One of the biggest advantages of retiring in Costa Rica is its territorial tax system — the country does not tax your foreign-sourced income at all. But there is a catch many Americans overlook: the United States taxes its citizens on worldwide income *no matter where they live*. Here is what every US expat in Costa Rica needs to understand. (This is general education, not tax advice — always work with a qualified expat tax professional.)
You Still File a US Return — Always
This surprises many new expats: as a US citizen or green-card holder, you must file a US federal tax return every year, reporting your worldwide income, regardless of where you live or whether you owe anything. Moving abroad does not end your US filing obligation.
The good news: filing does not usually mean *paying* US tax twice, thanks to two key tools.
Tool 1: The Foreign Earned Income Exclusion (FEIE)
If you have earned income (wages or self-employment — not pensions or investments), the FEIE lets you exclude a large amount from US tax. For tax year 2025 (filed in 2026) the exclusion is $130,000, rising to $132,900 for 2026. You claim it on Form 2555 and must meet either the bona fide residence test or the physical presence test (330 days abroad in a 12-month period).
This is especially relevant for remote workers and digital nomads. Retirees living on pensions get less benefit here, since pension and Social Security income is not "earned income."
Tool 2: The Foreign Tax Credit (FTC)
The US and Costa Rica do not have a bilateral income tax treaty. Instead, the Foreign Tax Credit (Form 1116) lets you credit income taxes paid to Costa Rica against your US tax bill, dollar for dollar, avoiding double taxation. Since Costa Rica does not tax your foreign income, retirees often have little local tax to credit — but the FTC matters if you earn Costa Rican-source income.
The Reporting Traps: FBAR and FATCA
Beyond income tax, the US requires you to *report* foreign accounts. These are information returns — miss them and the penalties are steep even when no tax is owed.
FBAR (FinCEN Form 114). If the combined value of your foreign financial accounts exceeds $10,000 at any point during the year, you must file an FBAR with the US Treasury. This is easy to trigger — a Costa Rican bank account used for a Rentista deposit or daily expenses can put you over.
FATCA (Form 8938). Filed with your tax return if your foreign financial assets exceed certain thresholds. For Americans living abroad, the thresholds start at $200,000 at year-end ($300,000 at any time) for single filers, and $400,000 ($600,000 at any time) for married filing jointly.
Social Security and Pensions
Your US Social Security and pension income remains taxable by the US under normal rules, but not by Costa Rica. You can generally have Social Security paid into a US or Costa Rican account. There is no Costa Rican tax on these foreign payments — the territorial system is one of the country's biggest retirement draws.
A Simple Compliance Checklist
- [ ] File Form 1040 annually (worldwide income)
- [ ] Claim the FEIE (Form 2555) if you have earned income, or the FTC (Form 1116) as appropriate
- [ ] File the FBAR if foreign accounts exceed $10,000
- [ ] File Form 8938 if you cross the FATCA thresholds
- [ ] Note the automatic 2-month extension to June 15 for Americans abroad (interest still accrues from April)
- [ ] Keep records of any Costa Rican income and taxes paid
The Bottom Line for US Retirees
For most American retirees, Costa Rica's territorial system means no Costa Rican tax on your pension and investments, while smart use of the FEIE/FTC plus diligent FBAR/FATCA reporting keeps you compliant — and rarely double-taxed — back home. The key is filing correctly and on time.
We Handle Residency — You Handle Taxes With a Pro
Legal Residency Costa Rica manages your immigration process end to end so you can enjoy the territorial tax benefits as a legal resident. For your US filings, we recommend pairing with a specialist expat tax preparer.
Request Your Free Consultation | Read the Tax Benefits Guide | Review Residency Services
Call us: +506-8385-5008 | Email: legalresidencycostarica@outlook.com | Office: Santa Ana, Costa Rica
Costa Rica won't tax your income — let us help you live here legally. Contact us today.
