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From Chile to the US: What You Need to Know About Taxes

Updated: Jan 22

Tax season is around the corner! If you're a Chilean living in the US, you may be wondering how to deal with the tax laws of both countries. You may also be wondering why you have to deal with two tax systems at all, since you already pay taxes in the US. Well, the answer is simple: because Uncle Sam says so. This article is based on our personal experience and research, so please consult a professional tax advisor before making any decisions.





I would say that the biggest difference is that in Chile, we are taxed based solely on our income. In the US you can deduct certain personal allowances depending on your marital status and number of dependents. Also, you can add expenses such as childcare and commute to be deducted from the taxes and get a better return. In Chile the only way to do that is to keep track of every expense and do an itemized tax filing.


  • How to File Taxes in the US as a Foreign National from Chile


If you are a Chilean citizen who lives or works in the United States, you may wonder how to file your taxes in both countries. Depending on your residency status, how long you have been living in the US, income sources, and other factors, you may have different tax obligations and benefits. In this blog post, we will explain some of the main differences and similarities between the tax systems of the US and Chile, and how they affect you as a foreign national.


The US is one of the few countries in the world that taxes its residents on their worldwide income, regardless of where they live or work. That means that if you live in the U.S and are considered a resident for tax purposes, any income from Chilean sources must be included in the US tax return. You need to report your global income to the IRS. Sounds unfair, right? Well, don't worry, there are some tax benefits that can help you reduce or eliminate your US tax liability, such as the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC). To file your taxes you can use local tax offices such as H&R Block or websites such as Turbotax and sprintax. Turbotax is useful for residents and sprintax for nonresident aliens for tax purposes but we’ll get to that.



  • First step: residency status


The first thing you need to determine is your residency status for tax purposes in both countries. This will affect how much income you have to report and how much tax you have to pay.


  • How to calculate residency status in the US


As we said, the US taxes its citizens and residents on their worldwide income, regardless of where they live or work. However, not all foreign nationals are considered residents for tax purposes. The US has two tests to determine your residency status: the green card test and the substantial presence test.


- The green card test: You are a resident for tax purposes if you are a lawful permanent resident of the US at any time during the calendar year. This means that you have been granted the right to live and work in the US indefinitely by the immigration authorities.

- The substantial presence test: You are a resident for tax purposes if you meet the following criteria:

- You were physically present in the US for at least 31 days during the current year, and

- You were physically present in the US for at least 183 days during the current year and the two preceding years, counting all the days in the current year, one-third of the days in the first preceding year, and one-sixth of the days in the second preceding year. You can calculate this using websites such as turbotax and sprintax. 


If you meet either of these tests, you are considered a resident alien and you have to file a Form 1040, reporting your worldwide income and claiming any deductions and credits that apply to you. You may also have to file state and local tax returns, depending on where you live or work in the US.


If you do not meet either of these tests, you are considered a nonresident alien and you have to file a Form 1040-NR, reporting only your US-source income and claiming any deductions and credits that apply to you. You may also have to file state and local tax returns, depending on where you live or work in the US.



  • Residency Status in Chile


Chile taxes its residents and individuals living in Chile on worldwide income. Foreigners working in Chile are subject to taxation only on their Chilean-source income during the first three years in Chile, after which worldwide income is taxed.


The residency status in Chile is determined by the following criteria:


- Domicile: You are domiciled in Chile if you have established your permanent home in Chile, or if you have left Chile temporarily with the intention of returning.


- Residence: You are resident in Chile if you stay in Chile for more than six months in a calendar year, or more than six months within two consecutive years.


If you are domiciled or resident in Chile, you have to file an annual income tax return (Formulario 22), reporting your worldwide income and claiming any deductions and credits that apply to you. You may also have to pay monthly provisional payments (PPM) throughout the year, based on your estimated annual income.


If you are not domiciled or resident in Chile, but you have Chilean-source income, you have to file an annual income tax return (Formulario 22), reporting only your Chilean-source income and claiming any deductions and credits that apply to you. You may also have to pay monthly withholding taxes (IR) at source, depending on the type and amount of your income.


  • Tax Treaty


The third thing you need to be aware of is the tax treaty between the US and Chile, which may affect your tax obligations and benefits in both countries. The tax treaty is an agreement that aims to prevent double taxation and fiscal evasion for people and companies operating and/or doing business between Chile and the United States.


The tax treaty was signed in February 2010, but it entered into force on December 19, 2023, after both countries completed their ratification processes. The tax treaty covers various types of income, such as wages, dividends, interest, royalties, capital gains, etc., and provides rules to determine which country has the right to tax each type of income.


The tax treaty also provides provisions for expanded access to foreign tax credits and other tax provisions aimed at reducing the overall tax burden, and in particular double taxation, for individuals and businesses operating in both countries.


The following table summarizes some of the main benefits of the tax treaty for individuals:

Type of Income

Benefit

Wages

Reduced withholding tax rate or exemption in the source country if certain conditions are met (e.g., presence for less than 183 days, payment by a nonresident employer, etc.)

Dividends

Reduced withholding tax rate of 5% or 15%, depending on the beneficial owner's interest in the payor 

Interest

Reduced withholding tax rate of 4%, 10%, or 15%, depending on the lender's status and the date of payment 

Royalties

Reduced withholding tax rate of 2% or 10%, depending on the type of royalty

Capital Gains

Exemption from taxation in the source country for gains from the sale of shares or other property, unless they are derived from immovable property or a permanent establishment


To claim the benefits of the tax treaty, you may have to provide certain documents or information to the tax authorities or payors in both countries, such as a certificate of residence, a Form W-8BEN or W-8BEN-E, a Formulario N°74 or N°75, etc.


Takeaways


- The US taxes its citizens and residents on their worldwide income, regardless of where they live or where they earn it. This means that if you are a Chilean national who lives and works in the US, you need to report and pay taxes on your income from both countries to the IRS. You may also need to file additional forms, such as Form 8938 (Statement of Specified Foreign Financial Assets) or FinCEN Form 114 (Report of Foreign Bank and Financial Accounts), if you have certain foreign assets or accounts.


- Chile taxes its residents on their worldwide income as well, but only if they have been living in Chile for more than six months in a calendar year. This means that if you are a US national who lives and works in Chile, you may not need to pay taxes on your income from outside Chile to the SII (Servicio de Impuestos Internos) unless you meet the residency criteria. However, you still need to report your income from both countries to the IRS and claim the appropriate credits or exemptions. 


- The tax year in the US is from January 1 to December 31, while the tax year in Chile is from April 1 to March 31. This means that you may have different filing deadlines and tax rates depending on which country you are filing in. For example, the deadline for filing your US tax return is usually April 15 (or June 15 if you live outside the US), while the deadline for filing your Chilean tax return is usually April 30. The tax rates in both countries also vary depending on your income level and filing status. 



As you can see, there are many differences for tax filing in the US compared to Chile as a foreign national from either country. That's why it's important to keep track of your income sources, expenses, deductions, credits, and taxes paid in both countries, and to seek professional guidance if you have any questions or doubts. 


Filing taxes in the US as a foreign national from Chile can be a complex and challenging task. You have to consider your residency status, income sources, and tax treaty benefits in both countries. You also have to comply with different filing requirements and deadlines in both countries.


I hope this blog post was helpful and informative for you. If you liked it, please share it with your friends and family who may be interested in this topic. And don't forget to subscribe to our blog and youtube channel for more tips and insights on living abroad. Thanks for reading!


Cheers!

Academic Family


Disclaimer: Information on academic-family.com is provided for informational purposes only. Our site does not intend to be a substitute for advice provided by a tax advisor, licensed physician, veterinarian or other healthcare professional or any information contained on or in any product label or packaging.

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