Americans who live and work in Costa Rica may be required to pay taxes to the United States and Costa Rican governments. Several exemptions and deductions exist, so it is wise to consult an experienced accountant in order to file correctly.
Paying U.S. Taxes
Americans are required to pay taxes on all income earned within the United States – taxpayers who submit a W-2 1099, or other income reporting form must pay taxes on those earnings. However, U.S. taxpayers receive a tax break on foreign-earned income – earnings outside of the United States paid by non-U.S. employers.
To qualify for the foreign-earned income exclusion, the taxpayer must live and work outside the United States, or meet the bona fide residence test, or meet the physical presence test. In short, the bona fide residence test includes one full tax year (January 1-December 31) of residence in a foreign country with only short trips out of the foreign country; the physical residence test is defined as having lived 330 days outside of the United States.
Taxpayers who qualify for the foreign-earned income exclusion are eligible for tax deductions of up to $92,900 (2011 tax year), which means that they will pay no taxes on the first $92,900 of foreign-earned wages. However, taxpayers whose income exceeds this amount will be taxed at the rate that would have applied without the deduction. For example, $100,000 in foreign-earned income will be taxed as $7,100 ($100,000-$92,900) at the same rate as the $100,000 tax bracket. Additional tax deductions may include the foreign housing exclusion/deduction, which is an amount equivalent to living expenses paid by an employer. This amount cannot exceed 16% of the maximum foreign-income exclusion – or $14,864 for the 2011 tax year.
All U.S. taxpayers are required to file for taxes if their income exceeds a certain amount:
- Single: $9,350
- Single and 65 or older: $10,750
- Head of household: $12,050
- Head of household and 65 or older: $13,450
- Qualifying widow(er): $15,050
- Qualifying widow(er) and 65 or older: $16,150
- Married filing jointly: $18,700
- Not living with spouse at end of year: $3,650
- One spouse 65 or older: $19,800
- Both spouses 65 or older: $20,900
- Married filing separately: $3,650
Those taxpayers residing outside of the United States or Puerto Rico on the regular due date of their tax return (usually April 15) are eligible for an automatic two-month extension. However, they will be required to pay interest on taxes for the period of time between the regular due date and extended due date. To obtain the extension, taxpayers should attach a statement to their tax return explaining that they were residing abroad at the time of their regular tax filing due date.
There are many certified public accountants residing in Costa Rica who are capable of helping residents file U.S. income taxes. Fees for filing personal income taxes start around $1,000.
Paying Costa Rican Taxes
Costa Rica requires taxpayers to pay taxes on income earned within Costa Rica. The income tax scheme is graduated, meaning that those who earn more are placed into a higher tax bracket. The following figures refer to annual salaries:
- Up to 2,747,000 CRC: not subject to income taxes
- Between 2,747,000 and 4,102,000 CRC: 10%
- Between 4,102,000 and 6,843,000 CRC: 15%
- Between 6,843,000 and 13,713,000 CRC: 20%
- More than 13,713,000 CRC: 25%
Note that taxes are paid by category. For example, an individual who earns 10,000,000 CRC ($20,000) annually will pay 0% on the first 2,747,000 CRC, 10% of the amount between 2,747,000 CRC and 4,102,000 CRC, and so on, so that they will pay at total of 1,178,050 CRC, or approximately $2,350 in taxes.
The Costa Rican fiscal tax year ends on October 31; taxes must be filed by December 15. Tax forms from the Treasury Department are available at certain national banks, including Banco de Costa Rica and Banco Popular. It is possible for taxpayers to complete these forms; alternatively, Costa Rican accountants charge very fair fees – starting around $50 – to prepare taxes and itemize deductions on the taxpayer’s behalf.