Tax Basics for U.S. Expats in Colombia

Colombia is only country in South America to have two different coastlines on both the Pacific Ocean and the Caribbean Sea. With increased political stability, tourism has been on the rise. There is something for everyone. Colombia is classified as a “megadiverse” country, ranked the 2nd most bio-diverse country in the world.

If you are planning to become a U.S. expat in the Colombia, 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: Pedro Szekely

How Living in Colombia Impacts U.S. Taxes

As a U.S. citizen or permanent resident (Greencard), you are required to file U.S. taxes even if you live in the Colombia. 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 Colombia 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.

Taxation in Colombia

Let’s start by understanding who is required to pay taxes in Colombia. Residents have to report taxes on worldwide income. However, non-residents are taxed only on Colombia-source income. Foreigners who are in the country for over 183 days during a consecutive 365-day period are considered residents for tax purposes.
The tax rates in Colombia are progressive for residents:

• Employment income for Residents – Progressive up to 33%;
• Employment income for Non-residents – Flat rate of 33%;
• Interest income – Same as for employment income;
• Dividend income – Same as for employment income
• Capital gains – Flat rate of 10%

Colombia 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.

FATCA and Colombia

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. It is important to know that Colombia does have a FATCA agreement in-place with the U.S.

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