Do US Citizens Pay Taxes While Living in Costa Rica?
Yes. The United States taxes citizens on worldwide income regardless of where they live. Moving to Costa Rica does not change your US tax obligations. However, Costa Rica's territorial tax system means only Costa Rica-sourced income is taxed locally. Your Social Security, pensions, IRA distributions, and US investments are not taxed by Costa Rica. You are not double-taxed, but you have reporting requirements (FBAR, FATCA) that carry severe penalties if missed.
The Foundational Rule
The US is one of only two countries in the world that taxes citizens on worldwide income regardless of residence. Moving abroad does not change this.
According to the IRS, approximately 4.4 million US citizens live abroad (State Department, 2023 estimate), and per the Taxpayer Advocate Service, a significant percentage of expats struggle with compliance, not because they're trying to evade taxes, but because the rules are genuinely complex. The State Department estimates roughly 450,000 US citizens reside in Central America alone.
What changes is complexity. You now have reporting requirements for foreign accounts, possible exclusions for income earned abroad, and state-level considerations that vary dramatically.
"The most common tax mistake I see isn't failing to file. It's failing to file the ancillary forms. People file their 1040 and think they're done. Then they miss the FBAR, or FATCA, or Form 5471 for their Costa Rican S.A., and each missed form carries its own five-figure penalty." Brennan Vitali, CFP®, Vitality Wealth Planning
This is not DIY territory. What follows is the vocabulary and awareness you need to work effectively with a qualified cross-border tax professional.
What You Still Owe the US
As a US citizen living in Costa Rica, you are taxed on:
- Social Security benefits
- Pension income
- Investment income (dividends, interest, capital gains)
- Rental income (US or foreign)
- Business income
- IRA and 401(k) distributions
- Any other income from any source, anywhere
Your filing deadlines and obligations remain the same. Expats receive an automatic two-month extension (to June 15) for filing, not for payment. If you owe, interest accrues from April 15.
FBAR: Foreign Bank Account Report
If the aggregate total of all your foreign financial accounts exceeds $10,000 at any point during the year, you must file an FBAR (FinCEN Form 114).
| Detail | What You Need to Know |
|---|---|
| Threshold | $10,000 aggregate maximum across all foreign accounts |
| What counts | Bank accounts, accounts you're a signatory on, accounts where you have authority |
| How to file | Electronically through BSA E-Filing (not with your tax return) |
| Deadline | April 15, automatic extension to October 15 |
| Non-willful penalty | Up to $16,536 per report per year (inflation-adjusted from $10,000 statutory base; per Bittner v. United States, 2023, penalties apply per report, not per account) (31 USC 5321) |
| Willful penalty | Greater of $100,000 or 50% of account balance, plus criminal penalties |
If you have a Costa Rican bank account with any meaningful balance, you almost certainly need to file an FBAR. Do not overlook this.
FATCA: Form 8938
The Foreign Account Tax Compliance Act requires reporting specified foreign financial assets on Form 8938, filed with your tax return.
Thresholds for expats living abroad:
| Filing Status | Year-End Threshold | Any-Point Threshold |
|---|---|---|
| Single | $200,000 | $300,000 |
| Married filing jointly | $400,000 | $600,000 |
"Specified foreign financial assets" includes bank accounts, investment accounts, foreign stock/securities, partnership interests, mutual funds, and certain other instruments.
FBAR and FATCA are separate requirements with different thresholds, forms, and filing locations. You may need both.
Foreign Earned Income Exclusion (FEIE)
If you have earned income while abroad (wages, self-employment, consulting, not investment income or pensions), you may exclude a significant amount from US taxation ($132,900 for 2026, indexed annually per IRS 2026 inflation adjustments). The exclusion is claimed on Form 2555. This is especially relevant for digital nomad visa holders and people working remotely from Costa Rica.
To qualify, you must meet either:
- Bona Fide Residence Test: resident of a foreign country for an entire tax year
- Physical Presence Test: physically present abroad for 330+ full days in a 12-month period
Important notes:
- FEIE only applies to earned income, not Social Security, pensions, or investments
- Must actively elect by filing Form 2555
- Revoking the election has consequences. Cannot re-elect for 5 years without IRS approval
- The Foreign Tax Credit may be more beneficial in some cases. Model both with your advisor.
Foreign Tax Credit
If you pay income taxes to Costa Rica, you can claim a Foreign Tax Credit (Form 1116) on your US return to avoid double taxation.
For most retirees on US-sourced income, this isn't relevant, because Costa Rica isn't taxing that income. But if you have Costa Rica-sourced income (local business, CR rental property), the credit becomes important.
No US-Costa Rica Tax Treaty
The US and Costa Rica have no bilateral income tax treaty. This means:
- No treaty-based provisions for reducing withholding rates
- No formal mechanism for resolving double-taxation disputes
- You rely on domestic US law (FEIE, Foreign Tax Credit) and Costa Rica's territorial system
This makes careful planning even more important.
State Tax: The Surprise That Catches People
Even after leaving the US, your former state may still consider you a tax resident.
| State Type | What to Expect |
|---|---|
| No income tax (FL, TX, NV, WA, WY, SD, AK, TN, NH) | No state tax concern |
| Clean release states | Release residency when you establish domicile elsewhere |
| Sticky states (CA, NM, VA, others) | Aggressive residency claims that follow you abroad |
California is notoriously aggressive. According to the California Franchise Tax Board, the state uses a multi-factor "closest connections" test that considers where your family lives, where you maintain property, professional licenses, and voter registration. Per published FTB guidance, even leaving the country does not automatically end your CA tax residency. Consult a CA tax specialist.
Strategy: If you live in a state with income tax, it may be worth establishing residency in a no-income-tax state before moving abroad.
Costa Rica's Tax System: The Good News
Costa Rica operates a territorial tax system: only income sourced within Costa Rica is subject to local tax.
Not taxed by Costa Rica:
- Social Security
- US pensions
- IRA/401(k) distributions
- US investment income (dividends, interest, capital gains)
- US rental income
Taxed by Costa Rica:
- Salary from a Costa Rican employer
- Income from a business operating in Costa Rica
- Rental income from Costa Rican property
- Interest earned in Costa Rican bank accounts
Costa Rican income tax rates (on CR-sourced income):
| Annual Income (approx. USD) | Rate |
|---|---|
| Up to ~$7,800 | 0% |
| $7,800–$11,500 | 10% |
| $11,500–$19,300 | 15% |
| $19,300–$38,700 | 20% |
| Above $38,700 | 25% |
Other Costa Rica taxes to know:
- VAT (IVA): 13% on most goods and services
- Property tax: ~0.25% of registered value annually
- Capital gains on real estate: 15% on gain from sale
- Luxury home tax: Progressive 0.25–0.55% on construction value above ~$235,000
Your Filing Checklist
Even living in Costa Rica, you must:
- File a US federal income tax return annually
- File FBAR (FinCEN 114) if foreign accounts exceed $10,000
- File FATCA Form 8938 if foreign assets exceed thresholds
- Take Required Minimum Distributions from retirement accounts per IRS RMD rules
- File state tax returns if your former state still claims you
- Report foreign trusts, gifts from foreign persons above thresholds, or ownership in foreign corporations (see our estate planning for expats guide for trust and inheritance considerations)
The Most Important Action
Hire a tax professional experienced with expat filing. This is a strong recommendation, not a suggestion.
Look for a CPA or Enrolled Agent who specializes in expat returns. Ask how many expat clients they serve. Ask if they are familiar with FBAR, FATCA, and Form 2555. If those terms are not part of their regular vocabulary, keep looking.
FAQ
Do I have to file US taxes if I live in Costa Rica?
Yes. US citizens must file federal income tax returns regardless of where they live. You may also need to file FBAR and FATCA reports for foreign accounts and assets. Expats get an automatic two-month filing extension to June 15, but any tax owed accrues interest from April 15.
Is my Social Security taxed in Costa Rica?
No. Costa Rica's territorial tax system does not tax US-sourced income, including Social Security. Your Social Security remains subject to US federal tax (up to 85% may be taxable depending on total income), but Costa Rica adds no additional tax.
What happens if I don't file an FBAR?
Penalties are severe. Non-willful violations can result in fines up to $16,536 per report per year (inflation-adjusted from the $10,000 statutory base). After the 2023 Supreme Court ruling in Bittner v. United States, penalties apply per annual report, not per account. Willful violations can result in the greater of $100,000 or 50% of the account balance, plus potential criminal penalties. FBAR compliance is not optional.
Can I avoid state income tax by moving to Costa Rica?
It depends on your state. States with no income tax (Florida, Texas, Nevada, etc.) aren't a concern. But "sticky" states like California, New Mexico, and Virginia may continue to claim you as a resident even after you leave the country. Research your state's specific rules or establish residency in a no-tax state before moving.
Do I need a special tax advisor for living abroad?
Yes. Cross-border tax filing involves FBAR, FATCA, potential FEIE, Foreign Tax Credits, and interactions between US and Costa Rican tax systems, plus possible state tax obligations. A general domestic CPA is not sufficient. Look for a professional who specializes in US expat tax returns.
Brennan Vitali is a CFP® and cross-border financial planner whose family splits time between the US and Costa Rica. Tax planning is a critical part of every relocation strategy. Take the Readiness Quiz or book a discovery call.