The warm climate and cost of living is compelling a growing number of Americans to move to Costa Rica. As a result, we have been receiving a number of questions from expats living in Costa Rica regarding the country’s tax system, social security benefits, how to minimize a US expat taxes and whether or not we are able to provide US expatriate tax services to American expats living in Costa Rica.
Below you will find our tax expert answers to those questions about taxation while living in Costa Rica.
Filing US Expatriate Tax Returns for Americans Living in Costa Rica
Does your firm provide US expat tax services to Americans living in Costa Rica?
Yes, we provide a full range of US expatriate tax services to Americans living in Costa Rica.
Are American Expats Living in Costa Rica Required to File US Expatriate Tax Returns?
An American expat living in Costa Rica is still under obligation to file taxes with the Internal Revenue Service (IRS) every year. US taxpayer must include all of their earned income, even that which has been paid by a foreign based employment. This includes earnings that have already been taxed by the Costa Rican government. A US expat may have an opportunity to have their IRS taxes reduced using certain tax credits and deductions.
How Can Americans Working in Costa Rica Minimize US Expat Taxes and Avoid Double Taxation?
American expats have a few options to consider that could help them to avoid being double taxed on any income they earn in Costa Rica. These will include:
- Foreign Earned Income Exclusion (FEIE): With FEIE an American expat in Costa Rica may be able to reduce the taxable income earned in Costa Rica by the first $101,300 for the 2016 tax year. For the 2015 tax year that amount was $100,800.
- Foreign Tax Credit: A US expat may be able to use a foreign tax credit towards income that is subject to taxation in Costa Rica and the US.
- Foreign Housing Exclusion or Deduction: If the Costa Rica housing expenses meet a certain threshold, they can be excluded on US expatriate tax returns.
For the Purpose of Taxation, Who is Considered a Resident of Costa Rica?
Once an expat has lived in Costa Rica for six months, they will be considered a resident. However, residency status is not a consideration when it comes to income tax. Both residents and non-residents are subject to the same taxation rate.
Is Foreign Income Subject to Taxation in Costa Rica?
Personal income taxes are only applied to income that is earned in Costa Rica. This is a significant difference in the taxation system of Costa Rica in comparison to other countries.
What are Personal Income Tax Rates?
Personal income tax is assessed in Costa Rica on any income from employment. However, personal income taxes in Costa Rica have considerably lower minimum payments than other countries. An individual earning $800 working at a corporation in Costa Rica, for example, will not be subjected to any income tax.
A freelancer can earn up to $3,000 before having to file an income tax return. This level is substantially higher than that of the United States (net income over $400 is subject to self-employment taxes in the USA), and creates opportunities for citizens of Costa Rica by enacting a tax structure that is less restrictive.
Costa Rica has become known to US expats for its lower tax rates and progressive method of determining rate based on the amount of income and the way in which it is earned.
The taxation rate for salaried employees in Costa Rica for a tax year 2013 is as follows:
Earned Income Tax Rate
Up to 714,000 Exempt
Between 714,000 and 1,071,000 – 10%
Above 1,071,000 – 15%
The tax rates for self-employed workers for tax year 2013 are slightly different:
Income Earned Tax Rate
Up To 3,171,000 Exempt
Between 3,171,000 and 4,735,000 – 10%
Between 4,735,000 and 7,898,000 – 15%
Between 4,735,000 and 15,827,000 – 20%
Above 15,827,000 – 25%
When are the Tax Returns Due in Costa Rica?
A tax return must be filed in Costa Rica by the 15th of February immediately following the end of the tax year. A US expat living in Costa Rica may request to have that deadline extended until the 15th of October.
What is the Tax Year-end for Taxpayers Living in Costa Rica?
The Costa Rica tax year differs from that of the United States. In the US income is counted from the 1st of January to the 31st of December, with returns due by the 15th of April or 15th of June for a US expat. The tax year in Costa Rica runs from the 1st of October to the 30th of September.
What Income is Considered Taxable Income in Costa Rica?
Earnings accumulated in Costa Rica are subject to taxation. Foreign income is exempt from being taxed.
Are Investment Income and Capital Gains Taxed in Costa Rica? If so, How?
Capital gains, investments in real estate and most banking accounts are not taxed on any appreciation in value. This is a significant difference in the tax structure of the country and one that provides significant benefits for investing in opportunities in Costa Rica.
There is a clear distinction between what is considered to be an investment and earnings that are business profits. For example, if business profits are solely from real estate investments, the money derived will be considered a profit for the business rather than a capital gain from an investment. Consequently, the earnings will be taxable.
This rule has little impact on personal income taxes as there is no business structure that profits from the investment. Personal investments will be subjected very rarely to any type of capital gains tax in Costa Rica, which is one of the reasons for the large number of foreign investments there.
What is the Social Security System in Costa Rica?
Costa Rica set up its social security system in the late 1940’s with an almost unheard of set of benefits and payments, especially amongst the nations of Central America. The program has been consistently maintained since that time and is now a cornerstone of the employment in Costa Rica.
Employer contributions into the social security system are generally 4.50% of the company’s entire payroll. Employees are required to contribute 2.50% of their pre-taxed earnings to the social security fund.
Self-employed individuals are obligated to pay between 4.75% and 7.25% of their income earned to the social security fund. The government of Costa Rica makes its own contribution of 0.25% of the covered earnings of businesses operating in Costa Rica.
Foreigners are also required to pay a portion of their earnings into the social security fund of Costa Rica.
In addition to social security, Costa Rica businesses are required to carry a minimum in workplace insurance. Most, however, will supplement that with additional coverage. All businesses are obligated to pay 3.25% of their entire payroll into this workplace insurance system. Some of that money is then allocated to a mandatory severance pay system. Employees add 1% of their pre-tax earnings into the insurance plan to help cover management costs. There are no government contributions with this plan.
Is There a Social Security Agreement Between the USA and Costa Rica?
US expats working in Costa Rica are required to pay 9.17% of their income into the social security system of Costa Rica. As there is no totalization agreement between the United States and Costa Rica, working US expats will be paying into the systems of both countries at the same time. If a totalization agreement were in effect, the US expat would only be obligated to pay into one.
Are There Other Taxes in Costa Rica?
Costa Rica applies a 13% sales tax on most purchases, with exceptions being made for certain foods and medicinal products.
What are the FBAR and FATCA Requirements for Americans living in Costa Rica?
Under the rules of the Foreign Bank Accounts Report (FBAR), United States citizens are required to report any cash balances held in foreign bank accounts. This rule has no bearing on the nation that they reside in. The IRS stated that if the balance is $10,000 or more, the US citizen must file FinCEN form 114. If this form is not filed before the 30th of June, the US citizen will be subject to large fines. There are no extensions offered under FBAR.
The Foreign Account Tax Compliance Act (FACTA) was also enacted by the US government as an attempt to locate US expats who are evading paying their due taxes. The foreign financial institutions are required to report the accounts of US persons. As well as Americans living in Costa Rica are subject to the FATCA filing requirements if they own foreign financial accounts that meet the filing threshold. They have to file form 8938 as a part of US expatriate tax return.
Conclusion
An American who is planning a move to Costa Rica needs to carefully consider the tax laws of both nations. For those US expats who need additional help, a tax expert specializing in expat issues can provide essential assistance.