As Americans, we have the freedom to live almost anywhere in the world. With its relaxed culture and breathtaking landscapes, Costa Rica is one of the top lifestyle and retirement destinations for Americans seeking a new life abroad.
As long as you are an American citizen, U.S. laws require that you still file your U.S. taxes – wherever in the world you are – reporting your worldwide income.
Things change a bit each year though, and in this article we’ll look at what’s new for Americans filing their U.S. taxes from Costa Rica in 2022.
General Filing Update
If you hold American citizenship or an American green card, you will be required to file taxes in 2022 if you meet the minimum income requirements. Your tax obligations do not change if you choose to live abroad.
The minimum income amount for filing in 2022 (so your income in 2021) depends on your income type. If you earn more than $12,550 total income globally, you will be required to file taxes. If you are self-employed, the limit is just $400. And, if you are an American who is married but filing separately, the income minimum (for any type of income) is just $5. Remember: if you earn income in currencies other than U.S. dollars, be sure to convert it into dollars to see if you need to file, and to report it on Form 1040.
If you have self-employment income, you will also have to pay U.S. self-employment taxes.
If you have bank or other financial accounts (e.g. investment, or pension) registered in Costa Rica or anywhere outside the U.S., you may have to report them by filing a Foreign Bank Account Report (FBAR) to FinCEN. The rule is that any American who had over $10,000 across all their foreign financial accounts during 2021 has to report them.
If you have a business, trust, or partnership in Costa Rica (or anywhere else abroad), you may have to report it, too.
Lastly, you may still have to file U.S. state taxes in the last state you lived in if you have retained ties there, depending on the rules in that state.
Can I Get A Tax Reduction
There is no U.S-Costa Rica Tax Treaty. However, when you file your U.S. taxes from Costa Rica you can claim some IRS provisions to reduce your U.S. tax bill.
In September 2021, Costa Rica introduced a new Digital Nomad visa, allowing qualifying Americans to work remotely in Costa Rica for a year, extendable for a second year, without paying Costa Rican taxes.
You can also claim the Foreign Earned Income Exclusion by filing IRS Form 2555 to exclude up to $108,700 (for tax year 2021) of your earned income from U.S. tax. So, if you work remotely in Costa Rica and earn less than this amount, it’s possible to pay no income tax at all.
If you earn over this amount and rent your home in Costa Rica, you can also claim the U.S. Foreign Housing Exclusion to exclude more of your earned income from U.S. tax relating to your housing expenses. If you pay Costa Rican income taxes, then you can claim the U.S. Foreign Tax Credit on Form 1116 to reduce your U.S. tax bill according to the amount of Costa Rican income tax that you pay.
Expat parents also have the ability to save more with the U.S. Child Tax Credit. The U.S. Child Tax Credit for tax year 2021 allows a $2,000 tax credit refund per child for Americans living abroad (it’s more if you spent at least 6 months in the U.S. last year), as long as the child has a valid social security number and is an American citizen. If you already owe no U.S. tax due to claiming the Foreign Tax Credit, $1,400 per child will be paid to you as a refund.
Other Updates for 2022
President Biden is planning to raise GILTI tax rates for foreign-registered corporations. So, if you have a company registered in Costa Rica, this could affect you. At the time of writing this article, the Build Back Better bill that contains this proposal is on hold.
Moving abroad is a fantastic adventure, but you still have to fulfill all of your responsibilities to Uncle Sam, including filing American taxes.
If you didn’t know that you had to file your American taxes while living in Costa Rica, or forgot, you have options. It’s certainly worth looking into the IRS amnesty program known as the Streamlined Procedure. The Streamlined Procedure gives you the opportunity to catch up with your tax filing, penalty-free.
This program is only for those who haven’t been contacted by the IRS yet. If you think this could be something you qualify for, reach out to an expert expat tax specialist now.
Nicolas Castillo, a Managing CPA at Bright!Tax, a leading provider of U.S expat tax services, provides us with some U.S. tax updates for Americans living in Costa Rica in 2022.