more than half of your income for the year is sourced in Mexico or whether the center of your professional activities is located there. This is a facts-and-circumstances test, not a simple day count. Once you are a Mexican resident, Mexico can tax worldwide income including US-source pensions and Social Security, though the US-Mexico income tax treaty, effective since 1994, helps prevent double taxation through its credit mechanics and a residency tie-breaker for dual residents. Like nearly every US treaty, it also contains a saving clause preserving the United States' right to tax its own citizens as if the treaty did not exist, so the treaty's practical value for most Americans is the credit and coordination it provides, not an outright exemption.
Should Remote Workers and Digital Nomads in Mexico Use the FEIE or the Foreign Tax Credit?
It depends on how much Mexican tax you actually pay and what kind of income you earn. Both tools exist to prevent the same dollar of income from being taxed twice, but they work in opposite directions.
The Foreign Earned Income Exclusion (Form 2555, IRC Section 911) lets a qualifying taxpayer exclude foreign earned income, compensation for services performed while physically present in or a bona fide resident of Mexico, up to the annually indexed maximum, which was $130,000 for 2025 and rises most years. Qualifying requires passing either the physical presence test (330 full days outside the US in any 12-month period) or the bona fide residence test. The FEIE tends to help remote workers and digital nomads most when Mexican income tax on their earnings is relatively light. It does not reduce self-employment tax, and using it generally disqualifies the refundable Additional Child Tax Credit in a year you exclude income.
The Foreign Tax Credit (Form 1116, IRC Sections 901 and 904) instead credits Mexican income tax paid, dollar for dollar within each income category, against US tax on the same income, with a one-year carryback and ten-year carryforward on Schedule B. It tends to help more once Mexican tax paid is substantial, since unused credits carry forward rather than disappearing, and it preserves eligibility for the refundable Child Tax Credit. Our FTC versus FEIE comparison covers cases where combining both, FEIE on wages up to the cap and FTC on the remainder, produces the best result.
Is There a Totalization Agreement Between the US and Mexico?
No, and this is the fact most self-employed Americans in Mexico get wrong. The United States and Mexico signed a totalization agreement in 2004 that was designed to coordinate Social Security coverage the way US totalization agreements do with roughly 30 other countries, including the UK, Canada, Germany, and Australia. That agreement was never submitted for the congressional review required under Section 233 of the Social Security Act to bring it into force, and as of today it still has never entered into force.
The practical consequence falls hardest on self-employed people. A US citizen freelancing or consulting while living in Mexico remains subject to US self-employment tax under IRC Section 1401 on net self-employment earnings, because the FEIE excludes foreign earned income from income tax but never from the self-employment tax base. If that same person also must contribute to the Mexican social security system (IMSS) because they run a registered business or work locally, there is no certificate of coverage, the tool a totalization agreement normally provides, to exempt them from one system or the other. The result can be paying into both countries' social insurance systems on the same earnings with no coordination between them. This is a narrower problem for W-2 employees of a US company working remotely from Mexico, but it is worth confirming before assuming either system can be skipped.
Does a Fideicomiso Trigger US Foreign Trust Reporting?
Generally no, provided the arrangement matches the fact pattern the IRS actually ruled on. Mexican law restricts direct foreign ownership of real estate in the restricted zone, generally within about 50 kilometers of the coastline or 100 kilometers of an international border, so foreign buyers hold that property through a fideicomiso, a bank trust in which a Mexican bank holds bare legal title as trustee while the foreign buyer holds full beneficial rights to use, lease, sell, mortgage, and direct the property.
Revenue Ruling 2013-14 addressed exactly this structure and concluded that a fideicomiso meeting those facts is not a trust for US federal tax purposes: because the bank's role is essentially administrative, holding legal title only to satisfy Mexican foreign-ownership rules, while the beneficiary retains every real power of ownership, the IRS treats the beneficiary as owning the underlying real property directly. A fideicomiso structured this way generally does not, by itself, require Form 3520 or Form 3520-A. Because the ruling depends on those specific facts, have the actual trust deed reviewed rather than assuming every fideicomiso automatically qualifies.
How Is Rental Income From Mexican Real Estate Taxed on Your US Return?
Rental income from a Mexican property is taxable on your US return the same way any other rental income is, converted to US dollars and reported regardless of whether you also owe Mexican tax on it. As a Mexican-source item, rental income is generally subject to Mexican tax even for someone who is not otherwise a Mexican tax resident, typically collected through withholding.
Mexican tax paid on that rental income can usually be claimed as a foreign tax credit on Form 1116 against US tax on the same income, which limits the double taxation but does not eliminate the need to track both sets of numbers separately. Our foreign rental income guide covers depreciation and expense allocation for property held outside the United States.
How Is the Sale of Mexican Property Taxed?
A sale of Mexican real estate is a reportable event on your US return in the year of sale, with gain or loss measured in US dollars using the exchange rates in effect when you acquired and sold the property, not in Mexican pesos. That currency conversion step can produce a US taxable gain even in a transaction that looks flat or negative in peso terms, so it deserves attention before closing, not after.
Mexico taxes the sale of Mexican-source real property as well, and the withholding exposure on the Mexican side can be significant for a nonresident seller. Mexican tax paid on the sale is generally available as a foreign tax credit against US tax on the same gain, computed on Form 1116, but the credit is limited by category and by the US tax otherwise due, so it will not always offset the Mexican liability dollar for dollar. See our guide to selling foreign property for how basis and holding period interact with the credit.
What Foreign Account Reporting Applies to Mexican Bank and Investment Accounts?
Two separate reporting regimes apply once you hold Mexican bank or investment accounts, and both exist independently of whether you owe any tax at all. The FBAR (FinCEN Form 114) is due whenever the aggregate value of your foreign financial accounts, including Mexican checking, savings, and investment accounts, exceeds $10,000 at any point during the year, and it is filed with FinCEN separately from your tax return. See our FBAR filing guide for the mechanics and deadlines.
Form 8938 (IRC Section 6038D) applies on top of the FBAR when specified foreign financial assets exceed a separate, higher threshold, and that threshold is higher for taxpayers who live abroad: for a taxpayer resident outside the United States, the threshold is $200,000 on the last day of the year or $300,000 at any point during the year for a single filer, and $400,000 or $600,000 respectively for a married couple filing jointly. Form 8938 is filed with your Form 1040 and asks for more detail about each account than the FBAR does. Our Form 8938 filing guide covers who qualifies for the higher abroad thresholds and what counts as a specified foreign financial asset.
Bottom Line
Living in Mexico does not replace your US filing obligation, and it does not automatically create a Mexican one either; the two run on different tests and have to be analyzed separately every year. Retirees living on US-source income should confirm whether they have actually become Mexican tax residents before assuming a Mexican return is required. Remote workers and digital nomads need to run the FEIE-versus-FTC comparison against their actual numbers rather than defaulting to whichever one a blog post recommends, and self-employed Americans specifically need to plan around the absence of a US-Mexico totalization agreement rather than discover it at filing time. Property owners should confirm their fideicomiso matches the Rev. Rul. 2013-14 fact pattern and keep FBAR and Form 8938 current on every Mexican account.
Have questions about US expat taxes in Mexico? Contact TS CPA for a free consultation. We respond within the same day.
Official IRS and Government Sources
- IRS, US Citizens and Resident Aliens Abroad
- IRS, Foreign Earned Income Exclusion
- Rev. Rul. 2013-14, Mexican Land Trusts
- Social Security Administration, Totalization Agreements
- US-Mexico Income Tax Convention
- 31 CFR 1010.350, Reports of Foreign Financial Accounts
- IRC Section 6038D, Information With Respect to Foreign Financial Assets
- IRS Tax Treaty Documents