Expat Living in Bermuda
Many U.S. expats call Bermuda home, and in fact, nearly 10 to 15% of the island’s inhabitants are American citizens or expats from other countries. The island boasts great weather, flawless beaches, beautiful sunsets, and a fun culture, but in exchange for those amenities, you can expect a relatively high cost of living. One of those considerations is US Expat Tax In Bermuda.
Most expats tend to work in professional industries such as accounting, law, banking, insurance, and IT, but some also work in tourism. The most popular areas to live include Hamilton, St. George, and Somerset Village. If you are ain American living in or thinking about moving to Bermuda, you need to think about your tax obligations.
Depending on your situation, you may have to file and pay taxes in both Bermuda and the United States. Keep reading to get an overview of the essentials.
Citizenship-Based Taxation on Worldwide Income
Most countries apply income tax on residents, meaning people who spend most of their time in the country. In contrast, the United States taxes all its citizens regardless of where they reside in the world. In other words, if you are a United States citizen living in Bermuda, you may need to file a U.S. income tax return and pay tax on your earnings. Additionally, you also need to ensure you meet your tax obligations in Bermuda.
Guide to US Expat Tax in Bermuda
Are you an expat living in Bermuda? Do you earn income in Bermuda? Then, you need to understand the tax rules of this country and how they apply to your situation. This guide is designed to help you navigate the essentials.
Who Is Liable for Income Tax in Bermuda?
Bermuda doesn’t have income tax or capital gains tax for residents, regardless of whether they are citizens or noncitizens. In other words, you don’t have to file a tax return declaring your earned or investment income, and you don’t have to pay tax on these amounts.
However, payroll tax and Social Insurance contributions must be paid based on your income. You may also need to pay land tax on your property or long-term rental, and estate tax may apply to your Bermuda property after your death.
Payroll Tax in Bermuda
Payroll tax is based on earnings, and both employers and employees must pay a portion of this tax. If you are an employee, your employer is responsible for making these payments, but if you are a small business owner, you must take care of both portions of this tax.
In the United States, self employed individuals are responsible for both the employee and employer portion of payroll taxes which include Social Security contributions and Medicare premiums. But in Bermuda, foreign workers are not allowed to be self employed.
Employer Portion of Payroll Tax
As of 2017, the employer portion of the payroll tax is based on the employer’s gross annual remuneration. Essentially, employers must add up all the income paid to their employees for the year, before taking out deductions or payroll taxes. However, earnings used for social insurance contributions, the Hospital Insurance Plan, certain retirement plans, hospital and health schemes, life insurance schemes, and workers’ compensation schemes are not included in the gross amount.
Then, employers must remit payroll taxes in the following amounts.
- 1.75% of payroll under BMD 200,000
- 7% of payroll between BMD 200,000 to BMD 500,000
- 9% of payroll between 500,001 to BMD 1 million
- 10.25% of payroll over BMD 1 million
To give you an example of how this works, imagine you are a business owner and you pay out BMD 1.2 million in gross wages annually (after taking into account the exceptions listed above). In this situation, you pay 1.75% of the first BMD 200,000 which is BMD 3,500. Then, you pay 7% of the next BMD 300,000 of wages, which is BMD 21,000; 9% of the next BMD 500,000, which works out to BMD 45,000; and finally 10.25% of the following BMD 200,000 which is BMD 20,500. To calculate your total payroll tax due, you add up the tax from each bracket, bringing your total to BMD 90,000. That is your portion of the nation’s payroll tax.
Employee Portion of Payroll Tax
The employee portion of payroll taxes is calculated differently and it’s based on each employee’s individual wages. As of July 1 2017, employee payroll tax uses the following rates:
- 4.75% of the first BMD 48,000
- 5.75% of the next BMD 48,000
- 7.75% of the next BMD 139,000
- 8.75% of all earnings over that amount
In Bermuda, employers can withhold this amount from their employees’ paychecks, or they can opt to pay the tax on their own. However, in all cases, the employer is responsible for making these payments. They can’t leave this obligation to their employees.
Social Insurance Contributions in Bermuda
In Bermuda, Social Insurance contributions are a flat amount every week, regardless of your earnings. At the time of writing, the rate is BMD 68.94. The employee must pay half and the employer pays the other half. So each payment is BMD 34.47.
If you have employees, you need to make these payments to the Bermuda Social Insurance Department. If you are an employee, your boss should make these payments on your behalf.
If you own property in Bermuda when you die, you may have to pay estate tax. Your personal representative should file an affidavit of value with the Supreme Court of Bermuda after your death.
The estate tax is based on the value of your real and personal property in Bermuda and any vessels or aircraft registered in Bermuda at the time of your death. If you live in Bermuda when you die, life insurance is also included in the total, but if you are not domiciled in Bermuda, life insurance is only included if it is paid in Bermuda or in Bermudan dollars.
If your estate is worth less than BMD 100,000, the estate tax is 0%. Over that value, the rates are as follows:
- 5% on the next BMD 100,000
- 10% on the next BMD 800,000
- 15% on amounts over BMD 1 million
Land Tax in Bermuda
If you own land or are a long-term tenant including life tenants and leaseholders who have been on the property for three or more years, you must also pay land tax. This tax is based on the annual rental value (ARV) of your property, and the rates are as follows:
- 0.80% on property worth up to BMD 11,000
- 1.80% on property worth between BMD 11,001 to BMD 22,000
- 3.50% on property worth between BMD 22,0001 to BMD 33,000
- 6.50% on land worth between BMD 33,001 to BMD 44,000
- 12.00% on property worth between BMD 44,0001 to BMD 90,000
- 25% on property worth between BMD 90,001 to BMD 120,000
- 47% on property worth over BMD 120,001
As of 2019, the land tax on commercial properties is 12%, and the land tax on commercial properties in economic empowerment zones is just 7%. Seniors can claim an exemption worth up to BMD 1,566. Essentially, this means that if you are over 65, you only pay land tax on the portion of your property with an annual rental value over BMD 45,500. These rates are subject to change, and you must make payments twice per year.
Tax Year, Filing Deadlines, and Payment Rules in Bermuda
As explained above, individuals don’t have to file an income tax in Bermuda, but if you have employees, the tax year for payroll tax runs from April 1 to March 31. You must submit your payroll tax payments by the 15th day after the end of every quarter.
Land tax payments are due in March and September. The exact date is specified on the demand letter telling you how much you owe.
U.S. income tax returns are typically due on April 15 of the year following the tax year for which you are filing. If April 15th falls on a holiday, returns are due the next business day.
How Can You Reduce Your US Expat Tax In Bermuda?
To reduce your tax obligation, you need to work with an accountant who can help you find credits, understand deductions, and make smart tax planning decisions. In most cases, it’s nearly impossible to find a firm that understands both Bermuda and U.S. tax rules.
Instead, you should consider hiring a local tax specialist who understands the laws in Bermuda. At the same time, you should also hire someone who understands U.S. taxes, and in particular, you need a tax professional who knows about the unique challenges faced by Americans living in another country. One that is well-versed in US Expat Tax In Bermuda.
What You Need to Know About Your U.S. Expat Tax Return When Living and Working in Bermuda
At Tax Samaritan, we help our clients handle both U.S. federal tax and state tax returns, and we work with many expats who live in countries all over the world. Unfortunately, many people think that they don’t need to file a U.S. income tax return if they are living in another country and don’t owe any U.S. income tax.
However, in a lot of cases, your tax liability may only be zero due to foreign earned income tax exclusions or foreign income tax credits. Keep in mind that you must file a return to claim those credits.
If you don’t file, you may face a failure to file penalty as well as other fees and interest. To be on the safe side, you should always consult with a tax professional about your situation. When you contact us, we can answer your questions and help you identify the best tax strategies for optimizing your US Expat Tax In Bermuda.
Bermuda Foreign Bank Account Reporting (FBAR)
If you have foreign financial accounts worth more than $10,000, you have to file a Foreign Bank Account Report (FBAR) with the Treasury Department. This rule applies to bank accounts , brokerage accounts, mutual funds, trusts, and a variety of other financial accounts. Note that $10,000 is the total.
For instance, if you have $6,000 in a savings account at Bermuda Commercial Bank and $5,000 at HSBC Bank Bermuda, you are over the threshold and you must file this form. Similarly, if you have $6,000 in a Bermudan bank and $7,000 in an account in another foreign country, you also have to file this form, even though you don’t have $10,000 in a single country.
Tax Treaty Between the United States and Bermuda
A tax treaty is a special agreement signed by both the United States and another country, and it outlines tax obligations and agreements for people who may be affected by taxation in both countries. For instance, some agreements allow taxpayers to claim a credit on their U.S. federal tax return for income taxes paid in another country. The United States-Bermuda agreement was signed in 1986, and it primarily only addresses the insurance industry.
If at least half of an insurance company is owned by Bermuda residents or U.S. citizens, the company may not have to pay U.S. tax on its profits. However, the company must also not distribute a substantial amount of its income to non-Bermuda residents or non-U.S. citizens. If you own an insurance company and qualify for these exemptions, you may still have to pay excise tax on insurance and reinsurance premiums.
United States — Bermuda Social Security Totalization Agreement
Totalization agreements are similar to tax treaties, but they specifically address issues related to Social Social programs. At this time, the United States and Bermuda do not have a totalization agreement.
As explained above, you must make Social Insurance contributions on your Bermuda earnings, but when you file your U.S. income tax return, you may also be obligated to pay Social Security contributions on these amounts as well. Luckily, Social Security contribution rates are relatively moderate, and as you make payments, you earn retirement or survivor benefits.