US expatriate tax advice financial planning Costa Rica

Basic Information - Do you need to file a return? What is the Foreign Earned Income Exclusion, foreign dependents and spouses

Now that I am living in Costa Rica, do I need to file a U.S. income tax return?

Most U.S. citizens must file an annual income tax return on their worldwide income. Where you live has no bearing on your filing requirements. As a general rule, pretend your are living in the United States and if you think you need to file a return, you are probably correct. It is better to file than not.

What is the exclusion? My only income is from a Costa Rican company, and I pay taxes to Costa Rica. Do I have to include this income on my U.S. tax return?

U.S. citizens must include all worldwide income on their tax returns. This income could qualify for the $80,000 foreign earned income exclusion, but the exclusion is not automatic. You must include the income on your tax return and then exclude it by using IRS form 2555. If you do not meet the requirements for the exclusion, then the tax you paid to Costa Rica could possibly be taken as a foreign tax credit.

I live in Costa Rica and work for a U.S. company. Does this income qualify for the $80,000 foreign earned income exclusion?

If you meet the other requirements for the foreign earned income exclusion, the wages you receive from your U.S. employer can also be excluded. Your employer is still required to withhold Social Security and Medicare on your wages.

I have my own small business in Costa Rica and work as a self-employed person. My business is not incorporated. Does this income qualify for the foreign earned income exclusion?

Yes. This income can qualify for the exclusion just as if you were working for a U.S. employer. Caution: The exclusion is for federal income tax only. You will still be required to pay self-employment tax (Social Security and Medicare taxes) on your profits.

Last year I got married to a Costa Rican citizen. Can I file a joint return with my spouse, who is not a U.S. citizen?

Yes, but in doing so, you make the election to report your income and your spouse’s income worldwide. If your spouse does not work, or has very little or no income, it could be to your advantage to file a joint return. If your spouse does not have a taxpayer identification number, one must obtained.

My Costa Rican wife has a child from a previous marriage. The child is living with us. Can I claim the child as a dependent on my tax return?

To be claimed as a dependent, the dependent must be a U.S. citizen or a resident of the United States, or, in certain cases, a legally adopted child of a U.S. citizen.

Financial planning:
Unearned income, special cases, Costa Rican companies, problems expatriates face when they don't file

I receive dividends from a Costa Rican company. Are the dividends "foreign earned income" and do they qualify for the exclusion?

No. The foreign earned exclusion does not apply to income such as interest, dividends, capital gains, pensions, annuities and gambling. The exclusion applies strictly to earned income – in other words, your wages, salaries, bonuses, commissions, fees and other compensation for services rendered. Note: If you own 10% or more of a foreign corporation, you are required to file with your individual income tax return IRS form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations).

I receive interest from my Costa Rican bank account. Do I have to report this interest on my U.S. income tax return?

Yes. U.S. citizens must include in their income monies received worldwide. This includes interest and dividend income. In addition, if the aggregate value for your foreign accounts is greater that $10,000 at any time during the year, a Report of Foreign Bank and Financial Accounts must be submitted to the U.S. Treasury Department.

I transferred money from the United States to Costa Rica. Is there anything special that I need to do?

If a U.S. citizen has a financial interest in or signature authority over any financial accounts, including bank, securities or other types of financial accounts in a foreign country, and if the aggregate value of these accounts exceeds $10,000 at any time during the year, the accounts must be reported to the U.S. Treasury Department.

My business is incorporated as a Costa Rican S.A. (sociedad anónima, incorporated company). Currently it is not making a profit, and I am not receiving a paycheck. Does this have to be included on my tax return?

Yes. If you own 10% or more of a foreign corporation, you are required to file with your individual income tax return IRS form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations). This includes inactive S.A.s and corporations not making a profit.

I have been living in Costa Rica for years and have not filed a tax return. What should I do?

It is to your advantage to seek professional help to determine whether or not you need to file.

US Citizens Living in Costa Rica: Why File US Tax Returns?

You get married to a foreign person, you and your new spouse want to travel to the U.S. to see your family. One of the requirements for your spouse to obtain a US visa, is for you to produce copies of your past 3 years of tax returns
You have decided to return to the US. You have not filed a tax return for years. What will the IRS say when you start filing return again?. How do you answer the question, how were you able live and feed yourself?
You made some money and you want to invest some of this money in the US stock market or U.S. Banks. How do you explain where the money came from? Better have the paperwork ready to prove what you say.
The statue of limitations on tax returns starts when the return is filed, so if you do not file a return when does the timing for the statue of limitations start? The answer could be never.
You did well in your foreign country and would like to return to the US. Buy a home and put money into bank accounts. How do you prove where the money came from? Will the government think maybe it is drug money?
As an expatriate, you gain a large amount of wealth and would like to leave your wealth to your family who are also living in the U.S. How do they explain their inheritance? What problems will they have? Could they be faced with your non compliance penalties and taxes?
Passport renewal. At present you are not required to present copies of you prior year tax returns to the embassy to renew your passport, but with new and advanced technology, could this soon be a requirement?
Your child wants to go to college in the US. He or she may need some assistance. Will you have to prove your income? Will you have to produce copies of your past tax returns?
You have not filed a tax return for years. You have met all the minimum requirements for Social Security and now you want to receive your Social Security benefits.
If you are working in a foreign country, you can exclude from tax over $80,000.00 of earned income. The key here is exclude. Before you can exclude it, you first must include it by filing a return. If you do not file a tax return to exclude the income, you risk losing the exclusion, if you lose the exclusion, the IRS can include it in taxable income. Why take the chance? File a return.

As a professional tax preparer for over 25 years, specializing in U.S. citizens living in a foreign country, these are just a few of the more common ways a U.S. citizen can themselves in trouble by not filing a tax return.

For additional information or advice, contact Randall J. Lindner E.A.randy@usataxlatin.com or in Costa Rica call 228-2201

Expatriate tax advice: financial planning for US citizens living in Costa Rica courtesy: Randall J. Lindner E.A.