“Kathleen, as both the United States and Mexico tax your worldwide income, if your income is from a U.S. pension and/or IRA distributions, wouldn’t the double-taxation treaty allow you to subtract the Mexican taxes from the U.S. taxes, in essence canceling them out?”
— Kathy M., United States
Tax treaties are individually negotiated, so you’d have to check the particulars of the double-taxation treaty between the United States and Mexico to understand fully.
Social Security could be specifically excluded from income taxes in Mexico. For other pension income, again, you’d have to check the specifics of the treaty. In theory, if your pension income is taxed in the U.S. and in Mexico, the taxes paid in Mexico would offset the taxes in the States.
However, as we recommend regularly, you should speak with a Mexico tax accountant to understand how your specific situation would be taxed in that country. It is possible that your pension could be taxed at a higher rate in Mexico than in the United States, meaning you’d end up paying more in tax by leaving the United States.
All that said, the underlying point is that, if you have more than just straight pension or Social Security income, you could end up paying way too much in taxes overall by becoming a resident of Mexico (or any other country that taxes you on your worldwide income).
From the point of view of running an international business, Mexico makes no sense at all.
