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

Taxation of U.S. Citizens Who Live and Work in Costa Rica

By Marion A. Keyes for the Costa Rica News

Since 1962, “qualified”US citizens living and working in Costa Rica have been able to exclude for U.S. tax purposes Costa Rican earned income and certain excessive housing cost amounts. Under the U.S. Internal Revenue Code, a “qualified individual” means a U.S. citizen or resident whose “tax home” is in a foreign country and who either: a) resides in a foreign country or countries for an entire taxable year, or b) is present in a foreign country or country during any period of twelve consecutive months for at least three hundred and thirty (330) full days in such period.

Resolving the question of “Which country is a person’s ‘Tax Home’?” can be difficult as it is a subjective, fact-based analysis. In general, an individuals “tax home” is the place:

1. Where they maintain a regular or principal place of business;
2. Where they are allowed to deduct their traveling expenses;
3. Where they reside for the entire taxable year; and
4. To which they have a “closer connection.”

A deeper level of analysis is then required to evaluate whether an individual has a “closer connection” to a particular country. Some of the factors that are taken into account include:

1. The location of the individual’s permanent home;
2. The location of the individual’s family;
3. The location of personal belongings, such as automobiles, furniture, jewelry, etc.;
4. The location of social, political, cultural or religious organizations with which the individual has a current relationship;
5. The location where the individual conducts his or her routine personal banking activities;
6. The location where the individual conducts business activities;
7. The location of the jurisdiction in which the individual holds a driver’s license;
8. The location of the jurisdiction in which the individual votes; and
9. The country of residence designated by the individual on forms and documents.

If you are a “qualified individual,” then you are able to exclude up to $92,900 of Costa Rican earned income for 2011.

In addition to the exclusion for Costa Rican earned income, a “qualified” U.S. taxpayer can exclude from Gross Income a portion of their housing costs.[7] This is a very detailed and formulaic computation and I will not subject you to further brain damage in this week’s article. If you would like to know more about this scintillating subject, I have provided the citation for you to geek out to your heart’s content.

Marion A. Keyes is a U.S.-based tax attorney who focuses on International Taxation, Asset Protection, and Estate Planning. He speaks English and Mandarin Chinese fluently and has enough Spanish that he has talked his way out of Costa Rican speeding tickets on no less than three occasions (“Me encanta este pais.”). Marion can be contacted via his website at www.taxlawgeek.com where he blogs on a number of tax law issues.

To read the full story visit the Costa Rica news here