Expat Living and U.S. Federal Income Taxes - HRG Costa Rica Vacations
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Expat Living and U.S. Federal Income Taxes

Filing the form

What you need to know about filing your taxes as an expatriate living in Costa Rica

It’s the end of another year in paradise so you can expect Uncle Sam to come calling. The IRS says, “Your worldwide income is subject to U.S. income tax, regardless of where you reside.” Even though you’ve been living in Costa Rica for years and even if you owe no tax, unless your income falls below a certain amount, you must file your 1040. If you are a U.S. citizen or resident alien, you must report ALL income, regardless of origin, earned or otherwise.

As a U.S. citizen or resident alien living abroad, you qualify for a few tax breaks if you’ve lived abroad at least 330 days in 12 months. The Foreign Earned Income Exclusion applies to any Costa Rican-sourced income you earned, allowing you to exclude up to US$100,800 from your foreign-sourced income.

If you rented your Costa Rican home, you’re eligible for the Base Housing Exclusion: the difference between your reasonable housing expenses (rent, repairs, utilities, etc.) and 16% of your FEIE amount.

The Foreign Tax Credit applies to a percentage of the Costa Rican taxes you pay on your Costa Rican-source income. You’ll also have to decide whether to claim the exclusion or the credit, no double dipping.

 

Points to remember:

  • Despite an automatic 2-month extension (June 15), pay your estimated tax to avoid penalties and interest.
  • Report in U.S. dollars, regardless of currency; use an annualized average exchange rate or a time-relevant rate.
  • Everyone on your 1040 needs a Social Security number or tax ID number.
  • There are tax implications for a non-U.S. resident/citizen spouse; you must also declare your spouse’s income.
  • Attach Form 8965 to your 1040 to comply with the Affordable Care Act and avoid a penalty.
  • The IRS Office in Philadelphia provides international tax assistance, as well as its customer service personnel at some embassies and consulates.
  • Report foreign bank accounts if aggregate foreign holdings exceed $10,000 at any time during the year while you’re living overseas or if those holding exceed $49,999 and you live stateside. The penalties are severe; foreign banks disclose that information.

 

The takeaway:

More detailed information about U.S. taxpayers living overseas and the tax law is available from IRS Publication 54. Unless you are supremely confident in your ability to understand and to apply tax law, consult an international tax expert or contact the IRS. We’re just pointing out a few things to think about come tax time.

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