Happy almost new year! The kitchen is finally clean, the trash collected, and preparations to say good riddance to 2021 on Friday night are well underway. But for many of us, there are a few financial details left to address for 2021; one rather large to-do item may be applying for the US federal COVID stimulus payments. If you haven’t received your 2020 or 2021 payments from the IRS (totaling $3,200 per person over the two years), it’s not too late to apply. You will, however, need to file your 2020 and 2021 US income tax returns. And this brings up a second point – you may discover that, while you’re preparing these returns, you should have been filing income tax and/or information returns with the IRS every year you’ve been an expatriate.
If you haven’t filed a tax return since you’ve been here, or it’s been a while since you did, you may want to take a quick look at the basic filing requirements because ignorance of the law is never a defense; if you should have filed but you haven’t, you may find that you’re unable to renew your US Passport because you’re not in compliance and the IRS thinks you’re seriously delinquent on your taxes.
What are the filing requirements? You are required to report to the IRS 100% of your income for all sources worldwide, every year. The one exception to this rule is if your income falls below the minimums listed in the following two charts:
| Filing Status | Age at End of 2020 | File if Gross Income is at Least |
| Single | under 65 | $12,400 |
| 65 or older | $14,050 | |
| Married filing jointly | under 65 (both spouses) | $24,800 |
| 65 or older (one spouse) | $26,100 | |
| 65 or older (both spouses) | $27,400 | |
| Married filing separately | any age | $5 |
| Head of household | under 65 | $18,650 |
| 65 or older | $20,300 | |
| Qualifying widow(er) | under 65 | $24,800 |
| 65 or older | $26,100 | |
| Filing Status | Age at End of 2021 | File if Gross Income is at Least |
| Single | under 65 | $12,550 |
| 65 or older | $14,250 | |
| Married filing jointly | under 65 (both spouses) | $25,100 |
| 65 or older (one spouse) | $26,450 | |
| 65 or older (both spouses) | $27,800 | |
| Married filing separately | any age | $5 |
| Head of household | under 65 | $18,800 |
| 65 or older | $20,500 | |
| Qualifying widow(er) | under 65 | $25,100 |
| 65 or older | $26,450 |
Remember, if you are lucky enough to be a New Year’s baby with a January 1 birthday, the IRS considers you are the age you turned on January 1 for the whole of the prior year. So, if you turned 65 on January 1, 2021, you treat yourself as being 65 for all of 2020 for the purpose of these charts.
If you’re below these limits for 2020 or 2021, great! No need to file a return. But you may want to – in 2020, there were two COVID stimulus payments you may not have received, one for $1,200, and the other for $600, per person, and in 2021, there was a single $1,400 payment per person. You may think you missed the boat for the 2020 payments, but people file late returns all the time; if you didn’t receive your payments via either check or direct deposit into your bank account in 2020, you still have time to claim your money by filing your 2020 tax return now and requesting the Recovery Rebate Credit. Same for the 2021 payment – claim the credit on your 2021 return if you didn’t receive your $1,400 during 2021.
If you’re wondering where to begin with preparing your tax returns, know that all income tax returns begin with Form 1040, which has been redesigned in the past few years to be a much shorter form, but with more schedules attached. If you’re over age 65, you’ll use Form 1040-SR, which is identical to Form 1040 except it uses 3 pages to cover the same ground due to a larger typeface.
You may have thought that you were exempt from filing because all your income is subject to the Foreign Earned Income Exclusion; you’re not. Remember, while you may not be paying taxes in the US, you’re still required to report 100% of your income from all sources worldwide. So, if you’re earning your total annual income by teaching English in Costa Rica, for example, you must declare your Costa Rican income on Form 1040, and then exclude it on Form 2555, the Foreign Earned Income Exclusion. Remember, the Foreign Earned Income Exclusion is only available for earned income, either wages or income from self-employment.
You should also be aware that payments made to the CAJA for healthcare and/or pension contributions in Costa Rica constitute foreign taxes under US law. There is no US/Costa Rica tax treaty; since these CAJA payments are based on a percentage of your income rather than a flat amount, they constitute a tax under US law, and are eligible for calculating the Foreign Tax Credit, which you’ll prepare on Form 1116. This credit may be used to offset any US income taxes you may owe on either earned (wages or self-employment) or unearned (dividends, interest, capital gains, rental income, and so on) income.
Additional taxes you may be subject to on Form 1040 are for Social Security and Medicare. These taxes, which normally are withheld from your US wages, must be submitted to the IRS even if you’re also paying healthcare and retirement contributions based on wages or self-employment income into the CAJA. Once again, because there is no tax treaty, the US does not recognize your CAJA payments as valid substitutes for contributions into the Social Security or Medicare systems. This is a good news/bad news scenario: paying into Social Security and Medicare hurts now because it’s a flat 15.3% of your earned income, but it does qualify you in the future to Social Security Retirement in retirement, or Social Security Disability if you are unable to work due to a disability. In addition, qualifying spouses may be eligible for Social Security Survivor benefits due to your disability or death. And this is the good news part, because Social Security payments to you in retirement or disability will be far greater than your pension benefits from the CAJA and may be adequate to support you here in Costa Rica during retirement.
Finally, because you’re living in a foreign country, the US government wants to know about all your foreign accounts (both bank and securities), as well as any foreign corporations you may own or be a major shareholder in. Once again, there’s a minimum amount that triggers the requirement to file these forms. Among these disclosures are:
- FinCEN Forms 114 and 114a, Report of Foreign Bank and Financial Accounts (the so-called FBAR) if you have $10,000 or more in the aggregate at any time during the year (added together across all your foreign accounts, in whatever currency the accounts are in, translated to US Dollars;
- Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, if you are somehow connected with a foreign trust or estate, or you received more than $100,000 from a nonresident alien;
- Form 8938, Statement of Specified Foreign Financial Assets, if you have foreign bank or brokerage accounts with an aggregate value in excess of $50,000 at any time during the year; and
- Form 5471, Information Return of US Persons with Respect to Certain Foreign Corporations if you own part or all of a foreign corporation (and this includes Costa Rican anonymous corporations).
A final word about all these reporting requirements. You may find it daunting to wrap your head around these and might be inclined to give up. After all, if the IRS hasn’t found you yet, what’s to say that they ever will? But there is a risk/reward scenario here: the penalties for failing to file many of these forms are felonies with harsh financial and custodial penalties. While it’s unlikely that the IRS will seize your foreign accounts, they may well confiscate any assets you still have in the US. If you are currently non-compliant but voluntarily file the missing forms and pay any taxes (or enter into a payment plan, if you can’t pay the full amount), the IRS may be willing to waive penalties and interest on the penalties; if they find you first, that option will likely be off the table. It’s a new year and a time of positive resolutions, and a great time to reach out to a trusted tax advisor, whether your old tax preparer back in the US, or a Costa Rican based US tax expert (there are several of us here), to assist you in pulling together your records, figuring out what forms you need to complete, and help you in completing and filing them. Who knows – you may not only not owe anything, but it’s possible that Uncle Sam has a cash payment waiting for you.