Tax Guide for Americans in Costa Rica

Americans in Costa Rica: A Comprehensive Journey from Residency to Filing

Moving to Costa Rica as an American opens doors to a vibrant tropical paradise, excellent biodiversity, and the unique "Pura Vida" approach to life. However, it also means navigating the complexities of dual tax obligations. You'll need to satisfy both the Costa Rican Dirección General de Tributación (tax authority) and the U.S. Internal Revenue Service (IRS). While this dual obligation can seem overwhelming, understanding the system is the first step to managing it effectively.

This comprehensive guide will walk you through every aspect of the tax landscape for U.S. expats in Costa Rica, from determining your tax residency status to managing double taxation without a full tax treaty. Consider this your complete manual for achieving tax compliance while enjoying your Costa Rican experience. All figures and rules are updated for 2025 where applicable.

Part 1: Defining Your Status - Costa Rican Tax Residency for U.S. Expats

Your Costa Rican tax obligations depend fundamentally on whether you're considered a tax resident. However, due to Costa Rica's territorial tax system, both residents and non-residents are taxed only on Costa Rican-source income.

You are generally classified as a Costa Rican tax resident based on the "183-day rule" or center of interests test, which considers:

Primary Factors:

Physical Presence: Spending 183 days or more in Costa Rica during the calendar year indicates residency.
Permanent Home: Maintaining a home in Costa Rica that's continuously available to you.
Center of Life: Where your personal and economic interests are concentrated, including:
- Location of family
- Professional activities
- Bank accounts and investments
- Social connections and memberships
Registration with the Civil Registry (TSE)

Absence of Treaty Tie-Breaker Rules

Since there is no income tax treaty between the U.S. and Costa Rica, there are no formal tie-breaker rules for dual residency claims. Residency is determined independently by each country, and double taxation is managed through unilateral relief mechanisms.

Understanding these rules is crucial for determining your filing obligations in Costa Rica, though taxation is limited to local sources.

Part 2: Deconstructing the Costa Rican Tax System

Costa Rica employs a territorial tax system, taxing only income sourced within the country, regardless of residency status. This is a major draw for expats with foreign income.

Income from Employment and Self-Employment

This includes:

Salaries, wages, bonuses, and benefits from Costa Rican sources
Self-employment and business income earned in Costa Rica
Pensions and social benefits from Costa Rican sources
Alimony received from Costa Rican sources

Progressive Tax Rates (2025, Annual Income in CRC)

Taxable Income (CRC)	Tax Rate
0 - 11,292,000	0%
11,292,001 - 16,572,000	10%
16,572,001 - 29,112,000	15%
29,112,001 - 58,224,000	20%
Above 58,224,000	25%

Important Note: These are annualized figures based on monthly brackets. For employees, tax is withheld monthly. Self-employed pay quarterly advances and file annually. Foreign-sourced income is exempt.

Capital Income

This applies to gains from assets:

Capital gains on real estate (15% if not habitual)
Interest and dividends from Costa Rican sources (15% withholding)
Rental income from Costa Rican properties

Tax Rate: Generally 15% flat rate (2025)

Other Income

Costa Rica does not tax foreign investment income, pensions, or savings unless sourced locally:

Foreign bank interest, dividends, and capital gains are exempt
No wealth tax or deemed return system
Assets include only Costa Rican real estate for property tax

Tax-Free Allowance: No general wealth tax; basic exemption on salary up to CRC 11,292,000 annually.

Comparing Costa Rican vs. U.S. Tax Systems

Key Differences:

Costa Rica's territorial system exempts foreign income, unlike U.S. worldwide taxation.
Costa Rican top rate of 25% applies at ~$100,000, lower than U.S. federal 37% at higher thresholds.
No state taxes in Costa Rica.
Fewer deductions in Costa Rica.

Other Notable Costa Rican Taxes

Value-Added Tax (IVA):
- Standard rate: 13%
- Reduced rates: 4% (private health), 2% (medicines), 1% (basic basket)
- Included in displayed prices.
Property Tax:
- Annual municipal tax: 0.25% of appraised value
- Luxury home tax additional if value > CRC 145 million (~$280,000)
Real Estate Transfer Tax:
- 1.5% of sale price or fiscal value
- Paid by buyer
Inheritance and Gift Tax:
- No inheritance or gift tax in Costa Rica
Selective Consumption Tax:
- On luxury goods, vehicles (up to 30%)

Part 3: Your U.S. Tax Obligations While Living Abroad

Your U.S. citizenship means you must file U.S. tax returns annually, reporting worldwide income. The key is using available tools to prevent double taxation.

The Core Tools: FEIE vs. FTC

1. Foreign Earned Income Exclusion (FEIE):

Exclude up to $130,000 (2025) of foreign-earned income.
Applies to wages and self-employment income, not passive income.
Must meet either Physical Presence Test (330 days abroad) or Bona Fide Residence Test.

2. Foreign Tax Credit (FTC):

Dollar-for-dollar credit for Costa Rican taxes paid.
Beneficial for Costa Rican-sourced income subject to local tax.
Can carry excess credits forward or back.
Separates income into categories (general, passive, etc.).

Which to choose?

FEIE: Often better in Costa Rica since much income may be exempt locally, reducing foreign tax paid.
FTC: Useful for Costa Rican-sourced income where local rates apply.
You can use both, but not on the same income.

Housing Cost Exclusion/Deduction

If using FEIE, you may also exclude/deduct qualified housing costs exceeding a base amount:

Rent, utilities (except phone/TV/internet)
Real and personal property insurance
Residential parking
Base amount for 2025: $20,800

Reporting Requirements: FBAR & FATCA

FBAR (FinCEN Form 114):

Required if foreign accounts exceed $10,000 aggregate at any point.
Includes Costa Rican bank accounts, investment accounts, pension funds.
Filed separately from tax return by April 15 (automatic extension to October 15).

FATCA (Form 8938):

Higher thresholds than FBAR.
Single filers abroad: $200,000 year-end or $300,000 any time.
Married filing jointly abroad: $400,000 year-end or $600,000 any time.

Penalties for non-compliance are severe, non-willful FBAR penalties up to ~$16,000 per violation (inflation-adjusted for 2025); willful up to the greater of $161,000 or 50% of account balance. FATCA starts at $10,000.

State Tax Considerations

Many states continue claiming tax rights over expats:

Aggressive states: California, Virginia, New Mexico, South Carolina
Tax-friendly states (no income tax): Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming

Consider establishing residency in a tax-friendly state before moving abroad.

Part 4: U.S.-CR Tax Relations

There is no comprehensive income tax treaty between the U.S. and Costa Rica, but a Tax Information Exchange Agreement (TIEA) exists for transparency. Double taxation is managed unilaterally:

Key Provisions and Strategies

No Savings Clause: Without a treaty, U.S. taxes citizens on worldwide income; Costa Rica only on local sources.
Pension Considerations:
- U.S. Social Security: Taxable in U.S.; exempt in Costa Rica as foreign-source.
- Private pensions: Taxable in U.S.; exempt in Costa Rica if foreign.
- No special government pension rules.
Investment Income:
- No reduced withholding; standard rates apply.
- U.S. withholds 30% on U.S.-source income to non-treaty residents.
- Costa Rica withholds 15% on local interest/dividends.
Real Estate: Taxable in the country where located.
Business Profits: Taxed where earned; no permanent establishment protection.

Part 5: The Practical Guide to Filing Your Taxes

Tax Filing Deadlines: A Combined Timeline

Event	Deadline	Notes
Costa Rican Tax Return	March 15	For the preceding year; self-employed
Costa Rican Tax Return (Extension)	Not automatic	Request if needed
U.S. Tax Return (Standard)	April 15
U.S. Tax Return (Expat Extension)	June 15	Automatic 2-month extension
U.S. FBAR Filing	April 15	Automatic extension to October 15
U.S. Tax Return (Further Extension)	October 15	Must file Form 4868
Costa Rican Preliminary Assessment Response	Within 1 month	If you disagree with assessment

How to File Your Costa Rican Return

DIMEX/Cedula: Essential ID for residents.
- Required for filing.
- Obtained through immigration.
Filing Options:
- DGT Website (ATV): Free official portal (in Spanish).
- Tax Preparation Software: Commercial options available.
- Tax Advisor (Contador): $200-1,000+ depending on complexity.

How to File Your U.S. Return

Tax Software: Ensure it supports foreign income and tax credits.
Expat Tax Professional: Recommended for complex situations.
Key Forms: 1040, 2555 (FEIE), 1116 (FTC), 8938 (FATCA).

Part 6: Key Costa Rican Tax Deductions and Benefits

Employment-Related Deductions

Business Expenses:
- For self-employed: Costs directly related to income generation.
- Limited for employees.
No Specific Expat Tax Break:
- Territorial system exempts foreign income.
- Pensionado/Rentista programs allow residency without local tax on foreign pensions/investments.
Other Work Deductions:
- Professional fees (limited)
- Depreciation on business assets

Personal Deductions

No Mortgage Interest Deduction:
- Not available for personal residences.
Healthcare Costs:
- Not deductible.
Educational Expenses:
- Not deductible for personal.
Charitable Donations:
- Deductible up to 10% of income for approved entities.

Tax Credits

Child Credit: CRC 3,080 per month per child.
Spouse Credit: CRC 4,620 per month.
No General Labor Credit.

Part 7: Special Considerations for Different Expat Situations

The Remote Worker

Working remotely for a U.S. company while living in Costa Rica:

Costa Rican Perspective:
- Services performed in Costa Rica = local-source income, taxable.
- Employer may need to withhold Costa Rican taxes.
- Social security contributions required (9.17% employee).
U.S. Perspective:
- U.S.-source if employer American, but worldwide for U.S. tax.
- Claim FTC for Costa Rican taxes.
Solutions:
- Employer of Record services.
- Contractor status.
- Local entity setup.

The Entrepreneur

Costa Rican Business Structures:

Sociedad de Responsabilidad Limitada (SRL): Limited liability, profits taxed at corporate rate.
SA (Corporation): 30% corporate tax on profits > CRC 119,629,000; lower brackets below.

Tax Benefits for Entrepreneurs:

Free Trade Zones: Tax exemptions for qualifying businesses.
Small Business Reduced Rates: 5-20% for low income.

U.S. Considerations:

SRL treated as corporation or partnership.
Watch for CFC rules.

The Retiree

U.S. Social Security: Taxable in U.S.; exempt in Costa Rica.
U.S. Private Pensions: Taxable in U.S.; exempt in Costa Rica.
Costa Rican CCSS: Mandatory health contributions.

The Student

Costa Rican Tax Implications: Student income often exempt if below threshold.
U.S. Tax Implications: Education credits may apply; FBAR for local accounts.

The Investor

PFIC Issue: European funds may be PFICs; U.S. funds preferred.
Costa Rican Accounts: Foreign investments exempt; local taxed at 15%.

Part 8: Common Pitfalls and How to Avoid Them

The Territorial Tax Misunderstanding

Problem: Assuming all income is exempt; services in CR are taxable.

Solution: Classify income sources carefully; consult advisor.
The Social Security Oversight

Problem: Not paying CCSS contributions.

Solution: Register with CCSS; no totalization agreement.
The 183-Day Trap

Problem: Unintended residency triggering filings.

Solution: Track days; plan visits.
The Registration Delay

Problem: Delaying DIMEX registration.

Solution: Apply promptly; essential for banking/tax.
The Assessment Surprise

Problem: Unexpected DGT assessments.

Solution: Respond within 30 days; keep records.

Part 9: Year-by-Year Tax Strategy Timeline

Year 1: Establishing Residency

Obtain DIMEX
Apply for Pensionado/Rentista if eligible
Open Costa Rican accounts (triggers FBAR)
Determine FEIE vs. FTC strategy
Register with DGT

Year 2: Optimization

Review income sources
Maximize exemptions
Consider local investments
Plan around PFIC

Year 3-4: Mid-term Planning

Prepare for permanent residency
Review pension options
Evaluate business setup

Year 5+: Long-term Considerations

Qualify for citizenship if desired
Review estate planning (no inheritance tax)

Pre-Return Year: Exit Planning

Understand capital gains on assets
File final return
Plan partial year

Frequently Asked Questions (FAQ)

Do I really need to file in both countries?

Yes. U.S. citizens file U.S. returns worldwide. Costa Rican residents file on local income. Use FTC or FEIE to avoid double tax.
How does territorial taxation work?

Only Costa Rican-sourced income is taxed; foreign pensions, investments exempt.
Is there a wealth tax?

No wealth tax; property tax 0.25% on local real estate.
Is health insurance mandatory?

Yes, CCSS contributions ~9.17% on income; subsidies possible.
How are RSUs taxed?

Taxed as income when vested if Costa Rican-sourced.
What about cryptocurrency?

Capital gains 15% if local; U.S. treats transactions as taxable.
Can I keep U.S. accounts?

Yes, but report via FBAR/FATCA; some brokers restrict.
Buy or rent?

Property tax low; transfer tax 1.5%; no CGT on primary if habitual.
How handle 401(k)?

Taxable in U.S.; distributions exempt in Costa Rica.
What records to keep?

7 years: income, banks, receipts, conversions, returns.

Your Path to Tax Success

Living in Costa Rica as an American presents unique tax opportunities, thanks to the territorial system. The key points to remember:

Costa Rica only taxes local income.
FEIE often advantageous due to low local taxation on foreign income.
No expat-specific breaks, but residency programs facilitate tax-free foreign income.
Avoid PFICs for U.S. efficiency.
Professional guidance recommended.

Costa Rica offers an exceptional quality of life, and while the tax system is straightforward, thousands of Americans navigate it successfully. With this guide and support, manage obligations while enjoying Pura Vida.

Tax laws change; stay informed via DGT and IRS, join expat groups, seek advice.