The worldwide-taxation problem
The starting point for any US citizen abroad is that the United States taxes its citizens on worldwide income, regardless of where they live. Unlike most countries (which tax based on residence, so that a person who moves away ceases to be taxed by the home country), the US taxes its citizens and certain residents on all their income wherever it arises, which means a US citizen in Panama remains inside the US tax system. This is the fundamental fact that distinguishes US expat taxation from the expat taxation of most other nationalities, and it is the reason a US citizen in Panama cannot simply “become Panamanian for tax” by moving: the US filing and reporting obligations follow the citizen.
The consequence is that a US expat in Panama is, in principle, subject to two tax systems at once, the US worldwide system and Panama”s territorial system, and the practical question is how those systems interact to avoid taxing the same income twice. The interaction is managed not by a tax treaty (because, as this page covers, there is not one) but by the US”s own unilateral mechanisms for relieving double taxation, principally the Foreign Earned Income Exclusion and the foreign tax credit. Understanding which mechanism applies to which income, and what reporting attaches, is the substance of US-expat tax planning in Panama.
The Foreign Earned Income Exclusion
The principal mechanism by which a US expat avoids double taxation on earned income is the Foreign Earned Income Exclusion (FEIE). The FEIE allows a qualifying US person to exclude a defined amount of foreign-earned income from US taxation each year, and eligibility turns on establishing that the person”s tax home is in a foreign country and meeting one of two tests.[1] The two tests are the Bona Fide Residence test, under which the person is a bona fide resident of a foreign country for an uninterrupted period that includes a full tax year, and the Physical Presence test, under which the person is present in a foreign country or countries for at least 330 full days during any consecutive 12-month period.[1] The exclusion is claimed on Form 2555.
The choice between the two tests matters because they suit different situations. The Physical Presence test is mechanical (it counts days) and it suits an expat whose pattern of presence clearly clears the 330-day threshold, but it is unforgiving of substantial US travel that breaks the count. The Bona Fide Residence test is more flexible on presence but requires establishing genuine residence in the foreign country, which is a facts-and-circumstances determination rather than a day-count. An expat who maintains a home in Panama, works there, and limits US presence may qualify under either, but the two tests are not interchangeable, and the right one depends on the person”s actual pattern of life. The exclusion itself applies to earned income (wages, self-employment), not to passive income like investment returns, and the excluded amount is set annually. The current figure should be confirmed against the IRS guidance, because it is adjusted each year.[1]
FATCA and foreign-asset reporting
Alongside the income-tax mechanics sits a separate and consequential reporting regime: FATCA, embodied for the individual taxpayer in Form 8938, the Statement of Specified Foreign Financial Assets. A US person whose specified foreign financial assets exceed the reporting thresholds must file Form 8938 and report those assets (which can include foreign bank accounts, foreign-held securities, and interests in foreign entities) to the IRS.[2] FATCA reporting is distinct from income taxation: it does not, by itself, tax the assets, but it requires their disclosure, and the thresholds that trigger the filing depend on the filer”s status and residence.
For a US expat in Panama, FATCA is the regime that makes foreign accounts and assets visible to the US tax authorities, and it sits alongside another foreign-account reporting requirement, the FBAR (the foreign bank account report), that the US imposes separately. The two are not the same form, they have different thresholds and different filing mechanics, and a US person with foreign accounts may need to file both; the specifics of what triggers each, and the current thresholds, should be confirmed against the IRS and FinCEN guidance rather than assumed.[2] The practical point is that moving finances to Panama does not move them outside US reporting: a Panamanian bank account, a Panamanian brokerage position, or an interest in a Panamanian company are all potentially within the FATCA and FBAR reporting perimeter, and the penalties for non-compliance are severe enough that the reporting is not optional and not to be guessed at.
The Panama side: the territorial principle
On the Panama side, the relevant feature is the territorial principle: Panama taxes only Panamanian-source income, and foreign-source income is not taxed by Panama. The income that Panama does tax, Panamanian-source income, is taxed at a 25% general corporate rate and a 25% top individual rate.[3] For a US expat whose income is foreign-source (a US pension, US investment income, fees from US or other foreign clients), Panama does not tax that income, which means the Panama side of the equation is, for the typical foreign-source-earning expat, a 0% Panamanian liability on the income the US is taxing.
This is the structural complement to the US worldwide system, and it is why Panama is attractive to US expats despite the US worldwide reach: the income is taxed once (by the US) rather than twice, because Panama does not add a second layer on foreign-source income. But the territorial exemption on the Panama side is conditioned on the income genuinely being foreign-source, and an expat with Panamanian-source income (local employment, a Panamanian business, Panamanian real estate) has Panamanian tax on that income at the 25% rate, in addition to whatever the US position is.[3] The Panama side is not “no tax” in general; it is “no tax on foreign-source income,” and the distinction matters as soon as the expat has any economic activity inside Panama.
The treaty gap: a TIEA, not a tax treaty
The relationship between the US and Panama on tax is mediated by a Tax Information Exchange Agreement (TIEA), signed in 2010, rather than by a comprehensive income tax treaty.[4][5] The distinction matters. A comprehensive income tax treaty typically allocates taxing rights between the two countries, sets reduced withholding rates on cross-border payments, and provides tie-breaker rules for residency. It is an instrument that directly relieves double taxation. A TIEA, by contrast, is primarily an information-exchange instrument: it obliges the signatories to share tax information, supporting transparency and enforcement, but it does not, by itself, allocate taxing rights or provide the relief articles a treaty would.[4]
The practical consequence for a US expat is that the relief from double taxation does not come from a treaty mechanism. There is no US–Panama treaty article that, for example, caps Panama”s withholding on a US-source payment or provides a residency tie-breaker; the absence of Panama from the US income tax treaty list is itself the relevant fact.[4] Instead, relief runs through the US unilateral mechanisms (the FEIE for foreign-earned income, the foreign tax credit for income taxed by Panama) applied under US law. This works, in the sense that double taxation is generally avoided for the typical expat, but it works through the US code rather than through a negotiated treaty, which means the planning and the positions taken are US-law positions rather than treaty-election positions.
How the two systems interact
Putting the pieces together, a US citizen in Panama typically faces the following arrangement. Foreign-source earned income (say, salary or self-employment fees from non-Panamanian sources) is not taxed by Panama (territorial principle) and is potentially excludable from US tax under the FEIE, subject to the FEIE”s tests and capped at the annual exclusion amount; income above the exclusion, or income not eligible for the FEIE, is taxed by the US, with any foreign tax paid available as a credit.[1][3] Panamanian-source income (local employment, a local business) is taxed by Panama at 25% and remains taxable by the US on the worldwide-income principle, with the Panamanian tax potentially creditable against the US liability to avoid double taxation. Passive income (investment returns, dividends) is taxed by the US (it is not earned income and does not qualify for the FEIE) and is taxed by Panama only if Panamanian-source.
And over all of this sits the reporting layer: FATCA Form 8938 for specified foreign assets, the FBAR for foreign accounts, and the Panamanian filing obligations for any Panamanian-source income.[2][3] The interaction is manageable (US expats live and comply with it routinely), but it is not simple, and it is not symmetric: the systems apply different definitions, different thresholds, and different timing, and a position that is correct in one system may require a corresponding position in the other. The absence of a treaty means there is no single instrument reconciling the two; the reconciliation is done through the US mechanisms applied to the Panamanian facts, and it is work that rewards being done deliberately and on paper rather than by assumption.
Income the exclusion does not cover
The FEIE is the principal relief mechanism for foreign earned income, but it does not cover every kind of income a US expat may have, and the income that falls outside the exclusion is taxed under the ordinary US rules, with relief, where applicable, through the foreign tax credit. Earned income above the annual exclusion amount, passive income (investment returns, dividends, interest, capital gains), and certain other categories are not excluded by the FEIE, and they remain in the US tax base.[1] Where that income has been taxed by Panama (for example, Panamanian-source rental income or business income taxed at the 25% rate), the foreign tax credit is the mechanism that prevents the same income from being taxed twice, by allowing the Panamanian tax paid to offset the US liability on that income.[3] Where the income has not been taxed by Panama, because it is foreign-source under Panama”s territorial rule, there is no foreign tax to credit, and the US tax simply applies.
The planning consequence is that the expat”s US position is a patchwork of treatments rather than a single rule: earned foreign income up to the exclusion is excluded; earned foreign income above the exclusion is taxed by the US with a credit for any foreign tax; Panamanian-source income is taxed by Panama and credited against the US liability; and purely foreign-source passive income is taxed by the US with no Panamanian offset (because Panama did not tax it). Modeling these treatments correctly across an expat”s actual income streams is the substantive work of US-expat tax compliance, and it is work that the absence of a treaty does not simplify. On the contrary, the treaty gap means each treatment is applied under the US code on its own terms, without a negotiated override.[1][4] An expat whose income profile is more than a single excluded salary should expect the compliance to reflect that complexity, and should expect the professional cost of getting it right to be part of the cost of the arrangement.
The filing picture and the timeline
The practical experience of US-expat tax is also shaped by the filing calendar and the reporting layer, which run alongside the computation. US citizens abroad receive an automatic extension for the filing of their return, but the reporting obligations (the FEIE election on Form 2555, the FATCA filing on Form 8938 where the thresholds are met, and the separate FBAR for foreign accounts) attach on their own schedules and with their own documentation requirements.[1][2] The Panamanian side has its own filing calendar for any Panamanian-source income, and the two calendars do not align by design. They align only if the expat coordinates them deliberately.[3] The result is that a US expat in Panama maintains, in effect, two parallel compliance tracks, each with its own deadlines, forms, and supporting documentation, and the discipline of running both tracks cleanly is itself part of the cost of the arrangement.
A few practical points make this manageable. Keeping the documentation that supports both positions (the FEIE day-count or bona-fide-residence evidence, the foreign-account and asset records for FATCA and FBAR, and the Panamanian-source income records for the Panama filing) organized through the year prevents the end-of-period scramble that produces errors. Engaging professionals in both jurisdictions who can coordinate (the US preparer who understands the expat regime, and the Panamanian advisor who handles the local filing) closes the gap between the two tracks. And treating the reporting as a year-round discipline rather than an annual event is the posture that experience rewards, because the reporting failures that create the most exposure are the ones that accumulate quietly over years, not the ones that occur in a single filing.[2]
Caveats and what to verify
Two cautions close this page, and they bear particular weight on a topic that spans two tax systems. First, every load-bearing figure and rule is date-stamped as of 2026-07: the FEIE eligibility tests and the annual exclusion amount, the FATCA thresholds, the FBAR requirements, and Panama”s 25% rate and territorial principle are all set by law and regulation in their respective jurisdictions and change over time. The FEIE exclusion amount is adjusted annually, the reporting thresholds are revised, and Panama”s rates and source rules amend.[1][2][3][4] Anyone relying on a figure or a rule should confirm it against the current IRS, FinCEN, and DGI guidance, not against this or any summary. Second, this page describes the framework; it is not individual tax advice in either jurisdiction, and because a real position turns on the specific income streams, the residency and presence facts, and the interaction of two systems with no treaty between them, anyone proceeding should consult both a qualified US tax professional and a Panamanian tax attorney. The US worldwide reach and Panama”s territorial exemption are both real; making them work together correctly for a specific person is professional work, and the cost of getting it wrong, in either jurisdiction, is substantial.
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