Understanding Costa Rica’s Expat Taxes

Costa Rica is a popular destination for expats seeking a tropical paradise with a stable government, low cost of living, and beautiful scenery. While living in Costa Rica may seem like a dream come true, expats must understand the country’s tax system to avoid any unexpected surprises.

Costa Rica’s Tax System

Costa Rica has a progressive tax system, meaning the more you earn, the higher your tax rate. The highest tax rate is currently 25%, which applies to individuals earning more than ₡4,688,000 (approximately $7,800 USD) per year. However, Costa Rica’s tax laws apply differently to residents and non-residents.

To be considered a resident for tax purposes, you must meet certain requirements, such as spending more than 183 days in the country during a calendar year or having a home in Costa Rica that you live in for more than 183 days during a year. It’s important to note that if you are a resident for tax purposes, you are subject to paying taxes on your worldwide income, not just income earned in Costa Rica.

Who Qualifies as an Expat in Costa Rica?

Expats are individuals who live in Costa Rica but are not citizens or permanent residents. If you don’t meet the requirements to be considered a resident, then you are a non-resident for tax purposes. Non-residents are only taxed on income earned in Costa Rica.

As an expat, you may be subject to additional taxes, depending on your situation. For example, if you own a business in Costa Rica, you will be subject to corporate income tax. If you own property in Costa Rica, you will be subject to property taxes. It’s important to understand all the taxes you may be subject to as an expat in Costa Rica.

Understanding Income Tax Laws for Expats

Expats who are residents for tax purposes must file a tax return in Costa Rica each year. The tax year in Costa Rica is the same as the calendar year, and tax returns are due by March 15th of the following year.

Expats are subject to the same income tax rates as citizens and permanent residents. However, expats may be eligible for certain deductions and exemptions, such as the foreign income exclusion. This exclusion allows expats to exclude up to $107,600 of foreign earned income from their taxable income in 2020.

It’s essential to keep accurate records of all your income and expenses throughout the year to ensure you file your tax return correctly. Failure to file your tax return or pay your taxes on time can result in penalties and fines.

Additional Taxes Expats Need to Know About

In addition to income tax, expats may be subject to other taxes, such as sales tax and social security tax. Costa Rica has a value-added tax (VAT) of 13%, which is added to the price of goods and services. Some goods and services may be exempt from VAT, such as basic food items and medical services.

Expats who are employed in Costa Rica are subject to social security tax, which is paid by both the employer and employee. The social security tax rate is currently 10.25% for employees and 26.50% for employers.

Filing Your Taxes as a Costa Rica Expat

Filing your taxes as a Costa Rica expat can be a complex process. To ensure you file your taxes correctly, it’s best to seek the advice of a professional tax advisor who is experienced in Costa Rican tax laws.

You can also file your taxes online through the Costa Rican tax authority’s website. However, the website is only available in Spanish, so you may need to use a translation tool or seek assistance from someone who speaks Spanish.

Tips for Minimizing Your Expat Tax Liability in Costa Rica

There are several ways expats can minimize their tax liability in Costa Rica. One way is to take advantage of deductions and exemptions, such as the foreign income exclusion. Another way is to contribute to a retirement account, such as a 401(k) or IRA, which can reduce your taxable income.

Expats may also be able to claim tax credits for taxes paid in other countries, which can reduce their tax liability in Costa Rica. It’s important to keep accurate records of all taxes paid in other countries to ensure you file your tax return correctly.

In conclusion, understanding Costa Rica’s tax system is essential for expats living in the country. Expats must know whether they are residents or non-residents for tax purposes, understand the different taxes they may be subject to, and file their tax returns correctly and on time. Seeking the advice of a professional tax advisor and taking advantage of deductions and exemptions can help minimize your tax liability in Costa Rica.