US Expat Tax for Americans in Panama – What You Need To Know

Expat Living In Panama

Living in Panama has much to offer and has long been popular with those who live north of the border in the U.S. It provides a great intercultural experience and incredible food.

It is also a popular retirement destination for Americans. The country boasts beautiful beaches, fascinating attractions, friendly locals, an all year round good climate, low cost of living and a good quality of life for all who live in Panama.

Below is a list of our top most attractive cities in Panama for foreigners to reside in (in no particular order):

• Bocas del Toro
• Boquete
• Chitre
• Coronado
• David
• El Valle
• Las Tablas
• Panama City
• Santa Fe
• Santiago
• Volcan

Worldwide Income and Citizenship-Based Taxation

The United States is one of the only countries that taxes worldwide income for all of its citizens, no matter where they live and regardless of how long they have been overseas.

Thus, if you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. This is affectionately known as the “citizenship-based” income tax.

Elsewhere in the world, the basic rule is that taxes are based on residency and not based on citizenship.

The United States’ taxation of worldwide income has been around since the 1860s, when it was enacted as part of the Revenue Act of 1861. The purpose was to stop wealthy people from fleeing the U.S. in a time of crisis and taking their money with them. The defense of ongoing citizenship-based taxation income rests on the belief that U.S. citizenship offers benefits even enjoyed by non-residents. Thus, overseas taxpayers are required to pay for this benefit even when they earn money elsewhere.

Even as the rest of the world including Panama has moved toward a different model of taxation, the United States’ citizenship-based taxation remains in place. In fact, there has not been a serious attempt to reverse this law. Instead, the debate usually focuses on how much tax overseas citizens should pay.

Guide To US Expat Tax In Panama

This guide is intended to provide a general review of the tax environment of Panama and how that will impact your U.S. expatriate tax return as a U.S. Expat In Panama.

Panama Income Taxes

Who Is Liable For Income Taxes In Panama

In Panama, resident and nonresident individuals are taxed on their Panamanian-source income regardless of the nationality of the individual and the location of the payment of the income. For tax purposes, the nationality of the individual is irrelevant.

Individuals are considered resident for tax purposes if they reside or remain in Panama for more than 183 continuous or non-continuous days in the calendar year or in the immediate preceding year or if they have established their permanent residence in Panama.

Income tax rates in Panama are progressive with the maximum tax rate at 25%.

Tax Year In Panama And Tax Filing And Payment Rules

The tax year in Panama is the calendar year and tax returns are due March 15 of the following year.

HOW YOU CAN SAVE MONEY ON YOUR U.S. TAX RETURN WHILE LIVING IN PANAMA?

Tax Samaritan is a firm focused on tax preparation and resolution for both U.S. (federal) and state income taxes. As a firm that specializes only in U.S. federal and state taxes, our opinion is that when trying to locate a firm that can provide expertise and preparation in both U.S. and Panama income taxes, it doesn’t exist with any single tax professional. Rather, such expertise can only be found in larger international tax firms that have separate tax specialists for U.S. and Panama. It’s a rare enough to find a tax expert in a single country let alone with expertise in multiple countries. For the convenience of having both country returns prepared by a single firm, there is a significant premium that will be incurred with little to no benefit (with the exception of some convenience).

Thus, we recommend that working separately with a local tax professional in Panama to handle your Panama income taxes and a separate U.S. tax professional or firm is the best approach. In addition, if you haven’t already moved to Panama, we recommend that you dig into some tax planning to fully understand your U.S. and Panama tax impacts prior to your move including the impact of any foreign investments and the establishment of any foreign business.
When dealing with U.S. and states taxes while living in Panama, there a number of preferential expat tax treatments that may benefit your U.S. expatriate tax return. In fact, for many U.S. expats it will reduce your U.S. tax liability to zero.

It is important to note that a common but dangerous mistake is the assumption that if there are zero taxes owed with tax benefits that a U.S. tax return does not need to be filed. That is not true. If you are working overseas, it is likely that you meet the filing requirements to file a tax return and must do so. It is important to note that the preferential tax treatments, such as the foreign earned income exclusion and foreign tax credit (described below) are not applicable to the outcome of your tax liability until they are claimed on a filed tax return.

What You Need To Know About Living And Working In Panama For Your U.S. Expat Tax Return

Tax Samaritan is a firm focused on tax preparation and resolution for both U.S. (federal) and state income taxes. As a firm that specializes only in U.S. taxes, our opinion is that when seeking a firm that can provide expertise in both U.S. and Panama income taxes, such expertise can only be found in larger international tax firms that have separate tax specialists for U.S. and Panama. It’s a rare enough to find a tax expert in a single country let alone with expertise in multiple countries.

Such expertise and convenience is extremely cost prohibitive except for taxpayers that have substantial assets and income where such support and value would be needed and warranted. Thus, we recommend that working separately with a local tax professional in Panama to handle your Panama income taxes and a separate U.S. tax professional or firm is the best approach. In addition, if you haven’t already moved to Panama, we recommend that you dig into some tax planning to fully understand your U.S. and Panama tax impacts prior to your move including the impact of any foreign investments and the establishment of any foreign business.

When dealing with US expat tax in Panama, there a number of preferential expat tax treatments that may benefit your U.S. expatriate tax return. In fact, for many U.S. expats it will reduce your U.S. taxes to zero.

Some of these preferential tax treatments or benefits for US expat tax in Panama include the:

• If you are a U.S. citizen or a resident alien of the United States and you live in Panama, US expat tax in Panama is based on your worldwide income and as such must file a U.S. return for all the years that you are residing in Panama. However, as a U.S. expat you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings that is adjusted annually for inflation ($99,200 for 2014). In addition, you can exclude or deduct certain foreign housing amounts. This is known as the Foreign Earned Income Exclusion and foreign housing exclusion .
• When it comes to US expat tax in Panama, most US expatriates worry about “double taxation” – paying taxes to two different countries – the U.S. and Panama. A U.S. taxpayer working overseas in Panama may be able to reduce U.S. taxable income and “double taxation” by claiming the Foreign Tax Credit on Form 1116. Should any foreign income not be fully offset by the foreign earned income exclusion, housing exclusion or housing deduction, the foreign tax credit paid or accrued may be used as a deduction or credit on the U.S. tax return. Taxpayers can elect to either deduct the taxes as an itemized deduction on Schedule A or claim a credit against tax. In most cases, it is to your advantage to take foreign income taxes as a tax credit.

A common but dangerous mistake is the assumption that if there are zero taxes owed with these tax benefits that a return for US expat tax in Panama does not need to be filed. That is not true. If you are working overseas, it is likely that you meet the filing requirements to file a tax return and must do so. It is important to note that the preferential tax treatments, such as the foreign earned income exclusion and foreign tax credit are not applicable to the outcome of your tax liability until they are claimed on a filed tax return.

When faced with US expat tax in Panama there are many tax items to consider, but the above are by far the most common preferential tax benefits. With top-notch experienced and knowledgeable expat tax preparation from Tax Samaritan, you can be assured that you are paying the minimal amount of U.S. taxes that you are legally obligated for.

Panama Foreign Bank Account Reporting – The FBAR (FinCen Form 114)

FBAR Filing Deadline

Many overseas taxpayers are required to file the Foreign Bank Account Report, or FBAR (FinCen Form 114). The FBAR filing deadline is April 15th (or the preceding business day if April 15th falls on a weekend) – with an extension available to October 15th.

Any reports received after the deadline are considered delinquent. In addition, unlike most other tax forms, the FBAR must be filed electronically.

FBAR Filing Requirements

The FBAR exists to help the U.S. government identify people who may be using foreign bank accounts to circumvent United States law. With FACTA, IRS criminal investigators will use the FBARs to help them identify or trace funds used for illicit purposes, to identify unreported income abroad, and to identify undisclosed foreign accounts.

This is an important IRS compliance requirement with huge monetary civil penalties at stake, as well as potential criminal consequences. In addition, because of FACTA, foreign financial institutions are starting to disclose U.S. account holder information, which makes it easier for the U.S. to enforce this law.

You must file an FBAR with the Treasury Department if you are a U.S. person with a financial interest in, or signature authority over, foreign financial accounts with an aggregate value of more than $10,000 at any point during the tax year. Foreign financial accounts include bank accounts, brokerage accounts, mutual funds, trusts or other types of foreign financial accounts maintained with a financial institution.

If you have specified foreign financial assets that exceed certain thresholds, you must also report those assets to the IRS on Form 8938. In some cases, you may be reporting the same accounts twice, but both forms are still required.

Who Is a U.S. Person?

A U.S. person for purposes of FBAR reporting includes U.S. citizens, U.S. residents, and entities including but not limited to corporations, trusts, estates, partnerships or limited liability companies that were created or organized in the U.S. under the laws of the U.S.

FBAR Late Filing And Non-Filing

Civil penalties for non-willful FBAR violations may be as high as $10,000 per violation. For willful violations, the maximum penalty is usually the greater of $100,000 or 50 percent of the account balance per violation. Criminal penalties can result in fines of up to $500,000 and imprisonment of up to 10 years. It is possible to incur both civil and criminal penalties for the same violation.

FBAR Reporting

Effective July 1, 2013, all FBARs must be electronically filed with the BSA E-filing system.

If you have bank accounts at National Bank of Panama, Caja de Ahorros, Banistmo, Banesco, Banco Azteca, Banco General, Citibank, CrediCorp Bank, Global Bank, MultiBank, Scotia Bank, Unibank or at another bank in Panama or any other foreign country, you may meet the filing requirement to disclosure your foreign accounts on the FBAR. Please don’t hesitate to contact Tax Samaritan to learn more about your filing requirements.

U.S. – Panama Social Security Totalization Agreement

The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes. These agreements must be taken into account when determining whether any alien is subject to the U.S. Social Security/Medicare tax, or whether any U.S. citizen or resident alien is subject to the social security taxes of a foreign country.

As of this time, Panama has not entered into a Totalization Agreement with the United States thus there is no opportunity to avoid double taxation of social security income for US expat tax in Panama.

International Social Security agreements, often called “Totalization agreements,” have two main purposes.

First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and pays Social Security taxes to both countries on the same earnings.

Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country. The agreements assign coverage to just one country and exempt the employer and employee from the payment of Social Security taxes in the other country.

Determining Eligibility For The Totalization Agreements

Determining eligibility for the totalization agreements and required reporting is based on proper analysis and the individual facts of the taxpayer.

U.S.- Panama Tax Treaty And Tax Relief For US Expat Tax In Panama

The U.S. does not currently have a tax treaty with Panama.