3 Things to Know About Taxes as a U.S. Expat in Panama

Panama is the only place in the world you can see the sun rise on the Pacific and set on the Atlantic. With 5,637 kilometers of coastline and more than 1,518 islands, Panama has more beaches than one can imagine. It is considered one of the best locations in the world to retire.

If you are planning to become a U.S. expat in Panama, or have been one for a while, it’s important to know the tax laws of Panama and the potential impact on your U.S. tax return. Expat taxes can be complicated. Fortunately, we have outlined the key points below.

Photo by: Official U.S. Navy

1. Taxation in Panama

Let’s start by understanding who is required to pay taxes in Panama. Both residents and non-residents are generally taxed on Panama-source income only. Foreigners who intend to reside in Panama more than 183 days in a calendar year are considered residents for tax purposes.

When it comes to income tax, the rates are:

• Employment Income: progressive up to 25%;
• Taxation on Interests: Generally none;
• Taxation on Dividends: Usually 10% final withholding tax;
• Taxation on Capital Gains: Generally 10%

Panama and the U.S. do not have a social security tax agreement in-place. Therefore, certain U.S. expats will be required to pay into both social security programs.

2. How Living in Panama Impacts U.S. Taxes

As a U.S. citizen or permanent resident (Greencard), you are required to file U.S. taxes even if you live in Panama. Plus, if you have assets in foreign financial accounts (e.g., foreign banks), there are informational reports you may be required to file. For example, U.S. Expats Living in Panama with $10,000 or more in foreign banks must file the FBAR (now known as FinCen 114).

Fortunately, the U.S. government provides various forms of tax relief that can lower or eliminate U.S. tax obligations

• The Foreign Earned Income Exclusion – It allows you to exclude a certain amount of income earned outside the U.S.
• The Foreign Housing Exclusion/Deduction – This one relates to additional income that can be excluded for household-related expenses tied to living abroad.
• The Foreign Tax Credit – It allows you to offset foreign taxes paid against U.S. tax obligations.

In most cases, the foreign earned income exclusion is preferable to the foreign tax credit if you live in a country with a lower tax rate than the U.S. (assuming your income is not above the applicable threshold). However, it’s a good idea to speak with an expat tax specialist to discuss the best application of these tax reliefs.

3. FATCA and Panama

The U.S. government is increasingly interested in knowing about the foreign assets held by its citizens and residents. As a result, it has been busy inking deals with other countries whereby foreign financial institutions (FFIs) will be required to:

• Identify accounts of U.S. persons;
• Report certain information to the IRS regarding those accounts;
• Withhold a 30% tax on certain payments to non-participating FFIs and account holders unwilling to provide the required information

As of the publication of this article, roughly 100 countries have either signed intergovernmental agreements with the United States or are in discussions. It is important to know that Panama does have a FATCA agreement in-place with the U.S.

If you have any questions regarding your U.S. expat taxes, contact us today. We are here to help.