3 Tax Basics for U.S. Expats in Honduras

Honduras is the original “Banana Republic.” Along with coffee and wood, banana remains a key export product. Along its Caribbean coast, Honduras has the Bay Islands. They are a popular expat haven and tourist destination, especially among scuba divers.

If you are planning to become a U.S. expat in Honduras, 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: Adalberto H. Vega

1. How Living in Honduras Impacts US Taxes

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

2. Taxation in Honduras

Let’s start by understanding who is required to pay taxes in Honduras. Residents are taxed on worldwide income, while non-residents are only taxed on Honduras-source income only. Foreigners are considered residents for tax purposes when they have lived in Honduras for more than 3 consecutive months in a tax year.

The tax system in the Honduras is progressive. The rates are as follows:

• Employment Income: Progressive up to 25%;
• Interest Income: 10% withholding tax;
• Dividends: 10% withholding tax;
• Capital Gains: Flat rate of 10%

Note that Honduras and the U.S. do not have a social security tax agreement in-place. This means that certain U.S. expats will be required to pay into both social security programs.

3. FATCA and Honduras

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 100 countries have either signed intergovernmental agreements with the United States or are in discussions. It is important to know that Honduras 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.