Rocky C. Says:
How are US taxes addressed on Social Security and IRA investments if living abroad say 6 months of the year, in Costa Rica?
Global Diversification Expert Ted Baumann Says:
Hi Rocky,
Let’s start with the general issue of taxes on your retirement income.
The US is effectively the only country in the world that taxes its citizens’ income no matter where they live or where they earn it. In the case of tax advantaged retirement income, it’s going to be subject to normal US taxes no matter where in the world you may live. The main tax break for US citizens living abroad, the Foreign Earned Income Exclusion, only applies to income from current employment or business. Passive income like pensions is not included in the tax break.
On the specific question about Costa Rica, there’s good news: the country does not tax foreign source income, whether active or passive. So, if you live in Costa Rica, you won’t pay tax on your US pension income. However, once you are a resident, you will be liable for a 12.5% contribution to the National Health scheme.
Costa Rica is the exception, not the rule.
Most countries, including Portugal, another favorite destination, do tax foreign passive income, including pensions. But most countries have a tax treaty with the US that prevents double taxation of the same income.
For example, if you lived in Portugal, you would pay Portuguese tax at normal rates on your US source pension income. But any taxes you’ve already paid on that income to the IRS would be deducted from your Portuguese tax obligations.
That doesn’t mean you wouldn’t end up paying tax on your pension; it all depends on what your tax bracket is in Portugal compared to the United States. If your Portuguese tax bracket is higher, you’ll end up paying more tax on your pension than you would if you remained in the US.
That’s why it’s critically important to understand relative tax brackets and tax policies in a country before you decide to move there. The ideal scenario is someplace like Costa Rica that has a fully territorial tax system, i.e., one that doesn’t tax foreign source income at all.
For more details about taxes in Costa Rica, check out our Escape to Costa Rica guidebook.
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