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U.S. EXPAT TAX GUIDE โ€“ CHILE

Do Americans need to file a US tax return while living in Chile?

Yes, US citizens living in Chile usually need to file a US tax return. The US requires its citizens and permanent residents to report their worldwide income, no matter where they live.

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In Chile, taxes are managed by the Servicio de Impuestos Internos (SII), the countryโ€™s tax authority. If you earn income from Chilean sources, like a job, investments, or a business, you must pay taxes in Chile.

Even though you pay taxes in Chile, you still have to report your income to the IRS in the US. To avoid being taxed twice on the same income, you can use benefits like the Foreign Earned Income Exclusion or the Foreign Tax Credit.

Itโ€™s important to follow both US and Chilean tax laws to avoid fines or other problems. If handling taxes feels overwhelming, working with a tax expert who understands both systems can make things much easier.

What are the 2024 income thresholds for filing a US tax return abroad?

The IRS sets specific income thresholds to determine if you must file a tax return. These depend on your filing status:

  • Single (under 65 years old): You need to file if your total worldwide income exceeds US$14,600.
  • Married filing jointly: A return is required if your combined income exceeds US$29,200.
  • Married filing separately: You must file if your income is more than US$5, even if your spouse is not a US citizen.

For married individuals filing separately, even minor sources of income, such as bank interest or a small side job, can require you to file a US tax return.

How do self-employed Americans in Chile handle their taxes?

If you are self-employed, you must file a US tax return if your net earnings exceed US$400. This includes income from freelancing, consulting, or operating a small business.ย 

Self-employed individuals are also subject to specific rules and forms, such as:

  • Schedule C: To report business income and expenses.
  • Form 8858: For reporting foreign business activities, if applicable.

Even if you contribute to Chileโ€™s social security system, the totalization agreement between the US and Chile means you wonโ€™t need to pay US self-employment tax. However, you still need to report your income.

Do US citizens have to pay taxes on income earned in Chile?

In many cases, US citizens can avoid paying taxes twice on the same income, thanks to US tax provisions:

  • Foreign Earned Income Exclusion (FEIE): This allows you to exclude up to US$126,500 (in 2024) of foreign-earned income from US taxation. To qualify, you must either:
    • Be a bona fide resident of Chile for the entire tax year, or
    • Meet the physical presence test by being in Chile for at least 330 days within a 12-month period.

Foreign Tax Credit (FTC): If you pay income taxes in Chile, you can use the FTC to offset your US tax liability. The credit reduces your US taxes dollar-for-dollar for taxes paid to Chile.

  • Schedule C: To report business income and expenses.
  • Form 8858: For reporting foreign business activities, if applicable.

Even if you contribute to Chileโ€™s social security system, the totalization agreement between the US and Chile means you wonโ€™t need to pay US self-employment tax. However, you still need to report your income.

What are some essential tax forms Americans need to be aware of when living in Chile?

If youโ€™re a US citizen living in Chile, itโ€™s important to know which tax forms you need to file. Filing these forms correctly helps you avoid fines and meet your IRS requirements. Here are some of the most common forms expats need:

  • Form 1116 (Foreign Tax Credit): Use this form to claim a credit for taxes youโ€™ve already paid in Chile, so you donโ€™t get taxed twice on the same income.
  • Form 8938 (Statement of Foreign Financial Assets): If your foreign bank accounts, investments, or other financial assets total more than certain limits, youโ€™ll need to report them on this form.
  • FBAR (FinCEN Report 114): File this form if the total value of your foreign bank accounts is more than US$10,000 at any point during the year.
  • Form 8854: If you give up your US citizenship, this form ensures youโ€™ve handled all your tax responsibilities.
  • Form W-8 BEN: Use this form to lower or eliminate taxes on US income, like dividends or interest, under tax treaties.

These forms can be confusing, so getting advice from a tax professional can save you time and stress.

What does the totalization agreement between the US and Chile cover?

The totalization agreement between the US and Chile is designed to prevent double taxation on social security contributions. Hereโ€™s how it works:

  • If you are paying into Chileโ€™s social security system, you are exempt from paying US Social Security and Medicare taxes.
  • This agreement is particularly helpful for self-employed individuals, as it exempts them from paying US self-employment tax.

What happens if you donโ€™t file your US tax return?

Failing to file a required US tax return can lead to serious consequences. Here are some potential penalties:

  • Failure-to-file penalty: This penalty can be as high as 5% of your unpaid taxes for each month your return is late, up to a maximum of 25%.
  • Failure-to-pay penalty: If you owe taxes and donโ€™t pay, youโ€™ll incur a penalty of 0.5% of the unpaid taxes each month.
  • FBAR penalties: If you had more than US$10,000 in foreign bank accounts at any point during the year and failed to file an FBAR (Foreign Bank Account Report), penalties can range from US$10,000 to 50% of the account balance.

If you are behind on your filings, the IRS provides a Streamlined Filing Compliance Procedure. This program allows taxpayers to catch up on missed filings without facing heavy penalties, provided the non-compliance wasnโ€™t willful.

How can US citizens avoid double taxation?

There are several strategies available to reduce or eliminate double taxation on income earned in Chile:

  1. Foreign Earned Income Exclusion (FEIE): Exclude a significant portion of your foreign-earned income from US taxation if you qualify.
  2. Foreign Tax Credit (FTC): Offset US taxes by claiming a credit for income taxes paid to Chile.
  3. Totalization agreement: Avoid paying US Social Security and Medicare taxes if you contribute to Chileโ€™s social security system.

By using these tools, many US expats can avoid double taxation while fulfilling their obligations to both the US and Chilean tax systems. To ensure compliance, consider consulting a tax professional familiar with expat tax rules.

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.

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