US Expat Taxes for Americans Living in Ecuador – What You Need to Know
There are an estimated 10,000 Americans living in Ecuador.
Ecuador has been voted the best overall country for expats, and it’s not too hard to understand why – the beautiful landscapes, security, good-quality free healthcare, and friendly locals for a start. As an American expatriate living in Ecuador though, what exactly do you need to know regarding filing US expat (and Ecuadorian) taxes?
All US citizens and green card holders who earn a minimum of $10,000 (or just $400 for self-employed individuals) anywhere in the world are required to file a US federal tax return and pay taxes to the IRS, regardless of where in the world they live or their income is generated.
The good news is if you are paying income tax in Ecuador, there are various exclusions and exemptions available to prevent you paying tax on the same income to the IRS too.
US taxes – what you need to know
If you earn over US$10,000 (or just $400 of self-employment income), wherever the income originates in the world you have to file IRS form 1040. While any US taxes due are still due by April 15th, expats get an automatic filing extension until June 15th, which can be extended further on request until October 15th.
If you have overseas assets worth over US$200,000 per person, excluding your home if it is owned in your own name, you also have to file form 8938 to declare them.
If you had a total of at least US$10,000 in one or more foreign bank and/or investment accounts at any time during the tax year, you also have to file FinCEN form 114, otherwise known as a Foreign Bank Account Report or FBAR.
If you pay income tax in Ecuador, there are several exemptions that allow you to pay less or no US income tax on the same income to the IRS.
“Husbands and wives must file tax returns separately in respect of employment income, business income, and income received from assets, which are owned individually. Income from jointly owned property and all other joint income are divided with each spouse reporting half.” – KPMG
The main exemptions are the Foreign Earned Income Exclusion, which lets you exclude the first around US$100,000 of foreign earned income from US tax if you can prove that you are a Ecuadorian resident, and the Foreign Tax Credit, which gives you a $1 tax credit for every dollar of tax you’ve paid in Ecuador. These exemptions can be combined if necessary. Remember though that even if you don’t owe any tax to the IRS, if your income is over US$10,000 (or $400 if you’re self-employed) you still have to file a federal return.
The US and Ecuadorian governments share taxpayer info, and Ecuadorian banks pass on US account holders’ account info to the IRS, so it’s not worth not filing or omitting anything on your return. The penalties for incorrect or incomplete filing for expats are steep to say the least.
If you’re a US citizen, green card holder, or US/Ecuadorian dual citizen, and you have been living in Ecuador but you didn’t know you had to file a US tax return, don’t worry: there’s a program called the IRS Streamlined Procedure that allows you to catch up on your filing without paying any penalties. Don’t delay though, in case the IRS comes to you first.
Ecuadorian taxes – what you need to know
If you are a foreigner resident in Ecuador and all your income is sourced abroad, you don’t need to file or pay Ecuadorian income tax. You will be liable to pay US taxes on this income though, unless you can claim one of the exemptions outlined above.
For income sourced in Ecuador, tax rates range from 0% to 35%.
You are considered an Ecuadorian resident if you spend over 183 days in the country in a tax year, or if Ecuador is your financial base, so if you receive all your income from Ecuador, even if you spend less than 183 days a year there.
There are several other personal taxes, including a property tax, and capital gain tax, however they are very low.
If you do have to file an Ecuadorian tax return, the Ecuadorian tax year is the same as the US, with tax returns due by between 10th and 28th March, depending on your taxpayer identification number. Spouses must file separate returns. The Ecuadorian tax authority is called the Servicio de Rentas Internas.
We strongly recommend that if you have any doubts or questions about your tax situation as a US expat living in Ecuador that you contact a US expat tax specialist.