Costa Rica and US Expat Taxes

Costa Rica attracts nature lovers from all around the world. The country offers a magical combination of beaches and rain forests. The amount of fauna and flora that the country hosts is truly amazing. No wonder so many expats decide to relocate to Costa Rica.

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

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Taxation in Costa Rica

Let’s start by understanding who is required to pay taxes in Costa Rica. Both residents and non-residents are taxed only on Costa Rica-source income. Foreigners who have lived in the country for over 6 consecutive months during a tax year are considered residents.

Costa Rica utilizes a progressive tax system. For 2013, income tax rates peak at 15% (attractive from a tax standpoint).

Note that Costa Rica 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 Costa Rica 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 Costa Rica. 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 Costa Rica 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). This is obviously the case with Costa Rica. However, it’s a good idea to speak with an expat tax specialist to discuss the best application of these tax reliefs.

FATCA and Costa Rica

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