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For many retirees and soon-to-be retirees, the idea of retiring in Costa Rica, although appealing, can often get complicated because of the U.S. tax implications.
So, before you say goodbye to your neighbors, take into account these vital U.S. tax considerations:
1. Pension Income
How will your move abroad affect your pension income taxes?
IRS says, “If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.”
As a retiree living in Costa Rica, you are not released from the U.S. tax reporting requirements. The United States requires all its citizens, regardless of their place of residence, to report their worldwide income annually. While your income sources could be many – real estate, domestic and foreign investments, pensions, and retirement plans – they must be reported and accounted for in your U.S. tax return.
The amount of tax payable each year during your retirement is calculated just the same way it was calculated when you were working. That said, you need to check what tax rules apply to you in Costa Rica.
2. Taxable?
Will you have to pay tax on your U.S. retirement income?
All retirement distributions are considered in your gross income in the U.S. (except for Roth IRA). These distributions are considered “passive” income and hence are not eligible for the Foreign Earned Income Exclusion.
The U.S. retirement income may be taxable in your new country of residence based on your visa status and where you live. Ensure that you check the taxation rules of Costa Rica on U.S. retirement income.
3. Widow(er)
How does living abroad affect taxes when your spouse passes away?
If you and your spouse retire in Costa Rica and if your spouse is the owner of a 401(k) and you are the primary beneficiary, what happens if your spouse passes away? Do you automatically inherit your spouse’s 401(k)? Is it taxable in the U.S.?
If you are the primary beneficiary of your spouse’s 401(k), you can either keep it as an inherited IRA or roll it over into your own IRA. A rollover is not a taxable event, but you’ll have to pay tax on the amount you withdraw.
4. Social Security
Will you receive your social security payments? Will the IRS tax those payments?
Your social security benefits will not be taxed by the U.S. if you move to one of the following countries: Germany, Romania, Canada, Ireland, Egypt, Italy (only if you are an Italian citizen), Israel, and the U.K. If you live in any country that’s not on this list, the U.S. tax rules are the same on Social Security as they are when you live in the U.S.
Did you know that moving offshore is saving Americans? So, if you’re thinking about retiring in Costa Rica, ensure that you check out all the information about your U.S. tax before you make a move. Thoroughly investigate the country’s tax laws and any arrangements between that country and the U.S. You may also want to check the IRS page titled ‘Expatriation Tax‘ before moving to Costa Rica. AND, check these 6 US tax tips by Charlotte Madisson.
The author
Rick Pendykoski owns Self Directed Retirement Plans LLC. This is a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.
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I DO want to remind our readers that we appreciate any referrals you can send us. Also, please remember the GoDutch Realty agents when you talk about your home in Costa Rica, we appreciate it.
