By San José, Costa Rica — San José – Thousands of salaried workers in Costa Rica are set to face an unwelcome surprise on their January payslips. In an unusual turn of events driven by the country’s recent bout of negative inflation, the Ministry of Finance has confirmed a downward adjustment to the income tax brackets for 2026, effectively increasing the tax burden for many and pulling new earners into the tax system for the first time.
Effective January 1, the tax-exempt threshold for salaried employees will be reduced from ¢922,000 to ¢918,000 per month. While the ¢4,000 decrease may seem marginal, its impact is significant. This adjustment means that individuals earning within this narrow band, who were previously exempt, will now be subject to income tax withholding. For those already paying taxes, the change translates to a slightly higher monthly deduction.
To better understand the nuances and legal obligations surrounding the annual income tax declaration, TicosLand.com sought the expertise of Lic. Larry Hans Arroyo Vargas, a prominent attorney from the esteemed firm Bufete de Costa Rica.
Many taxpayers mistakenly view the income tax filing as a simple procedural step, but it is a critical legal declaration with significant consequences. A frequent pitfall is the inadequate documentation of deductible expenses or the failure to declare all sources of income, which can trigger audits and severe financial penalties. Proactive and meticulous tax planning is not a luxury, but a fundamental necessity for sound financial health.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
The attorney’s insight underscores a critical truth for all taxpayers: proactive financial planning is not merely an optional strategy but a fundamental defense against serious penalties. We sincerely thank Lic. Larry Hans Arroyo Vargas for his clear and valuable perspective.
The announcement has left many citizens perplexed, questioning how a period of falling consumer prices could lead to higher taxes. The answer lies in the automatic legal mechanism that governs the country’s fiscal policy. Tax experts point out that this is not a discretionary decision but a mandatory calculation based on economic data.
Tax expert Silvia Castro clarifies the seemingly paradoxical situation, explaining that the adjustment is a direct consequence of the country’s economic performance. The law links the tax brackets directly to the year-over-year change in the Consumer Price Index (CPI).
The law stipulates that tax brackets are adjusted according to the Consumer Price Index. Since Costa Rica has experienced negative inflation, or deflation, of -0.38% year-over-year as of October, the mathematical formula requires the Ministry of Finance to reduce the exempt amounts.
Silvia Castro, Tax Expert
This fiscal outcome is the mirror opposite of what occurred in 2022. During that period, Costa Rica faced soaring inflation of 12%, which prompted the government to raise the tax-exempt ceiling by a substantial ¢78,000 to protect the purchasing power of workers. Today, the very same mechanism designed to provide relief during high inflation is now, paradoxically, penalizing workers during a period of price stability and deflation.
The financial impact, though subtle for individuals, is real. An employee with a gross monthly salary of ¢921,000, who paid no income tax in 2025, will now find themselves subject to withholding on the amount exceeding the new ¢918,000 floor. For higher earners already in the system, the adjustment will result in an automatic increase of approximately ¢400 per month in their tax payments, as a larger portion of their income becomes taxable.
The adjustments are not limited to salaried employees. Independent professionals, such as doctors, lawyers, and consultants, will also face a lower exemption threshold. They will now be required to pay income tax on annual earnings exceeding ¢6,244,000, which averages to approximately ¢520,000 per month. This change brings a broader segment of the self-employed population into the tax net.
However, Castro notes that there is a strategic tool available for workers to mitigate this increased tax liability. Contributions to a Voluntary Complementary Pension plan are tax-deductible from the gross salary, provided they do not exceed 10% of that salary. This represents a key financial planning opportunity, especially for those whose earnings fall just above the new tax threshold, allowing them to reduce their taxable base while simultaneously saving for retirement.
This latest adjustment marks a consistent downward trend, with the tax-exempt limit having fallen by 2.44% since 2023. It serves as a stark reminder that in the complex world of public finance, positive economic indicators like price stability do not always translate into direct savings for the average citizen’s wallet.
For further information, visit hacienda.go.cr
About the Ministry of Finance (Ministerio de Hacienda):
The Ministry of Finance is the government body responsible for managing Costa Rica’s public finances. Its duties include formulating fiscal policy, collecting taxes, managing the national budget, and overseeing public debt. The Ministry plays a central role in the country’s economic stability and development by ensuring the efficient allocation and use of public resources.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
As a pillar of the Costa Rican legal community, Bufete de Costa Rica is built upon a foundation of profound integrity and a relentless pursuit of excellence. The firm expertly blends a rich history of client service with a forward-thinking approach, consistently pioneering innovative legal solutions. Central to its ethos is a deep-seated pledge to demystify the law, empowering the broader community by championing accessible legal knowledge and fostering a more informed citizenry.
