Monday, January 2, 2012

Retirees and Taxes in Costa Rica

Recently I gathered some statistics about Tax-unfriendly states for retirees in the U.S. California leads the list. The Golden state is a retiree’s tax nightmare. Although Social Security benefits are exempt from state income taxes, all other forms of retirement income are fully taxed. Californians pay some of the highest income taxes in the U.S. State and local sales taxes can reach 10.5% in some cities and towns, although food and prescription drugs are exempt. Real estate is assessed at 100% of cash value, but taxes are capped at 1% of value. In Rhode Island Social Security benefits are taxed just like they are by the federal government. Rhode Island attacks virtually all other sources of retirement income, too. Starting this year, capital gains are taxed as ordinary income, eliminating the lower capital-gains rate in effect before 2010.

The nation’s smallest state also has one of the biggest statewide sales-tax rates — 7% — although it excludes food, medicine, some clothing and precious metal bullion. In Vermont there are no exemptions for retirement income in the Green Mountain State, except for Railroad Retirement benefits (which are exempt in every state). Out-of-state pensions are fully taxed. Vermont exempts medical devices and prescription and nonprescription drugs from its 6% sales tax. But it imposes a 9% tax on prepared foods, restaurant meals and lodging, and a 10% sales tax on alcoholic beverages served in restaurants. Real estate taxes have two components: school property tax and municipal property tax collected by towns and cities where the property is located. There are some other states that are slightly more kinder to retirees but don’t expect bargains. So, some retirees are looking to move abroad to stretch their pensions.

On the other hand you can save on some taxes by moving to Costa Rica. Home taxes are only a quarter of one percent of the declared value. For example, on a home that is assessed at $100,000 you only pay $250 in taxes. I know people whose home is worth more than that and they pay even less. There is also no capital gains tax on real estate.If you go into business your corporation can limit some of your tax liability here. Costa Rican corporations can also reduce your U.S. Taxes. I am not advocating tax avoidance but only stating that there some advantages to doing business here. Really the only taxes which are high here are those on imports and the sales tax. If you don’t buy a lot of imported items you won’t be affected that much by import duties. Sales tax is another matter. It is high here but since many items are less expensive than in the U.S. so you will still be saving money. The government has to get its operating money from some place to provide services so imports and sales are taxed.

I would like to mention that U.S. citizens including retirees are permitted to earn $91,500 tax free on active income (a job) while living abroad.

Article courtesy of Living in Costa Rica

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