Costa Rica’s relaxing beaches and vibrant culture make it a hotspot for American expats looking for a change of pace. Those expats still have to file taxes with the IRS, even though they no longer live in the United States.
The American government taxes citizens on their worldwide incomes regardless of where they live. Moving abroad to Costa Rica could generate new filing requirements for expats, such as IRS Form 8938 and a Report of Foreign Bank and Financial Accounts (FBAR). That said, expats can also benefit from new tax perks, like the foreign earned income exclusion (FEIE) and the foreign tax credit (FTC). These perks can help you keep your tax liability low while complying with IRS requirements. To benefit from expat-specific exclusions or credits, we can file your taxes before Tax Day. Though filing extensions exist for expats, aiming for the normal filing deadline is often important to avoid interest accruing on unpaid tax or risk penalties for failure to file.
Call (541) 362-9127 to learn more about what the tax CPAs for U.S. expats at US Tax Help can do for you during tax season.
Tax Considerations for Expats Who Live in Costa Rica
There are many tax considerations for expats who live in Costa Rica, namely that their U.S. reporting responsibility still exists. Expats may gain additional filing requirements based on their foreign financial holdings and benefit from new tax exclusions or credits, which our tax CPAs can explain when preparing and planning your U.S. return.
Continued Tax Liability
The first thing Americans who expatriate to Costa Rica should know about their IRS tax liability is that it continues, even after moving abroad. Unlike most other countries, the U.S. operates within a citizenship-based taxation system. While many other countries, including Costa Rica, impose taxes based on residency, the United States can keep taxing your worldwide income wherever you live.
Our tax CPAs for U.S. expats living in Costa Rica can complete IRS Form 1040. In doing so, we will report their annual incomes and provide the necessary information about their foreign employers. If you work remotely for an American company while living in Costa Rica, you must also report that income using Form 1040 as you normally would.
New Reporting Liabilities
Expats often have to file international information returns if their foreign financial holdings and assets are above reporting thresholds. The two information returns expats typically have to file are IRS Form 8938 and Financial Crimes Enforcement Network (FinCEN) Form 114, also known as an FBAR.
Expats use Form 8938 to report their specified foreign assets. These include bank and financial accounts held with foreign financial institutions and other assets, which our tax CPAs can clarify based on your holdings. Expats in Costa Rica with over $200,000 in foreign assets on the final day of the tax year need to file Form 8938, as do expats with over $300,000 at any time in the tax year. If you moved to Costa Rica with your spouse, who is also an American taxpayer, and you file your return together, the threshold to report doubles.
Form 114 is used to report foreign bank accounts with over $10,000. Filing Form 8938 with the IRS will not absolve you of your responsibility to file Form 114 with the FinCEN. Failure to file Form 114 when required could result in expensive financial penalties. The maximum civil penalty for failure to file Form 114 is $100,000 or half the contents of the foreign bank accounts, whichever amount is greater. There are also financial penalties for failure to file Form 8938, which our tax CPAs can help you avoid.
Potential Tax Breaks
Relocating to Costa Rica comes with new filing requirements for expats, but it also comes with potential tax breaks. For example, the IRS lets expats omit up to $1265,000 of their foreign wages from taxation in the United States. We can help expats get the FEIE by completing IRS Form 2555, which we will attach to your finished Form 1040.
Furthermore, expats may get the FTC, which eliminates instances of double taxation. Using Form 1116, we can cite income taxes you paid to the Costa Rican government, which the IRS will then apply to your U.S. tax liability, lowering it dollar for dollar.
To get either tax perk, you must pass certain IRS residency tests, such as the bona fide resident or physical presence tests. Based on your ties to Costa Rica and how long you have lived there, we can confirm if you qualify for the FEIE and the FTC.
Even after moving abroad, expats may qualify for some of the same deductions or credits they used to lower their tax liabilities while living domestically in the United States. For example, expats can still claim the child tax credit for dependents, and we can explore all potential benefits when planning your taxes.
Reporting Deadlines and Extensions
The reporting deadline for expat tax returns is Tax Day. This typically falls in mid-April, and expats should prioritize submitting their returns on time. Although a two-month extension is granted to expats living abroad, relying on it could be risky if you owe taxes to the IRS. Even with the extension, interest will begin accruing on unpaid tax on the original due date.
In certain situations, expats may ask for an extra six months from Tax Day to send their returns to the IRS, but interest will continue to accrue.
Missing original filing deadlines or extended deadlines could result in costly penalties. For example, taxpayers might be fined for failing to file tax and additional information returns, like IRS Form 8938 and FinCEN Form 114. Furthermore, filing taxes late could disqualify expats from benefiting from exclusions and credits that could otherwise lower their taxable incomes. We can prevent this by carefully reviewing your finances and assets, planning and preparing your tax returns and supplemental schedules, and filing the necessary documents with the IRS and the FinCEN on time.
Call Us for Help with Your US Taxes from Costa Rica
Call US Tax Help’s tax CPAs for U.S. expats at (541) 362-9127 for assistance today.