Taxation of U.S. Citizens Who Live and Work in Costa Rica
In a previous article, I explained the broad reach of the U.S. taxing jurisdiction and how it subjects U.S. citizens and residents to a worldwide taxing regime.[1] This is the starting point; i.e., โGross Income.โย From here, I will show you how this figure is reduced by various provisions within the U.S. Internal Revenue Code.
Since 1962, โqualifiedโ U.S. citizens living and working in Costa Rica have been able to exclude for U.S. tax purposes Costa Rican earned income and certain excessive housing cost amounts.[2] Under the U.S. Internal Revenue Code, a โqualified individualโ means a U.S. citizen or resident whose โtax homeโ is in a foreign country and who either: a) resides in a foreign country or countries for an entire taxable year, or b) is present in a foreign country or country during any period of twelve consecutive months for at least three hundred and thirty (330) full days in such period.[3]
Resolving the question of โWhich country is a personโs โTax Homeโ?โ can be difficult as it is a subjective, fact-based analysis.ย In general, an individuals โtax homeโ is the place:
- Where they maintain a regular or principal place of business;
- Where they are allowed to deduct their traveling expenses;
- Where they reside for the entire taxable year; and
- To which they have a โcloser connection.โ[4]
A deeper level of analysis is then required to evaluate whether an individual has a โcloser connectionโ to a particular country.ย Some of the factors that are taken into account include:
- The location of the individualโs permanent home;
- The location of the individualโs family;
- The location of personal belongings, such as automobiles, furniture, jewelry, etc.;
- The location of social, political, cultural or religious organizations with which the individual has a current relationship;
- The location where the individual conducts his or her routine personal banking activities;
- The location where the individual conducts business activities;
- The location of the jurisdiction in which the individual holds a driverโs license;
- The location of the jurisdiction in which the individual votes; and
- The country of residence designated by the individual on forms and documents.[5]
If you are a โqualified individual,โ then you are able to exclude up to $92,900 of Costa Rican earned income for 2011.[6]
In addition to the exclusion for Costa Rican earned income, a โqualifiedโ U.S. taxpayer can exclude from Gross Income a portion of their housing costs.[7] This is a very detailed and formulaic computation and I will not subject you to further brain damage in this weekโs article.ย If you would like to know more about this scintillating subject, I have provided the citation for you to geek out to your heartโs content.[8]
Next week I will be focusing on the U.S. tax consequences that occur when a U.S. citizen expatriates and thereafter becomes a citizen of Costa Rica.ย For those who have already made the move, I give you this …
So kiss me and smile for me
Tell me that youโll wait for me
Hold me like youโll never let me go
Cause Iโm leavinโ on a jet plane
Donโt know when Iโll be back again
Oh baby, I hate to go.[9]
Marion A. Keyes is a U.S.-based tax attorney who focuses on International Taxation, Asset Protection, and Estate Planning.ย He speaks English and Mandarin Chinese fluently and has enough Spanish that he has talked his way out of Costa Rican speeding tickets on no less than three occasions (โMe encanta este pais.โ).ย Marion can be contacted via his website at www.taxlawgeek.com where he blogs on a number of tax law issues.
Featured Image is contributed fromย SeniorLiving.org
[2] 26 U.S.C. ยง 911.
[3] 26 U.S.C. ยง 911(d)(1).
[4] 26 C.F.R. ยง 301.7701(c) and (d).
[5] 26 C.F.R. ยง 301.7701(d).
[6] 26 U.S.C. ยง 911(b)(2)(D).ย This amount is adjusted annually to account for inflation.
[7] 26 U.S.C. ยง 911(c).
[8] Id.
[9] Denver, John. โLeaving on a Jet Plane.โ Rhymes & Reasons. RCA Records. 1969.ย This song was originally written by John Denver in 1966 and was then made famous by Peter, Paul and Mary on their 1967 album 1700.