Mexico has an exceptional economy that is ripe with opportunity, and you may actively be researching the pros and cons associated with relocating south of the border and opening up your own business. Those who are financially savvy understand the incredible impact that taxes can have on net income and net worth. You understandably want to make the wisest financial decision possible that will improve your quality of life rather than be a detriment to it.

With this in mind, you may be wondering what are the taxes in Mexico that you may be responsible for. You may also want to know how taxes in Mexico will affect you personally. After you have learned more about the various forms of taxation in Mexico, you can better determine how to proceed with your relocation plans.

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What You Need to Know About Taxes in Mexico

Personal Income Taxes for Citizens

Regardless of whether you plan to retire in Mexico or start a new business in this country, you may be wondering what is the individual tax in Mexico for income. All sources of income earned in Mexico are taxed, and this includes income from a job, from your own business, from an interest-bearing bank account in Mexico, on a rental property and more.

If you go through the steps to become a resident, you will need to pay the standard tax income in Mexico for residents. This averages about 35 percent, based in large part on your income. If you are not a citizen of Mexico, different tax rates will apply.

Income Tax in Mexico for Expats

If you are in Mexico on a work visa or a permit, you may pay a higher rate than your counterparts who are full citizens. The expat or visa income tax rate ranges between 15 and 30 percent. The actual rate that you will be subject to is based on your total income. Keep in mind that only income that is generated from Mexican investments and sources of income are taxed on a Mexican tax return. If you still receive income from your home country, you may be required to file a tax return through that country as well.

Taxes on Investments and Estates in Mexico

Because all income that you generate is considered to be tax income, it is important that you know the Mexico income tax rate for investments. Most income investments will be taxed at your standard income tax rate. However, income from rental properties receive special consideration for Mexican tax purposes.

There are three options that you can consider when calculating income tax on a rental property that is located in Mexico. You can take a flat 35 percent rate on gross income, a 30 percent rate less allowed deductions or a 25 percent tax rate based on the gross income. If you plan to live partially or fully on rental income in Mexico, you can see that the tax rate would be a major consideration.

Business Tax in Mexico

As you might imagine, the business tax in Mexico can be rather steep. The country has a flat corporate tax rate of 30 percent. While the flat tax rate makes it easier for businesses to determine how much they will owe each year, it is important to note that there may be some standard deductions available that can offset the total amount of business tax that is owed.

Sales Tax in Mexico

When you make purchases in Mexico, you will be responsible for paying the sales tax, which is also known as the IVA. This tax rate is 16 percent on the cost of all goods purchased. However, it can be difficult to determine if you are paying the tax. Some stores factor the IVA sales tax into the price so that you do not pay more than what is marked on the price tag. Other stores unfortunately do not report or pay the IVA tax. This is an illegal practice on their part. However, the government is becoming stricter about enforcing compliance with this aspect of the tax law.

Property Tax in Mexico

If you plan to purchase property in Mexico, it is important to know what the taxes in Mexico are for real estate. First, you will pay a one-time acquisition fee that equals two percent of the total sales price. This is required to be paid at closing.

Other taxes in Mexico related to real estate include an annual property tax and a capital gains tax when you sell the property. The annual property tax is very low, and it is normally only a few hundred dollars per year on the average home. You will, however, be required to pay it in cash and in person at the municipal office. The capital gains tax is either 20 percent of the declared value or 28 to 30 percent of the net gain on the property.

The Need to Pay U.S. Taxes

Regardless of whether you choose to relocate to Mexico or another country, you will still be required to file a U.S. tax return as long as you are an American citizen. You will also need to report all foreign assets that you hold in other bank accounts.

There are various credits available to decrease the burden associated with double taxation. For example, you may qualify for the Foreign Income Credit, the Foreign Housing Exclusion and the Foreign Earned Income Exclusion. Your accountant can provide you with more information about each of these credits.

Final Thoughts

Before you make any major decisions about if you should move and where you should relocate to, it is important to crunch numbers. Taxes in Mexico can be high in some cases, and you understandably want to ensure that it is affordable for you to live in this country. Take time to analyze how each of these taxes in Mexico will affect your life if you move.

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