Taxes and the FEIE: The Tax Picture for Americans in San Miguel de Allende

The first time we filed from abroad, the tax software kept showing a number I did not believe: zero federal income tax. Not a deduction, not a credit, an exclusion, as if the income never existed. I reread the rules three times before an accountant confirmed it. You qualify, this is normal, this is what the Foreign Earned Income Exclusion is designed for. Once I understood why it was true, the whole financial case for the move snapped into place. Here is the honest map of the tax picture, including the parts the exclusion does not touch.

What is the Foreign Earned Income Exclusion?

The FEIE lets you exclude a large amount of income you earn from work while living abroad, up to an annual limit that adjusts each year (up to $130,000 per qualifying person in 2025, double that for a married couple if both qualify). If you perform your work while physically outside the United States and meet one of two tests, that income is treated as if it never existed for federal income tax purposes.

Two things keep it honest. It applies only to earned income, the money you make through labor. Dividends, interest, capital gains, rental income, and business distributions stay fully taxable. And it eliminates federal income tax only. You still pay Social Security, Medicare, self-employment tax where it applies (about 15.3 percent on net earnings), value-added tax on what you buy, and state tax if you keep residency in a state that charges it. This is not a loophole. It is the individual version of the same principle that lets the tax code avoid taxing the same labor twice when an American is genuinely based abroad.

How do you qualify for the FEIE?

Two paths lead to qualification, and most families use them in sequence.

The Physical Presence Test asks for 330 full days outside the U.S. in any rolling 12-month window. It does not have to match the calendar year, and the days do not have to be consecutive. A full day means 24 hours outside U.S. borders, so any calendar day you touch U.S. soil, an airport included, does not count. If you arrive mid-year and cannot reach 330 days before the filing deadline, you can file Form 4868 to push the deadline to October and qualify then.

Bona Fide Residency asks you to reside in a foreign country for a full calendar year and genuinely build a life there. Evidence includes a residency card, a long-term lease or home, community involvement, and school enrollment for children. It is a facts-and-circumstances test, which means you cannot paperwork your way into it. Because it requires a full calendar year, many families start under Physical Presence and shift to Bona Fide Residency once they are settled in San Miguel.

Does living in San Miguel de Allende make me a Mexican taxpayer?

Your residency card does not create Mexican tax residency. Immigration status and tax residency are legally distinct, and a temporal or permanente card, or the CURP that comes with it, is not a tax registration. Whether to obtain an RFC, Mexico's tax ID, depends on your facts and belongs in a conversation with a cross-border tax advisor, not at an immigration or bank counter.

Mexican law does have a "center of vital interests" test. In plain terms, Mexico can treat you as a tax resident if more than half your income comes from Mexican sources, or if Mexico is the primary place of your professional activities. For someone whose clients, contracts, and business infrastructure are U.S.-based, the case for a U.S.-centered economic life is strong, and the U.S.-Mexico tax treaty provides a tie-breaker when both countries could claim you. This is legal machinery best walked through with a qualified professional, not a do-it-yourself project.

What lowers my Mexican audit profile?

The book's own posture is to keep a clean, single narrative. In practice that meant a short list of habits: hold only a CURP rather than an RFC, keep no Mexican accounts that receive income, issue no Mexican invoices, take on no Mexican employment or rental income, and pay local expenses with foreign cards or cash. A peso account funded with small deposits to pay utilities and groceries is routine consumer activity and does not by itself establish an economic center in Mexico. The authors lived in Mexico three years without a Mexican bank account, using Wise for recurring payments and letting rental agents handle certain transactions, precisely to avoid documentation ambiguity during an audit.

The two compliance forms you cannot skip

Separate from the FEIE, two filings apply to nearly every American abroad, and missing them carries penalties that dwarf the income tax you saved.

The FBAR (FinCEN Form 114) is required if the combined value of your foreign financial accounts topped $10,000 at any point in the year, even for a single day. It covers checking, savings, brokerage, and accounts you merely have signatory authority over, and it is filed separately from your tax return.

FATCA (Form 8938) is filed with your return if your foreign financial assets exceed the thresholds for taxpayers living abroad ($200,000 single or $400,000 married filing jointly at year-end). The two overlap but are not interchangeable. Many Americans abroad must file both, and filing one does not satisfy the other.

What about the housing exclusion?

On top of the FEIE, the foreign housing exclusion can remove more taxable income by letting you exclude qualified housing costs above a base amount, up to a location-specific cap. The structure is simple even though the numbers change each year: your qualified housing costs, minus a published base amount, up to the local limit. Most Mexican localities carry a standard cap, with higher-cost cities assigned higher ones. For many expat families this adds another meaningful slice of excluded income beyond the FEIE itself. Your accountant can pull the current base and caps for the year you file.

The honest bottom line

For mid- to high-earning remote workers and small-business owners, this stack (FEIE, the housing exclusion, and careful state and structure planning) can shift tens of thousands of dollars a year. The savings are real, and so are the traps: state tax if you keep residency, self-employment tax the FEIE never touches, unearned income that stays fully taxable, and a miscounted travel day that can drop you below 330. None of this is universal, and the Foreign Tax Credit or an S-Corp structure can change the math for some filers. Model your actual situation with a cross-border CPA before you move. Explore the full relocation guide and the community for current figures, referrals, and the state-tax details that decide how much of this applies to you.