U.S. TAX GUIDE IN CHILE
What should US citizens in Chile know about the FEIE?
For some basic knowledge, the Foreign Earned Income Exclusion (FEIE) is a great tax break for US expats; it lets you exclude a chunk of your income from US taxes.
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In 2024, the amount you can exclude is US$126,500. This exclusion is a way for the IRS to give relief to people who earn money outside of the US, so they don’t end up double-taxed on their income.
Who qualifies for the foreign earned income exclusion?
To qualify for the FEIE, you need to meet some specific conditions. You must have:
- Foreign earned income: This means money you earned while working in a foreign country like Chile. Income from investments (like dividends or interest) doesn’t count.
- You need to pass either the Bona Fide Residence Test or the Physical Presence Test. Basically, you need to prove to the IRS that you’re really living and working outside the US for a specific amount of time.
How does the Bona Fide Residence Test work?
The Bona Fide Residence Test shows the IRS that you are living abroad long-term. You need to live in a foreign country, such as Chile, for at least one full calendar year.
It’s more about proving that you’ve set up a permanent home abroad rather than just temporarily living there.
This test is great for people who have moved to Chile permanently or for a long time, like for work or retirement.
How does the Physical Presence Test work?
The Physical Presence Test is a bit more straightforward. You must be physically present in Chile (or any other country) for at least 330 full days out of a 12-month period.
The days don’t have to be consecutive, and the 12 months can span across two calendar years.
For instance, you can qualify for this if you spend most of the year in Chile but also travel to other countries, as long as you’ve spent 330 full days outside the US during the period.
What is the Foreign Housing Exclusion (FHE)?
In addition to the FEIE, US expats living in Chile can also use the Foreign Housing Exclusion to reduce their taxable income further. This exclusion lets you subtract certain housing-related expenses from your US taxes, like rent, utilities, household repairs, and even parking fees. It’s especially helpful if you’re living in a city with high living costs.
The IRS allows you to deduct these expenses as long as they are reasonable and necessary. So if you’re renting an apartment in Santiago, for example, you may be able to deduct the cost of rent and some utilities.
Can I combine the FEIE and FHE?
Yes, you can. If you’re earning more than the FEIE limit of US$126,500, the Foreign Housing Exclusion can help you bring your taxable income down even more. Here’s how this might work:
Say you’re living in Santiago, and in 2024, you earned US$150,000. You can exclude the first US$126,500 through the FEIE. But that still leaves US$23,500 of taxable income.
This is where the housing exclusion comes in. Let’s assume you paid US$20,000 in rent and utilities. Depending on your expenses, you might be able to exclude US$10,000 of that amount, bringing your taxable income down to around US$13,500.
I can’t find Chile in the FHE table. What do I do?
For countries not on the table, the standard daily rate of US$52.60 should apply.
You can select the “other” option to finish your tax return.
What housing expenses qualify for the exclusion?
Here are the expenses you can usually deduct:
- Rent
- Utilities (like electricity, water, and gas)
- Repairs (if they’re for keeping up the property)
- Parking fees (if your rental includes residential parking)
However, you can’t deduct things like mortgage payments, the cost of buying furniture, or home improvements.
Why use the FEIE and housing exclusion?
Using the FEIE and the Foreign Housing Exclusion together can help you avoid paying more US taxes while living in Chile.
Example
Imagine you’re an expat living in Valparaíso, Chile. You earn US$160,000 from your job and have spent US$25,000 in housing expenses in 2024.
- You exclude US$126,500 with the FEIE.
- You exclude US$5,800 with the Foreign Housing Exclusion (after subtracting the base housing amount of US$19,200).
- Your taxable income is US$27,700.
What if my income exceeds the exclusion limit?
If you earn more than the US$126,500 FEIE limit, you will generally need to pay US taxes on the extra amount.
For high earners, careful tax planning becomes essential. This is where expats earning significantly more than the exclusion limit may also want to explore the Foreign Tax Credit (FTC) to reduce their tax liability by claiming credit for the taxes they’ve paid to Chile.
