US Expat Taxes for Americans Living in Costa Rica– What You Need to Know
There are an estimated 50,000 Americans living in Costa Rica.
Living in Costa Rica is an incredible experience for a variety of reasons, including the natural environment, the friendly locals, the healthcare and the climate, to name but a few. As an American expatriate living in Costa Rica though, what exactly do you need to know regarding filing US expat (and Costa Rican) 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 Costa Rica, 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 $400 if you’re self-employed), you have to file IRS form 1040. While taxes 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 foreign 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 and declare them.
If you had a total of at least US$10,000 in one or more foreign 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.
“According to Costa Rican law, employees working under an employment relationship (including international assignees paid through Costa Rican payroll) do not have to file income tax returns.”
If you pay income tax in Costa Rica, there are several exemptions that allow you to pay less or no income tax on the same income to the IRS. The primary one is 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 Costa Rican resident. 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 Costa Rican governments share taxpayer info, and Costa Rican 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 tax evasion for expats are steep to say the least.
If you’re a US citizen, green card holder, or US/Costa Rican dual citizen, and you have been living in Costa Rica 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 with your filing without paying any penalties. Don’t delay though, in case the IRS comes to you first.
Costa Rican taxes – what you need to know
Costa Rica only taxes residents (defined as anyone who is in Costa Rica for at least six months during a tax year) on income generated in Costa Rica. Tax rates are relatively low compared with the US, ranging from zero to 25%. Non-residents with Costa Rican income are also subject to a withholding tax.
There is also a small property tax payable annually by property owners based on the value of the property.
The Costa Rican tax year is the same as the American. Americans who spend at least 183 days in Costa Rica in a year are considered tax residents.
Costa Rican taxes are collected by the Ministerio de Hacienda, and the income tax declaration form is form D103, although if your sole Costa Rican income is from employment in the country, income tax is deducted at source and you don’t need to file a return.
We strongly recommend that if you have any doubts or questions about your tax situation as a US expat living in Costa Rica that you contact a US expat tax specialist.