Expat Living In Colombia
Food, friends and festivals—that’s what you can expect as an American expat living in Colombia. Colombia is a popular South American destination for several reasons: a dramatically low cost of living, diverse culture and, of course, the scenery. This article on US Expat Tax in Colombia will provide a brief intro to taxes in Colombia from both the perspective of local taxes and your tax obligations in the U.S.
An excellent place to retire, Colombia is home to a friendly, laid-back culture, fantastic climate and an extraordinary number of things to do. Expats living in Colombia can expect to enjoy the flora and the fauna (as one of the 17 “megadiverse” countries in the world) while also taking advantage of the local comforts and amenities.
Below is a list of our top most attractive cities in Colombia for foreigners to reside in (in no particular order):
- Santa Marta
- San Andres
- Villa De Leyva
- San Agustin
Worldwide Income and Citizenship-Based Taxation
The United States is one of the few countries that taxes worldwide income for all of its citizens, no matter where they live and regardless of how long they have been overseas. While some countries have treaties that avoid double taxation, Colombia is not one of them.
Thus, if you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. This is affectionately known as the “citizenship-based” income tax.
Elsewhere in the world, the basic rule is that taxes are based on residency and not based on citizenship.
The United States’ taxation of worldwide income has been around since the 1860’s, when it was enacted as part of the Revenue Act of 1861. The purpose was to stop wealthy people from fleeing the U.S. in a time of crisis and taking their money with them. The defense of ongoing citizenship-based taxation income rests on the belief that U.S. citizenship offers benefits even enjoyed by non-residents. Thus, overseas taxpayers are required to pay for this benefit even when they earn money elsewhere.
Even as the rest of the world including Colombia has moved toward a different model of taxation, the United States’ citizenship-based taxation remains in place. In fact, there has not been a serious attempt to reverse this law. Instead, the debate usually focuses on how much tax overseas citizens should pay.
Guide To US Expat Tax In Colombia
This guide is intended to provide a general review of the tax environment of Colombia and how that will impact your U.S. expatriate tax return as a U.S. Expat In Colombia.
Colombia Income Taxes
Expats who are in Colombia for less than six months out of the year are considered nonresidents. They will only be taxed on income that comes from Colombia, at a flat tax rate of 35%. Expats who reside in Colombia for more than six months out of the year are taxed on all their income, but will be taxed based on their income range. For these residents, the progressive tax rate ranges from 0% to 33%.
An individual who spends more than 183 days in Colombia will be considered to be a resident in Colombia. However, they may end up subject to double taxation. America does not have any exemption for double taxation with Colombia, which means that you may be a tax resident of both Colombia and America at the same time.
Tax Year In Colombia And Tax Filing And Payment Rules
In Colombia, tax deadlines change from year to year. In 2019, large taxpayers must pay between February 8th and February 21st. Other taxpayers must pay from April 9 through May 10. These deadlines are adjusted every year with an announcement by the government, but they will generally fall during the same time. Payments are split into first payments and second payments.
HOW YOU CAN SAVE MONEY ON YOUR U.S. TAX RETURN WHILE LIVING IN COLOMBIA?
Tax Samaritan is a firm focused on tax preparation and resolution for both U.S. (federal) and state income taxes. As a firm that specializes only in U.S. federal and state taxes, our opinion is that when trying to locate a firm that can provide expertise and preparation in both U.S. and Colombia income taxes, it doesn’t exist with any single tax professional. Rather, such expertise can only be found in larger international tax firms that have separate tax specialists for U.S. and Colombia. It’s a rare enough to find a tax expert in a single country let alone with expertise in multiple countries. For the convenience of having both country returns prepared by a single firm, there is a significant premium that will be incurred with little to no benefit (with the exception of some convenience).
Thus, we recommend that working separately with a local tax professional in Colombia to handle your Colombia income taxes and a separate U.S. tax professional or firm is the best approach. In addition, if you haven’t already moved to Colombia, we recommend that you dig into some tax planning to fully understand your U.S. and Colombian tax impacts prior to your move including the impact of any foreign investments and the establishment of any foreign business.
When dealing with U.S. and states taxes while living in Colombia, there a number of preferential expat tax treatments that may benefit your U.S. expatriate tax return. In fact, for many U.S. expats it will reduce your U.S. tax liability to zero.
It is important to note that a common but dangerous mistake is the assumption that if there are zero taxes owed with tax benefits that a U.S. tax return does not need to be filed. 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 (described below) are not applicable to the outcome of your tax liability until they are claimed on a filed tax return.
When dealing with US expat tax in Colombia, there a number of preferential expat tax treatments that may benefit your U.S. expatriate tax return. In fact, for many U.S. expats it will reduce your U.S. taxes to zero.
Some of these preferential tax treatments or benefits for US expat tax in Colombia include:
- If you are a U.S. citizen or a resident alien of the United States and you live in Colombia, US expat tax in Colombia is based on your worldwide income and as such must file a U.S. return for all the years that you are residing in Colombia. However, as a U.S. expat you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings that is adjusted annually for inflation ($105,900 for tax year 2019). In addition, 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 US expat tax in Colombia, most US expatriates worry about “double taxation” – paying taxes to two different countries – the U.S. and Colombia. A U.S. taxpayer working overseas in Colombia may be able to 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 on Schedule A or claim a credit against tax. In most cases, it is to your advantage to take foreign income taxes as a tax credit.
A common but dangerous mistake is the assumption that if there are zero taxes owed with these tax benefits that a return for US expat tax in Colombia does not need to be filed. 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 applicable to the outcome of your tax liability until they are claimed on a filed tax return.
When faced with US expat tax in Colombia there are many tax items to consider, but the above are by far the most common preferential tax benefits. With top-notch experienced 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.
Colombia Foreign Bank Account Reporting – The FBAR (FinCen Form 114)
FBAR Filing Deadline
Many overseas taxpayers are required to file the Foreign Bank Account Report, or FBAR (FinCen Form 114). The FBAR filing deadline is April 15th (or the preceding business day if April 15th falls on a weekend) – with an extension available to October 15th.
Any reports received after the deadline are considered delinquent. In addition, unlike most other tax forms, the FBAR must be filed electronically.
FBAR Filing Requirements
The FBAR exists to help the U.S. government identify people who may be using foreign bank accounts to circumvent United States law. With FACTA, IRS criminal investigators will use the FBARs to help them identify or trace funds used for illicit purposes, to identify unreported income abroad, and to identify undisclosed foreign accounts.
This is an important IRS compliance requirement with huge monetary civil penalties at stake, as well as potential criminal consequences. In addition, because of FACTA, foreign financial institutions are starting to disclose U.S. account holder information, which makes it easier for the U.S. to enforce this law.
You must file an FBAR with the Treasury Department if you are a U.S. person with a financial interest in, or signature authority over, foreign financial accounts with an aggregate value of more than $10,000 at any point during the tax year. Foreign financial accounts include bank accounts, brokerage accounts, mutual funds, trusts or other types of foreign financial accounts maintained with a financial institution.
If you have specified foreign financial assets that exceed certain thresholds, you must also report those assets to the IRS on Form 8938. In some cases, you may be reporting the same accounts twice, but both forms are still required.
Who Is a U.S. Person?
A U.S. person for purposes of FBAR reporting includes U.S. citizens, U.S. residents, and entities including but not limited to corporations, trusts, estates, partnerships or limited liability companies that were created or organized in the U.S. under the laws of the U.S.
FBAR Late Filing And Non-Filing
Civil penalties for non-willful FBAR violations may be as high as $10,000 per violation. For willful violations, the maximum penalty is usually the greater of $100,000 or 50 percent of the account balance per violation. Criminal penalties can result in fines of up to $500,000 and imprisonment of up to 10 years. It is possible to incur both civil and criminal penalties for the same violation.
Effective July 1, 2013, all FBARs must be electronically filed with the BSA E-filing system.
If you have bank accounts at Bancolombia , Banco de Bogotá, Davivienda, Banco de Occidente or at another bank in Colombia 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. – Colombia Social Security Totalization Agreement
The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes. These agreements must be taken into account when determining whether any 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, Colombia has not entered into a Totalization Agreement with the United States thus there is no opportunity to avoid double taxation of social security income for US expat tax in Colombia.
International Social Security agreements, often called “Totalization agreements,” have two main purposes.
First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and pays Social Security taxes to both countries on the same earnings.
Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country. The agreements assign coverage to just one country and exempt the employer and employee from the payment of Social Security taxes in the other country.
Determining Eligibility For The Totalization Agreements
Determining eligibility for the totalization agreements and required reporting is based on proper analysis and the individual facts of the taxpayer.
U.S.- Colombia Tax Treaty And Tax Relief For US Expat Tax In Colombia
The U.S. does not currently have a tax treaty with Colombia.