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Would I owe US Taxes after living in CR for a Calandar year Jan to Decand continuing as a resident? I read IRS Publication #54 Tax Guide for us Citiz and Resident Aliens Living Abroad. On Page 47 in the Q&A section I read that as a retired US Citizen living abroad that I would have the same “…U.S.Tax obligation as that of a retired person living in the United States.” I had thougfht that I would have an exclusion of over $80,000 , but it seems that this publication #(54) from the IRS would indicate this exemption is for foreign earned income only.
What is your experience anyone? I am not asking for tax advice Thanks BobBob, the U.S. Internal Revenue Code provides for “universal taxation” on the incomes of Americans. That is, it matters not where you live or for how long, you are still liable for U.S. income taxes. Sorry to burst your bubble.
There is an exclusion for income earned outside the U.S. — the foreign earned income tax credit. It’s a bit over $80,000 per year and indexed, so it increases annually. But that exclusion is only for earned income, not from U.S. Social Security, U.S.-derived pensions, IRAs, 401(k) distributions, etc all of which derive from U.S. sources.
And, of course, if as a resident of Costa Rica you apply for that foreign earned income tax credit, you thereby open yourself up to a charge of working illegally in Costa Rica unless you’ve dotted all the “t”s and crossed all the “i”s.
David Thanks for the info. I’m sure you are right. I have enjoyed your many postings and look forward to meeting you in CR Happy New Year Bob
David, do you know about capitol gains? Is it the straight percentage like in the states or is there an exemption if it was realized out of the country?
Cindyc, my guess (and it’s just that) is that foreign capital gains are taxed as would be domestic ones. Since they’re not “earnings”, they wouldn’t appear to qualify for the foreign EARNED income tax credit, but they might qualify for exclusion some other way.
Of course, a shifty-eyed accountant might help you find a way to “take” those gains in the name of a foreign corporation of which the IRS would have no direct knowledge. However, you should be aware that IRS does, nevertheless, require that you report annually on any foreign bank account under your control the balance of which equals or exceeds $10,000US at any time (even for one second) during each tax year.
If your ONLY source of income is Social Security, you are not even obligated to file a tax return, regardless of where you live. If you have other passive income, or some other money coming in that requires taxation, you miss out on this filing exclusion. Personally, I LIVE for the day when I am in Costa Rica, collecting SS, and never ever filing a tax return again!
Are you sure about that?
Don’t US citizens have to file a tax return each and every year, no matter what they earned the previous year, no matter where they live?
Scott Oliver – Founder
WeLoveCostaRica.comThe answer from http://www.irs.gov/businesses/small/international/article/0,,id=96796,00.html is – as usual, appropriately vague…
“If you are a U.S. citizen or resident alien living or traveling outside the United States, you generally are required to file income tax returns, estate tax returns, and gift tax returns and pay estimated tax in the same way as those residing in the United States. Your income, filing status, and age generally determine whether you must file a return. Generally, you must file a return if your gross income from worldwide sources is at least the amount shown for your filing status in the Filing Requirements table in Chapter 1 of Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.”
Scott Oliver – Founder
WeLoveCostaRica.comIf you are living in Costa Rica (or anyplace else, for that matter) you should file for your Social Security benefit 120 days in advance of your eligibility date — the day you turn 62, in my case. I’m assuming, here, that you want to begin drawing your retirement benefit as early as possible.
Coincidentally, just yesterday I got my SS award letter. Included was a pamphlet that explains that, if your total income is above a certain level, then 85% of your SS benefit is taxable as ordinary income.
What’s more, if you live outside the U.S., and not in a country with which the U.S. has some other treaty agreement, then 30% of 85% (a net of about 25.5%) of your SS benefit will be withheld each month in anticipation of this tax obligation. Sadly, Costa Rica is one of those countries where the 30% (well, 25.5%) withholding applies.
When I was at the U.S. Embassy to apply, I tried to give the clerk our U.S. address (a mail forwarding service in Miami), but she would have none of it. They are required to send mail directly to you in Costa Rica (or wherever) using the Correo. That’s one way they know where you live.
I suppose you could apply at a SS office in the U.S. and get around that by using some friend or relative’s address, but you’ll still have the ultimate tax obligation.
I’ve spoken to SSA at least a half dozen times about this issue, and included the information about living in a foreign country. They stated emphatically that IF social security is your SOLE source of income and you do not have any other income from passive sources that would be reportable, then you do NOT have to file an income tax return and nor are your social security benefits taxable regardless of where you live. I know plenty of people who are getting their SSA checks in CR and not one colon is deducted for taxes.
I’d have to agree with Maravilla. I’ve taken care of Mom’s taxes for years, both before she retired and afterwards. Since her only income is SS and a small pension we stopped filing returns 10 years ago since her income was below a taxable level when the stand deduction was applied. She continues to get her SS check, and has not been visited by the boys at the IRS. Since they run their under reporter program about 2 years after the close of each tax season to pick up unreported income I’d say they have the same opinion that a return is not required when you only income is non-taxable or below a taxable level.
As for the issue of withholding and living out of the US… that’s a new one on me. Besides, with direct deposit and a debit card… does it matter where you live these days?
“What’s more, if you live outside the U.S., and not in a country with which the U.S. has some other treaty agreement, then 30% of 85% (a net of about 25.5%) of your SS benefit will be withheld each month in anticipation of this tax obligation. Sadly, Costa Rica is one of those countries where the 30% (well, 25.5%) withholding applies.”
Dave, where did you get this from? The issue of up to 85% of SS being subject to tax is nothing new… Uncle Sam’s way of rewarding those of us that have provided for ourselves and saved while paying the MAX in SS tax during our working years… You get the max payment… but then they tax it effectivly giving you a reduced SS payment because you have a pension, saved in your 401k, invested, and were generally a BAD person by not spending yourself into debt while working! The USA’s own little socialist program. But where did you get the whole withholding info from? And how does Uncle Sam know where you’ll be and for how long? The 30% seems pretty steep… and if you are aware of this why not just have your SS direct deposited and use your debit card to withdraw it wherever you choose call home. The US has MUCH bigger issues than trying to figure out where I’m sleeping at night…
I just wrote a fairly exhaustive reply but the system shut me down and it was lost. It’s too late to do all that over again.
My source is “Your Payments While You Are outside The United States”, SSA Pub. 05-10137/ICN 480085 dated January 2006. Among other things, it contains the requirement to report your actual address and the definition that you are “outside the U.S.” after 30 days absence. It also contains the information about tax liability and withholding.
On page 29, it says, “If you are not a U.S. citizen or a U.S. resident, federal income taxes will be withheld from your benefits. The tax is 30 percent of 85 percent of your benefit amount.” (.30 x .85 = .255)
What is not clear from the language of this paragraph, as I reread it, is just how this withholding applies. Does it mean that it applies if you are not BOTH a U.S. citizen AND a U.S. resident? Or does it mean that it applies if you are not one or the other, EITHER a citizen OR a resident? I, for example, am a U.S. citizen, but I am not a U.S. resident. (And I live outside the U.S. for thirty days or longer.) Does this apply to me?
I dunno.
Dave… don’t sweat it… just have your well deserved SS check direct deposited in your bank account and give uncle same a PO Box in the states for your address… if they ask just tell them you don’t sleep much and the you have REALLY tiny furniture. The feds can’t find Osama… so I’m guessing you’re safe.
Reading the words “If you are not a U.S. citizen or a U.S. resident, federal income taxes will be withheld from your benefits. The tax is 30 percent of 85 percent of your benefit amount.” (.30 x .85 = .255) I’m thinking it’s more directed at folks that come to work in the US then run home after they get their SS check and NEVER plan on paying Uncle Sam a dime in taxes or file a return.
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