By Ross Lustman, JD, CPA, EA
Nearly 25,000 US citizens have legal residency in Costa Rica. The US State Department estimates that nearly another 100,000 may live there as “perpetual tourists” – coming and going every 90 days, but making Costa Rica their home. Living in Costa Rica can greatly improve your lifestyle. But it doesn’t let US expats in Costa Rica off the hook from filing US taxes.
Costa Rica offers great reasons to relocate to there. The climate is unparalleled. Medical costs are still a fraction of their US equivalent. Rent and groceries are cheaper, too. Whether you’re in the small, quiet community of Monteverde, the surfer’s paradise of Tamarindo, or the hustle and bustle of the Central Valley, Costa Rica has something to offer everyone.
It’s no wonder why so many US citizens choose Costa Rica as their home. However, when you leave the US, your obligations to Uncle Sam stay with you.
United States Citizens generally must file US Income Tax Returns, and often pay an income tax, no matter where they live or earn their income.
If there’s one group that didn’t get the memo about “pura vida,” it’s the IRS. Therefore US expats in Costa Rica need to make sure they continue to meet their US Income Tax obligations while living in Costa Rica.
Important thinks to keep in mind when preparing your tax return or speaking with your CPA:
1) The Foreign Earned Income Exclusion for Costa Rica expats
A US citizen who works abroad can usually claim the Foreign Earned Income Exclusion. It allows you to exclude the first $105,900 of earned income from US income taxation. This applies in Costa Rica as well.
No matter whether you work for a large multinational company and transfer to the Costa Rican office, or you set up shop as an entrepreneur in the country, you may be able to qualify for this big tax break.
To qualify, you need to either spend 330 full days outside of the United States, or be a bona fide resident of a foreign country. You can find out more here about bona fide residency.
2) The Foreign Tax Credit and your Costa Rica Caja Payment
If you have legal residency in Costa Rica, chances are you’re paying every month to the Caja Costarricense de Seguro Social – the Caja for short. This is Costa Rica’s Social Security equivalent, in addition to being the public medical system for the country.
The United States and Costa Rica do not have a Social Security Totalization Agreement – which means there are some instances where you may be subject to both US Social Security, and Costa Rican Caja on the same income.
However, there is a silver lining. When a country does not have Social Security Totalization Agreement with the United States, the social security tax of that country is considered an income tax for Foreign Tax Credit purposes.
This means if you have Costa Rican income where you’re paying Caja, you can use that payment as a tax credit to reduce your US Income Tax.
3) Corporations everywhere in Costa Rica
If you own a home in Costa Rica, there’s a strong chance the attorney who handled the sale advised that you put the home in a holding company called a Sociedad Anonima (S.A.) or a Sociedad de Responsabilidad Limitada (SRL or Ltda).
Many will own their vehicles or other property in this same way. They have streamlined this a bit in the last few years, but it is not unheard of to have five, ten, or even more holding companies, just to go about your daily life in Costa Rica.
For US income tax purposes, these are corporations and must be reported on Form 5471. The penalty for failing to file Form 5471 can be $10,000 or more. Therefore it is important to make sure this is done. For inactive companies with less than $100,000 in assets, you can use a simplified form for dormant companies.
4) Foreign Asset Reporting – FBAR and Form 8938
It’s harder than it used to be to open a bank account in Costa Rica. (In our experience, we found that US citizens living in Costa Rica have the best luck with BAC San Jose or Banco Promerica). If you are living here for any stretch of time you’ll want to jump through the hoops to make sure you can open an account.
Any US citizen with more than $10,000 in non-US banks must report their accounts to the US government on FinCEN Form 114, also called the FBAR. If you apply for residency in Costa Rica as a rentista by making a $60,000 deposit into a Costa Rican bank, you will obviously have to do the FBAR.
Depending on your filing status and where you live, you may have to file another reporting form, the Form 8938. This may be required with as little as $50,000 in foreign financial assets.
Real estate is not considered a financial asset for the purposes of Form 8938, but stock in a foreign corporation is. So, if you have your Costa Rican home held in an S.A. or S.R.L., you may be subject to Form 8938 even if you do not keep much in your Costa Rican bank account.
Filing your US expat taxes when living in Costa Rica
There’s a lot to keep in mind when you are filing your US Income Tax Return from Costa Rica. Most US-based accountants are not familiar with the nuances of expat tax. Even many expat tax preparers don’t know much about Caja, S.A. or S.R.L., so you may not report everything correctly or lose out on available deductions.
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