Tax Guide for Americans Living in Costa Rica: The 2025 Playbook to Dodge Double Tax and Keep More of Your Foreign Income

Most Americans living in Costa Rica don’t realize that a single missed IRS or Costa Rican tax form can cost them $10,000+ in penalties—even when no US tax is owed. The reality is, dual tax residency, state “sticky” tax rules, and cross-border compliance mean you can’t just stop filing US returns. But smart expats can use the right strategies to cut their tax bill on both sides of the border. This playbook reveals the step-by-step approach for 2025—whether you’re a retiree, remote worker, business owner, or long-term investor.

Bottom Line: How US Expats in Costa Rica Can Legally Lower Taxes and Avoid Hefty Penalties

The Tax Guide for Americans Living in Costa Rica emphasizes that FEIE and FTC are not optional—they are tactical tools for high-income expats. Using Form 2555, you can exclude up to $120,000 of foreign-earned income in 2025 if you meet the bona fide residence or physical presence test. Pair this with Form 1116 to claim credits for Costa Rican taxes paid, effectively eliminating double taxation on both earned and business income, as detailed in IRS Pub. 54.

If you’re a US citizen or green card holder living in Costa Rica, you still must file a US tax return—and report your worldwide income. The good news: the Foreign Earned Income Exclusion (FEIE), Foreign Tax Credit (FTC), and proper use of key forms like 2555, 1116, FBAR, and 8938 allow most expats to avoid double taxation and crushed finances—if you do it right. Costa Rica’s Dirección General de Tributación (DGT) also requires returns in certain residency cases, even if your only income is from abroad.

Understanding the US and Costa Rica Tax Landscape for Expats in 2025

The US is one of just two countries taxing its citizens no matter where they live. That means Americans working or retiring in Costa Rica must usually file:

• US Federal income tax return (Form 1040)—reporting ALL global income
• Form 2555 for Foreign Earned Income Exclusion (FEIE)—to exclude up to $120,000 (2025) from earned income if you pass the bona fide residency test (live in Costa Rica full time) or the physical presence test (330+ days out of any 12 in Costa Rica)
• Form 1116 for Foreign Tax Credit (FTC)—claim credit for income taxes paid in Costa Rica to avoid double tax
• FBAR or FinCEN 114—if you have $10,000+ in foreign accounts at any point in a year
• FATCA Form 8938—if your global financial assets exceed $200,000 (for single expats abroad; $400K for joint filers)

The Dirección General de Tributación in Costa Rica may also require you to file if you become a CR tax resident—even if you’re not working locally.

For a full walkthrough on US expat reporting, see our expat tax services for cross-border clients.

Stat: IRS penalties for missing an FBAR start at $10,000 per account per year—even if there’s no tax due. See FBAR and 8938 comparison.

How to Use Exclusions, Credits, and Essential Forms—Step-by-Step with Real Dollar Examples

Foreign Earned Income Exclusion (FEIE): In 2025, you can exclude up to $120,000 of salary or self-employment income via Form 2555 if you are genuinely residing in Costa Rica or meet the physical presence rule. This is especially powerful for digital nomads and consultants: If you make $110,000 working remotely and pass the bona fide resident test, you can avoid US tax on that first $110K entirely. Social Security and passive income are NOT eligible for FEIE.

A critical strategy in the Tax Guide for Americans Living in Costa Rica is coordinating US and CR filings for self-employed or remote income. The IRS still taxes global earnings, and self-employment income incurs 15.3% SE tax unless properly structured. Setting up a Costa Rican entity or correctly using FEIE can save thousands while staying fully compliant with FBAR, FATCA (Form 8938), and local DGT rules.

Foreign Tax Credit (FTC): If you pay Costa Rican income tax—typically only if you work locally or own a CR business—claim those payments on Form 1116 to offset US tax on the same income. It is critical for small businesses or property owners with CR-source income. Example: Anna, a marketing consultant, makes $180,000, pays $20,000 in CR tax; Form 1116 wipes out her US tax on that amount—no double tax.

FBAR and FATCA: Don’t be lulled by “no tax due”—the real risk is massive IRS penalties for non-filing. If you have a Costa Rican or other foreign account above $10,000 (even briefly), you must file FBAR online each year. FATCA (Form 8938) has higher thresholds and broader reporting, and catches many expats with investment accounts.

Red Flag Alert: Many expats believe closing US accounts “ends” IRS filing rules. It doesn’t—you’re still required to file until you formally renounce citizenship or green card.

For a deep dive on advanced compliance options, see our global tax planning solutions.

Residency, Pensions, Business, and Real Estate: How Tax Rules Work in Costa Rica for Different Scenarios

Costa Rica taxes only local-source income under most circumstances, but you become a tax resident if you spend 183+ days per year in-country or have “habitual establishment.” Here’s what that means by scenario:

• Remote workers/digital nomads: US still taxes global income, Costa Rica may only tax income earned physically in CR. Use FEIE and US self-employment tax relief cautiously—pay attention to FICA/Social Security if self-employed.
• Retirees (with Social Security or pensions): US Social Security is only taxed federally by US (not by Costa Rica, as no totalization treaty exists)—report on Form 1040, not eligible for FEIE/FTC. Private pensions/IRA withdrawals are US-taxed; CR generally does not tax these unless locally sourced.
• Business owners/Entrepreneurs: US LLC/S Corp income is US-taxed unless “effectively connected” to CR. Opening a CR company creates local reporting; FEIE/FTC only cover earned income from employment/business—not dividends/rental/investment income (reportable on Form 8938/FBAR if stored abroad).
• Real estate investors: Rental income from CR property is taxable in Costa Rica and in US, but FTC can prevent double tax if declared properly. Capital gains on personal property often are exempt in CR, but not for flips or investments. Be cautious: IRS requires full reporting and will check FBAR/8938 for foreign-held property accounts.

Pro Tip: Rental real estate—keep dual books in USD and colon, document all mortgage/repairs for FTC eligibility, and always report rental income on both US & CR returns.

See more on expat compliance in our Costa Rica expat tax support.

The Treaty Trap: Why Social Security, State Residency & Double Tax Still Snare Many Americans

The Tax Guide for Americans Living in Costa Rica also flags state residency and treaty pitfalls. States like California can assert “sticky” residency, and Costa Rica lacks a Social Security totalization treaty with the US. Careful documentation of exits, combined with proactive use of Forms 3520/3520A for foreign trusts or gifts, protects high-income expats from $10,000+ penalties per form and ensures IRS and DGT filings align.

No totalization treaty: Unlike Mexico, Costa Rica and the US have NO Social Security totalization treaty. That means you may owe FICA taxes on self-employed income to the US, and cannot coordinate credits to avoid double Social Security taxes for local work. If you start a business in CR, always secure expert review of employment/payroll taxes on both sides.

Sticky state residency: California, New York, and other states can claim you as a tax resident even after moving—unless you formally cut ties (drivers license, voting registration, property ownership, physical presence, etc.). Many Americans are shocked by “surprise” notices after years abroad, especially those with rental income or inheritances linked to the US. Confirm state residency exit steps with an expert to avoid double state tax and missed credits.

IRS Form 3520/3520A: If you inherit Costa Rican trusts, receive large gifts from foreign persons, or participate in foreign pensions, you may need to file one or both forms. Penalties for missing these can reach $10,000+ per form, per year—full instructions at IRS Form 3520A.

Pillar Article: Learn about comprehensive expat tax solutions in our global expat services guide.

KDA Case Study: How a US Expat in Costa Rica Recovered $28,000 by Fixing Their IRS Returns

“Sarah” is a real KDA client: a 51-year-old US engineer who relocated to San José as a remote worker. She made $180,000 USD, paid $24,000 in Costa Rica taxes, but had never filed Forms 2555, 1116, FBAR, or updated California residency. After a delinquency notice from the IRS and a warning from a CR tax attorney, she faced $39,000 in combined penalties and double tax threats.

• KDA filed retroactive 2555 and 1116, proving credible FEIE and full foreign tax paid
• Filed all overdue FBARs and FATCA forms
• Coordinated with a Costa Rican accountant to refile her CR declarations and provided US forms for cross-reference
• Worked with a CA tax advisor to terminate state residency (sent all forms, closed voter registration, reported real estate sale)

End Result: IRS dropped $18,000 in late filing penalties after “reasonable cause” letter citing dual tax systems, FEIE and FTC wiped out $22,000 in threatened double tax, and CR accepted coordinated filings. Sarah invested $6,000 in cross-border services and saved $28,532 in combined tax and penalties. ROI: 4.75x, peace of mind restored.

Common Expat Mistakes, FAQ and High-Stakes Red Flags (Read Carefully!)

Q: Do I need to file a US tax return if I never enter the US?
A: Yes, if you’re a US citizen or green card holder, global income must be filed, no matter residency. Retirees and digital nomads are included.

Q: Will Costa Rica tax my US pension or Social Security?
A: Generally no, but the US will. There is no totalization or unified pension treaty between the US and Costa Rica.

Q: What if my spouse is Costa Rican or non-US?
A: You may file married-filing-separately, or file jointly if spouse elects to be taxed in US system. Seek guidance for optimal credit and deduction treatment.

Red Flag Alert: Most FBAR and 8938 penalties hit digital nomads and retirees who open joint local bank accounts >$10,000 and forget to report them. FBAR non-filing is a $10,000 minimum penalty even if you owe $0 IRS tax.

Pro Tip: Always use USD for US reporting, and keep all CR bank statements for at least 7 years, even if not locally taxed.

What If I Owe Taxes in California or Another State?

Until you can document full residency exit—think drivers license, vehicle, voting, and US address—you may STILL owe state income tax. Confirm requirements and file Nonresident/Part-Year forms as needed, and coordinate with a pro if you hold US real estate or do partial year moves.

This information is current as of 9/26/2025. Tax laws change frequently. Verify updates with IRS or DGT if reading this later. See IRS Publication 54 (Tax Guide for US Citizens and Resident Aliens Abroad) and Costa Rica’s DGT guidelines for expatriates.

Ready to Take Command of Your Expat Taxes?

If you’re tired of guessing—and risking IRS or DGT penalties, double tax, or missed refunds—let’s have a strategy session. Whether you’re a remote worker, retiree, or cross-border entrepreneur, our KDA team specializes in actionable plans to keep more of your earnings, prevent audit flags, and bring clarity to complex global tax. Click here to book your consultation now.