US Expat Taxes for Americans Living in Panama – What You Need to Know
There are an estimated 25,000 Americans living in Panama.
There are many good reasons for living in Panama, including the climate, exotic landscapes, good healthcare, and the long-held close relationship with the US to name but a few. As an American expatriate living in Panama though, what exactly do you need to know regarding filing US expat (and Panamanian) taxes?
All US citizens and green card holders who earn a minimum of $10,000 (or just $400 for self-employed individuals) anywhere in the world are required to file a US federal tax return and pay taxes to the IRS, regardless of where in the world they live or their income is generated.
The good news is if you are paying income tax in Panama, there are various exclusions and exemptions available to prevent you paying tax on the same income to the IRS too.
US taxes – what you need to know
If you earn over US$10,000 (or just $400 of self-employment income), wherever the income originates in the world you have to file IRS form 1040. While any US taxes due are still due by April 15th, expats get an automatic filing extension until June 15th, which can be extended further on request until October 15th.
If you have overseas assets worth over US$200,000 per person, excluding your home if it is owned in your own name, you also have to file form 8938 to declare them.
If you had a total of at least US$10,000 in one or more foreign bank and/or investment accounts at any time during the tax year, you also have to file FinCEN form 114, otherwise known as a Foreign Bank Account Report or FBAR.
“The official currency in Panama is the balboa (PAB). Since the balboa exists in the form of coins only, Panama uses United States dollars (USD) for all its paper currency. The US dollar and the balboa have the same value in Panama and can be used interchangeably, with no exchange restrictions.”
– PriceWaterhouse Cooper
If you pay income tax in Panama, there are several exemptions that allow you to pay less or no US income tax on the same income to the IRS. The main one is the Foreign Earned Income Exclusion, which lets you exclude the first around US$100,000 of foreign earned income from US tax if you can prove that you are a Panamanian resident, and the Foreign Tax Credit, which gives you a $1 tax credit for every dollar of tax you’ve paid in Panama. These exemptions can be combined if necessary. Remember though that even if you don’t owe any tax to the IRS, if your income is over US$10,000 (or $400 if you’re self-employed) you still have to file a federal return.
The US and Panamanian governments share taxpayer info, and Panamanian banks pass on US account holders’ account info to the IRS, so it’s not worth not filing or omitting anything on your return. The penalties for incorrect or incomplete filing for expats are steep to say the least.
If you’re a US citizen, green card holder, or US/Panamanian dual citizen, and you have been living in Panama but you didn’t know you had to file a US tax return, don’t worry: there’s a program called the IRS Streamlined Procedure that allows you to catch up on your filing without paying any penalties. Don’t delay though, in case the IRS comes to you first.
Panamanian taxes – what you need to know
If you are a foreign resident in Panama and all your income is sourced abroad, you don’t need to pay Panamanian income tax. You will be liable for US taxes on this income though, unless you claim one of the exemptions outlined above.
For income sourced in Panama, tax rates range from 0% to 25%.
You are considered an Panamanian resident if you spend over 183 days in the country in a tax year. The Panamanian tax year is the same as in the US. Panamanian tax returns are due by March 15th, with an extension available until April 15th. The Panamanian tax authority is called the Direccion General de Ingresos.
We strongly recommend that if you have any doubts or questions about your tax situation as a US expat living in Panama that you contact a US expat tax specialist.