Taxes – What U.S. Expat in Nicaragua Should Know

Nicaragua is the largest country in Central America. Its colonial town, Granada, is the oldest city on continental Latin America. Granada is an increasingly popular tourist destination. Furthermore, Nicaragua has a beautiful Pacific coast, especially for surfers.

If you are planning to become a U.S. expat in Nicaragua, 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

Taxation in Nicaragua

Let’s start by understanding the basics of the tax system in Nicaragua. Both residents and non-residents on Nicaragua-source income only (however, residents have a base amount that is exempt from taxes). All foreigners who intend to reside indefinitely in Nicaragua are considered residents for tax purposes.

The applicable income tax rates are:

• Employment Income of Residents: Progressive up to 30% (base amount is tax-exempt);
• Employment Income of Non-residents: Flat 20%;
• Taxation on Interests: 10% withholding tax;
• Taxation on Dividends: 10% withholding tax;
• Taxation on Capital Gains: Same as employment income.

Note that Nicaragua 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.

How Living in Nicaragua Impacts U.S. Taxes

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

FATCA and Nicaragua

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 Nicaragua has a FATCA agreement in-effect (as of June 30, 2014).

If you have any questions regarding your U.S. expat taxes, contact us today. We are here to help.