US Expat Taxes in Panama
Panama is one of the most popular destinations for American retirees and entrepreneurs, with an estimated 25,000 to 30,000 US citizens living there. The draw is a combination of the territorial tax system (foreign-source income is not taxed), the US dollar as legal tender alongside the Balboa, the Friendly Nations Visa program, a low cost of living, and modern infrastructure in Panama City. Americans in Panama are concentrated in Panama City (the financial and commercial center), Boquete (a mountain town popular with retirees), Coronado and the Pacific beach communities, and Bocas del Toro. ### The Panamanian Tax System Panama operates a territorial tax system, meaning only income sourced within Panama is subject to Panamanian income tax. Foreign-source income — including US investments, rental income from US property, US pensions, and remote work for US clients performed from Panama — is generally not taxed by Panama. This is the single most important fact for US expats: many Americans in Panama owe little or no Panamanian income tax. For Panamanian-source income, the individual tax rates are progressive: - 0% on the first $11,000 - 15% on $11,001 to $50,000 - 25% on income above $50,000 Check the current thresholds with the Dirección General de Ingresos (DGI), Panama's tax authority. The tax year runs January 1 to December 31, and individual returns are due by March 15 of the following year. ### Residency Test Panama does not have a statutory day-count residency test like many countries. Tax residency is generally determined by domicile — if you have a permanent residence permit (such as the Friendly Nations Visa or Pensionado Visa) and reside in Panama, you are considered a tax resident. However, because Panama uses a territorial system, becoming a Panamanian tax resident does not trigger worldwide taxation. You are only taxed on Panamanian-source income regardless of your residency status. For US tax purposes, Americans in Panama can qualify for the FEIE through either the Bona Fide Residence Test (establishing a genuine residence in Panama for a full tax year) or the Physical Presence Test (330 full days outside the US in a 12-month period). ### No US-Panama Income Tax Treaty The United States and Panama do not have a bilateral income tax treaty. The two countries signed a Tax Information Exchange Agreement (TIEA) in 2010 and Panama has a FATCA IGA, but these are information-sharing mechanisms, not treaties that reduce tax rates. Without a treaty, there are no reduced withholding rates on cross-border payments, no tie-breaker rules for dual residents, and no special provisions for pensions or government service income. The Foreign Tax Credit (Form 1116) is the only mechanism for offsetting any Panamanian taxes paid against your US liability. ### No US-Panama Totalization Agreement There is no social security totalization agreement between the US and Panama. If you are self-employed in Panama, you may owe both Panamanian Caja de Seguro Social (CSS) contributions and US self-employment tax. Employees working for Panamanian employers pay CSS contributions, and there is no exemption from US Social Security tax unless you can demonstrate to the IRS that you are not also earning self-employment income subject to US tax. This can create a double social security burden. ### FEIE vs. Foreign Tax Credit in Panama Panama's territorial system creates a unique situation for the FEIE vs. FTC analysis. If you work remotely from Panama for US clients, your income is foreign-source for US purposes (your tax home is in Panama) but generally not taxed by Panama (because it is not Panamanian-source income). In this scenario, you pay zero Panamanian tax, which means the FTC provides no benefit — the FEIE ($132,900 for 2026, $130,000 for 2025) is the only tool for reducing your US tax. If you earn Panamanian-source income (e.g., from a local business or employment), Panama's 15-25% rates are below US rates, so you will still owe some residual US tax after the FTC. The FEIE is almost always the better choice for US expats in Panama. ### Filing Obligations Summary A US citizen living in Panama typically must file: Form 1040 (US federal return), Form 2555 (FEIE) or Form 1116 (FTC) — the FEIE is almost always preferred in Panama due to the territorial system's zero-tax result on most income — FinCEN Form 114 (FBAR) if the aggregate value of foreign accounts exceeds $10,000, Form 8938 (FATCA) if financial assets exceed the threshold, and potentially a Panamanian tax return if you have Panamanian-source income. You may also need Form 3520 for any Panamanian private foundations and Form 8621 for any Panamanian investment fund holdings that qualify as PFICs. ### Real Estate and Property Tax Panama has a property tax (impuesto de inmueble) on real estate, with progressive rates on assessed values. Primary residences receive a homestead exemption. Property transfer tax is 2% of the registered value or the cadastral value, whichever is higher. For US purposes, property taxes paid to Panama are not deductible as a foreign income tax credit (property tax is not an income tax), but they may be deductible as an itemized deduction on Schedule A if you itemize.
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Tax Treaty Information
- No US-Panama income tax treaty exists — the two countries have only a Tax Information Exchange Agreement (TIEA) signed in 2010
- No reduced withholding rates on dividends, interest, or royalties — Panama applies domestic rates (dividends: 10% for bearer shares, 5% for registered; interest: 12.5% on deposits)
- No treaty-based tie-breaker residency provisions for dual residents
- No totalization agreement — potential double social security taxation through CSS and US FICA/SE tax
- Panama's FATCA IGA means Panamanian banks report US account holders to the IRS through DGI
FBAR & FATCA Requirements
US citizens in Panama must file the FBAR (FinCEN Form 114) if the aggregate value of all foreign financial accounts exceeds $10,000 at any point during the year. Although Panama uses the US dollar, Panamanian bank accounts are still foreign accounts. Reportable accounts include: - Bank accounts at Panamanian banks (Banco General, Banistmo, BAC International, Global Bank, etc.) - Brokerage accounts at the Bolsa de Valores de Panamá - CSS (Caja de Seguro Social) accounts - Foundation or trust accounts (Panama's private foundation structure is commonly used for asset protection) - Corporate bank accounts where you have signature authority For Form 8938 (FATCA), the threshold for expats filing jointly is $400,000 at year-end or $600,000 at any point ($200,000/$300,000 for single filers). Panama has a FATCA IGA, and following the 2010 TIEA, Panamanian financial institutions are required to report US person accounts. Panama was removed from various "tax haven" gray lists after implementing these transparency measures, but the IRS continues to scrutinize Panamanian accounts closely. The FBAR deadline is April 15, with an automatic extension to October 15. Willful non-filing penalties can reach the greater of $100,000 or 50% of the account balance per violation. Non-willful penalties can be up to $10,000 per account per year. Panama's history as a major banking center means the IRS pays particular attention to FBAR compliance for Panamanian accounts.
Foreign Earned Income Exclusion (FEIE)
The FEIE ($132,900 for 2026, $130,000 for 2025) is the most valuable tool for US expats in Panama. Because Panama's territorial system typically does not tax foreign-source income — and most remote workers' income is not Panamanian-source — the FTC is often worthless (you cannot credit tax you did not pay). The FEIE, combined with the Foreign Housing Exclusion (which can shelter housing costs above the base amount), is often the only way to reduce US tax. You must meet either the Bona Fide Residence Test or Physical Presence Test. Note that the FEIE covers only earned income (salary, wages, self-employment income), not passive income like dividends, interest, or capital gains. US expats in Panama with significant investment income will still owe US tax on that income with no Panamanian tax to credit. You should also be aware that the FEIE election, once made, can only be revoked with IRS consent. If you revoke the FEIE to switch to the FTC in a year when you earn Panamanian-source income subject to Panamanian tax, you cannot re-elect the FEIE for five years without IRS approval.
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Common Tax Issues in Panama
- 1Territorial System Creates Zero-Credit Trap. Panama's territorial system means you typically pay no Panamanian tax on foreign-source income. For US expats working remotely for US companies, this means zero Panamanian tax and therefore zero Foreign Tax Credits. Your only relief is the FEIE, and income above the $132,900 threshold (2026) is fully taxable by the US with no offset. Passive income (dividends, interest, capital gains from US investments) is also fully taxable by the US.
- 2Friendly Nations Visa and Tax Implications. The Friendly Nations Visa allows citizens of approximately 50 countries (including the US) to obtain permanent residence in Panama by establishing economic ties (opening a bank account, forming a company, or gaining employment). Obtaining the visa makes you a Panamanian tax resident, but due to the territorial system, this has minimal Panamanian tax impact. However, it can strengthen your case for the FEIE Bona Fide Residence Test for US purposes.
- 3Panama Pacifico Special Economic Zone. The Panama Pacifico SEZ (on the former Howard Air Force Base) offers tax incentives to qualifying businesses and their employees, including reduced income tax rates and other exemptions. US expats employed by companies in this zone should check whether their employment income is subject to the reduced rates and how this affects their FTC calculation.
- 4CSS Pension Contributions and US Self-Employment Tax. Panama's Caja de Seguro Social (CSS) collects mandatory social security contributions from employees and employers. Employee contributions are approximately 9.75% of salary, and employer contributions are approximately 12.25% (check the current rates with CSS). Without a totalization agreement, self-employed US citizens in Panama face potential double social security taxation: CSS contributions plus US self-employment tax at 15.3%. CSS contributions are not deductible on your US return.
- 5Panamanian Foundations and US Trust Reporting. Panama's Fundación de Interés Privado (Private Interest Foundation) is widely used for asset protection and estate planning. For US tax purposes, a Panamanian foundation is typically treated as a foreign trust, requiring annual Forms 3520 and 3520-A. The penalties for non-filing are severe — up to the greater of $10,000 or 35% of the gross reportable amount per year. Many US expats use foundations without realizing the US reporting burden.
- 6FBAR Despite Dollar Currency. Because Panama uses the US dollar as legal tender, some expats mistakenly believe their Panamanian bank accounts are not "foreign." They are. Any account at a Panamanian financial institution is a foreign account for FBAR purposes, regardless of the currency. The $10,000 aggregate threshold applies to the combined balances of all non-US accounts.
- 7Rental Income from Panama. If you own property in Panama and earn rental income, that income is Panamanian-source and subject to Panamanian income tax. The standard approach is to include rental income in your Panamanian tax return at the progressive rates (15-25%). For US purposes, you report the same income on Schedule E and claim the Panamanian tax as an FTC. Because Panama's rates are below US rates, you may owe residual US tax.
- 8State Tax Residency. Some US states continue to tax former residents who move abroad. California, New Mexico, South Carolina, and Virginia are among the strictest. If you maintained state domicile before moving to Panama, check your former state's rules. States generally do not recognize the FEIE, and you may owe state tax on your worldwide income even while living in Panama.
- 9Inheritance and Gift Tax Considerations. Panama has no estate or inheritance tax. However, US citizens remain subject to US estate and gift tax on worldwide assets. Gifts or inheritances received from non-US persons exceeding $100,000 in a calendar year must be reported on Form 3520. If you transfer assets to a Panamanian foundation or trust, the transfer may be a taxable gift for US purposes.
Filing Deadlines
Local Tax Rates
0%-25% (territorial system — only Panamanian-source income is taxed)
10% (on Panamanian-source gains only)
7% (ITBMS)
Local Resources
IRS Tax Treaty Tables
IRS listing of all US income tax treaties — confirms no US-Panama treaty exists; US expats rely on the FEIE and FTC
IRS International Taxpayers
IRS resources for US citizens abroad including FBAR, FEIE, FTC, FATCA, and foreign trust reporting
Dirección General de Ingresos (DGI)
Panama's tax authority — income tax rates, filing deadlines, and the territorial tax system rules
US Embassy in Panama City
US Embassy services for American citizens in Panama including notarials, tax information, and emergency assistance
Key Deadlines & Thresholds (Tax Year 2026)
| Item | Deadline / Threshold | Details |
|---|---|---|
| US tax return (Form 1040) | April 15 | Standard deadline for all US taxpayers |
| Automatic expat extension | June 15 | Automatic 2-month extension for US citizens and residents living abroad on April 15 |
| Extended deadline (Form 4868) | October 15 | Must file Form 4868 by April 15 (or June 15 if abroad) to extend; interest still accrues on unpaid tax |
| FBAR (FinCEN 114) | April 15 (auto-extended to October 15) | Filed electronically with FinCEN, not the IRS; no extension request needed |
| FEIE maximum exclusion | $132,900 | Maximum foreign earned income you can exclude for tax year 2026 ($130,000 for 2025) |
| FBAR reporting threshold | $10,000 | Aggregate balance across all foreign accounts at any point during the calendar year |
| Form 8938 (FATCA) — single filer abroad | $200,000 end of year / $300,000 any time | Higher thresholds apply to US persons living outside the United States |
| Form 8938 (FATCA) — married filing jointly abroad | $400,000 end of year / $600,000 any time | Domestic thresholds are lower ($50,000 / $75,000 single; $100,000 / $150,000 joint) |
FEIE vs Foreign Tax Credit: Which Should You Choose?
| Factor | FEIE (Form 2555) | Foreign Tax Credit (Form 1116) |
|---|---|---|
| What it does | Excludes foreign earned income from US taxable income | Credits foreign taxes paid against US tax liability dollar-for-dollar |
| Maximum benefit (2026) | $132,900 excluded from income, plus a housing exclusion | No cap; credit equals the lesser of foreign tax paid or US tax on that income |
| Best for | Expats in low-tax or no-tax countries (e.g., UAE, Singapore, Panama) | Expats in high-tax countries (e.g., UK, Germany, Japan, France) where foreign tax exceeds US tax |
| Qualification test | Bona fide residence test or physical presence test (330 full days in a 12-month period) | No residency or physical presence test required; available to anyone who pays foreign income tax |
| Carry forward | No; unused exclusion is lost | Yes; excess credits carry forward 10 years and back 1 year |
| Works in 0% tax countries? | Yes; this is its main advantage in zero-tax jurisdictions | No benefit if no foreign tax is paid (nothing to credit) |
| Applies to | Earned income only (salary, wages, self-employment) | All income categories (earned, passive, investment, capital gains) |
Frequently Asked Questions: US Taxes in Panama
Does Panama tax my US investment income?
Do I still need to file FBAR if my accounts are in US dollars?
How does the Friendly Nations Visa affect my US taxes?
Is my Panamanian private foundation a US-reportable trust?
What is a worked example of US-Panama tax filing?
Do I owe US self-employment tax in Panama?
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