Slight increase in taxation of Retiree Expats

The local tax office, Belastingdienst Caribisch Nederlands or BCN, has slightly modified the way expats from the US are taxed. The Double Tax Decree (DTD) applies to exempt pension, IRA and Social Security payments received from the US to the extent they are taxed by the US. However only 85% of Social Security is potentially taxable in the US. The remaining 15% is never subject to US tax. And some pension payments have a difference between the taxable amount and the amount received. This usually shows up on Box 1 and Box 2 of the Form 1099-R. To the extent the US does not tax a payment, there will be no offset by the DTD.

The calculation is based on a ratio of (1) income subject to double tax divided by (2) the total gross income less the $280 fixed deduction times (3) the income tax on the gross income after subtracting the tax free amount (in 2016 this is $11,908 plus the elderly allowance of $1,347 if over retirement age.) The "income tax" in (3) does not include the portion which is premiums; for retirees over retirement age that is the Health Insurance Premium, which is a maximum of $153 in 2016.

So to compute the proper tax and report correctly, the BCN now requires a copy of the first two pages of your 1040 to be attached to the Bonaire tax form. It's also best to include supporting schedules, 1099's and K-1's if needed to explain where the amounts come from, especially if some items are not taxable here (such as rental income) or if you file a joint US return.

The net result varies depending on your income but in effect the income not taxed by the US is subject to about a 30% tax. If you have this situation, remember the foreign tax paid is a deduction on your Schedule A in the US. It cannot be claimed as a credit on Form 1116.

There is a quite different calculation in the case of dividends and interest income, too complicated to explain here.

If you have questions, please feel free to contact us.