Panama’s economy has boomed recently, spurred by bustling tourism and international trade. Attracted by this small Central American nation’s vibrant culture, food, and nightlife, as well as expanding business opportunities, thousands of Americans reside in Panama today.
Despite moving abroad, these Americans must still report their incomes to the IRS, lest they risk facing expensive financial penalties. Suppose you plan on expatriating to Panama or are among the thousands of U.S. citizens currently living and working there. In that case, ensuring you fully comply with all IRS reporting and filing requirements is important. Our tax CPAs can confirm whether or not you are a covered expatriate, how much income you can exclude from your U.S. tax return, and prepare your taxes to file by the due date to avoid unnecessary penalties for late reporting.
Call US Tax Help at (541) 362-9127 to learn more about how our tax CPAs for expats in Panama can help you.
Are You a Covered Expatriate After Moving to Panama?
The expatriation tax (exit tax), whose provisions can be found at 26 U.S.C. § 877 and § 877A, broadly applies to long-term residents who have terminated their U.S. resident status and persons who have renounced their U.S. citizenship to move to another country.
If you are a “covered expatriate,” any gifts or bequests you make on U.S. persons, such as an inheritance passed down to your children, will be taxed at the highest gift tax rate, which is currently 40% (above the excluded amount, which is $18,000 per year, per person). Through the “mark-to-market” tax imposed by the HEART Act (Heroes Earnings Assistance and Relief Tax), you will also be treated as though you have sold all your assets the day before expatriation at fair market value for tax purposes. Capital gains from the supposed sale are taxed as income.
You are a covered expatriate if you expatriated on or after June 17, 2008, and you could not certify via Form 8854 your total compliance with all federal reporting requirements and tax obligations for the five years before you expatriated. You would also be a covered expatriate if your net worth was at least $2 million on the day you expatriated or terminated your residency. Finally, if your average yearly net income tax exceeded certain thresholds during the five years before you expatriated or terminated your residency, you would also be considered a covered expatriate.
One of the most meaningful ways to avoid being a covered expatriate after moving to Panama is to reduce your net worth to below $2 million or to plan ahead of your expatriation to satisfy all tax obligations for the five years before you move abroad.
Who Has to File US Taxes After Moving to Panama?
You must continue filing U.S. taxes with the IRS as long as you maintain your American citizenship. The U.S. taxation system taxes all citizens based on their worldwide incomes, regardless of where they live.
This can be an unfortunate surprise to expats, who might have assumed that erasing their IRS tax liability would be a perk of moving abroad to another country like Panama. That is not the case, and expats could face similar IRS consequences as domestic residents for not filing or paying their income tax.
We can help you understand how your tax obligations change after moving abroad, including new international information returns you may have to file, such as Form 8938 or a Report of Foreign Bank and Financial Accounts.
How Much in US Taxes Will You Have to Pay After Moving to Panama?
The IRS requires all taxpayers, including expats, to report their worldwide incomes. However, the IRS also understands that Americans who live overseas should be able to exclude more of their incomes than domestic residents and offers exclusions that do just that.
While preparing your annual return, our tax CPAs for expats in Panama can complete IRS Form 2555 to determine your eligibility for the foreign earned income exclusion. For the 2024 tax year, the IRS lets expats exclude up to $1265,000 of their income from taxation. You can exclude this income as long as you pass either the bona fide residence test or the physical presence test. If you and your spouse expatriate to Panama together, you could each exclude $126,500 on your joint return, totaling up to $253,000 of your joint income.
For many expats, the foreign earned income exclusion alleviates most or all of their annual wages from IRS taxation. So, despite having to prepare and file your taxes to avoid penalties while living abroad, you might not end up owing any income tax to the IRS after our tax accountants claim the appropriate exclusions.
Who Can Claim the Foreign Tax Credit While Living in Panama?
The foreign tax credit lets expats credit the taxes paid to a foreign government, like Panama, to the IRS. This valuable credit helps expats prevent instances of double taxation, which is being taxed twice on the same income.
Like the foreign earned income exclusion, you can claim the foreign tax credit after passing either the bona fide residence test or the physical presence test.
To pass the former assessment, you must have been a bona fide resident of Panama for an uninterrupted period covering a full tax year. Expats can demonstrate this by showing their earnings from foreign companies, ownership of and residency in foreign properties, and taxes paid to foreign governments.
To pass the physical presence test, expats must be physically present in Panama for 330 full days across 12 consecutive months. This gives expats, especially those who have recently moved abroad, some leeway to travel or return to the United States temporarily while still qualifying for the foreign tax credit.
Are You Required to File an FBAR with the IRS for Bank Accounts in Panama?
In recent years, the IRS and Department of Justice have taken increasingly aggressive and far-reaching measures to crack down on acts of suspected tax evasion and other tax crimes. One such measure is the Report of Foreign Bank and Financial Accounts, commonly referred to as the FBAR. This requirement applies to anyone with offshore bank accounts over certain amounts, including expatriates.
Suppose you are a U.S. person, which includes citizens, residents, corporations, partnerships, limited liability companies, trusts, and estates, and have signature authority over or financial interest in a foreign financial account. In that case, you might have an FBAR liability. If the aggregate value of the account or accounts exceeded $10,000 at any point in time, however brief it may have been, our tax accountants can help you prepare an FBAR.
The deadline for FBAR reporting is also Tax Day, with an automatic extension until October 15th. The FBAR must be filed online via FinCEN Report 114, available exclusively through the BSA E-Filing System, and our tax CPAs for expats in Panama can help you navigate this complicated reporting method.
What Are the Consequences of Not Filing US Taxes for Expats in Panama?
Expatriates and citizens abroad are subject to unique and complex IRS criteria, violations of which can expose the taxpayer to severe civil and, under certain circumstances, even criminal consequences. Taking a proactive, aggressive, and strategic approach to your tax matter with assistance from an experienced tax CPA can help keep your financial options open while giving yourself the best possible chance of avoiding or mitigating the harsh penalties that might otherwise be imposed.
Expats who may not owe income tax to the IRS still have to report their annual earnings and claim the appropriate exclusions or credits to erase their liability. Otherwise, they could face serious financial penalties and, in egregious cases, criminal charges.
When the IRS believes taxpayers intentionally avoid reporting or paying what they owe, they might pursue criminal investigations and possibly bring charges. The IRS can do this against taxpayers who violate the Tax Code, even if they live abroad.
Typically, the IRS begins by assessing financial penalties, like for failure to file or pay. These penalties start as small percentages of what taxpayers owe but can grow as they continue to be unpaid.
The same Tax Day deadline applies to expats in Panama, though the IRS does give them an automatic two-month filing extension. Keep in mind that this filing extension does not stop interest from accruing on unpaid tax; it just stops the IRS from assessing initial penalties for late reporting.
The accidental or negligent failure to file an FBAR can result in a civil penalty of up to $10,000 per violation. The intentional (“willful”) failure to file an FBAR is more serious, capable of resulting in a civil penalty of the greater of $100,000 per violation or 50% of the account balance – and, of even greater concern, federal prosecution by the Department of Justice. Criminal penalties include a fine of up to $250,000 or up to five years in prison. Additionally, the taxpayer will receive a permanent felony record, which can present tremendous obstacles concerning loans, employment, and various professional licenses and certifications.
Call Us Today for Help with Your Taxes as an Expat
Call US Tax Help’s tax CPAs for expats in Panama at (541) 362-9127 for help with your American taxes.