U.S. Taxes When You Live Abroad:
What Retirees in Costa Rica Must Know

You Must Still File U.S. Taxes

The United States taxes its citizens on worldwide income — regardless of where they live. Moving to Costa Rica does not end your U.S. tax filing obligation. You must continue to file a U.S. federal tax return each year, reporting all income from all sources worldwide.

This sounds more alarming than it is in practice. For most retirees living in Costa Rica on Social Security, pension income, and investment returns, the combination of available exclusions, credits, and standard deductions means the actual U.S. tax owed is minimal — and often zero.

How Social Security Is Taxed Abroad

Social Security benefits may be subject to U.S. federal income tax depending on your combined income — the same rules that apply to domestic residents. Up to 85% of your Social Security benefit may be taxable if your combined income (adjusted gross income + nontaxable interest + half your Social Security benefit) exceeds certain thresholds.

However, most retirees living in Costa Rica have significantly lower combined income than they did in the U.S. — particularly if they have sold U.S. assets, paid off debts, and reduced their overall income footprint. Many find that little or none of their Social Security is taxable in retirement abroad.

Costa Rica does not tax Social Security benefits or foreign pension income received by residents. Your Social Security is taxed only by the U.S. — never twice.

The Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion (FEIE) allows qualifying U.S. citizens living abroad to exclude a significant amount of foreign-earned income from U.S. taxation — over $120,000 per person as of 2026, adjusted annually for inflation.

Important caveat: the FEIE applies to earned income — wages and self-employment income from working abroad. It does not apply to Social Security benefits, pension income, investment income, or rental income. For most retired seniors living on passive income, the FEIE has limited direct application.

However, for retirees who do any part-time consulting, freelance work, or online work while abroad, the FEIE is highly valuable and should be discussed with an expat tax professional.

The Foreign Tax Credit

The Foreign Tax Credit allows U.S. citizens to offset their U.S. tax liability by the amount of income tax paid to a foreign government. Since Costa Rica does not tax foreign-source income (including U.S. Social Security and pension income), most retirees at Magnolia Reserve have no Costa Rican income tax to credit.

For retirees who generate income from Costa Rican sources — such as rental income from a locally owned property — the Foreign Tax Credit prevents double taxation by the U.S. and Costa Rica.

FBAR and FATCA: Reporting Foreign Accounts

Two additional reporting requirements apply to U.S. citizens with foreign bank accounts:

FBAR (FinCEN Form 114)

If the aggregate value of all your foreign financial accounts exceeds $10,000 at any point during the year, you must file an FBAR report annually through the Financial Crimes Enforcement Network (FinCEN). This is separate from your tax return and filed electronically through the BSA e-filing system. Penalties for non-filing are severe.

FATCA (Form 8938)

If your foreign financial assets exceed higher thresholds ($200,000 for single filers living abroad), you must also file IRS Form 8938 with your tax return. FATCA thresholds are higher than FBAR thresholds, so many retirees trigger FBAR but not FATCA.

Costa Rica's Tax Rules for Residents

Costa Rica operates on a territorial tax system. This means Costa Rica only taxes income that is earned within Costa Rica. Foreign-source income — including U.S. Social Security, U.S. pensions, investment income from U.S. accounts, and rental income from U.S. properties — is not taxed by Costa Rica.

This is one of the most significant tax advantages of retiring in Costa Rica. Most American retirees whose income is entirely from U.S. sources owe zero Costa Rican income tax, regardless of how long they have lived there or what residency status they hold.

If you do earn income from Costa Rican sources — such as local employment, freelance work for Costa Rican clients, or rental income from a Costa Rican property — that income is subject to Costa Rican income tax at graduated rates.

Why You Need an Expat Tax Specialist

The rules governing U.S. expat taxation — FBAR, FATCA, FEIE, the Foreign Tax Credit, capital gains on home sales, and the interaction between U.S. and Costa Rican tax law — are complex enough that working with a tax professional who specializes in expat returns is strongly advisable.

The cost of a qualified expat tax specialist is modest relative to the potential savings and the risk of errors. Firms that specialize in expat taxation (such as Greenback Tax Services, Bright!Tax, and Taxes for Expats) have deep expertise in exactly this situation and can prepare your return accurately and efficiently.

Magnolia Reserve's concierge team maintains relationships with reputable expat tax advisors and can provide referrals to residents and prospective residents on request.