Sep 5, 2025
Costa Rica receives a large contingent of retired U.S. citizens and expatriates. According to the U.S. Department of State, approximately 120,000 Americans live in the country, concentrated primarily in the regions of San José, Guanacaste, and Puntarenas. The U.S. tax system is based on the principle of worldwide taxation, so all citizens must report their worldwide income to the IRS, regardless of where it is earned.
With the IRS, U.S. citizens residing in Costa Rica must file their annual income tax return, Form 1040. Foreign-earned income is subject to U.S. tax, although special benefits may apply. For example, they can claim the foreign earned income exclusion (Form 2555) and the foreign tax credit (Form 1116) to offset taxes paid in Costa Rica. In addition, any citizen with foreign bank accounts totaling more than $10,000 must report them on the FBAR (FinCEN Form 114). Additionally, under FATCA, significant foreign financial assets must be declared on IRS Form 8938.
Costa Rica signed an Intergovernmental Agreement (Model 1) with the United States for FATCA. This requires Costa Rican financial institutions to report accounts held by US persons to the IRS. Therefore, local banks often require their US clients to submit Form W-9 (self-certification of tax status) and, in some cases, sign statements confirming their status as US taxpayers. A client who does not cooperate may be classified as "high risk," and if they fail to comply with FATCA requirements, the institution would be required to withhold up to 30% of certain US-sourced payments.
Costa Rica is a member of the OECD and adopts international transparency standards (FATCA/CRS). However, there is no double taxation treaty with the United States. In practice, this means that each country applies its own rules: Costa Rica primarily taxes income generated within Costa Rica, while the United States taxes the worldwide income of its citizens. Although there is no bilateral agreement, the US tax system allows for a credit for income taxes actually paid in Costa Rica, avoiding double taxation in most cases.
Implications and risks of non-compliance
Failure to comply with these tax obligations carries severe penalties. Failure to file an FBAR or Form 8938 can result in initial fines of $10,000 (which increase if the return is delayed), and deliberate failure to comply can result in penalties of up to 50% of the account balance per year. Since Costa Rica reports accounts held by U.S. citizens to the IRS, the risk of detection is high. Local financial institutions may classify clients who fail to submit the required information as high risk and withhold up to 30% of U.S.-source funds. Beyond fines and interest, failure to comply can result in extensive audits, loss of tax benefits, difficulties with international loans, and reputational damage for both the taxpayer and their companies or partners.
Sources: Statistics on U.S. residents in Costa Rica; IRS regulations on worldwide taxation, foreign income exclusion, tax credit, FBAR, and FATCA; Costa Rica FATCA/CRS reports and tax compliance recommendations.