New US Tax Laws and Their Impact on American Expats in Costa Rica

As the global tax landscape continues to evolve, American expats in Costa Rica face unique challenges due to the complex interplay between US and Costa Rican tax laws. This post will explore recent developments and potential changes in US tax laws that could affect American expats living in Costa Rica.

Introduction to US Tax Obligations for Expats

US citizens, regardless of their residence, are required to file taxes with the IRS and report their worldwide income. This includes income earned in Costa Rica, which can lead to double taxation if not managed properly. US expats can mitigate this through the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC).

Recent Developments in US Tax Laws

While there are no immediate changes to individual taxation, any shift towards a territorial system could potentially simplify tax obligations for expats. However, this would require significant legislative changes.

Foreign Earned Income Exclusion (FEIE)

The FEIE allows expats to exclude up to $130,000 of foreign-earned income from US taxes in 2025. To qualify, expats must meet either the Physical Presence Test or Bona Fide Residence Test.

Foreign Tax Credit (FTC)

The FTC helps eliminate double taxation by allowing expats to offset their US tax liability with taxes paid to the Costa Rican government. This is particularly beneficial if the foreign tax rate is higher than the US rate.

Costa Rican Tax System Overview

Costa Rica operates on a territorial tax system, meaning only income sourced from within Costa Rica is taxed. However, tax residents must report their worldwide income, which includes salaries, investments, and rental income from anywhere in the world.

Tax Residency Rules

Costa Rica determines tax residency based on the 183-day rule. If you spend 183 days or more in the country within a calendar year, you become a tax resident.

Property Tax Considerations

Property taxes in Costa Rica are relatively low at 0.25% of the declared value annually. However, luxury homes face an additional tax ranging from 0.25% to 0.55%.

Navigating Dual Tax Systems

Many expats must manage both Costa Rican and US tax obligations. The lack of a US-Costa Rica tax treaty or totalization agreement means that expats may face dual taxation if not managed properly.

Strategies to Mitigate Double Taxation

Foreign Earned Income Exclusion (FEIE): Excludes up to $130,000 of foreign-earned income from US taxation.
Foreign Tax Credit (FTC): Allows dollar-for-dollar credits for foreign income taxes paid, which can reduce or eliminate US tax liability.

Conclusion

The potential changes in US tax laws could offer relief for American expats in Costa Rica by simplifying compliance and reducing double taxation risks. However, these changes are speculative and require legislative action. In the meantime, expats should continue to utilize available tax credits and exclusions to minimize their tax liabilities.

This post provides an overview of how new US tax laws might impact American expats in Costa Rica, focusing on potential simplifications and increased international cooperation.

Additional Tips

Consult a Tax Professional: Given the complexity of both US and Costa Rican tax laws, it's essential to seek professional advice to ensure compliance and optimize tax strategies.
Stay Informed: Regularly check for updates on tax reforms and their implementation timelines to adjust your financial planning accordingly.
Use Available Tax Credits: Utilize the FEIE and FTC to minimize double taxation and reduce your tax liability. Arcadia Team