If you retired to San Miguel de Allende or Lake Chapala, or you’re working for a US company from a flat in Roma Norte, the IRS side of your life hasn’t changed much. You still file a 1040 every year. What’s changed is that Mexico may now tax you too, and a lot of Americans here have never checked whether it does.
So we start with residency. Almost everything else on this page depends on it.
Are you a Mexican tax resident, or just living in Mexico?
Mexico’s test sits in article 9 of the Código Fiscal de la Federación, and it’s simpler than people expect. You’re a tax resident if you’ve set up your home (casa habitación) in Mexico. If you also have a home in another country, you’re a resident if your centre of vital interests is in Mexico, which the code says is the case when more than half your income for the year comes from Mexican sources or your main professional activity is here.
Your immigration status doesn’t decide it. A residente permanente card is good evidence that you live here, but the test is about your home, and a visitor who never really leaves can meet it too. The reverse also happens: a retiree who spends winters in Mérida and keeps the house in Arizona, with all their income from US pensions, is often not a Mexican tax resident at all.
The case we see most is the retiree who sold the US house and now has one home, in Mexico. That person is a Mexican tax resident, whether or not they’ve ever registered with the SAT.
Residents register for an RFC (the Mexican taxpayer number) and file a declaración anual for each calendar year between 1 and 30 April of the following year, so 2025 is due by 30 April 2026. Resident individuals pay ISR on worldwide income at progressive rates from 1.92% to 35%, with the top rate starting at MXN 4,511,707.38 of annual taxable income (about $234,800 at the IRS 2025 average rate of 19.212). Self-employed people and small business owners with income up to MXN 3.5 million a year can opt into RESICO, which charges 1% to 2.5% of monthly income with no deductions.
What does the US–Mexico tax treaty do for a retiree?
For Social Security, a lot. Article 19(1)(b) says Social Security paid by one country to a resident of the other, or to a US citizen, is taxable only in the paying country. It’s one of the few provisions that survive the treaty’s saving clause, so the result is clean: your US Social Security is taxed by the US, up to 85% of it under the usual rules, and Mexico doesn’t touch it.
Private pensions, IRAs and 401(k) distributions are different. Article 19(1)(a) gives them to the country where you live, so a Mexican resident is taxable on them in Mexico. The saving clause lets the US keep taxing you as a citizen anyway. Article 24(4) sorts out the overlap. Mexico gives credit only for the US tax the treaty would allow on a non-citizen, and the US then gives credit for the Mexican tax, treating the income as Mexican-source to the extent needed. That re-sourcing is a treaty position, which we usually disclose on Form 8833.
In practice a Mexican-resident retiree with a large IRA has a real Mexican filing to do, and the answer is rarely zero on both sides. It isn’t double tax, but it’s two returns that have to agree with each other.
| Income | Mexico (if you’re resident) | US return |
|---|---|---|
| US Social Security | Not taxed (treaty Art. 19(1)(b)) | Taxed, up to 85% of benefits |
| IRA, 401(k), private pension | Taxed as resident | Taxed, with credit for Mexican tax via Art. 24(4) |
| Salary from a US employer, work done in Mexico | Taxed, up to 35% | Taxed; FTC or FEIE |
| Rent from a Mexican property | Taxed, even if you aren’t resident | Taxed; credit for Mexican tax |
| Gain on a Mexican home | Exempt if your casa habitación and within the limit, otherwise taxed | Taxed above the §121 exclusion |
Working remotely from Mexico: FEIE or the foreign tax credit?
It turns on residency again. If you aren’t a Mexican tax resident and pay no Mexican tax on your wages, the foreign earned income exclusion (Form 2555) is the tool: up to $130,000 of 2025 earnings, provided your tax home is in Mexico and you pass the physical presence test (330 full days outside the US in a 12-month period) or the bona fide residence test. If your rent is high, the housing exclusion adds relief above a base of $20,800. For Mexico City, IRS Notice 2025-16 lets you count up to $47,900 of housing costs, more than the default cap.
If you are resident, Mexico taxes your salary even though a US company pays it, and because a US employer won’t withhold ISR you generally make the monthly provisional payments yourself. At professional salaries Mexican tax usually beats the US tax on the same pay. That’s where the foreign tax credit (Form 1116) wins, because it wipes out the US tax and keeps the excess for later.
Say you earn $120,000 working remotely from Mexico City
You’re single, a Mexican tax resident, and a US software company pays you $120,000 in 2025, about MXN 2,305,000 at the IRS average rate. You have no other income.
On the Mexican side, before any personal deductions, that salary lands in the 34% bracket and the annual tariff gives ISR of about MXN 665,000, or roughly $34,600.
On the US side, after the $15,750 standard deduction, US income tax on $104,250 comes to about $17,900. The Mexican tax more than covers it, so a foreign tax credit brings your US income tax to $0 and leaves roughly $16,700 of unused credit to carry forward for up to ten years. The FEIE would also get you to $0, but with nothing carried forward.
What the credit can’t touch is Social Security tax. Your US employer keeps withholding FICA because you’re a US citizen on its payroll, and there’s no totalization agreement to switch that off.
Illustrative figures, rounded. A real return uses your actual Mexican filings.
Why the missing totalization agreement costs freelancers in Mexico
The US and Mexico signed a Social Security totalization agreement in June 2004. It was never sent to Congress and has never come into force, so nothing coordinates the two countries’ social security systems for you.
Self-employed in Mexico? The FEIE won’t cover self-employment tax
If you freelance or run a sole business from Mexico and have $400 or more of net self-employment earnings, you owe the 15.3% US self-employment tax on it. The FEIE doesn’t reduce it, and without a totalization agreement there’s no certificate of coverage to exempt you. It’s the most common unpleasant surprise we see from Americans who moved to Mexico to freelance.
RESICO can make this worse in a quiet way. At 1% to 2.5% of income, the Mexican tax is small, so there’s little to credit on your US return. For most RESICO freelancers the FEIE, not the credit, is what keeps US income tax down, and the self-employment tax is simply a cost to budget for.
How the IRS sees your afore, CETES and Mexican funds
Anyone who has worked for a Mexican employer has an afore, the individual retirement account the IMSS system requires, invested in SIEFORE funds. This is where the law is genuinely unsettled. The IRS hasn’t said how an afore should be treated. Some practitioners call it a foreign grantor trust or treat the SIEFOREs as PFICs, which would mean Forms 3520 and 8621. Others treat the mandatory account as part of Mexico’s social security system, closer to a state pension than to an investment account. We lean towards the second view for mandatory contributions, reporting the balance on the FBAR and Form 8938, and we look harder at voluntary contributions (aportaciones voluntarias), which behave much more like ordinary savings.
The rest is clearer. CETES, bought through Cetesdirecto or your bank, are Mexican government bills: the interest goes on your 1040 as ordinary income and they’re not a PFIC. A fondo de inversión, the mutual fund your Mexican bank will happily sell you, generally is a PFIC and needs Form 8621 every year. If you want funds, hold US-domiciled ones in a US brokerage account.
Owning coastal property in Mexico through a fideicomiso
Foreigners can’t hold land directly within 50 km of the coast or 100 km of a border, so a condo in Puerto Vallarta or a house in Tulum usually sits in a fideicomiso, a trust held by a Mexican bank for your benefit. For years American owners filed Forms 3520 and 3520-A on these, because a foreign trust normally needs them.
You generally don’t have to. Rev. Rul. 2013-14 says a fideicomiso in which the bank holds only bare legal title isn’t a trust for US tax purposes, so the IRS treats you as owning the property directly. The ruling depends on the bank’s role being limited that way, so read your trust deed once. The property itself isn’t an FBAR item, but rent you collect and a gain when you sell both go on your US return.
What happens when you sell a home in Mexico?
Mexico exempts the sale of your casa habitación if the price is no more than 700,000 UDIs (roughly MXN 6 million at late-2025 UDI values), the sale is signed before a notario, and you haven’t used the exemption in the previous three years. Above that limit, the excess is taxed. The notario calculates and withholds the ISR at closing, and will want your RFC and proof that the property really was your home. A vacation condo doesn’t qualify.
On the US side, the §121 exclusion works for a foreign home: up to $250,000 of gain, or $500,000 married filing jointly, if you owned it and lived in it as your main home for two of the last five years. The US gain is measured in dollars, each price converted at the rate on its own date, so a falling peso can shrink a gain that looks large in pesos.
Take Linda, selling a Puerto Vallarta condo she used for winters
Linda, a US citizen who lives in Texas and winters in Mexico, bought her condo through a fideicomiso in 2014 for $220,000, about MXN 2.9 million at the time. She sold it in 2025 for MXN 8,650,000, about $450,000 at the rate on closing day.
Her US gain is about $230,000 before closing costs. The condo was never her main home, so §121 doesn’t apply, and at the 15% long-term rate the US tax on it is about $34,500. Because the gain pushes her income over $200,000, some of it also picks up the 3.8% net investment income tax.
Mexico taxes the gain too. As a non-resident she generally pays either 25% of the gross price or, if she appoints a Mexican representative, 35% of the peso gain after her cost is indexed for inflation, and the notario withholds it at closing. Either way that Mexican tax is creditable against the US tax on the same gain and will normally cover it. It generally can’t be used against the 3.8% surtax, which is the part people don’t see coming.
Illustrative figures. Exchange rates and Mexican tax depend on the actual dates and the notario’s calculation.
Reporting Mexican bank accounts: FBAR and Form 8938
If your non-US accounts together topped $10,000 at any point in 2025, you file an FBAR. That includes peso and dollar accounts at Mexican banks, a Mexican brokerage account, an afore, and accounts you can sign on for someone else. Form 8938 comes in above $200,000 at year end or $300,000 at any time for single filers living abroad ($400,000 and $600,000 married filing jointly). Mexican banks report US account holders to the SAT under FATCA, and the SAT passes it to the IRS. Our FBAR guide walks through the form.
Filing your US return from Mexico
You must file for 2025 if your gross income is at least $15,750 (single, under 65), or just $5 if you’re married to a Mexican spouse and file separately, which is the usual choice unless you elect to bring their income onto a joint US return. Self-employed people file at $400 of net earnings. The return is due 15 June 2026 for those living abroad, with Form 4868 taking it to 15 October, but any tax owed is due 15 April. Convert pesos at the IRS yearly average of 19.212 for income received through the year, and at the spot rate for one-off sales.
Don’t forget the state you left. A state that still sees you as resident can keep taxing you, and our state tax guide covers how to break it. If you’ve been in Mexico a while without filing, the Streamlined procedures are the way back.
When you come to us, the first thing we’ll settle is whether Mexico treats you as a tax resident, because that answer decides whether the treaty credits matter, whether the FEIE or the credit is right, and what the SAT expects from you each April. The general US expat tax guide covers the rest.