2023 Taxes for US Expats Living in Panama
- Living as an Expat in Panama
- Panama at a Glance
- US Expat Taxes in Panama
- Who Has to File Taxes in Panama?
- Who Qualifies as a Tax Resident in Panama?
- Income Tax in Panama
- Other Tax Situations in Panama
- What Tax Forms Do US Expats in Panama Need to File?
- Do the US and Panama have a Tax Treaty?
- Does Panama Have a Totalization Agreement with the US?
- Navigating Tax Compliance for US Expats in Panama
Living as an Expat in Panama
With links to the Atlantic and Pacific oceans, Panama has a tropical climate nestled between Costa Rica and Colombia. Full of vibrant music, specialty coffee, and over 1,400 islands, Panama is home to over 20,000 US expats. If you’re an American living in Panama or considering making the jump, knowing how Panama taxes for US expats work is essential.
Taxes are complicated, but when you’re an expatriate in Panama, you’re responsible for income tax for paying taxes to both countries.
Panama at a Glance
- Primary Tax Form for Residents: Tax return form D-151
- Tax Year: Calendar year (January 1 – December 31)
- Tax Deadline: March 15th
- Currency: Panamanian balboa (PAB), US dollar (USD)
- Population: Approximately 4 million
- Number of US Expats: Estimated to be 25,000
- Capital City: Panama City
- Primary Language: Spanish
- Tax Treaty: No
- Totalization Agreement: No
US Expat Taxes in Panama
When living abroad in Panama, you must file both a Panama tax return and a US tax return. The good news is the income tax rate in Panama is easy to figure out, especially since the Panamanian Balboa is equal to the US dollar.
But, since there is no tax treaty between the US and Panama, you’re on the hook to pay taxes on the same income to both countries. Fortunately, there are some US tax breaks expats can take advantage of to lower their tax bill, which we’ll walk you through later in this guide.
Here’s what you need to know about taxes for foreigners in Panama:
Who Has to File Taxes in Panama?
Both residents and non-residents are required to file taxes in Panama. But unlike other countries, residents and non-residents are only taxed on their Panama-earned income. Foreign-earned income is not taxed in Panama.
If you work for an employer that withholds taxes, you do not need to file a tax return, and your taxes will be automatically withheld. But, if you’re self-employed, have multiple jobs without income withheld, or have a more complicated tax situation, you must file a tax return.
How much you’ll pay in taxes depends on whether you’re a resident or non-resident.
Who Qualifies as a Tax Resident in Panama?
Determining your tax residency status is essential when living in Panama, as it affects your tax obligations. As a rule of thumb, you are considered a resident of Panama if you spend 183 days or more in the country in a calendar year.
However, it is worth noting that other factors, such as having a permanent home or center of vital interest in Panama, may also impact your tax residency status. You should consult with an expat tax professional service like Greenback to determine your specific tax residency status in Panama.
Income Tax in Panama
Here’s how much you’ll pay in income tax if you’re a Panama resident:
- If you earn between $0 to $11,000 annually, you will not pay income tax.
- If you earn between $11,001 and $50,000, you’re taxed at 15% on all income above $11,000.
- If you earn over $50,000, you’ll pay $5,850 in income tax, plus 25% on all income over $50,000.
Non-residents are taxed at a flat rate of 15% of their Panama-sourced income plus the 2.75% educational tax rate.
Learn where the best tax havens are, common traps, and ways to save money on your US expat taxes.
Other Tax Situations in Panama
Companies in Panama pay a flat 25% tax rate on taxable corporate profits.
Value-added Tax (VAT)
Panama’s VAT is known as the movable goods and services transfer tax. The standard tax rate is a flat 7%.
There is no wealth tax in Panama.
There is no inheritance tax in Panama.
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. A 3% withholding is made at the closing as an advance payment against the 10% capital gains tax for real estate transactions. There are no wealth, gift, or inheritance taxes.
Employees contribute 9.75% of their wages to Social Security in Panama. Employers contribute 12.25% to this fund.
What Tax Forms Do US Expats in Panama Need to File?
Depending on your source of income, filing a tax return may not be necessary. If you’re self-employed, own a business, or receive additional income while working for an employer, filing a personal tax return is a must. However, you’re not required to file a tax return if you only have one job with an employer that withholds taxes.
The tax year in Panama is the same as in the US (January 1 – December 31), and income taxes must be filed by March 15. If you are required to file a tax return, you will file it with the Panama Ministry of Economy and Finance.
Additionally, the primary tax forms that US expats in Panama will need to complete are Form 1040 and Form 2555 (Among other tax forms)
US citizens and residents must file Form 1040, the standard tax form, regardless of where they live. Expats use Form 2555 to claim the foreign earned income exclusion, which enables them to exclude a portion of their income from US taxes.
In addition, US expats in Panama may also be eligible for certain tax benefits and deductions, such as the foreign tax credit, which can help to reduce their overall tax burden.
Do the US and Panama have a Tax Treaty?
Although the US has tax treaties with many countries, the US and Panama do not have a tax treaty. This means US expats are subject to paying double taxes on their income.
Does Panama Have a Totalization Agreement with the US?
No, the US does not have a totalization agreement with Panama. You could end up paying into both countries’ Social Security funds.
Navigating Tax Compliance for US Expats in Panama
If you’re a US expat living in Panama, you may wonder which tax forms you must file during tax season. This guide should have given you a better understanding, but if you’re still unsure or have any questions, don’t hesitate to contact us. We’re here to help clarify your residency status and ensure you file the necessary forms.
Contact us, and one of our customer champions will gladly help. If you need concrete advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.