By Gabriela Páez
If you are a U.S. citizen living in Costa Rica, it’s important to stay informed about your tax obligations to the IRS. Even though you reside outside the U.S., you are still subject to the worldwide income tax policy, which means you must file certain forms and, in some cases, pay taxes in the U.S.
Here’s what you need to know to fulfill your tax responsibilities and take advantage of available tax benefits.
Do You Have to File Taxes in the U.S. Even if You Live in Costa Rica?
Yes. As a U.S. citizen, the IRS requires you to report all your worldwide income, regardless of where you live or work. This means that even if all your income comes from Costa Rica, you may still need to file a U.S. tax return using Form 1040 if you exceed the following thresholds for 2025:
Single (under 65 years old): $14,600 USD
Married filing jointly (both under 65 years old): $29,200 USD
Head of household (under 65 years old): $21,900 USD
If you exceed these limits, you must file a tax return in the U.S. However, there are tax benefits that can help you reduce or even eliminate the amount you owe.
One of the most important is the Foreign Earned Income Exclusion (FEIE), which allows you to exclude up to $130,000 USD of foreign-earned income in 2025. To qualify, you must meet one of these requirements:
Bona Fide Residence Test: You were a legal resident of Costa Rica for the entire tax year.
Physical Presence Test: You were physically present in Costa Rica for at least 330 days within a consecutive 12-month period.
If you meet one of these requirements, you can claim this exclusion by filing Form 2555.
Another option is the Foreign Tax Credit (FTC), which allows you to offset U.S. taxes with the taxes you have already paid in Costa Rica, helping to prevent double taxation.
IRS Amnesty Programs for Late Filers
If you haven’t filed your U.S. taxes for a while, the IRS offers amnesty programs that may help you get back into compliance without facing massive penalties.
One of the most commonly used programs is the Streamlined Foreign Offshore Procedures, designed for taxpayers who failed to file their tax returns in previous years but did not do so with the intent to evade taxes. To qualify, you must:
Submit the last three years of tax returns (Form 1040).
Submit the last six years of FBAR reports if you have foreign bank accounts with a balance exceeding $10,000 USD at any point in the year.
Explain to the IRS that your failure to comply was accidental and not intentional.
If you have filed tax returns but forgot to report foreign bank accounts (FBAR or FATCA), you can use a simpler process to submit the missing forms without penalties.
Tax Deadlines for 2025
Even if you live outside the U.S., the IRS enforces the same tax deadlines:
April 15, 2025: Deadline to file your tax return and pay any taxes owed.
June 15, 2025: Automatic extension for expats. However, if you owe taxes, interest will start accruing from April 15.
October 15, 2025: Final deadline if you requested an additional extension using Form 4868. Keep in mind that failing to file by this date could result in penalties of up to $10,000 USD.
If you have foreign bank accounts in Costa Rica and the total balance exceeds $10,000 USD at any time during the year, you must also file FBAR (FinCEN Form 114) by April 15.
Additionally, if your foreign financial assets exceed $50,000 USD (or $100,000 USD if filing jointly with your spouse), you must file Form 8938 (FATCA) along with your tax return.
Many expats also buy property abroad and later sell it for a profit. It’s important to remember that any capital gains from real estate sales in Costa Rica must be reported to the IRS.
What Changes Could Happen with Trump in Power?
Donald Trump has openly discussed the possibility of eliminating double taxation for Americans living abroad. If implemented, this would mean that expats would only pay taxes in their country of residence and not in the U.S.—something many consider a much-needed tax relief.
In a recent interview with the New York Post, Trump stated:
“It’s not fair that American citizens living abroad have to pay taxes twice. We’re going to change that and put Americans first.” (New York Post)
If this measure goes into effect, it would be great news for expats in Costa Rica and other countries, as it would significantly simplify their tax obligations. However, as of now, there is no formal proposal in Congress, so it remains a possibility rather than an immediate reality.
On the other hand, some analysts warn that eliminating double taxation could create loopholes for high-net-worth individuals to avoid paying taxes in the U.S. According to Bloomberg Línea:
“While eliminating double taxation is appealing, it could also open the door for wealthy individuals to avoid paying taxes in the U.S. The administration will need to establish mechanisms to prevent this policy from being used as a tax evasion strategy.” (New York Post)
This means that, although the idea is on the table, it is likely that if implemented, it will include restrictions to prevent potential abuses.
How Does FATCA Affect Expats in Costa Rica?
The Foreign Account Tax Compliance Act (FATCA) is a U.S. law designed to prevent tax evasion through foreign bank accounts. It directly affects U.S. citizens in Costa Rica because it requires Costa Rican financial institutions to report any accounts owned by U.S. citizens or tax residents to the IRS.
This means that if you have bank accounts in Costa Rica with balances exceeding $50,000 USD, your bank may automatically report them to the IRS. Some key points about FATCA in Costa Rica include:
Costa Rican Banks’ Reporting Obligations: Financial institutions in Costa Rica must disclose information about accounts held by U.S. citizens, meaning the IRS can access details about your accounts even if you don’t report them yourself.
Form 8938 Requirement: If your foreign financial assets exceed the specified thresholds, you must report them on your tax return.
Bank Account Closures: Some banks in Costa Rica have closed accounts held by U.S. citizens to avoid the complications of complying with FATCA regulations.
In summary, FATCA allows the IRS to monitor expats’ foreign bank accounts, making it even more crucial to accurately report all accounts and foreign assets.
What Should You Do Now?
If you are a U.S. citizen living in Costa Rica, the most important thing is to stay informed and ensure you comply with tax regulations. Here are some key recommendations:
File your tax return on time to avoid IRS penalties.
Take advantage of tax benefits, such as the foreign earned income exclusion and foreign tax credit.
If you have bank accounts in Costa Rica, check if you need to file FBAR or FATCA.
For now, the law remains unchanged. So the best course of action is to comply with existing regulations while staying alert for any tax reforms that could benefit U.S. citizens abroad.
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