Foreign Tax Credit & Foreign Earned Income Exclusion for Expats in Colombia
Expats in Colombia can avoid double taxation with either the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC).
Being an expat in Colombia means you need to have an understanding of your reporting obligations to the DIAN (the National Administrative Department of Taxes and Customs of Colombia). Once new expats realize they are obligated to report their income and pay taxes in Colombia, a normal thought usually follows: “Am I going to be double taxed when I report to the IRS?”
The short answer: Probably not. Being an expat affords you two tools that can be used to avoid double taxation and includes the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC).
Qualifying Criteria for Foreign Earned Income Exclusion (FEIE)
Qualifying for the FEIE isn’t necessarily straightforward and U.S. expats in Colombia qualify for FEIE under two circumstances. Either the taxpayer must spend at least 330 days outside of the United States (Physical Presence Test) or establish bona fide residence in a foreign country (Bona Fide Residence Test).
Both of these tests share several essential nuances that can be confusing to taxpayers as they try to match their situation with what’s required by law. How you establish and prove your foreign residence for the Bona Fide Residence Test especially usually requires the expertise of an experienced tax professional.
For example, the Bona Fide Residence Test means you reside in Colombia under a visa such as:
You may take quick trips back to the United States for visiting friends or family, spending Christmas in your hometown, or going on temporary business trips, but you still clearly define that your main place of residence is in Colombia.
FEIE vs. FTC: Which One is Right for Me?
Expats in Colombia must choose between FEIE and FTC, and can not utilize both. When a U.S. taxpayer selects FEIE, this is also seen as a long-term commitment and therefore, the IRS does not allow taxpayers to switch back-and-forth between FEIE and FTC without submitting a formal request.
The FEIE is only applicable to earned income, meaning income earned through salaries, wages, commissions, or self-employment income. You can not take this exclusion for any income received through passive investments, dividends, capital gains, etc. If you have a lot of passive income sources the FEIE may not be the best choice for you.
The FTC works as a direct credit for taxes paid to Colombia for the same income you are reporting to the U.S. For example, let’s imagine you paid 10,000,000 COP in taxes to the DIAN based on a total of:
That same 10,000,000 COP can be used, through an approved currency conversion method, as a credit against taxes due to the IRS using the FTC. However, with FEIE you would not be able to exclude the income generated from the Bancolombia Fiuducuenta as it is a passive investment style income.
When it comes to choosing which is better, FEIE or FTC, it depends on various aspects of your situation, from how you earn your income, your foreign residency, the income tax rules in the foreign country, among others.
By working with a tax professional who can help weigh the pros and cons of FEIE vs. FTC depending on your current situation, as well as long-term impact, you could avoid additional reporting or paying excess income tax both now and in the future.
Consult and File with Experienced Professionals at USATax.co
Avoid double taxation and contact the professionals at USATax.co for expert consultation about the best choice between FEIE and FTC based on your situation now and in the future. We work with hundreds of expats in Colombia, helping them avoid double taxation and submitting their tax filings quickly and accurately.