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Tax Advantages for Expats Living in Costa Rica

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Living in Costa Rica is sunshine and sandy beaches, rainbows and afternoon naps in the hammock. It’s a lot of exactly what you think (and hope) it’ll be.

It’s also tax benefits for U.S. taxpayers. Huge benefits. Benefits to the tune of $200,000+ in reduced tax liability.

 And that buys a lot of paradise.

  1. The Foreign Earned Income Exclusion

If you live and work (or own a business) in Costa Rica, you may qualify for the U.S. Foreign Earned Income Exclusion (FEIE), which allows you to earn an established amount tax-free – as of 2017, $102,100 for single payers, or $204,200 if your U.S. spouse lives abroad, too. To qualify, you’ll need to file your standard tax return, plus Form 2555.

Note that the FEIE applies only to earned income – in other words, a salary, wages, self-employment income, etc. – and not passive income, to include capital gains, interest, dividends, etc.

To qualify for FEIE, you must also meet one of the two following requirements:

  • You are a legal resident of Costa Rica for an uninterrupted period. This uninterrupted period must include an entire tax year, typically a full calendar year. This can be difficult to meet your first year abroad, which brings us to:
  • You have been physically present in Costa Rica for 330 days of a 12-month period, not limited to a tax or calendar year. Short-term travel to the U.S. must be subtracted from your time abroad.
  1. Foreign Tax Credit

Speaking of income taxes, the Foreign Tax Credit (FTC) offers a dollar-to-dollar credit against your U.S. income tax liability, for any income taxes you pay to Costa Rica. Note that the FTC does not combine with the Foreign Earned Income Exclusion; in other words, you cannot take the Foreign Tax Credit for tax benefits under the FEIE (or other tax breaks).

  1. Foreign Housing Exclusion/Deduction

Here’s one for U.S. employees residing abroad: the Foreign Housing Exclusion/Deduction, which allows you to exclude or deduct certain earned income, as well as specific qualifying expenses: rent, insurance, utilities, etc.

Here’s how it works: The IRS establishes a “base housing amount” at 30% of the FEIE. As of 2017, this amount would be $30,630; from this, you must deduct the IRS-established “base housing amount,” calculated at 16% of FEIE, or $16,336 for 2017. With these numbers, your total “foreign housing cost amount” boils down to $14,294. This is the income you may exclude or deduct, if you qualify for the Foreign Housing Exclusion. 

  1. Other Tax Credits

In addition to foreign-only tax benefits, you’re also eligible for credits you have enjoyed back home, including the child tax credit, the American opportunity tax credit, and other standard credits. Speak with your tax professional for more details. 

  1. Financial Privacy

The benefits of living abroad don’t stop at the IRS. Did you know that your foreign-held real estate grants you a certain amount of legal financial privacy?

Whereas foreign bank accounts must be disclosed, real estate held abroad still grants you a certain amount of privacy. Foreign real estate held directly in your name does not have to be reported to the IRS. And that means, real estate can be a way to partially diversify your savings while maintaining a smidgen of privacy.

  1. Tax Deductions & Deferrals

When you own property in Costa Rica, you should know that certain property-related expenses – yes, even qualifying travel to Costa Rica, to make improvements or repairs to your home – may be tax deductible.

What’s more, if you purchased your home abroad through your IRA, any income you earn – for example, income from a short-term vacation rental – must be reinvested back into your IRA. The upside: your IRA income is tax deferred.

These are just six of the most common ways living abroad and owning Costa Rican real estate can provide real, quantifiable tax benefits. Speak with an experienced expat tax lawyer for more information on how to minimize your U.S. tax liability while residing abroad.

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