U.S. TAX GUIDE IN CHILE
What do US citizens in Chile need to report to the IRS?
Remember, as a US citizen or Green Card holder, you need to report your worldwide income. This includes wages, salaries, self-employment income, and even investment income, regardless of where it was earned.
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If you’re employed, you’ll report your salary on Form 1040, just like you would if you were living in the US. Your income should be converted to US dollars using the average exchange rate for the year; you can find this information on the US treasury website.
For self-employed individuals, things are a bit more complex. You’ll need to report your self-employment income on Schedule C (Profit or Loss From Business) as part of your Form 1040 and also on Form 8858. Here’s what you’ll need:
- Gross revenue: This is the total income you earned from your business.
- Expenses: Business-related costs like supplies, marketing, and rent can be deducted from your gross revenue to calculate your net income or loss.
What if I have a net loss from my business?
If your self-employment income in Chile results in a net loss (meaning your expenses were higher than your revenue), you won’t owe any taxes on that income, but you still need to file if your total self-employment income exceeded US$400.
In fact, you can potentially use that loss to reduce your taxable income in future years.
Even if you’re reporting a loss, you’ll still need to file a tax return if your income meets the IRS’s filing threshold. For self-employed individuals, the threshold is only US$400 in net earnings. So, if you made more than that, you’ll need to file.
Do I need to pay self-employment tax?
Yes, if you’re self-employed in Chile, you’ll usually need to pay self-employment tax to cover your contributions to Social Security and Medicare. However, there’s some good news: Chile and the US have a totalization agreement.
This agreement prevents you from paying social security taxes in both countries. If you’re already paying social security taxes to Chile, you won’t need to pay US.
What forms do I need to file?
- Form 1040: This is your standard US income tax return where you report all of your income, including wages, self-employment earnings, and investment income.
- Schedule C: If you’re self-employed, you’ll use this form to report your income and expenses from your business.
- Form 2555: This form is used to claim the Foreign Earned Income Exclusion (FEIE), which allows you to exclude up to US$126,500 (for 2024) of foreign-earned income from US taxation if you meet the qualifications.
- Form 1116: If you’ve paid income taxes in Chile, you can use this form to claim a Foreign Tax Credit (FTC). This reduces your US tax liability by crediting the taxes you’ve already paid in Chile.
- Form 8858: If you have foreign business operations, you may need to file this form to report on those activities.
- FBAR (FinCEN Form 114): If you have more than US$10,000 in foreign bank accounts at any point during the year, you’ll need to file an FBAR to report those accounts.
- Form 8938: This form is required if you hold significant foreign financial assets (typically over US$200,000 for single filers living abroad).
Foreign Earned Income Exclusion
One of the most useful tools for US expats is the Foreign Earned Income Exclusion (FEIE). If you qualify, you can exclude up to US$126,500 of foreign-earned income from US taxes. There are two ways to qualify:
- Bona Fide Resident Test: You need to be a resident of Chile for at least one full tax year.
- Physical Presence Test: You need to be physically present in Chile for 330 days within a 12-month period.
Foreign Tax Credit
You can also choose to claim the Foreign Tax Credit (FTC) if you’ve paid income taxes to Chile. The FTC gives you a dollar-for-dollar credit for the taxes you’ve paid abroad, which helps to reduce your US tax bill.
For example, if you paid US$5,000 in income taxes to Chile, you can use that to reduce your US taxes by the same amount. This prevents you from being taxed twice on the same income.
You can either claim the FEIE or the FTC, and in some cases, you may be able to use both. It’s a good idea to talk to a tax professional to figure out which option is best for your situation.
What happens if I’m married to a Chilean citizen?
If you’re married to a Chilean citizen and you’re filing your US taxes separately from your spouse, you’ll need to file under the Married Filing Separately status.
In this case, the income threshold for filing is just US$5. That’s right—even if you only earned $5 in interest income, you’ll need to file a return.
If your spouse isn’t a US citizen or green card holder, their income doesn’t need to be reported on your US tax return.
