US Expat Panama Taxes: Top 8 Ways Living in Panama Impacts Your US Taxes

Top 8 Ways Living in Panama Impacts Your US Taxes Abroad

If you thought the only attraction in Panama was the Panama Canal, there is much to learn! Known as the Crossroads of the Americas for its geographical location where North and South America meet, there is plenty to love about this modernized, well-developed Central American country. But how will life in Panama affect your US taxes abroad? What will you pay for Panama taxes? Fortunately, we have outlined the top 8 things you need to know about taxes in Panama!

8 Things to Know about Taxes in Panama for US Expats

1. Working in Panama: Taxes for Expats

Americans living in Panama, or in any other country, must file US expat tax returns each year. The US also requires that you include all worldwide income on your expat tax return, including any income that is also subject to tax in Panama. Taxes for expats will be something that you’ll need to include in your adjustments to living abroad.

While you are taxed on your worldwide income, there are several important deductions and credits available to help offset your US taxes abroad. There are a few ways to avoid dual-taxation that you may qualify for if you meet certain residency tests:

  • Foreign Earned Income Exclusion (FEIE)
  • Foreign Tax Credit
  • Foreign Housing Exclusion

By meeting either the Physical Presence test or the Bona Fide Residence test you can exclude up to $108,700 of your 2021 foreign earnings on your US tax return. The Foreign Housing Exclusion was created to help offset the higher cost of living overseas. This exclusion allows you to deduct a certain amount of your living expenses—the actual amount is tied to the current year’s FEIE, as well as where you are living.

The Foreign Tax Credit reduces your US tax dollar for dollar on what you pay in taxes to Panama. Your Foreign Tax Credit will be limited to only those earnings which are subject to US tax. That means that any tax on your excluded Panamanian earnings (excluded by the FEIE or the Foreign Housing Exclusion) will not be included in the calculation of your US Foreign Tax Credit.

2. Who is a Resident of Panama?

You are considered a resident of Panama if you are present for at least 183 days in a calendar year.

3. Panama Taxation: Is Foreign Income Taxed?

Residents and non-residents are taxed only on their Panama-sourced income. Regardless of nationality or residency status, you are not required to report worldwide income for Panama taxation.

4. Panama Income Tax Rates

Tax rates for residents are fairly simple—they are progressive and based on total income, ranging from 0% to 25%. Non-residents are taxed at 15%, plus the educational tax rate of 2.75%.

For the 2021 tax year, the national income rates for Panama are as follows:

 

Taxable Income (USD) Tax Rate(%)
Up to 11,000 0
11,000 to 50,000 15
Over 50,000 25

 

5. US-Panama Tax Treaty

A US – Panama Tax Treaty does not exist. They signed a tax-information agreement in 2010 to allow tax transparency between the two countries, but this does not impact dual-taxation unfortunately.

6. Dates for Panama: Incomes Taxes for US Expats and Residents

The tax year ends on December 31, just like the US. Tax returns are due March 15 of the following year, and you may file for an extension until May 15. However, if your only income comes from your employment, you don’t have to file a return at all. The amount of tax due is automatically withheld by your employer for Panama income taxes.

7. Social Security

Employees must pay into the social security system. You are required to pay 9.75% of your gross pay. Because no totalization agreement exists, you may be required to pay into systems in both Panama and the US. You should contact a qualified expat tax professional to help you understand how this will impact you financially.

8. Property Taxes in Panama and More

For property taxes in Panama, if the property is valued under $120,000, it does not qualify. However, anything over that amount will be taxed between 0.5% to 0.7%.

Capital gains taxes are paid at 10% of the calculated gain. For real estate transactions, a 3% withholding is made at the closing as an advance payment against the 10% capital gains tax. There are no wealth, gift or inheritance taxes.

Need More Advice About How Living in Panama Impacts Your US Taxes Abroad?

If you have additional questions about filing US/Panama taxes, please contact our expert CPAs and IRS Enrolled Agents.

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