Costa Rica has been called the “Switzerland of Central America” due to its reputation as a tax haven, stemming from its simple tax systems and low income tax rates. But living in Costa Rica doesn’t relieve you of the obligation to file your US expat tax return. Fortunately, we’ve outlined the 8 things you need to know as an American living in Costa Rica.
1. How Working in Costa Rica Impacts US Expat Taxes
An expat who lives in Costa Rica, or in any other country, still has US tax filing requirements. You must continue to file a US expat tax return each year and include all worldwide income on your US return, including any income that is also subject to tax in Costa Rica. You might reduce your US expat taxes by taking advantage of US tax credits and deductions related to your Costa Rican income. The following exclusions and credits help to relieve some of the double taxation you may incur by having to pay tax to two countries:
- Foreign Earned Income Exclusion (FEIE), allows exclusions on your salary (earnings) from work in a foreign country
- Foreign Tax Credit may be available on income that is subject to US tax and to tax in another country.
- Foreign Housing Allowance may be added to the FEIE if your expenses for housing outside the US meet certain thresholds.
If you meet certain requirements, you can exclude up to $105,900 of your 2019 foreign earnings on your US tax return and $107,600 in 2020. In addition to the FEIE, you may also be able to deduct some of your housing expenses. Both of these exclusions reduce your US taxable income dollar for dollar. Like most US tax credits, the Foreign Tax Credit reduces the expat taxes you owe. One dollar of credit reduces US tax by one dollar. Your Foreign Tax Credit will be limited to only those Costa Rican taxes that are allocated to the Costa Rican earnings subject to US tax. That means that any Costa Rica tax on your excluded Costa Rican earnings (excluded by the FEIE, the Foreign Housing Exclusion or because of Costa Rican tax rules) will not be included in the calculation of your US foreign tax credit.
2. Who is a Resident of Costa Rica?
After you have lived in Costa Rica for six months, you are considered a resident. Residents and non-residents pay the same rate of tax on their Costa Rican employment income. There are differences in how a resident and non-resident are taxed on income from sources other than employment.
3. Is Foreign Income Taxed Within Costa Rica?
Only revenue earned within Costa Rica is subject to Costa Rican tax. The country’s government operates on the tax principle of territoriality, which means that any personal income earned outside of Costa Rica is exempt from Costa Rican tax.
4. Costa Rican Income Tax Rates
Costa Rica applies different tax rates based on the kind of income that its residents receive. A 15% tax rate generally applies to dividend and interest income, and most capital gains are exempt from tax. The following charts show the tax rates that are applied to income from fixed salaries and to income from profit-generating activities such as self-employment. Income is shown in Costa Rica colons (CRC).
|Tax Rates on Fixed Salaries of Residents of Costa Rica|
|Income Range||Tax Rate (%)|
|Up to 840,000 CRC||Exempt|
|840,000 to 1,233,000 CRC||10%|
|1,233,000 up to 2,163,000 CRC||15%|
|2,163,000 to 4,325,000 CRC||20%|
|In excess of 4,325,000 CRC||25%|
5. US–Costa Rica Tax Treaty
One important thing to note for expat taxes is the US and Costa Rica do not have an income tax treaty though they do have an agreement whereby they exchange information.
6. Costa Rica Tax Due Dates
Expats who move to Costa Rica have to adjust to a tax year that runs from October 1 to September 30. Your Costa Rica tax return is due February 15 each year.
7. Social Security in Costa Rica
If you work as an employee in Costa Rica in 2020, you will contribute 10.5% of your earnings to the Costa Rican social security system. These contribution rates apply to all Costa Rican workers whether they are residents or non-residents. If you operate a business in Costa Rica and pay employees, your contribution rate to the Costa Rica social security system is 26.5% of your employee’s gross wages.
8. Other Items Affecting Americans Living in Costa Rica
The sales tax rate on most goods and certain services is 13% in Costa Rica. No sales tax is charged on food items, medicinal products and some other items purchased in Costa Rica.
Have More Questions About Your Expat Tax Return?
If you have additional questions about your US expat tax return or to have Greenback Expat Tax Services prepare your return, please contact us.