US expat taxes in Costa Rica run on two tracks that rarely line up. Costa Rica's largely territorial system, administered through the Direccion General de Tributacion, taxes residents only on income sourced inside the country, while the United States taxes its citizens and green card holders on every dollar of worldwide income regardless of where they live. That mismatch means US-source income earned by an American in Costa Rica is taxed only by the US, with no Costa Rican tax on it at all and therefore nothing for the Foreign Tax Credit to credit against it. Retirees on a pensionado or rentista visa and remote workers on the digital nomad program feel this mismatch the most, and with no US-Costa Rica income tax treaty and no totalization agreement covering social security, working out double-tax relief, retirement account treatment, and self-employment tax exposure falls entirely on US domestic law rather than treaty provisions built for this exact situation.
Do US Citizens Living in Costa Rica Have to File Both Costa Rican and US Tax Returns?
Yes, in most cases. Costa Rica requires its own filing from residents on Costa Rican source income through the Direccion General de Tributacion, which sits within the Ministerio de Hacienda, and the United States separately taxes its citizens and green card holders on worldwide income no matter where they live. That US filing obligation is tied to citizenship or immigration status, not to where you actually spend the year.
Because Costa Rica's system is largely territorial rather than worldwide, an American living there may end up with little or no Costa Rican tax due on income earned outside the country, even while the full US Form 1040 filing requirement stays in place on everything, US-source and foreign-source alike. Filing and paying tax in Costa Rica, when it applies, does not excuse you from filing a US return, and the absence of a Costa Rican tax bill on foreign income does not reduce your US obligation either. The Foreign Earned Income Exclusion and the Foreign Tax Credit do all of the double-tax planning work on the US side, since there is no treaty to divide the responsibility.
How Does Costa Rica's Territorial Tax System Work for Residents?
Costa Rica generally taxes residents only on Costa Rican source income, which is the key fact that shapes almost every planning decision for an American living there. Foreign-source income, including US wages, US self-employment income earned for clients abroad, and foreign investment income, is generally not taxed by Costa Rica even though the earner is a Costa Rican tax resident.
That territorial approach is common among Costa Rica's popular residency categories, including the pensionado and rentista programs aimed at retirees and the digital nomad visa aimed at remote workers, all of which draw people who plan to keep earning or receiving income from outside Costa Rica. Costa Rica applies progressive rates to the income it does tax, and the current-year rates and residency rules should always be confirmed directly, since local tax rules are updated periodically. For US purposes, the practical effect is that the Costa Rican side of the equation is often much smaller than in a worldwide-taxation country, which changes how the Foreign Tax Credit and Foreign Earned Income Exclusion actually perform.
Should You Claim the FEIE or the Foreign Tax Credit on Costa Rican Income?
For most Americans in Costa Rica, the Foreign Earned Income Exclusion tends to carry more of the load than it does in a high-tax, worldwide-taxation country, precisely because Costa Rica's territorial system often leaves little or no Costa Rican income tax paid on foreign earned income. The Foreign Tax Credit on Form 1116 can only credit tax actually paid to Costa Rica, computed by category under IRC Sections 901 and 904, so when Costa Rica is not taxing the income in the first place there is nothing for the credit to offset.
The Foreign Earned Income Exclusion on Form 2555 instead excludes foreign earned income up to an annually indexed maximum, for example $130,000 for 2025, under IRC Section 911, without needing any Costa Rican tax to have been paid at all. The FEIE does nothing for self-employment tax, can disqualify the refundable Additional Child Tax Credit for a family with children, and once revoked generally cannot be re-elected for five years without IRS consent. The Foreign Tax Credit still matters whenever Costa Rican source income is actually taxed locally, so both elections should be compared every year rather than defaulting to one; our FEIE versus Foreign Tax Credit comparison walks through the tradeoffs in more detail.
What Does the US-Costa Rica Tax Treaty Do for Double Taxation?
Nothing, because no such treaty exists. The United States and Costa Rica have no comprehensive income tax treaty, which means the tie-breaker residency rules, saving clause exceptions, and treaty-based pension provisions that shape planning in treaty countries are simply not available to an American living in Costa Rica.
Instead, double-tax relief rests entirely on domestic law: the Foreign Tax Credit under IRC Sections 901 and 904, and the Foreign Earned Income Exclusion under IRC Section 911. Because Costa Rica's own territorial system already limits what it taxes, the missing treaty is less consequential for foreign earned income than it would be in a worldwide-taxation country, but it still leaves gaps. US-source income that Costa Rica does not tax has no local credit to offer relief against in the first place, and any Costa Rican source income that does get taxed locally has only the domestic Foreign Tax Credit standing behind it.
Is There a US-Costa Rica Totalization Agreement for Social Security?
No. The United States and Costa Rica have never signed a totalization agreement, unlike many other popular expat destinations. Without one, there is no coordination between the two countries' social security systems and no certificate of coverage available to exempt a worker from one system while covered by the other.
The practical impact falls hardest on self-employed Americans in Costa Rica. A self-employed US citizen generally owes US self-employment tax on net self-employment earnings regardless of where the work is performed, and with no totalization agreement in place, there is no certificate of coverage or Costa Rican offset that can reduce that specific US liability. Our guide to totalization agreements and self-employment tax abroad explains how the certificate process works in countries that do have an agreement, which helps clarify exactly what a Costa Rica-based self-employed American is missing.
How Are Costa Rican Pensions and Retirement Accounts Taxed by the US?
Not automatically, and the missing US-Costa Rica tax treaty removes an option that exists in some other countries. A Costa Rican pension or retirement savings vehicle is not, by itself, tax-deferred for US purposes just because it receives favorable treatment under Costa Rican law.
Under IRC Sections 401(a) and 402(b), the IRS starts from the position that income building up inside a foreign retirement arrangement is currently taxable to a US person, and only a specific treaty provision can push that timing out. Costa Rica has no such treaty, so a Costa Rican pension gets no deferral carve-out and has to be measured against that default current-taxation rule instead. Our foreign pension US tax treatment guide walks through the four questions that determine the answer for any foreign plan: whether growth is taxed as it accrues, whether a treaty defers it, what has to be reported, and how distributions are taxed.
Are Costa Rican Investment Funds Taxed as PFICs?
Usually, yes, and it catches many Americans off guard, since a Costa Rican brokerage or bank has no reason to warn a US client about a classification that only exists under US tax law. A Costa Rican fondo de inversion or other pooled investment vehicle typically meets the definition of a passive foreign investment company under IRC Section 1297, with Sections 1291 and 1298 governing the tax treatment. That classification is a matter of US tax law, does not depend on how lightly the fund is taxed under Costa Rica's territorial system, and applies whether or not a tax treaty exists.
Once a fund is a PFIC, the default US tax treatment is severe: without a timely election, the IRS allocates gains and certain distributions ratably across your entire holding period, applies the top rate in effect for each of those years, and layers an interest charge on top of the resulting tax. Each PFIC generally requires its own Form 8621 filing, even in a year where no tax is actually due, which is why Americans in Costa Rica are usually steered toward US-domiciled brokerage accounts and US-based index funds rather than a local fund held through a Costa Rican institution.
What Else Do You Have to Report to the IRS?
The income tax return is only the starting point. Costa Rican financial accounts and investment holdings trigger a separate set of reporting obligations that apply whether or not any US tax ends up owed, none of them tied to a tax treaty or a totalization agreement, and the IRS enforces each one on its own terms with penalties that routinely dwarf the underlying tax bill.
The Costa Rica Reporting Stack
Reference- FBAR (FinCEN Form 114). Required when the combined balance of your Costa Rican bank, brokerage, and retirement-related accounts exceeds $10,000 at any point during the year. See our FBAR filing guide.
- Form 8938 (FATCA, IRC §6038D). A separate filing threshold, higher for Americans living abroad, that can require you to list the same Costa Rican accounts directly on your federal tax return. See our Form 8938 guide.
- Form 8621 (PFIC). Generally required for each Costa Rican fondo de inversion or other pooled fund that qualifies as a passive foreign investment company. See our PFIC and Form 8621 guide.
A separate question, governed by the substantial presence test, is whether you count as a US tax resident at all in a given year. That question matters most for someone whose path to Costa Rica was not a clean, single move, such as a rentista or pensionado applicant who spent repeated tourist stays scouting the country and gathering paperwork before the relocation actually became permanent.
Bottom Line
The territorial system that draws retirees and remote workers to Costa Rica does not translate into a simpler US tax picture, and with no income tax treaty and no totalization agreement, there is no coordination layer between the DGT and the IRS to lean on the way there is in many other expat destinations. The two agencies operate entirely independently, the Foreign Earned Income Exclusion generally does more work than the Foreign Tax Credit precisely because Costa Rica taxes so little foreign-source income, and a self-employed American can face full US self-employment tax with no certificate of coverage to offset it. Pensions, fondos de inversion, and Costa Rican bank and brokerage accounts each carry their own reporting rules on top of the income tax analysis, and a mistake on any single one of them typically costs far more in penalties than the underlying tax ever would have.
Have questions about US expat taxes in Costa Rica? Contact TS CPA for a free consultation. We respond within the same day.
Official IRS and Government Sources
- IRS, Foreign Earned Income Exclusion
- IRS, Foreign Tax Credit
- IRS, US Citizens and Resident Aliens Abroad
- IRS, United States Income Tax Treaties A to Z
- Social Security Administration, Totalization Agreements Overview
- FinCEN, Report of Foreign Bank and Financial Accounts (FBAR)
- IRS, About Form 8621
- IRC Section 911, Citizens or Residents Living Abroad