Don't Let Taxes Wag The Dog
A reader wrote this week with a new reason for being turned off from Colombia…taxes. Someone told the guy that Colombia taxes anyone in the country for more than six months on his worldwide income and that Colombia imposes a wealth tax. Therefore, because, as he interpreted it, this meant that he, a U.S. citizen, would be double-taxed, he was taking Colombia off his list.
As a former U.S. tax preparer who has been living and working outside the United States for more than 14 years and who has filed personal taxes in at least four countries at this point, I know how complicated taxes can be for the global citizen. However, they do not have to be onerous. You just have to understand some basics.
First, every country in the world whose tax system I know anything about (this includes at least a few dozen countries) considers anyone spending 183 days or more in that country a tax resident (assuming that country taxes residents on their worldwide income). Whether you are a legal resident or not is immaterial to the presumed status as tax resident. That said, unless you’re earning income in the country, it’s difficult for any country to enforce tax collection, as you’re not in the system.
Obtain legal residency, and you’re in the system. With legal residency, you’re going to be taxed as a resident…which, again, in most countries, means being taxed on your worldwide income. Examples of countries that don’t tax residents on their worldwide income include Belize, Panama, and Malaysia. Those countries tax you, resident or not, only on income earned in the country.
For U.S. citizens, being taxed on your worldwide income by another country because you’re resident in that country can seem horrifying, as you are also going to continue to be taxed on your worldwide income by the IRS…right?
Your Knight In Shining Armor: The FEIE
Not necessarily. As I discuss often, you have some relief on the U.S. side of the equation if you’re working outside the country. The Foreign Earned Income Exclusion (FEIE) allows you to exclude up to US$107,600 (that’s the figure for 2020) in income earned (that is, income from working for a living). For amounts over the FEIE or for non-earned income (dividend or interest income), you can get a tax credit in the United States for taxes paid in another country. The bottom line is that, generally speaking, you aren’t going to end up paying taxes twice on the same income.
Returning to the Colombia example, resident in this country, you would be taxed on your worldwide income, but not until after five years of residency. Likewise with the wealth tax if you meet the minimum net worth, which is currently about US$1.7 million. Colombian marginal tax rates are 0% up to about US$15,500, 19% between US$15,500 and US$24,500, 28% from US$24,500 to US$60,000, and 33% for taxable income over US$60,000. This means that most Colombians don’t pay income tax.
It’s impossible to easily compare Colombia’s tax bands with those of the United States (10%, 15%, 25%, 28%, 33%, and 35%). The United States allows for personal exemptions and standard deductions that mean you aren’t taxed on your first US$9,500 (for 2012) of income if you are single or your first US$19,000 of income if you are married (both examples are for taxpayers under the age of 65). You don’t reach the top bracket in the United States until US$388,350 of taxable income.
However, when comparing income taxes in other countries with those in the United States, you have to remember state and possibly local income taxes…and maybe other taxes, too. U.S. property taxes, for example, tend to be much higher than those in other countries, not only because property values are greater, but also because U.S. rates are higher and because of how property tax rates are applied in different countries. And don’t forget sales tax (generally less in the United States than other countries), social charges (if you’re working), and other random taxes.
My point is that you have to look at the whole tax picture. You can’t reduce this very big question to just one of its components–income tax, for example.
If taxes are a main concern, you can always do what one proud reader wrote in to boast about a few years ago. He was responding to an article I’d written stating that Americans never lose their annual IRS filing obligation, no matter where in the world they reside. The guy wrote to tell me this wasn’t true. If you earn less than the personal exemption and standard deduction amount (the US$9,500 figure for 2012 that I quote above), then you don’t have to file a tax return.
This guy had purposely arranged his life so that he didn’t have more income than that minimum in any given year. As a result, not only did he not pay any taxes in the United States, but neither did he have to file a tax return. Choosing to earn below the U.S. poverty line so as not to be required to send the IRS a form each year seems like the taxes wagging the dog to me.