Educate yourself with this colorful and easy-to-read presentation prepared specifically for US Expats living and/or working in Colombia.
A common question arises when moving to Colombia as an American Expatriate: Am I required to file a US Income Tax Return? Here is a list of the 20 things you need to know about Expat Taxes.
- In almost all cases, if you are living in Colombia, you are required to file taxes in the United States. In fact, this responsibility is outlined in all U.S. passports. This requirement is so important that the Internal Revenue Service (IRS) now has the power to notify the U.S. Department of State of any taxpayer with specified amounts of delinquent tax debt. This notification may result in the taxpayer’s inability to renew or the revocation of their U.S. passports.
- Both U.S citizens and U.S resident aliens are required to file income taxes. For tax filing purposes, a U.S. resident alien (also known as a Green Card holder) is considered a U.S. Citizen.
- The substantial presence test, or 183-day rule, impacts those who are not a citizen or a lawful permanent resident. Any individual who is not an American citizen or a resident alien but meets the Substantial Presence Test, a calculation of the number of days inside the United States over a 3-year period, is also considered an American citizen for tax filing purposes.
- For those individuals that meet U.S. residency tax filing requirements, gross worldwide income is the second test of who is required to file a U.S. Income Tax Return. Gross income is calculated based on worldwide income and these income amounts are relatively low. For example, self-employed individuals who earned more than $400 are required to report taxes.
- In those rare cases where a person does not meet the gross income filing requirements, it still may be beneficial to do so as a form of protection. This protection comes from the IRS’ inability to examine, or commonly termed audit, a tax return after a specified number of years. Generally, the IRS will only audit tax returns filed within the last 3 years. For unfiled tax returns, there is no statute of limitations.
- In 2019, the tax filing income deadline for all American taxpayers is April 15th. However, there are four types of extensions available to those living abroad. To avoid penalties, estimated taxes are still due before the original deadline.
- There are four ways to extend the April 15th deadline for U.S taxpayers living abroad. Three of the four extensions must be requested.
- If a U.S taxpayer lives or works abroad, they are granted an automatic extension. This gives an automatic 2-month extension (June 15th); a statement must be included in the tax return explaining that the taxpayer lives abroad.
- You can extend your filing deadline until October 15th by filing the Form 4868. This request can be made electronically or by mail. We provide this service at no charge for existing clients.
- You can request the 6-month extension (Form 4868) after April 15th but before June 15th. This differs from most who must make the request prior to the original tax filing deadline.
- You can extend your filing deadline until December 15th by using the discretionary 2-month. For taxpayers who are unable to meet the automatic extension deadline, a letter requesting 2 additional months may be sent to the IRS. An explanation must be provided and it is important to make this request only in unique circumstances. The extension must be requested before October 15th.
- Foreign Earned Income Exclusion (FEIE) applies to only earned income from wages and self-employment. Generally, the FEIE is the preferred method of avoiding double-taxation. You must meet one of the 2 residency tests (Physical Presence Test or Bona Fide Residence Test). However, the FEIE is not automatic. A tax returned must be filed in order to exclude the income. Self-employment tax is not exempt under the FEIE.
- In order to qualify for the Bona Fide Residence Test you need to reside in a foreign country for an entire tax year; uninterrupted. This is generally the preferred method as you don’t have travel restrictions. You also must be a tax filing resident of Colombia.
- If you are physically present in Colombia for more than 329 days during a period of 12 consecutive months, you can meet the physical presence test. You do not need to be present solely for work purposes.
- You may also be able to exclude or deduct the expenses related to your housing in Colombia. To carry out this, you must meet the Bona Fide Residence or Physical Presence Test. Keep in mind that your housing deduction corresponds to the total housing expenses minus the base housing amount.
- Housing expenses paid or incurred in a foreign country are tax deductible. However, expenses must be considered reasonable for you, your spouse, and your dependents. Housing expenses include such things as: rent, utilities, insurance, parking, non-refundable fees to secure a lease, rental of furniture and accessories.
- Not all housing expenses are allowed. Some housing expenses that are not allowed include: buying something lavish or extravagant, buying property, domestic labor (e.g. maids), television subscriptions, and purchased furniture.
- Base Housing amounts are calculated both annually and daily. These calculations limit the expenses related to housing that can be excluded or deducted. These calculations are a form of ‘floor and ceiling’ for housing expense deductions while working abroad.
- For taxes paid in Colombia, you may be able to reduce your US tax liability dollar-for dollar. This credit can be taken when you don’t qualify for the FEIE, if you earn income in excess of the exclusion amount, or on those income types not eligible to be excluded.
- In some cases, claiming the FTC on all your income, may reduce your US taxes more than FEIE. However, if you used the FEIE in previous years, this choice is generally not allowed without a formal request. The IRS doesn’t want you to ‘flip-flop’ between the 2 elections.
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