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10 tax tips for U.S. citizens living in Costa Rica in 2021

Allyson Lindsey, Managing CPA and Partner at Bright!Tax, a leading provider of US expat tax services, provides us with some US tax tips for Americans living in Costa Rica in 2021.

Costa Rica is among the top destinations for Americans seeking to live abroad for a bounty of good reasons – the sublime natural environment, the temperate climate, the hospitable people, and the quality of life, to name but a few.

All American citizens still have to file U.S. taxes after moving to Costa Rica though, reporting their global income. This is because U.S. has a citizenship-based as opposed to a residence-based tax system.

So all Americans living in Costa Rica always have to file a U.S. tax return, if their worldwide income exceeds minimum IRS thresholds, which for 2020 tax year are:

  • $12,400 of any income
  • just $400 of self-employment income
  • just $5 for Americans married but filing separately to a foreigner.

Note that how much time Americans spend in or out of Costa Rica or the U.S. in a year doesn’t affect the requirement to file a U.S tax return.

In this article we’ll list our top 10 tax tips for Americans living in Costa Rica in 2021.

1 – Don’t forget to File!

Living in Costa Rica is a huge adventure – so much so that many Americans forget to file their U.S. tax return. Doing so can have significant consequences though.

In the age of online international finance, the IRS has global reach. Americans living abroad have until June 15 to file though, and they can request a further four months by filing IRS Form 4868, so there’s plenty of time.

2 – If you do forget to file, catch up as soon as possible

If you are an American living in Costa Rica and you forgot to file your last tax return (or even your last two), you can simply back file them to catch up.

If you haven’t been filing for longer because weren’t aware that you had to file U.S. taxes from abroad on the other hand, you can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure.

Catching up under the Streamlined Procedure program involves filing your last three missed federal returns, and self-certifying that you weren’t willfully avoiding your obligations.

Don’t delay though: as the program is only voluntary, if the IRS contacts you first, the program will no longer be available, and you will likely face IRS penalties and back taxes.

3 -You may have to file Costa Rican taxes, too

Costa Rica updated its tax laws in 2019. Costa Rican income tax is payable on any income that is generated in Costa Rica, for residents or non-residents. A resident for tax purposes is anyone who spends more than 183 days (including part days) in Costa Rica in a year.

Residents pay Costa Rican income tax at relatively low rates on a scale of 1% to 25%. Non-residents (including Americans who spend less than 183 days a year in Costa Rica) are also subject to a flat withholding tax on any Costa Rican income they may have, at either 10%, 15%, or 25%, depending on the income type.

Costa Rica also has a small property tax of 0.25% of the value of property paid annually.

4 – Claim tax credits when you file

Americans living in Costa Rica may therefore find themselves liable to pay both Costa Rican and U.S. taxes.

It depends on the details of each expats situation. For example, an American who retires in Costa Rica with their retirement income all coming from the U.S. won’t be liable to pay Costa Rican taxes, whereas someone who carries out work while in Costa Rica will on that income.

Someone who receives rental income from the U.S. and freelance income for work carried out in Costa Rica meanwhile will just be liable to Costa Rican tax on their freelance income, meanwhile.

While the U.S. and Costa Rica haven’t signed a tax treaty to prevent double taxation, when Americans living in Costa Rica file their U.S. tax return, they can claim the U.S. Foreign Tax Credit, which gives U.S. tax credits to the same value as the Costa Rican taxes that they’ve paid. To claim the Foreign Tax Credit, expats must file IRS Form 1116.

They may also be able to claim other U.S. tax credits, depending on their circumstances. For example, expat parents can claim the Child Tax Credit, which gives them a tax credit of $2,000 per dependent child each year.

If they have already eradicated their U.S. tax bill by claiming the Foreign Tax Credit, then a part of this sum will be issued as a tax refund, even though no U.S. tax was paid.

5 – It may be preferable to claim the Foreign Earned Income Exclusion

Americans living and working in Costa Rica may benefit more by claiming the Foreign Earned Income Exclusion on IRS Form 2555, rather than the Foreign Tax Credit.

The Foreign Earned Income Exclusion allows expats to simply exclude the first $107,600 (the figure for 2020) of their earned income from U.S. tax.

Which is preferable depends on the details of each expat’s situation though – their income types, levels and sources, how much time they spend in Costa Rica each year, and whether they have dependent children, for example.

6 – Make sure you get a Stimulus Check, if you’re eligible

In 2020, two rounds of Stimulus Checks were announced to help alleviate the financial effects of the Coronavirus pandemic on individual Americans, while the new administration is also planning a third.

All American citizens whose income was below certain levels qualified.

The checks were technically refundable tax credits for the 2020 tax year, however they were calculated based on previous tax year, meaning some expats may receive a further payment in 2021 (if their income was lower in 2020 compared to 2019 for example, or if they claim the Foreign Earned Income Exclusion for the first time, which reduces their Adjusted Gross Income that stimulus checks are calculated from.

If you provide your U.S. bank details when you file your federal return, the IRS will calculate and pay your stimulus check to you automatically.

7 – Expats sometimes have to file state taxes, too

Some Americans living in Costa Rica may have to file U.S. state taxes, too.

It depends on the rules in the state where they last lived.

Most states are happy to relinquish former residents, unless they still retain significant ties in the state, such as maintaining a home or financial accounts, or having dependents there.

Expats should communicate with the state where they last lived to let them know that they’ve moved and to find out whether they still have to file

8 – If you have foreign registered financial accounts, you may have to file an FBAR

Americans who open bank accounts (or other financial accounts, such as investment accounts) outside the U.S. may have to file am FBAR Foreign Bank Account Report) each year.

There’s no additional tax implication, it’s just a reporting requirement, however penalties for not filing FBARs for those who should are steep.

The rule is that any American who has $10,000 or more in total in their financial accounts outside the U.S. (and including joint accounts, pension accounts, and business accounts) at any time in a year has to file an FBAR to the Financial Crimes Enforcement Network (FinCEN) online. Foreign banks and investment firms are reporting the same information directly to the U.S. Treasury.

9 – There may be even more U.S. reporting to do!

Americans living in Costa Rica who have other types of financial interests abroad may have to report them.

These interests include financial assets (depending on the values), foreign registered businesses, and cryptocurrencies.

10 – Seek expert advice

With additional forms to file and reporting obligations and often currency conversions to factor in, filing U.S. taxes from abroad is typically more complex than filing from in the States, so it’s almost always beneficial for expats in Costa Rica to seek advice from an expat tax specialist firm, to avoid future run ins with the IRS and to ensure you file to your maximum financial advantage.

This story was sponsored by Bright!Tax.

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