U.S. EXPAT TAX GUIDE โ CHILE
What must US citizens living in Chile report on their US taxes?
As a US citizen or Green Card holder living in Chile, you are required to report your worldwide income to the IRS. This includes wages, income from self-employment, interest, dividends, and other earnings regardless of where they originate.
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If you work for an employer, your wages must be reported on Form 1040, the standard US tax return. All amounts should be converted into US dollars using the average exchange rate for the tax year, which can be found on the US Treasuryโs website.
For those who are self-employed, youโll need to file Schedule C to document income and expenses from your business and possibly Form 8858 if foreign business entities are involved.
What to report:
- Gross income: The total revenue earned from your business or work.
- Business expenses: Costs such as equipment, office supplies, or advertising, which reduce your taxable income.
How does the Chilean tax system work?
Chile uses a territorial tax system, which means you only pay taxes on Chilean-source incomeโincome earned within Chileโnot money earned abroad.
Individuals in Chile pay the Global Complementary Tax, which is based on a sliding scale. The more you earn, the higher your tax rate, ranging from 0% to 40%. If you are a nonresident, youโll pay a flat tax rate of 15% or 35%, depending on the type of income.
Companies in Chile pay a corporate tax of 27%, but certain businesses may qualify for special tax breaks under preferential tax regimes. If you own property in Chile, youโll also need to pay property tax.
The Chilean tax agency, known as Servicio de Impuestos Internos (SII), manages tax collection. Some income, like foreign pensions, may be exempt from Chilean taxes under specific rules, such as Resolution Nยฐ 124 of 2017.
What if your business operates at a loss?
If your expenses exceed your income and you have a net loss, you wonโt owe taxes on that income. However, you must still file a tax return if your self-employment earnings exceed US$400. Losses can often be carried forward to future years, reducing taxable income when your business becomes profitable.
Do self-employed US citizens in Chile pay additional taxes?
Yes, self-employed individuals are generally required to pay self-employment taxes, which fund US Social Security and Medicare. However, a totalization agreement between the US and Chile prevents you from paying into both countriesโ social security systems. If you already pay Chilean social security contributions, you are exempt from the US self-employment tax.
Which forms are required for US citizens in Chile?
Depending on your financial situation, you may need to file one or more of the following forms:
- Form 1040: The main form where you report income, deductions, and credits.
- Schedule C: For self-employed individuals, used to report income and expenses related to your business.
- Form 2555: To claim the Foreign Earned Income Exclusion (FEIE) and exclude up to US$126,500 of foreign-earned income in 2024.
- Form 1116: To claim the Foreign Tax Credit (FTC) for income taxes paid to Chile.
- Form 8858: For those with foreign business operations.
- FBAR (FinCEN Form 114): Required if your foreign bank account balances total more than US$10,000 at any point in the year.
- Form 8938: For reporting foreign financial assets exceeding US$200,000 for single filers abroad.
What are the deadlines for Americans living in Chile?
The US tax filing deadline is April 15, but expats automatically get an extension to June 15. If you need more time, you can request an extension until October 15. In special cases, a final extension to December 15 may be possible. However, if you owe taxes, interest starts adding up after April 15, even if you file later.
The Foreign Account Tax Compliance Act (FATCA) requires expats to report foreign financial accounts if their total value is above certain limits. Chileโs agreement with the US, called the bilateral intergovernmental agreement (IGA), helps enforce these rules. Missing deadlines or underpaying taxes can lead to penalties like the failure-to-file penalty or other charges.
If youโre behind on your taxes, the Streamlined Filing Compliance Procedures can help you catch up without large penalties as long as the mistakes werenโt intentional.
Staying compliant with both US and Chilean tax laws can feel challenging, but meeting deadlines helps avoid serious financial trouble.
Does the US and Chile have a tax treaty?
The US and Chile have tax treaties and agreements to help US citizens avoid paying taxes twice on the same income. These agreements explain how different types of income, like social security benefits, royalties, or income from self-employment, are taxed.
The Foreign Account Tax Compliance Act (FATCA) Agreement requires Chilean banks to share information with the IRS to make sure US citizens report their foreign accounts. If you want to claim benefits from the treaty, you may need to file Form 8833, which explains how the treaty applies to your taxes.
There is also a Totalization Agreement between the US and Chile. This prevents dual social security taxation, so you donโt have to pay into both countriesโ social security systems while working in Chile.
However, many tax treaties have a savings clause. This means the US can still tax its citizens as if the treaty didnโt exist, except for certain types of income.
Filing taxes under these agreements can be tricky, especially if you need to complete forms like Form 8858 or Schedule C. Getting help from a tax professional can make it easier to stay compliant and take advantage of the benefits available to you.
How can the Foreign Earned Income Exclusion help?
The Foreign Earned Income Exclusion (FEIE) allows you to exclude a significant portion of your foreign-earned income from US taxes. For 2024, the maximum exclusion is US$126,500. To qualify, you must meet one of these tests:
- Bona Fide Residence Test: Be a resident of Chile for an entire tax year.
- Physical Presence Test: Spend at least 330 days in Chile during a 12-month period.
The FEIE only applies to income earned through employment or self-employment. Passive income, like dividends or interest, cannot be excluded.
How does the Foreign Tax Credit work?
The Foreign Tax Credit (FTC) prevents double taxation by allowing you to offset US taxes with the income taxes youโve paid to Chile. For example, if you paid US$6,000 in Chilean income taxes, you can reduce your US tax bill by the same amount.
You may be able to use both the FEIE and FTC to maximize your tax savings. Consulting a tax professional familiar with expat rules is often helpful to determine the best approach.
What if youโre married to a Chilean citizen?
If youโre married to a non-US citizen and file separately, the filing threshold for US taxes is just US$5 under the Married Filing Separately status. This means even small amounts of income, such as interest from a bank account, require a tax return.
If your spouse is not a US citizen or Green Card holder, their income is not included on your US tax return. However, shared foreign accounts may require additional reporting, such as an FBAR.
What are the risks of not filing US taxes?
Failing to file a US tax return can lead to significant penalties:
- Failure-to-file penalty: Up to 5% of unpaid taxes per month, capped at 25%.
- Failure-to-pay penalty: An additional 0.5% of unpaid taxes per month.
- FBAR penalties: Not filing an FBAR for foreign accounts over US$10,000 can result in penalties ranging from $10,000 to 50% of the account balance.
If youโre behind on filings, the IRS offers a Streamlined Filing Compliance Procedure for expats to catch up on overdue tax returns without excessive penalties.
How can US citizens in Chile avoid being taxed twice?
To avoid double taxation, consider these strategies:
- Foreign Earned Income Exclusion (FEIE): Exclude eligible foreign-earned income.
- Foreign Tax Credit (FTC): Offset US taxes with Chilean income taxes.
- Totalization Agreement: Avoid paying Social Security taxes to both countries.
By using these tools, you can minimize your tax burden while staying compliant with both US and Chilean tax laws. Working with an expat tax specialist can help ensure that you take full advantage of these options.
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.
More about the Chile guide
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Rental Property
Capital Gains