How to Avoid Double Taxation as a U.S. Expat in Colombia

Whether your entire year is spent in the US or your only connection to the country as an expat is your American passport, you’re still more likely than not to have an obligation to file a tax return to the IRS.  In Colombia, on the other hand, the tax obligation for expats and foreigners generally arises when the individual spends at least 183 days in the country, or receives income considered sourced from within Colombia.

If you are a US citizen who meets the filing criteria in Colombia this means that you might need to report your income to both the US tax authorities and the DIAN (the Colombian tax authority). However, the fact that you may have to file twice doesn’t mean you are required to pay double the taxes.

USATax.co helps expats with this common pain point and overcome this daunting task. Since 2018, our team has grown to be the most qualified US-Colombia tax firm aiming to bring you confidence throughout the entire filing process. We have created this resource to dispel misbeliefs and to introduce the tools, along with a roadmap, to avoid double taxation as a US expat in Colombia. Let’s dive in.

Tax Credit & Foreign Earned Income Exclusion

Similar to the US, residing in Colombia means that your total worldwide income is taxable. In other words, the total income derived over the course of the year is the same amount you would report to both the IRS and DIAN. Since the USA and Colombia have comparable tax brackets, the tax owed to Colombia will be similar to that of the US in a comparable situation.

The US and other world leaders want to promote free trade internationally. Double taxation would make that difficult, especially living in a place like Colombia where the taxes are already sizable. With the help of qualified tax accountants, expats can accurately leverage two key tools to avoid being double-taxed:

• Foreign Tax Credit (FTC): If you owe taxes in your country of residence, you can go ahead and pay there first. Any amount you pay can generally be used as a credit for when you file in the US. In Colombia, taxes are generally higher, so you will likely end up using the entire credit to avoid double taxation in the US completely. However, omitting or incorrectly claiming the FTC can render this tool useless, which makes a knowledgeable tax accountant a worthwhile investment. 

• Foreign Earned Income Exclusion (FEIE): If you live in Colombia and fall in one of the two specified categories, either the bona fide residence or physical presence test, you may be eligible for the FEIE. With the FEIE, any earned income up to a certain threshold ($108,700 for 2021 and $120,000 for 2022) may be excluded from your taxable income when filing in the US. Please note, that the rules for tax residency in Colombia are generally easy to follow, while the rules for the IRS in regards to FEIE and tax residency are  less straightforward.

Residents vs. Non-Residents: What to Keep in Mind

Your eligibility for both FTC (Form 1116) and FEIE (Form 2555) may depend on several factors, including your migratory status in Colombia.

In Colombia, the form DIAN 110 is used for Colombian non-residents, whereas the form DIAN 210 is for residents. Determining which of the forms is required should be evaluated based on your specific circumstances – for example, the simple 183-day physical presence test. 

In general, when required to file both in Colombia and the US, expats should start preparing their US tax return first before preparing the DIAN return. This way, tools like the FTC and FEIE can be properly applied with the correct timing. Below is how both options might affect your tax strategy.

DIAN 110 – Nonresidents

Here, we have translated the DIAN 110 form into English for you.

In the case of FTC, most expats earn income from one of two categories: Passive Category Income and General Category Income. Taxes paid on passive income (dividends, interest, royalties, and rents) and general income (such as wages, salaries, or income from a trade or business) should be reported separately. Colombia has similar rules when identifying categories of income.

For FEIE, it’s slightly different. Since FEIE has more stringent requirements and requires expats to meet either the bona fide residence or physical presence test, this exemption may not always apply. Know that if Colombia considers you a non-resident, then the US will likely do the same, making the FTC a viable option.

DIAN 210 – Residents

Here, review the English version of the DIAN 210 form.

Know that for FTC, this credit can be taken when an expat does not qualify for the FEIE, if they earned income in excess of the exclusion amount or on those income types not eligible for the FEIE. See lines 93-96 of the form above.

In the case of FEIE, DIAN form 210 may be used as evidence to support one’s eligibility for taking this exemption. It should be kept with all other tax documents that support the contents of the tax return. Check out the important income and deductions information that start on lines 32 and 54 of the DIAN 210 form.

Paid vs. Accrued Taxes

Generally, US expats can choose to take the FTC on taxes paid or accrued. This may benefit those who owe taxes to Colombia but have yet to pay them. If the FTC is taken on accrued taxes, those taxes must be paid in the prescribed time, or amending your return will be required. For DIAN 110, see lines 79-101. For DIAN 210, see lines 75-104. 

The distinction between paid and accrued taxes is also vital because the US and Colombian filing deadlines don’t line up. 

In Colombia, your filing deadline is between August and October each year, while in the US, it’s between January 1 and April 15. This means that if you want to opt for FTC work with your accountant to calculate your tax even before filing. This draft can then be used as an FTC guarantee when you file your taxes in the US. If done correctly, your estimated tax will be very close, if not exact, to the final result.

Colombian Peso: A note on USD Currency Exchange

Last but not least, know that income and deductions received or paid in Colombian peso must be reported in US dollars. However, you must use the correct currency conversion method, as outlined by the IRS, when making your calculation from COP to USD. The IRS will post certain countries’ currency annual average – but not Colombia. So, it requires the right math from the right sources to get the approved conversion rates. 

The IRS only accepts exchange rates from predetermined resources – so follow those to make sure you declare correctly. You can find additional information on the IRS’ Foreign Currency and Currency Exchange Rates site.

In Conclusion

Using either the FTC or FEIE can provide you a roadmap to better navigate tax reporting for both IRS and DIAN in the future. Not only can you avoid double taxation, but you also ensure that you are correctly meeting your obligations to prevent any potential trouble.

If you’re facing double filing requirements and require further assistance this tax year, book an appointment with our licensed tax professionals and we will start you with an in-depth consultation and assessment of your current tax situation.