As a US Citizen with Mexican residency status, where must I pay income tax?

Question

I'm a US Citizen, but I have Mexican temporary residency status. I work remotely in Mexico for a US company, and I have been paying US income tax only.

Under what circumstances should I pay taxes on my income in Mexico?

Answer 1

This is an ugly subject for the US citizens given the taxation of the global income.

Having said that you may need to look at US-Mexico Tax Treaty, and the supporting Technical Explanation, The protocol from 2003, and Technical Explanation to it all available from the IRS as well as FAQ from IRS for individual International Tax Matters.

Long story short from IRS FAQ:

What is foreign earned income? Is it income paid by a foreign person for working abroad, or is it income paid by a U.S. company for working abroad?

Earned income is pay for personal services performed, such as wages, salaries, or professional fees. Foreign earned income is income you receive for services you perform in a foreign country or countries.

To qualify for the foreign earned income exclusion:

• Your tax home must be in a foreign country; and
• You must meet either the bona fide residence test or the physical presence test.
• It does not matter whether earned income is paid by a U.S. employer or a foreign employer.

Foreign earned income does not include the following amounts:

• The previously excluded value of meals and lodging furnished for the convenience of your employer. _ Pension or annuity payments including social security benefits.
• Payments by the U.S. Government, or any U.S. government agency or instrumentality, to its employees.
• Amounts included in your income because of your employer's contributions to a nonexempt employee trust or to a non-qualifying annuity contract.
• Recaptured unallowable moving expenses.
• Payments received after the end of the tax year following the tax year in which you performed the services that earned the income.

Which means that you have to report the income earned in Mexico to the IRS but you get relief under the tax treaty from Double Taxation you will get Tax paid to the US as credit in Mexico and Tax Paid in Mexico as credit to the US.

So what I would suggest is to get a competent accountant that knows how to deal with foreign earned income in both Mexico and US and have them deal with it.