Once you move to Costa Rica, will you have to pay taxes on income in your new home country?
But wait; do you still need to pay U.S. taxes (assuming you’re from there)?
What if you’re living in Costa Rica but working virtually, still earning a foreign paycheck?
How about taxes on social security and other forms of income?
And will all of this change if/when you become an official Costa Rican resident?
Ay Dios mío, there are some serious questions you need to answer when it comes to paying taxes in paradise.
Your body, mind, and soul may reside in Costa Rica, but for the sake of paying taxes, you’re still a citizen of your home country. That’s typically the scenario when United States citizens move to Costa Rica, or anywhere abroad.
No wonder many expats look for jobs in Costa Rica where they can earn wages “under the table” or in cash so they can avoid paying a large U.S. tax bill (not that I endorse that!) If you become a Costa Rican citizen you will have an additional tax obligation there.
Here is the exact verbiage from the IRS website:
Beyond that, the tax rules and codes, both in Costa Rica and the United States, are far too complicated for me to try and give you sage advice here.
The best I can do is urge you to consult with a CPA or professional tax preparer that has some experience dealing with taxation issues for expats abroad. Don’t take tax advice from online forums, rumors, or the word of other expats. Always seek professional advice on taxation issues.
That being said, there are some general rules we know about taxes in Costa Rica:
Costa Rican citizens enjoy the fact that there is no wealth or inheritance tax in the country.
• Sales tax is currently 13% (the equivalent to VAT)
• Sales tax is levied on all goods except for food, medicinal products, and a few other items
• Gasoline carries an additional tax
• Income tax and social security run at 10% - 15% for both depending on income level Taxes on property sales:
• Transfer of property title is approximately 2.75%, including transfer taxes and attorney’s fees
• Property tax ‘impuesto terretorial,’ annual - 1% of assessed property value (about 10 - 40% of market value) goes to the city government
• Certain areas have additional taxes for trash collection and street maintenance
• Capital gains - NONE
Additionally, for U.S. expats it’s important to know that the IRS taxes all income made worldwide. So you won’t be easily avoiding paying taxes back in The U.S. just by physically relocating to Costa Rica. The good news is that you may be able to avoid paying double taxes on income you earn in Costa Rica and then again to the IRS.
You may be able to avoid double taxation thanks to the Foreign Earned Income Exclusion (IRS Form 2555 or Form 2555-EZ) and Foreign Tax Credits (IRS Form 1116).
You may qualify to exclude from income up to an amount of your foreign earnings that is adjusted for inflation ($91,400 for 2009, $91,500 for 2010, $92,200 for 2011, $95,100 for 2012, $ 97,600 for 2013).
You can exclude or deduct certain foreign housing amounts - Housing Exclusion (IRS Form 2555) or Housing Deduction (IRS Form 2555).
But, you must file a tax return with the Internal Revenue Service to qualify for these benefits.
There are caveats, qualifiers, and exclusions, of course. So, once again, the best advice I can give you is to consult a certified tax planner that has knowledge and experience in helping expats. If you want to further inform yourself, I’ve heard The Complete US Expat Tax Book is a great resource.
I’ve lived in Costa Rica or abroad for ten years now, and still file and pay my U.S. taxes every April 15 as if I was still residing in the states.
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