Tax Outlook for Expats Moving to Costa Rica
When moving to Costa Rica or any other foreign country, you need to be aware of two things related to your tax situation:
How living abroad will impact your home tax requirements, and
What your tax filing requirements will be in the foreign country
The StartAbroad Costa Rica Guide
Taxes in Costa Rica
Income Tax in Costa Rica
Income tax is only paid on revenue earned within Costa Rica. If you make income from Social Security, a pension, real estate investments in your passport country, through an online business or freelance work, you will not have to pay income tax in Costa Rica. The Costa Rica tax year runs from Oct 1 - Sep 30.
Any income you make within the country, either through employment, a business, or a vacation rental, is subject to Costa Rican tax. The tax rate is progressive and there are different tax brackets for salary/wages and for other income-producing activities, including self-employment. Tax on dividend and interest income is usually 15%.
Costa Rica tax brackets
Sales Tax in Costa Rica
The general sales tax is 13% in Costa Rica. Some critical services, like lawyers, doctors, dentists, and other independent professionals, are exempt.
Property and Inheritance Tax in Costa Rica
If you are investing in real estate in Costa Rica, you will pay annual property tax of 0.25%. For properties with values above CRC 137 million (2022) you will also have to pay a luxury tax of 0.25-0.55%.
Expats are able to inherit property or assets owned by their partners or parents in Costa Rica. Inheritance and gifts are not taxed in Costa Rica, however a progressive tax (see table) is applied to the transfer of properties and property rights.
Foreign Earned Income Exclusion for Americans in Costa Rica
The US requires all citizens to file a tax return, but also allows significant exclusions for expats. For 2021 you can exclude the first $108,700 of foreign earned income from your U.S. taxes if you qualify. You can qualify by either the Physical Presence test or the Bona Fide Resident test. Most expats use the Physical Presence test, which requires you to be present in a foreign country (not necessarily just Costa Rica) for 330 of a 365 day period. Note that Social Security doesn't qualify as foreign earned income.
Foreign Tax Credit for Americans in Costa Rica
The Foreign tax credit system allows you to offset taxes you paid in Costa Rica for your US expat taxes (or vice versa) dollar for dollar. Note that you can't use the credit on income that has already been excluded by the Foreign Earned Income Exclusion.
Foreign Housing Exclusion or Deductions
American expats who claim FEIE and whose income exceeds the FEIE threshold can use this to exclude or deduct eligible expenses like rent, parking, furniture rental, utilities, and more from their taxes. For 2021, Americans can exclude or deduct up to $15,218.
Foreign Bank Account Reporting
The U.S. requires all citizens to report foreign bank accounts over a certain value. If you have foreign financial accounts with a combined value over $10,000 at any point in the year, you'll have to file an FBAR.
If you have foreign accounts and assets (stocks, bonds, real estate, insurance, etc.) above a certain threshold, you'll have to file a Form 8938, also known as FATCA. For single filers the threshold is $200,000 at the end of the year or if combined assets were over $300,000 at any time of the year. For couples the limit is $400,000 on the last day of the year or if combined assets were over $600,000 at any time of the year.