U.S. EXPAT TAX GUIDE – CHILE
What tax breaks can US citizens in Chile claim on foreign-earned income?
US citizens living in Chile may be eligible for tax benefits such as the Foreign Earned Income Exclusion (FEIE), which allows you to exclude a portion of your income from US taxes. In 2024, the FEIE limit is US$126,500. This exclusion is designed to reduce double taxation for individuals working outside the US.
Table of contents
What counts as foreign-earned income?
Foreign earned income is money you earn from working in another country. This includes wages, salaries, and self-employment income, but not passive income like interest or dividends.
How to Qualify for the FEIE
To claim the FEIE, you must:
- Have foreign-earned income.
- File IRS Form 2555 with your US tax return.
- Meet one of two tests:
- Physical Presence Test: Spend at least 330 full days in a foreign country during a 12-month period.
- Bona Fide Residence Test: Show you’ve lived in a foreign country for a full tax year and made it your main home (e.g., with a lease, utility bills, or local bank accounts).
Which Test Should You Use?
If you’re on a short-term foreign assignment (330+ days), use the Physical Presence Test. If you’ve moved abroad permanently, the Bona Fide Residence Test may work better.
Getting the FEIE right can save you money. If you’re unsure, consult a tax professional to help with your specific situation.
How does the Bona Fide Residence Test work?
This test proves you live in another country on a long-term basis. To qualify, you must:
- Be a resident of Chile for an entire calendar year.
- Show that you’ve established a permanent home there, such as renting or owning property.
The Bona Fide Residence Test is ideal for those planning to stay in Chile for work, retirement, or other long-term commitments.
What is the Physical Presence Test?
The Physical Presence Test is based on the number of days you spend outside the US. To qualify:
- You must be physically present in a foreign country, such as Chile, for at least 330 full days during any 12-month period.
- These days do not need to be consecutive, and the period can span across two tax years.
For example, if you travel outside Chile for short trips but still meet the 330-day requirement, you may qualify under this test.
What are the US tax filing rules for Americans living in Chile?
If you’re a US citizen or Green Card Holder living in Chile, you must still file a US tax return, even if you pay taxes in Chile. The US taxes its citizens on their worldwide income, no matter where they live. Here’s a simple overview of what you need to know.
Filing Deadlines
The US tax deadline is April 15, but expats get an automatic extension until June 15. If you need more time, you can request an extension to October 15. However, if you owe taxes, interest will start adding up after April 15.
Important Forms
- Form 1040: The basic US tax return where you report all your income.
- Form 2555: Use this to claim the Foreign Earned Income Exclusion to lower your taxable income.
- Form 1116: This lets you claim a foreign tax credit for taxes you’ve paid in Chile.
If you own a business or have large foreign assets, additional forms may be needed.
Other Tips
Chile’s tax system may impact your US taxes. If you’re behind on filings, the IRS offers programs like the Streamlined Filing Compliance Procedures to help you catch up without heavy penalties.
To avoid mistakes, consider getting help from a tax professional who knows both US and Chilean tax laws.
How does the Foreign Housing Exclusion (FHE) work?
The Foreign Housing Exclusion allows US expats to deduct certain housing-related expenses from their US taxable income. Examples of qualifying expenses include:
- Rent
- Utilities such as electricity and water
- Repairs to maintain your rental property
- Parking fees related to your residence
The exclusion applies only to reasonable costs. Luxury accommodations or excessive expenses typically don’t qualify.
Can I use both the FEIE and FHE together?
Yes, these two benefits can be combined for greater tax savings. If your income exceeds the FEIE limit of US$126,500, the FHE can reduce your taxable income further.
Example of combined use:
- Total income: US$150,000
- FEIE exclusion: US$126,500
- Remaining taxable income: US$23,500
- Housing expenses: US$20,000
If US$10,000 of your housing costs qualify for the FHE, your taxable income decreases to US$13,500.
What happens if Chile is not listed in the housing exclusion table?
If Chile isn’t included in the IRS’s list of countries with specific housing limits, the default rate of US$52.60 per day applies. This ensures reasonable housing costs are still deductible, even for unlisted locations.
What types of income qualify for the FEIE?
The FEIE applies to income earned from employment or self-employment in a foreign country. It does not cover:
- Investment income, such as interest or dividends
- Pensions or Social Security benefits
- Rental income from US properties
How can high-income earners in Chile reduce taxes beyond the FEIE?
If your income exceeds the FEIE limit, there are additional strategies to lower your US tax liability:
- Foreign Housing Exclusion: Deduct qualified housing costs.
- Foreign Tax Credit (FTC): Claim a dollar-for-dollar credit for income taxes paid to Chile.
- Tax planning: Consult a professional to structure income and deductions for optimal savings.
What if my income exceeds the FEIE limit?
Income above the FEIE limit is subject to US taxes. For example:
- Total income: US$160,000
- FEIE exclusion: US$126,500
- Qualifying housing expenses: US$20,000 (FHE)
- Taxable income: US$13,500
What common mistakes do expats make with the FEIE?
One big mistake is not filing a US tax return. Even if the FEIE reduces your taxes to zero, you still need to file a return and include Form 2555 to claim the exclusion. Another error is miscalculating the exclusion if you didn’t live abroad for the entire year. You need to adjust the amount for the time you were outside the US.
To qualify, you must meet either the bona fide residence test or the physical presence test. These tests depend on how long you’ve lived or stayed abroad. Misunderstanding the rules or missing days can cause problems.
Some people forget that other forms, like Form 5471 for foreign companies or Form 8833 for tax treaty benefits, can affect the FEIE. Also, forgetting to use foreign tax credits correctly might mean paying more taxes than necessary.
To avoid these issues, work with a tax professional who understands the FEIE and expat tax rules. They can help you get it right and save money.
Why should US expats consider using these tax benefits?
The FEIE and FHE are essential tools for US expats in Chile. By reducing your taxable income, they prevent double taxation and make living abroad more affordable. These exclusions are especially helpful for those in high-cost cities like Santiago or Valparaíso.
What steps should expats take to stay compliant with US tax laws?
To ensure compliance and maximize savings:
- Track your residency: Maintain records to prove you meet the residency or physical presence requirements.
- Document expenses: Keep detailed receipts and records of qualifying housing costs.
- File correctly and on time: Submit all required forms, including extensions if necessary.
- Seek professional guidance: A tax advisor experienced in expat taxation can help you navigate complex rules and ensure you claim all applicable benefits.
Why partner with a specialist Expat accountant?
Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in Germany. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.
