Expat Living In Costa Rica
Living in Costa Rica is a popular choice among people who once lived in the United States. With its excellent healthcare system, desirable food and breathtaking landscape, it is no wonder that expats choose this country for residence. This article on US Expat Tax In Costa Rica will provide a brief intro to taxes in Costa Rica from both the perspective of local taxes and your tax obligations in the U.S.
Below are some of the best and most popular cities in Costa Rica for expats (in no particular order):
- Puerto Viejo
Worldwide Income and Citizenship-Based Taxation
The United States is one of the only countries that taxes worldwide income for all of its citizens, no matter where they live and regardless of how long they have been overseas.
Thus, if you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. This is affectionately known as the “citizenship-based” income tax.
Elsewhere in the world, the basic rule is that taxes are based on residency and not based on citizenship.
The United States’ taxation of worldwide income has been around since the 1860s, when it was enacted as part of the Revenue Act of 1861. The purpose was to stop wealthy people from fleeing the U.S. in a time of crisis and taking their money with them. The defense of ongoing citizenship-based taxation income rests on the belief that U.S. citizenship offers benefits even enjoyed by non-residents. Thus, overseas taxpayers are required to pay for this benefit even when they earn money elsewhere.
Even as the rest of the world, including Costa Rica, has moved toward a different model of taxation, the United States’ citizenship-based taxation remains in place. In fact, there has not been a serious attempt to reverse this law. Instead, the debate usually focuses on how much tax overseas citizens should pay.
Guide To US Expat Tax In Costa Rica
The purpose of this guide is to provide a general overview of Costa Rica’s tax environment so you can understand how it will affect your U.S. expatriate tax return as an expat living in Costa Rica.
Costa Rica Income Taxes
Who Is Liable For Income Taxes In Costa Rica?
In Costa Rica, both residents and non-residents are taxed on the income they earn within the country. Income from foreign sources is not subject to Costa Rican taxes.
Who Is A Costa Rican Tax Resident?
An individual will be considered a resident of Costa Rica for tax purposes if they live in Costa Rica for more than six consecutive months during the tax year. For people who are employed, a shorter term of residence may apply.
Costa Rica calculates tax differently for different types of income. Income subject to tax in this country includes employment income, self-employment and business income, investment income, directors’ fees and capital gains. Income tax rates in Costa Rica are progressive with the maximum tax rate of 15 percent for employment income and 25% for self-employment and business income.
Tax Year In Costa Rica And Tax Filing And Payment Rules
The tax year in Costa Rica is the fiscal year running from October 1 to September 30. However, taxpayers may elect to pay taxes based on a calendar year in some circumstances.
When taxes are paid based on the fiscal year, returns must be filed and all tax liabilities must be paid no later than December 15.
HOW YOU CAN SAVE MONEY ON YOUR U.S. TAX RETURN WHILE LIVING IN COSTA RICA?
Tax Samaritan is a firm focused on tax preparation and resolution for both U.S. (federal) and state income taxes. As a firm that specializes only in U.S. federal and state taxes, our opinion is that when trying to locate a firm that can provide expertise and preparation in both U.S. and Costa Rica income taxes, it doesn’t exist with any single tax professional. Rather, such expertise can only be found in larger international tax firms that have separate tax specialists for U.S. and Costa Rica. It’s a rare enough to find a tax expert in a single country let alone with expertise in multiple countries. For the convenience of having both country returns prepared by a single firm, there is a significant premium that will be incurred with little to no benefit (with the exception of some convenience).
Thus, we recommend that working separately with a local tax professional in Costa Rica to handle your Costa Rica income taxes and a separate U.S. tax professional or firm is the best approach. In addition, if you haven’t already moved to Costa Rica, we recommend that you dig into some tax planning to fully understand your U.S. and Costa Rica tax impacts prior to your move including the impact of any foreign investments and the establishment of any foreign business.
When dealing with U.S. and states taxes while living in Costa Rica, there a number of preferential expat tax treatments that may benefit your U.S. expatriate tax return. In fact, for many U.S. expats it will reduce your U.S. taxes liability to zero.
It is important to note that a common but dangerous mistake is the assumption that if there are zero taxes owed with tax benefits that a U.S. tax return does not need to be filed. That is not true. If you are working overseas, it is likely that you meet the filing requirements to file a tax return and must do so. It is important to note that the preferential tax treatments, such as the foreign earned income exclusion and foreign tax credit (described below) are not applicable to the outcome of your tax liability until they are claimed on a filed tax return.
What You Need To Know About Living And Working In Costa Rica For Your U.S. Expat Tax Return
Expats living in Costa Rica have access to certain benefits or preferential tax treatments to reduce their liability. Some of the preferential tax treatments or benefits for US expat tax in Costa Rica include:
- Foreign Earned Income Exclusion and foreign housing exclusion – If you are a U.S. citizen or a resident alien of the United States and you live in Costa Rica, US expat tax will be based on your worldwide income and, as such, you must file a U.S. return for all the years that you are residing in Costa Rica. However, as a U.S. expat you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings that is adjusted annually for inflation ($105,900 for tax year 2019). In addition, you can exclude or deduct certain foreign housing amounts.
- Foreign Tax Credit – When it comes to US expat tax in Costa Rica, most US expatriates worry about “double taxation” – paying taxes to two different countries – the U.S. and Costa Rica. A U.S. taxpayer working overseas in Costa Rica may be able to reduce U.S. taxable income and “double taxation” by claiming the Foreign Tax Credit on Form 1116. Should any foreign income not be fully offset by the foreign earned income exclusion, housing exclusion or housing deduction, the foreign tax credit paid or accrued may be used as a deduction or credit on the U.S. tax return. Taxpayers can elect to either deduct the taxes as an itemized deduction on Schedule A or claim a credit against tax. In most cases, it is to your advantage to take foreign income taxes as a tax credit.
When faced with US expat tax in Costa Rica, there are many tax items to consider, but the above are by far the most common preferential tax benefits. With top-notch experienced and knowledgeable expat tax preparation from Tax Samaritan, you can be assured that you are paying the minimal amount of U.S. taxes possible.
Costa Rica Foreign Bank Account Reporting – The FBAR (FinCen Form 114)
FBAR Filing Deadline
Many overseas taxpayers are required to file the Foreign Bank Account Report, or FBAR (FinCen Form 114). The FBAR filing deadline is April 15th (or the preceding business day if April 15th falls on a weekend) – with an extension available to October 15th.
Any reports received after the deadline are considered delinquent. In addition, unlike most other tax forms, the FBAR must be filed electronically.
FBAR Filing Requirements
The FBAR exists to help the U.S. government identify people who may be using foreign bank accounts to circumvent United States law. With FACTA, IRS criminal investigators will use the FBARs to help them identify or trace funds used for illicit purposes, to identify unreported income abroad, and to identify undisclosed foreign accounts.
This is an important IRS compliance requirement with huge monetary civil penalties at stake, as well as potential criminal consequences. In addition, because of FACTA, foreign financial institutions are starting to disclose U.S. account holder information, which makes it easier for the U.S. to enforce this law.
You must file an FBAR with the Treasury Department if you are a U.S. person with a financial interest in, or signature authority over, foreign financial accounts with an aggregate value of more than $10,000 at any point during the tax year. Foreign financial accounts include bank accounts, brokerage accounts, mutual funds, trusts or other types of foreign financial accounts maintained with a financial institution.
If you have specified foreign financial assets that exceed certain thresholds, you must also report those assets to the IRS on Form 8938. In some cases, you may be reporting the same accounts twice, but both forms are still required.
Who Is a U.S. Person?
A U.S. person for purposes of FBAR reporting includes U.S. citizens, U.S. residents, and entities including but not limited to corporations, trusts, estates, partnerships or limited liability companies that were created or organized in the U.S. under the laws of the U.S.
FBAR Late Filing And Non-Filing
Civil penalties for non-willful FBAR violations may be as high as $10,000 per violation. For willful violations, the maximum penalty is usually the greater of $100,000 or 50 percent of the account balance per violation. Criminal penalties can result in fines of up to $500,000 and imprisonment of up to 10 years. It is possible to incur both civil and criminal penalties for the same violation.
Effective July 1, 2013, all FBARs must be electronically filed with the BSA E-filing system. If you have bank accounts at Banco National de Costa Rica, Banco de Costa Rica, Scotiabank, BAC San Jose, Citibank Costa Rica or at another bank in Costa Rica or any other foreign country, you may meet the filing requirement for disclosure of your foreign accounts on the FBAR. Please don’t hesitate to contact Tax Samaritan to learn more about your filing requirements.
U.S. – Costa Rica Social Security Totalization Agreement
The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes. These agreements must be taken into account when determining whether any alien is subject to the U.S. Social Security/Medicare tax, or whether any U.S. citizen or resident alien is subject to the social security taxes of a foreign country.
Totalization agreements have two main purposes.
First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and pays Social Security taxes to both countries on the same earnings.
Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country. The agreements assign coverage to just one country and exempt the employer and employee from the payment of Social Security taxes in the other country.
As of this time, Costa Rica has not entered into a Totalization Agreement with the United States thus there is no opportunity to avoid double taxation of social security income for US expat tax in Costa Rica.
U.S.- Costa Rica Tax Treaty And Tax Relief For US Expat Tax In Costa Rica
At this time, the U.S. does not have a tax treaty with Costa Rica.