Taxation of U.S. Citizens Who Live and Work in Costa Rica

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    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., “Gross Income.”  From here, I will show you how this figure is reduced by various provisions within the U.S. Internal Revenue Code.

    Since 1962, “qualified” 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 “qualified individual” means a U.S. citizen or resident whose “tax home” 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 “Which country is a person’s ‘Tax Home’?” can be difficult as it is a subjective, fact-based analysis.  In general, an individuals “tax home” is the place:

    1. Where they maintain a regular or principal place of business;
    2. Where they are allowed to deduct their traveling expenses;
    3. Where they reside for the entire taxable year; and
    4. To which they have a “closer connection.”[4]

    A deeper level of analysis is then required to evaluate whether an individual has a “closer connection” to a particular country.  Some of the factors that are taken into account include:

    1. The location of the individual’s permanent home;
    2. The location of the individual’s family;
    3. The location of personal belongings, such as automobiles, furniture, jewelry, etc.;
    4. The location of social, political, cultural or religious organizations with which the individual has a current relationship;
    5. The location where the individual conducts his or her routine personal banking activities;
    6. The location where the individual conducts business activities;
    7. The location of the jurisdiction in which the individual holds a driver’s license;
    8. The location of the jurisdiction in which the individual votes; and
    9. The country of residence designated by the individual on forms and documents.[5]

    If you are a “qualified individual,” 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 “qualified” 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 week’s article.  If you would like to know more about this scintillating subject, I have provided the citation for you to geek out to your heart’s 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.  For those who have already made the move, I give you this …

    So kiss me and smile for me

    Tell me that you’ll wait for me

    Hold me like you’ll never let me go

    Cause I’m leavin’ on a jet plane

    Don’t know when I’ll 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.  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 (“Me encanta este pais.”).  Marion can be contacted via his website at where he blogs on a number of tax law issues.

    Featured Image is contributed from

    [2] 26 U.S.C. § 911.

    [3] 26 U.S.C. § 911(d)(1).

    [4] 26 C.F.R. § 301.7701(c) and (d).

    [5] 26 C.F.R. § 301.7701(d).

    [6] 26 U.S.C. § 911(b)(2)(D).  This amount is adjusted annually to account for inflation.

    [7] 26 U.S.C. § 911(c).

    [8] Id.

    [9] Denver, John. “Leaving on a Jet Plane.” Rhymes & Reasons. RCA Records. 1969.  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.

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