What U.S. Expats in El Salvador Should Know About Taxes

El Salvador is the smallest and most densely populated country in Central America. It is well-known among surfers because of the ideal conditions along its Pacific Coast. The tourism industry has grown dynamically over recent years, as the Salvadoran government focuses on developing this sector.

If you are planning to become a U.S. expat in El Salvador, or have been one for a while, it’s important to know the tax laws of the country and the potential impact on your U.S. tax return. Expat taxes can get complicated. Fortunately, we have outlined the key points below.

Photo by: thphht

Taxation in El Salvador

Let’s start by reviewing some basics about the tax system in El Salvador. Residents are taxed on El Salvador-source income and foreign investment income, while non-residents are only taxed on El Salvador-source income. Foreigners who are in the country for more than 200 days during the tax year are considered residents for tax purposes.

The tax rates in El Salvador are progressive:

• Employment income for residents – Progressive up to 30%
• Employment income for non-residents – Flat rate of 30%
• Long term capital gains rate – flat 10%;
• Short-term capital gains rate – Same as employment income

El Salvador and the U.S. do not have a social security tax agreement in-place. Therefore, certain U.S. expats will be required to pay into both social security programs.

How Living in El Salvador Impacts US Taxes

As a U.S. citizen or permanent resident (Greencard), you are required to file U.S. taxes even if you live in El Salvador. Plus, if you have assets in foreign financial accounts (e.g., foreign banks), there are informational reports you may be required to file. For example, U.S. Expats Living in El Salvador with $10,000 or more in foreign banks must file the FBAR (now known as FinCen 114).

Fortunately, the U.S. government provides various forms of tax relief that can lower or eliminate U.S. tax obligations

• The Foreign Earned Income Exclusion – It allows you to exclude a certain amount of income earned outside the U.S.
• The Foreign Housing Exclusion/Deduction – This one relates to additional income that can be excluded for household-related expenses tied to living abroad.
• The Foreign Tax Credit – It allows you to offset foreign taxes paid against U.S. tax obligations.

In most cases, the foreign earned income exclusion is preferable to the foreign tax credit if you live in a country with a lower tax rate than the U.S. (assuming your income is not above the applicable threshold). However, it’s a good idea to speak with an expat tax specialist to discuss the best application of these tax reliefs.

FATCA and El Salvador

The U.S. government is increasingly interested in knowing about the foreign assets held by its citizens and residents. As a result, it has been busy inking deals with other countries whereby foreign financial institutions (FFIs) will be required to:

• Identify accounts of U.S. persons;
• Report certain information to the IRS regarding those accounts;
• Withhold a 30% tax on certain payments to non-participating FFIs and account holders unwilling to provide the required information

As of the publication of this article, roughly 80 countries have either signed intergovernmental agreements with the United States or are in discussions. El Salvador and the U.S. do not yet have a FATCA agreement in-place. However, you should be aware of the implications given that the IRS intends to expand FATCA’s reach in the upcoming years.

If you have any questions regarding your U.S. expat taxes, contact us today. We are here to help.