Costly Errors Retirees and Other Expats Make when Relocating to Countries Like Costa Rica

I am not a tax expert but here are some basic facts that potential retirees in Costa Rica or any country should be aware of.

Besides filing annual U.S. tax returns, expatriates need to report foreign bank accounts to the Treasury Department or risk the consequences. This procedure is called the FBAR and is the cumulative balance in your foreign financial accounts exceeds $10,000 at any time during the year. The penalty if you do not do not comply can be the greater of $100,000 or half of the account value for every year you failed to file.

expat-tax-guide

Any person with more than $200,000 and a couple with more than $400,000 in foreign financial assets at the end of the year—or with more than a respective $300,000 or $600,000 any time during the year—must also file IRS Form 8938, a Statement of Specified Foreign Financial Assets.

If you don’t comply with these requirements all foreign banks are required by law to close your account.

I just went through this process and it is very tedious but necessary to avoid huge problems as a foreigner living abroad.

Another serious error when you become an expat is closing your U.S. bank accounts. Although you will need to open a bank account in your new country to pay some local expenses, don’t close your U.S. accounts. Also keep most of your money in the U.S., you will also minimize the foreign assets you must report annually to the IRS.

Furthermore, if these is a financial crisis in your new country the less cash you keep their the better. You can always use an ATM to draw from your account in your home country. Due to unforeseeable events you may also have to return home and will need a bank account there.

You should also investigate the tax treaty between the country you retire in and the U.S. You may think that you will only have to pay taxes in one country, but that is not always the case. The IRS can expect you to pay in addition to what you have to pay in your new country.

Fortunately, if you have residency in Costa Rica you can earn up to 99,000 and qualify for a foreign tax exemption on an active income. Passive incomes do not enjoy this privilege.

Finally, U.S. Citizen’s earnings are subject to U.S. income tax regardless of how much you make or where you live. If you you fail to file a U.S. tax return, you may face penalties and interest, and in the worse case scenario criminal prosecution.

As far as state income tax is concerned if you do not own a home or other property in the state where you formerly resided and there are no other ties, then you should not be liable for state taxes. However, this can vary from state to state so do your research.

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