A Beginner’s Guide to Costa Rican Tax for US Expats

A Beginner's Guide to Costa Rican Tax for US Expats

Struggling to figure out whether you have to pay taxes as an American expat in Costa Rica, or better yet, if you still have to pay US taxes as an expat living in the country?

You may have moved to Costa Rica because of its low cost of living, but unfortunately you must file your income taxes every year, whether you’re working in the country, outside of it, or collecting a pension while here.

With that in mind, this guide will explain to you the Costa Rica tax system, help you identify if you have to file taxes in both Costa Rica and the US, and show you which tax forms you most likely have to file.

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Key Takeaways

  • Costa Rica taxes any income earned by both nationals and foreign residents that earned within the country.
  • You don’t have to pay taxes in Costa Rica for any income you earn outside of the country even if you send it to Costa Rica.
  • Employees have their taxes deducted, while the self-employed must file their own returns annually.
  • US citizens must still declare taxes to the IRS, but they won’t be taxed twice.
  • Forms can be complicated, so it makes sense to hire a tax specialist or accountant for at least the first year or two.

Costa Rica Tax System

The Costa Rican tax system for its citizens is governed by a concept known as territorialism. This means all income that is considered foreign is not taxed by the government. 

On the other hand, all personal income earned within Costa Rica is taxed depending on the amount of income.

To clarify, if your source of income comes from outside of Costa Rica, you don’t need to pay Costa Rican income taxes. It can be income from investments, regular income, or a social security pension. Regardless, you do not have any tax obligations to Costa Rica. 

This also applies if you live in Costa Rica as a US expat and you work online for a company based in the United States or own a business abroad. You will be exempt from any and all Costa Rican income taxes. 

However, if the source of income comes from Costa Rica, such as a Costa Rican company, you need to pay Costa Rican income tax.

Income Taxes

Income taxes in Costa Rica apply only if you generate an income from your Costa Rican business or domestic employment. 

Taxes are also imposed whether or not the income stems from employment. All individuals in Costa Rica who are employed are accountable for a monthly percentage tax for withholdings, which is determined by salary amount. 

Income in Costa Rica is taxed at a progressive rate with a maximum of 25% from employment and self-employment. 

However, tax rates from employment are calculated on a monthly basis, and taxes from self-employment are calculated on an annual basis. 

Property Transfers/Purchase Taxes

When a property is purchased it must be transferred into the purchaser’s name. When this is done, a 1.5% tax is calculated based on the property value.

Sales Taxes

The Costa Rican sales tax is referred to as VAT and is currently 13%. This tax amount gets imposed twice: once after being imported and once as an individual buys the item.

Tax is assessed on each item, excluding items for medicinal purposes, food, or items determined to be nontaxable. 

As a business owner, you will be required to obtain the tax from all purchasers.

Tax Residents and Non-Tax Residents

If you live in Costa Rica for more than 183 days a year, you’re considered a tax resident. 

Income taxes for tax residents in Costa Rica are set at a progressive rate, which ranges from 0-25%. 

However, if you’re a non-tax resident, your income tax rate will be fixed at either 10%, 15%, or 25% depending on the income type. It is withheld by your employer. 

How Much Tax Do You Have To Pay?

Regardless of how much income you make, the government of Costa Rica requires that you disclose the amount. 

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You’re obligated to pay an income tax for any income made within Costa Rica. 

Costa Rica border
Costa Rica uses a territorial taxation system. This means that you’re subject to tax only for income made within Costa Rica.

Nevertheless, while working for an employer in Costa Rica for more than 6 months, you will need to obtain residency to cover the taxes accrued during the term of employment. 

This shouldn’t be a problem, though, as you need residency status to be able to work for a Costa Rican employer.

Tax Residents

Resident taxes are calculated based on the amount of money you earn every month. This means a monthly salary of 842,000 colons or less is tax exempt. 

For salaries above this amount but no more than 1.236 million colons a tax of 10% will be assessed, and if a higher salary is obtained, then the monthly tax increases to 15-25%. 

Here’s a full income tax rate in Costa Rica for salaries:

Income RangeTax Rate
0 colons – 941,000 colons 0%
941,000 colons – 1,381,000 colons10%
1,381,000 colons – 2,423,000 colons15%
2,423,000 colons – 4,845,000 colons20%
More than 4,845,000 colons25%

If you’re self-employed, then the tax is assessed on an annual basis.

If your annual income is below 4.181 million colons, then tax is not assessed. If your annual income is more than 4.181 million colons but less than 6.244 million colons, then an annual tax of 10% is assessed. 

When your annual income is above 6.244 million colons, your annual tax rate will be 15-25% depending on which bracket you fall into. You can find a full breakdown at the link above.Non-Tax Residents

Under your non-residency status, a tax of 10% will be taken based on the earned income received within Costa Rica.

If you’re a non-resident and work independently, a 15% tax will be assessed on your earned income for any service considered to be professional. 

For any advice provided, you will be taxed 25%.

Dividend and Interest Income

Dividend and interest income are usually subject to 15% tax in Costa Rica.

Costa Rica Tax on Foreign-Earned Income

Tax in Costa Rica uses a territorial taxation system. This means you don’t have to pay taxes in Costa Rica for any income you earn outside of the country. 

You’re only subject to tax within Costa Rica. 

How to File Costa Rica Tax

While working in Costa Rica, taxes are withheld from the salary you earn. The good thing, though, is that you’ll have no need to file a tax return. This is because both social security and income taxes are paid on a monthly basis. 

If you are self-employed and receive income through fees, services, royalties, commissions, or rental property, you need to file tax.

The filing process is entirely online for all documents. With the elimination of paper filing, taxes can be paid in a quicker fashion.

The only exception to paper filing is for any penalty that requires you to take the form to a bank for payment. 

However, filing taxes in Costa Rica can be complicated. In order to do it, you have to be the company’s legal representative to declare and pay taxes. This is due to the personal responsibility that it places on the individual for accurate filing.

To begin the filing process, you need to create an account through the Administración Tributaria Virtual (ATV) and file taxes there.

However, you need to make sure that you qualify to obtain the account with the ATV system by showing either the NITE number assigned to you, a residency card (DIMEX), or an ID card (cedula).

The only exception is if you’re working independently.

For tax purposes, the Ministry of Finance will have all of the required tax forms you need for your situation. 

Costa Rica Tax Forms 

When you contact the Ministry of Finance, you will find that there are a few different tax forms depending on your situation.

Below are some of the more common examples.

D150 Tax Form 

The D150 provides a thorough summary of your total payments, withholdings, or retentions that may have been completed through the business during the year.

A few examples include:

  • Total income tax from salary
  • Any and all stockholder payments 
  • All foreign financial settlements that result from any payments made to executive boards 
  • Any settlements made to entities outside of Costa Rica, made specifically for television, interests, fees, transport, etc.

You have until November 30 to file this form. And although filing this form seems to be voluntary, it’s actually mandated by law if any of the aforementioned is conducted. 

D151 Tax Form 

The D151 is a summary of vendor settlements concerning all expenses associated with all clients throughout the year and within Costa Rica. 

The summary must also fall in line with a few stipulations:

  • If an amount over 2,000,000 colons was obtained at any point in the year, then the customer involved with the transaction must be disclosed.
  • If a vendor was paid more than 2,000,000 colons at any point in the year, then the vendor must be disclosed.
  • You must also disclose anyone that receives over 50,000 colons in more than one way, such as interests, fees, commissions, or leases.

The D151 has a November 30 deadline and is a crosscheck of all individuals receiving payments and if the taxes from the business are filed and the amount. It is the sister form to the 1099.

It’s important to remember that the fee for late filing can be as high as US$7,500.

D101 Tax Form

The gold mine of all Costa Rican tax forms is the D101. This is the form you use to submit annual taxes, and it involves disclosing a summary of the following:

  • Equity
  • Expenses that are itemized
  • Revenue that is non-taxable and taxable
  • All liabilities
  • All assets

The foundation of the entire calculation of taxes lies with Section 2 and 3 (revenues and expenses).

With that, the Ministry of Finance will give their attention to the revenues and expenses sections more than any other section. You have to submit this form by December 15.

Remember, this tax form needs to be completed by both individual business owners and corporations that are operating in Costa Rica, such as realtors or vacation home rentals. 

Failing to file a D101 may cause you to be fined an amount of over US$380 plus interest for any liability for income tax.

When Do I Have to File Costa Rica Tax Returns? 

Costa Rica’s tax year starts on October 1 and ends September 30. Nevertheless, you can take advantage of a calendar year to get the taxes fully paid depending on your situation. 

If you pay taxes according to a fiscal year, you have to report liabilities by December 15. 

If you miss the filing date for taxes, you’ll be subjected to a fine. Even worse, if you fail to file and never do, then you’ll find it impossible to obtain important paperwork pertaining to your business for being non-compliant with your taxes.

Joint Tax Filing in Costa Rica

If you and your spouse are both self-employed, then you must file your tax returns separately. If you have children, then only the mother or father can claim a personal child credit. 

Currently, joint tax filing is not recognized in Costa Rica.

Do I Have to File US Tax Returns while Living in Costa Rica?

If you live in Costa Rica, you still have to file US taxes. 

The only exception is when you make an annual income less than the standard deduction for that year, which is currently set at US$13,850 for a single person and US27,700 if you file jointly with your spouse.

Costa Rica national theatre
If you’re an American expat, you must file U.S. taxes even while living in Costa Rica.

However, please note that if you are self-employed and make more than US$400, you must file US taxes. 

It’s important to remember that the length of stay in the US or Costa Rica doesn’t have any influence on whether you need to file US taxes. 

You can do it easily by using a tax filing software such as TurboTax.

Foreign-Earned Income Exclusion

If you live outside of the U.S. for more than 330 days a year, you might be entitled to a Foreign-Earned Income Exclusion (FEIE). 

It basically gives you a tax deduction for the amount of US$120,000 in 2023, in addition to standard deductions. 

Foreign Account Tax Compliance Act

As an American citizen living abroad, there are many obligations you must take care of, and taxes will always be a big one to remember.

Besides taxes, you also have to report other finances regarding bank account balances abroad. 

The information disclosed is mandatory and is regulated by way of the Foreign Account Tax Compliance Act (FATCA) agreement, which both the US and Costa Rica have made official.

With the FATCA, all US citizens must disclose any and all assets that are above a certain amount held in a foreign country. If the amount exceeds the limit, then the IRS is to be notified of the assets. 

In order for FATCA to be used, you must submit form 8938 along with your federal tax returns. 

Since FATCA regulations are subject to change, you should always check the IRS’s website

Once there, you’ll see many links related to FATCA, such as different assets that you may need to disclose according to the rules governing the form.

You’ll also see a link that provides a requirements summary that will be helpful when it comes time to report taxes as an expat. It gives excellent guidance on the entire process and what the individual responsibilities entail. 

It’s highly recommended that you stay up to date with any information concerning FATCA so that you don’t miss out on important updates. 

FATCA Concerning Foreign Banks

Under FATCA, any bank that opens an account for an expat must notify the IRS. The IRS must also be notified of any accounts for which an expat has partial ownership but is not held by the expat. 

Foreign banks who need additional guidance can also contact the IRS. Just like expats, the information available is also helpful to the financial institution and will easily guide them through the process so that all requirements are met. 

It’s also suggested that the foreign bank stay up to date and aware of any changes that may occur to the FATCA form.

FBAR and Costa Rican Bank Accounts

Opening a Costa Rican bank account seems even more difficult today than it was in the past. However, you may have better luck with smaller banks than national banks. 

So it’s important that you attempt to open an account shortly after arriving – or at least find out if you can.

If you currently have at least US$10,000 in a foreign bank account, you must disclose it to the Treasury Department via a form known as the Foreign Bank Account Report (FBAR). 

With the FBAR or FinCen Form 114, all financial bank accounts must be accounted for that all expats hold.

For expats obtaining a rentista residency in Costa Rica, the filing of the FBAR will need to be completed due to the large deposit required.

Decreasing US Taxes While Living in Costa Rica

As an expat calling Costa Rica home, you have a few ways to lower your US taxes. Below we’ve listed a few of the most commonly used by expats living abroad.

Foreign Earned Income Exclusion

Under the Foreign Earned Income Exclusion (FEIE) you are entitled to certain tax deductions based on your foreign-earned income.

Keep in mind you must adjust this number annually to account for any inflation.

Foreign Housing Exclusion 

With the Foreign Housing Exclusion (FHE), you can deduct a portion of your housing costs while living abroad.

Foreign Tax Credit

With the Foreign Tax Credit (FTC), you don’t have to panic about double taxes that may occur because of living in Costa Rica as a US citizen when you claim the FTC.

So, if you have any income from a foreign source and it’s not eliminated completely by the others, then this credit may be a good path to take when tax time comes around in the US. 

Also, you can decide to have your taxes set up like an itemization – or a credit – for tax purposes. A lot of the time, it’s best to use this advantage as a credit.

How to Deal with Income Taxes in Costa Rica and the US

When you live under residency status in Costa Rica, you’ll be under the same tax rates as Costa Rican citizens who make the same amount as you. 

Remember though, being a citizen of the US means you continue to file the yearly IRS taxes too. This includes reporting any foreign bank accounts you have opened by way of the FBAR. 

The good thing about the FBAR is that it’s only needed if a citizen’s foreign bank account has a minimum amount of US$10,000 within the tax year.

It can be a confusing and complicated process to stay on top of taxes if you’re never in your home country. This is why it is important to get in touch with a tax specialist who deals with taxes for expats. 

They will be able to guide you on the best course of action to take if you need to clear up any tax issues.

Find out more: The Complete Guide to Filing US Taxes from Abroad

Pension Tax 

While the entire world continues to adopt other types of tax systems, the US continues to remain steadfast in its taxation based on citizenship.  

So unfortunately, having a pension while retiring in Costa Rica means you’re liable for the US taxes, unless it’s a social security pension. 

US Tax on Dividends and Investment Taxes

Since US citizens are taxed worldwide, you’re also subject to US tax on income generated from dividends and investments in the same way as you are in the US. 

When to File US Tax While Living in Costa Rica

When filing US taxes, you are granted a 2-month extension up to 15 June. If you need even more time, you have to fill out IRS Form 4868, which gives you 4 more months.

Now, on to You

We hope that this article answers all of your questions about taxes in Costa Rica.

Please note that taxes are a complicated matter. Tax regulations are also subject to change.

With that said, find a tax advisor who is well-versed in taxes for US citizens living in Costa Rica to make sure you stay compliant in both countries. 

Patrick is a Bangkok-based copywriter and editor. After working at Thomson Reuters for 7 years, he decided to move from Manila to Bangkok. He has been adoring the efficiency of the train system in Thailand's capital ever since. He wrote for medical tourism and luxury travel companies as well as for an online music magazine where he gushes over Britney Spears. Patrick is currently writing a novella set in heaven. Find him on patsession.com and on Twitter @limcaco_.

2 thoughts on “A Beginner’s Guide to Costa Rican Tax for US Expats”

  1. As a US Resident I’m selling property in CR, gain expected, should be subject to 15% CR Taxes, is this amount available to US Foreign Tax credit, to avoid double taxation

    Reply
    • Since each person has a very different taxation situation, it’s best to get this kind of advice from a tax advisor.

      Reply

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