Expat Tax for Americans in Costa Rica – What You Need To Know
Expat Living In Costa Rica
Expat 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 ex-pats choose this country for residence. This article on US Expat Tax In Costa Rica will provide a brief intro to Costa Rica taxes from both the perspective of local taxes and your tax obligations in the U.S. as an American living in Costa Rica.
Below are some of the best and most popular cities for expats in Costa Rica (in no particular order):
- Puerto Viejo
- Grecia
- Atenas
- Escazu
- Ojochal
- Uvita
- Dominical
- Tamarindo
- Jacó
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 citizenship.
Worldwide Taxation
The United States’ taxation of worldwide income has been around since the 1860s when 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 taxation model, 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. That means even your Costa Rica pensions are taxable to the U.S.
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 in Costa Rica.
Costa Rica Taxes For Expats
Who Is Liable For Costa Rica Taxes?
When it comes to Costa Rica taxes for Expats, both residents and non-residents are subject to taxation 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?
When it comes to taxes in costa rica for expats, an individual will be a Costa Rica resident 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, business income, investment income, directors’ fees, and capital gains. In Costa Rica, income tax rates are progressive. 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 focusing on tax preparation and resolution for both U.S. (federal) and state income taxes. As a firm specializing 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 is found in larger international tax firms that have separate tax specialists for U.S. and Costa Rica. It’s rare to find a tax expert in a single country, let alone with multiple countries’ expertise. For the convenience of having both country returns prepared by a single firm, a significant premium will be incurred with little to no benefit (except for some convenience).
Thus, we recommend working separately with a local tax professional in Costa Rica to handle your Costa Rica income taxes. A separate U.S. tax professional or firm is the best approach. If you are moving to Costa Rica from the US, we recommend digging into some tax planning. So that you fully understand U.S. tax impacts for expats in Costa Rica before your move. Including the impact of foreign investments and the establishment of any foreign business.
Preferential Expat Tax Treatments
When dealing with U.S. and state taxes while living in Costa Rica, several preferential ex-pat tax treatments may benefit your U.S. expatriate tax return. In fact, for many U.S. expats it will reduce your U.S. tax liability to zero.
It is important to note that a common but dangerous mistake is the assumption that if there are zero taxes owing with tax benefits, a U.S. tax return filing requirement doesn’t apply.
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), do not apply 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 ex-pat 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, expats in Costa Rica may qualify to reduce U.S. taxable income up to an amount of foreign earnings that is adjusted annually for inflation. Also, 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 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 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.
Knowledgeable Expat Tax Preparation
When faced with US expat tax in Costa Rica, there are many tax items to consider. But the above are the most common preferential tax benefits. With top-notch experience and knowledge with ex-pat tax preparation from Tax Samaritan. You have the assurance 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 must 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.
Receipt of any reports after the deadline is delinquent. Also, unlike most other tax forms, the FBAR filing must be electronic.
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 identify or trace funds used for illicit purposes. Also, to identify unreported income abroad and identify undisclosed foreign accounts.
This is an important IRS compliance requirement with huge monetary civil penalties at stake, as well as potential criminal consequences. Also, because of FACTA, foreign financial institutions are starting to disclose U.S. account holder information. This 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 foreign financial accounts maintained with a financial institution.
Form 8938
If you have specified foreign financial assets that exceed certain thresholds, you must also report those assets to the IRS on Form 8938. You may be reporting the same accounts twice in some cases. But there is still a requirement to file both forms including your US investment in Costa Rica.
Who Is a U.S. Person?
A U.S. person for FBAR reporting purposes 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.
FBAR Reporting
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 to avoid double taxation of income concerning social security taxes.
These agreements must be taken into account when determining whether an alien is subject to the U.S. Social Security/Medicare tax or whether any U.S. citizen or resident alien is subject to a foreign country’s social security taxes.
Totalization Agreements Have Two Main Purposes
First, they eliminate dual Social Security taxation. This 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 elsewhere. 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 ex-pat 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.
Tax Samaritan Takeaways For US Expats In Costa Rica
Please click on the hyperlinks below for additional takeaways for your expat tax in Costa Rica:
Tax Samaritan Expat Tax Services
IRS Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad
Inland Revenue Authority of Singapore (for tax schedules and other resources)