Panama was once called “Switzerland of the Americas” for its banking privacy laws. However, the image of Panama has remarkably improved since the leadership of President Martinelli. Currently Panama is one of the prominent retirement destinations among American expats. Moreover, it has always been of the popular tourist destinations due to its beautiful nature and history. American expats Panama must understand the major expatriate tax rules and filing requirements both in Panama and the USA.
We get multiple questions from our clients in Panama. Who is required to pay overseas taxes and to file a tax return in Panama? Should American expats Panama file US expatriate tax returns, although, they live and work in Panama and do not have any income from the USA? The purpose of this guide is provide a summary of key expat tax questions.
Expatriate Tax Rules and Returns for Expats Panama
Many American expatriates in Panama are not aware of the fact that U.S citizens and green card holders are subject to the worldwide taxation by the US authorities. Consequently, American expats Panama have to file US expatriate tax returns whether they live in Virginia or Panama if they meet the filing requirements.
American expats Panama can utilize three provisions under Internal Revenue Code section 911.
- Foreign earned income exclusion. American expats Panama can exclude up to $101,300 in a tax year 2016 if they earn foreign income and met either bona fide or physical presence test.
- Foreign housing exclusion. American expats Panama can deduct certain foreign housing expenses if they are eligible to claim the foreign income exclusion.
- Foreign tax credit. American expats Panama can take a credit or deduct foreign income taxes paid in Panama.
Additionally, American expats Panama with an aggregate value of foreign financial assets over $10,000 at any time during the year must file the FBAR or form TD F90-22.1.
Tax system in Panama – FAQ
I am an American expat living in Panama. Is my worldwide income taxed in Panama?
Panama uses a territorial basis of taxation. Panama assesses an income tax only on income derived from Panamanian sources.
Who is considered a tax resident in Panama?
American expats Panama are considered residents if they reside in Panama for more than 183 days continued or rollover during the same year.
What is the tax year in Panama?
The tax year in Panama is a calendar year. Tax return due date is March 15. Extension is allowed but any estimated tax must be paid by March 15.
What is an income tax rate in Panama?
Panama uses a progressive tax rate up to 25%. American ex-pats will also pay the Educational Insurance Tax (1.25% of salaries) and the Social Security Tax (8% of wages).
Which income is considered a taxable income in Panama?
The taxable income in Panama includes the wages, salaries, multiple benefits, self-employment income, dividends and income from the sale of real estate.
Can an expat in Panama file a tax return on overseas taxes with a spouse?
Spouses can choose and file either jointly or separately.
Is it a requirement to file an expat tax return in Panama every year?
Tax returns must be filed by March 15. Taxpayers with one source of income like a local employer are not required to make estimated payments or file a tax return.
Does Panama have a double tax treaty and social security agreement with the USA?
In April 2011, Panama signed a tax information agreement with the USA that will require the authorities of Panama to cooperate with the USA on civil matters. There is no totalizaiton or social security agreement between the USA and Panama. It means that American expats Panam who are self-employed might be required to pay social security taxes in both countries as well as to file US expatriate tax returns.
Conclusion
These are some of the basic overseas tax issues that American expats Panama must consider. It is essential to stay up to date with the latest developments before deciding to move to live and work in Panama.
American expats Panama who have questions about overseas taxes paid in Panama or would like to know how it affects US expatriate tax returns, should seek help of an expat tax CPA that specializes in US taxes for expats. International tax experts at Artio Partners will be pleased to assist you and provide guidance.