Expat Tax In Iceland – Ultimate Tips You Need To Know

Expat Tax In Iceland

Expat Tax In Iceland – Expat Living In Iceland

Iceland has the second-highest quality of life in the world, according to the Economist Intelligence Index of 2011. It is a Nordic island country in the North Atlantic Ocean. Read on to discover essential tips on US Expat Tax In Iceland.

Its high latitude and surrounding cool waters keep summers chilly, with most of the archipelago having a polar climate. Around 19,000 people held foreign citizenship in the country.  Iceland’s public debt has decreased since the economic crisis in 2008. And, as of 2015 is the 31st-highest in the world by proportion of national GDP.

Iceland ranks high in economic, democratic, and social stability, as well as equality.

Below is our top 10 list of areas to live in Iceland for expats (in no particular order):

  • Reykjavik
  • Akureyri
  • Húsavík
  • Vík í Mýrdal
  • Seyðisfjörður
  • Siglufjörður
  • Kópavogur
  • Hafnarfjörður
  • Selfoss
  • Vestmannaeyjar

About Iceland

Iceland is located in between the North Atlantic and Arctic Oceans. The main island is south of the Arctic Circle. Its compulsory subjects are English and Danish, and the currency is the Iceland króna.

Iceland’s original population was of Nordic and Gaelic origin. The culture in Iceland attributes its origin to North Germanic traditions. Much of Iceland’s cuisine is based on fish, lamb, and dairy products, with little to no use of herbs or spices. The official written and spoken language is Icelandic, a North Germanic language descended from Old Norse.

In 2020, Iceland’s ranking is the fourth most developed country globally by the United Nations’ Human Development Index. It also ranks first on the Global Peace Index.

The climate of Iceland’s coast is subarctic. Iceland ranks as one of the eco-friendliest countries in the world. The vast majority of the electricity production in Iceland is from renewable energy sources and solutions.

Guide To US Expat Tax In Iceland

The Tax Samaritan country guide to US ex-pat tax in Iceland provides a general review of the tax environment of Iceland and how that will impact your U.S. expatriate tax return as a U.S. Expat In Iceland.

As a U.S. taxpayer, all worldwide income is subject to taxation and reporting. For most expatriates, you have a requirement to file a U.S. tax return on an annual basis on April 15 each year. June 15 if you are residing overseas on the April 15 deadline. The tax treatment for different classes of income can vary significantly from Iceland and the U.S.

For example, certain benefits are tax-free in Iceland. But, in the U.S., these benefits are likely to be benefits that are subject to inclusion as taxable income in the U.S. As such, there are many considerations related to US expat tax in Iceland. This brief article will address a few of those considerations.

Iceland Expat Income Taxes

Who Is Liable For Income Taxes In Iceland

Residents of Iceland are subject to tax on their worldwide income. Nonresidents are subject to tax on their Icelandic source income only. Wages and remuneration are Iceland-source income even if an employer does not have a permanent establishment in Iceland. Individuals are residents if they permanently reside in Iceland. An individual’s residency determination is where he or she is located permanently, stays during his or her spare time, and maintains a home.

Tax Year In Iceland And Tax Filing And Payment Rules

Icelandic tax residents must file annual income tax returns for the 2020 calendar year by 31 March 2021. Employers withhold taxes for employed individuals working in Iceland. Employers that do properly withhold and remit the tax will be liable for the payment. Nonresident taxpayers earning Icelandic-source salaries and pensions generally must file a tax return.

Icelandic law regulates the right of foreign nationals to enter, reside and work in Iceland. To begin paid employment in Iceland, a foreign national must satisfy conditions entitling him or her to enter and reside in Iceland and hold a work permit.

For purposes of entry, residence, and work in Iceland, foreign nationals segmentation into different categories of workers applies depending on whether they are Nordic nationals, EEA nationals, or nationals of another country.

Iceland Tax Relief

If you operate a business that incurs a loss, they may be carried forward for ten years. However, there is no loss carry-back and no deduction by a decedent.

Nonresident individual taxpayers are subject to a final withholding tax at a rate of 22% (20% for legal entities) on dividends and 12% on interest income. Interest on bonds issued in the names of financial institutions or energy companies is not subject to Icelandic tax.

Expat Tax Withholding

Withholdings are levied on nonresident individuals on Iceland-source income, such as royalties, interest, management fees, etc., at a rate up to twenty-two percent.

Social security contributions apply to wages and salaries and must be withheld by the Icelandic employer. These contributions cover health insurance, unemployment insurance, birth leave insurance and bankruptcy insurance. Self-employed individuals must register for social security purposes, and are subject to the same social security contribution rate.

Iceland has entered into tax treaties (commonly known as Avoidance of Double Taxation Agreements or DTAs) to protect those who qualify from taxation of the same income by both Iceland and the taxpayer’s country of residency or citizenship. Most ex-pats should have their US and Iceland-source income carefully reviewed by an international tax specialist like Tax Samaritan to ensure any treaty benefits are correctly claimed.

What You Need To Know About US Income Taxes

When dealing with US expat tax in Iceland, several preferential expat tax treatments may benefit your U.S. expatriate tax return. In fact, for many U.S. expats, the Foreign Earned Income Exclusion (IRS Form 2555) and other deductions will reduce your U.S. tax liability to zero.

Some of these preferential tax treatments or benefits for US expat tax in Iceland include:

  • If you are a U.S. citizen or a resident alien of the United States and live in Iceland, your US expat tax in Iceland is based on your worldwide income. As such, you must file a U.S. return for all the years that you are residing in Iceland. However, as a U.S. ex-pat you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings that have an annual adjustment for inflation ($107,600 for 2020). 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 your US expat tax in Iceland, most US expatriates worry about “double taxation.” Paying taxes to two different countries – the U.S. and Iceland. A U.S. taxpayer working overseas in Iceland 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 elect to either deduct the taxes as an itemized deduction or claim as a credit. In most cases, it is to your advantage to take foreign income taxes paid as a credit.

Don’t Make This Mistake

A common but dangerous mistake is the assumption that if there are zero taxes when claiming these tax benefits, there is no US ex-pat tax filing requirement.

That is not true.

If you are working overseas, it is likely that you meet the filing requirements to file a tax return 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 automatically granted until an accurate return is filed correctly.

When faced with US expat tax in Iceland there are many tax items to consider.

But the above are by far the most common preferential tax benefits.

With top-notch experience and knowledgeable expat tax preparation from Tax Samaritan, you can be assured that you are paying the minimal amount of U.S. taxes that you are legally obligated for.

Iceland Foreign Bank Account Reporting – The FBAR (FinCen Form 114)

Another important tax deadline that frequently applies to US expat tax in Iceland is in regards to the disclosure of foreign assets on the FBAR (Foreign Bank Account Report – Form 114).

The FBAR filing deadline is April 15th (or the preceding business day if April 15th falls on a weekend). Unfortunately, requesting an extension on your individual return does not extend the FBAR due date. There is no extension available for the FBAR deadline. Any reports filed after this date are considered a delinquent FBAR. However, in recent years, an automatic extension till October 15th is applicable.

The FBAR must be filed with the Treasury Department (it is not filed with your federal income tax return) whenever you meet the FBAR filing requirements. In a nutshell, this is whenever a U.S. person has a financial interest in, or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust or other types of foreign financial account (including an insurance policy with a cash value such as a whole life insurance policy) maintained with a financial institution, with an aggregate value of over $10,000 at any time during the calendar year based on the highest value of each foreign account during the tax year.

If you have bank accounts at Arion Bank, Kvika Banki, Seðlabanki Íslands, Sparisjóður Höfðhverfinga ses., Sparisjóður Suður-Þingeyinga ses. or at another bank in Iceland or any other foreign country, you may meet the filing requirement to disclosure your foreign accounts on the FBAR.

Please don’t hesitate to contact Tax Samaritan to learn more about your filing requirements.

U.S. – Iceland 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 must be 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 the social security taxes of a foreign country.

As of this time, Iceland has entered into a Totalization Agreement with the United States. This agreement helps people who would otherwise have to pay Social Security taxes to both countries on the same earnings. The agreement covers Social Security taxes (including the U.S. Medicare portion) and Social Security retirement, disability, and survivors insurance benefits.

Under the agreement, if you work as an employee in the United States, you will usually be covered by the United States. You and your employer will pay Social Security taxes only to the United States. If you work as an employee in Iceland, you normally will be covered by Iceland, and you and your employer pay Social Security taxes only to Iceland.

Self-employed individuals living and working in Iceland are covered by the Iceland system and should obtain a certificate of coverage to claim the benefits of the totalization agreement. You must attach a photocopy of the certificate to your U.S. individual tax return to exempt yourself from U.S. self-employment tax properly. Tax Samaritan can help guide you through this process if unsure of how to proceed.

U.S.- Iceland Tax Treaty And Tax Relief For US Expat Tax In Iceland

The United States has a separate tax treaty with Iceland. Many articles apply to non-resident aliens for U.S. tax purposes and extend certain benefits to U.S. citizens, residents, and green card holders (limited by the ‘Savings Clause’). It is essential to understand if you qualify for these benefits. We recommend discussing with a tax professional to determine if you are eligible for benefits in the treaty.

Tax Samaritan Takeaways For US Expats In Iceland

Please click on the hyperlinks below for additional takeaways and resources for expats residing in Iceland

Tax Samaritan Expat Tax Services

IRS Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad

Iceland Revenue and Customs (for tax schedules and other resources)

List of Banks in Iceland,(for important contact numbers)

US Embassy in Iceland

Iceland Ministry of Foreign Affairs (for important contact numbers)

All About Randall Brody
Randall is the Founder of Tax Samaritan, a boutique firm specializing in the preparation of taxes and the resolution of tax problems for Americans living abroad, as well as the other unique tax issues that apply to taxpayers. Here, they help taxpayers save money on their tax returns.

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