Expat Tax for Americans in Colombia – What You Need To Know
Expat Living In Colombia
Food, friends, and festivals—that’s what you can expect as an American ex-pat living in Colombia. Colombia is a popular South American destination for several reasons. A dramatically low cost of living, diverse culture, and, of course, the scenery. This article on US Expat Tax in Colombia will provide a brief intro to taxes in Colombia from both the perspective of local taxes and your tax obligations in the U.S.
An excellent place to retire, Colombia is home to a friendly, laid-back culture. A fantastic climate, and an extraordinary number of things to do. Expats living in Colombia can expect to enjoy flora and fauna (as one of the 17 “megadiverse” countries globally) while also taking advantage of the local comforts and amenities.
Below is a list of our topmost attractive cities in Colombia for foreigners to reside in (in no particular order):
- Cartagena
- Bogota
- Medellin
- Santa Marta
- Cali
- Guatape
- Salento
- San Andres
- Villa De Leyva
- Barranquilla
- Taganga
- San Agustin
- Zipaquira
- Pereira
- Barichara
Worldwide Income and Citizenship-Based Taxation
The United States is one of the few countries that taxes worldwide income for all of its citizens, no matter where they live and regardless of how long they have been overseas. While some countries have treaties that avoid double taxation, Colombia is not one of them.
Thus, if you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. This is affectionately known as the “citizenship-based” income tax.
Elsewhere in the world, the basic rule is that taxes are based on residency and not citizenship.
The United States’ taxation of worldwide income has been around since the 1860s when enacted as part of the Revenue Act of 1861. The purpose was to stop wealthy people from fleeing the U.S. in a time of crisis and taking their money with them. The defense of ongoing citizenship-based taxation income rests on the belief that U.S. citizenship offers benefits even enjoyed by non-residents. Thus, overseas taxpayers have a requirement to pay for this benefit even when they earn money elsewhere.
Even as the rest of the world, including Colombia, has moved toward a different taxation model, the United States’ citizenship-based taxation remains in place. In fact, there has not been a serious attempt to reverse this law. Instead, the debate usually focuses on how much tax overseas citizens should pay.
Guide To US Expat Tax In Colombia
This guide intends to provide a general review of Colombia’s tax environment. And how that will impact your U.S. expatriate tax return as a U.S. Expat In Colombia.
Colombia Income Taxes
Expats who are in Colombia for less than six months out of the year are non-residents. They will only be subject to taxation on income from Colombia, at a flat tax rate of 35%. Expats in Colombia for more than six months out of the year have taxation on all their income. But will be subject to taxation on their income range. For these residents, the progressive tax rate ranges from 0% to 33%.
An individual who spends more than 183 days in Colombia will be a resident in Colombia. However, they may end up subject to double taxation. America does not have an exemption for double taxation with Colombia. This means that you may be a tax resident of both Colombia and America at the same time.
Tax Year In Colombia And Tax Filing And Payment Rules
In Colombia, tax deadlines change from year to year. In 2019, large taxpayers must pay between February 8th and February 21st. Other taxpayers must pay from April 9 through May 10. These deadlines are adjusted every year with an announcement by the government. But they will generally fall during the same time. Payments are split into first payments and second payments.
HOW YOU CAN SAVE MONEY ON YOUR U.S. TAX RETURN WHILE LIVING IN COLOMBIA?
Tax Samaritan is a firm focused on tax preparation and resolution for both U.S. (federal) and state income taxes. As a firm specializing only in U.S. federal and state taxes, our opinion is that when trying to locate a firm that can provide expertise and preparation in both U.S. and Colombia income taxes, it doesn’t exist with any single tax professional. Rather, such expertise is found in larger international tax firms with separate tax specialists for U.S. and Colombia. It’s rare to find a tax expert in a single country, let alone with multiple countries’ expertise. For the convenience of having both country returns prepared by a single firm, a significant premium will be incurred with little to no benefit (except for some convenience).
Local Country Taxes
Thus, we recommend working separately with a local tax professional in Colombia to handle your Colombia income taxes. A separate U.S. tax professional or firm is the best approach. If you haven’t already moved to Colombia, we recommend that you dig into some tax planning to fully understand your U.S. and Colombian tax impacts before your move, including the impact of any foreign investments and the establishment of any foreign business.
When dealing with U.S. and state taxes while living in Colombia, several preferential expat tax treatments may benefit your U.S. expatriate tax return. In fact, for many U.S. ex-pats it will reduce your U.S. tax liability to zero.
It is important to note that a common but dangerous mistake is the assumption that if there are zero taxes with these tax benefits. Then, there is no U.S. tax filing requirement. This is not true. If you are working overseas, it is likely that you meet the filing requirements and must do so. It is important to note that the preferential tax treatments, such as the foreign earned income exclusion and foreign tax credit, are not granted automatically and must be claimed on a properly filed U.S. tax return.
When dealing with US expat tax in Colombia, there several preferential expat tax treatments that may benefit your U.S. expatriate tax return, in fact, for many U.S. expats, it will reduce your U.S. taxes to zero.
Preferential Expat Tax Treatments
Some of these preferential tax treatments or benefits for US expat tax in Colombia include:
If you are a U.S. citizen or a resident alien of the United States and live in Colombia, the US expat tax in Colombia is based on your worldwide income. You must file a U.S. return for all the years that you are residing in Colombia. However, as a U.S. expat you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings that is adjusted annually for inflation (increasing to $112,000 per person for tax year 2022). Also, you can exclude or deduct certain foreign housing amounts. This is known as the Foreign Earned Income Exclusion and foreign housing exclusion.
When it comes to US expat tax in Colombia, most US expatriates worry about “double taxation” – paying taxes to two different countries – the U.S. and Colombia. A U.S. taxpayer working overseas in Colombia may reduce U.S. taxable income and “double taxation” by claiming the Foreign Tax Credit on Form 1116. Should any foreign income not be fully offset by the foreign earned income exclusion, housing exclusion, or housing deduction, the foreign tax credit paid or accrued may be used as a deduction or credit on the U.S. tax return. Taxpayers can either deduct the taxes as an itemized deduction on Schedule A or claim a credit against tax. In most cases, it is to your advantage to take foreign income taxes as a tax credit.
Colombia Foreign Bank Account Reporting – The FBAR (FinCen Form 114)
FBAR Filing Deadline
Many overseas taxpayers must file the Foreign Bank Account Report, or FBAR (FinCen Form 114). The FBAR filing deadline is April 15th (or the preceding business day if April 15th falls on a weekend) – with an extension available to October 15th.
Any reports received after the deadline are delinquent. Besides, unlike most other tax forms, the FBAR filing is electronic.
FBAR Filing Requirements
The FBAR exists to help the U.S. government identify people who may be using foreign bank accounts to circumvent United States law. With FACTA, IRS criminal investigators will use the FBARs to help them identify or trace funds used for illicit purposes, identify unreported income abroad, and identify undisclosed foreign accounts.
This is an important IRS compliance requirement with huge monetary civil penalties at stake, as well as potential criminal consequences. Also, because of FACTA, foreign financial institutions are starting to disclose U.S. account holder information, making it easier for the U.S. to enforce this law.
You must file an FBAR with the Treasury Department if you are a U.S. person with a financial interest in, or signature authority over, foreign financial accounts with an aggregate value of more than $10,000 at any point during the tax year. Foreign financial accounts include bank accounts, brokerage accounts, mutual funds, trusts, or other types of foreign financial accounts maintained with a financial institution.
If you have specified foreign financial assets that exceed certain thresholds, you must also report those assets to the IRS on Form 8938. You may be reporting the same accounts twice in some cases, but both forms are still necessary.
Who Is a U.S. Person?
A U.S. person for FBAR reporting purposes includes U.S. citizens, U.S. residents, and entities including but not limited to corporations, trusts, estates, partnerships, or limited liability companies that are created or organized in the U.S. under the laws of the U.S.
FBAR Late Filing And Non-Filing
Civil penalties for non-willful FBAR violations may be as high as $10,000 per violation. For willful violations, the maximum penalty is usually the greater of $100,000 or 50 percent of the account balance per violation. Criminal penalties can result in fines of up to $500,000 and imprisonment of up to 10 years. It is possible to incur both civil and criminal penalties for the same violation.
FBAR Reporting
Effective July 1, 2013, all FBARs must be electronically filed with the BSA E-filing system.
If you have bank accounts at Bancolombia, Banco de Bogotá, Davivienda, Banco de Occidente, or at another bank in Colombia or any other foreign country, you may meet the filing requirement to disclose your foreign accounts on the FBAR. Please don’t hesitate to contact Tax Samaritan to learn more about your filing requirements.
U.S. – Colombia Social Security Totalization Agreement
The United States has entered into agreements, called Totalization Agreements, with several nations to avoid double taxation of income concerning social security taxes. These agreements are taken into account when determining whether an alien is subject to the U.S. Social Security/Medicare tax or whether any U.S. citizen or resident alien is subject to a foreign country’s social security taxes.
As of this time, Colombia has not entered into a Totalization Agreement with the United States. Thus, there is no opportunity to avoid double taxation of social security income for US expat tax in Colombia.
Purpose Of Totalization Agreements
International Social Security agreements, often called “Totalization agreements,” have two main purposes.
First, they eliminate dual Social Security taxation, which occurs when a worker from one country works in another country and pays Social Security taxes to both countries on the same earnings.
Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and elsewhere. The agreements assign coverage to just one country and exempt the employer and employee from the payment of Social Security taxes in the other country.
Determining Eligibility For The Totalization Agreements
Determining eligibility for the totalization agreements and required reporting is based on proper analysis and the taxpayer’s individual facts.
U.S.- Colombia Tax Treaty And Tax Relief For US Expat Tax In Colombia
The U.S. does not currently have a tax treaty with Colombia.
Tax Samaritan Takeaways For U.S. Expats In Colombia
Please click on the hyperlinks below for additional takeaways for your expat tax in Colombia:
IRS Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad