U.S. TAX GUIDE IN CHILE
Do Americans need to file a US tax return while living in Chile?
It depends. Generally, the US government taxes its citizens and permanent residents on worldwide income, meaning you’re required to file a tax return in the US even if you’re living abroad.
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What are the income filing thresholds (2024) for US citizens abroad?
The IRS sets income thresholds to determine whether you need to file a tax return, and they’re based on your filing status (single, married, etc.).
- Single under 65 years old: You must file a return if your worldwide income exceeds US$14,600.
- Married filing jointly: You’re required to file if your combined income with your spouse exceeds US$29,200.
- Married filing separately: If your worldwide income is more than US$5, yes, just US$5, you need to file.
This means that even if you’re married to a non-US citizen, like a Chilean spouse, and you make only a tiny amount of money (or even just earn bank interest), you’ll need to file a tax return if your income exceeds the filing thresholds.
How do self-employed US citizens in Chile file taxes?
Even if your overall income is low, the IRS has specific guidelines for self-employed individuals. Net earnings from self-employment over US$400 require you to file a US tax return.
This means if you’re freelancing, consulting, or running a small business, you must report your self-employment income, no matter how small it is. It’s also important to keep in mind that this income may be subject to self-employment tax in the US, even if it’s earned abroad.
US citizens will need to file Schedule C and Form 8858; thankfully, because of the totalization agreement between the two countries, you won’t need to pay self-employment tax to the IRS.
Do I have to pay US taxes on income earned in Chile?
Many expats worry about double taxation, where they end up paying taxes both in Chile and the US. Luckily, the IRS offers provisions to help you avoid that.
- Foreign Earned Income Exclusion (FEIE): This allows you to exclude up to US$126,500 of foreign-earned income (for 2024) from your US tax return, provided you meet certain qualifications. To be eligible, you need to either be a bona fide resident of Chile or be physically present in Chile for 330 days within a consecutive 12-month period.
- Foreign Tax Credit (FTC): If you pay income tax to Chile, you may be able to claim a credit on your US return for those taxes. The Foreign Tax Credit (FTC) essentially reduces your US tax liability by giving you a dollar-for-dollar credit for the taxes paid to Chile.
Both can reduce or eliminate your US tax liability, but they’re not mutually exclusive. In fact, in some cases, expats can use both the FEIE and the FTC to minimize their US tax.
Does the totalization agreement between the US and Chile affect taxes?
Chile and the US have a totalization agreement in place, which prevents expats from having to pay social security taxes to both countries on the same income. This is especially relevant if you’re self-employed, because you won’t be expected to pay US self-employment tax.
Generally, if you’re paying into Chile’s social security system, you won’t have to contribute to US Social Security or Medicare.
This agreement ensures you’re only contributing to one country’s social security system. However, the agreement doesn’t cover income taxes, so you still need to file your US tax return if you meet the income thresholds.
What happens if I don’t file a US tax return?
The IRS doesn’t take kindly to missed filings, and penalties can rack up fast.
- Failure-to-file penalty: This can be up to 5% of your unpaid taxes for each month your return is late, capped at 25% of your unpaid taxes.
- Failure-to-pay penalty: If you owe taxes and don’t pay, this penalty is 0.5% of your unpaid taxes each month.
- FBAR penalties: If you have more than US$10,000 in foreign bank accounts at any time during the year, you need to file an FBAR (Foreign Bank Account Report). Failure to do so can result in hefty penalties, ranging from US$10,000 to 50% of your account balance.
If you’re behind on filing, the IRS offers a streamlined filing procedure that lets you catch up without harsh penalties, provided you weren’t willfully avoiding your tax obligations.
Can I avoid paying double tax?
Yes, as stated previously, there are options to avoid paying both US and Chilean taxes on the same income.
- Foreign Earned Income Exclusion (FEIE): This allows you to exclude a significant portion of your foreign-earned income from US taxation.
- Foreign Tax Credit (FTC): For taxes you’ve already paid in Chile, you can claim a credit to offset your US tax liability.
- Totalization agreement: Helps self-employed individuals avoid paying US social security taxes including US self-employment tax.
Together, these options make sure you aren’t taxed twice on your income.