US Expat Taxes for Americans Living in Sri Lanka – What You Need to Know
It has been estimated that there are several thousand Americans living in Sri Lanka.
Living in Sri Lanka is an incredible experience for a number of reasons, including the friendly locals, the beaches and landscapes, and the culture and cuisine. As an American expatriate living in Sri Lanka though, what exactly do you need to know regarding filing US expat (and Sri Lankan) taxes?
All US citizens and green card holders who earn a minimum of around $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 Sri Lanka, 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 Sri Lanka, there are several exemptions that allow you to pay less or no US income tax on the same income to the IRS.
“Under Sri Lanka’s pay-and-file system, individuals other than employees are required to pay tax in instalments on or before 15 August, 15 November, 15 February of the tax year, and 15 May immediately following its end.” – Sri Lanka Inland Revenue
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 Sri Lankan resident, and the Foreign Tax Credit, which gives you a $1 tax credit for every dollar of tax you’ve paid in Sri Lanka. 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 Sri Lankan governments share taxpayer info, and Sri Lankan 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/Sri Lankan dual citizen, and you have been living in Sri Lanka 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.
Sri Lankan taxes – what you need to know
Sri Lankan residents are taxed on their worldwide income on a scale from 6% to 12%. Non-residents are solely taxed on income sourced in Sri Lanka.
Foreigners living in Sri Lanka are considered a resident for tax purposes if they are physically present in Sri Lanka for 183 days or more during a tax year.
The Sri Lankan tax year runs from April 1st to March 31st. If your only source of income is from employment in Sri Lanka, your income will be taxed at source and you won’t have to file a tax return. Otherwise, Sri Lankan tax returns are due by November 30th. The Sri Lankan tax authority is called Sri Lanka Inland Revenue.
We strongly recommend that if you have any doubts or questions about your tax situation as a US expat living in Sri Lanka that you contact a US expat tax specialist.