US Expat Taxes in Panama: FEIE, FBAR and FATCA

The United States taxes its citizens on worldwide income regardless of where they live. Moving to Panama does not alter that, and no Panamanian status can. As our guide to the territorial system puts it, Panama’s rules do not, and cannot, release a US citizen from the IRS.

What Panama does change is the other side. Because it does not tax foreign-source income, an American living here typically faces no local charge on income earned outside Panama. There is no second tax authority sending a bill. That genuinely simplifies life — and, as section 05 explains, it also removes a tool that Americans in most other countries rely on.

This guide covers the three instruments that structure the American filing year abroad: one that can reduce what you owe, and two that only report. Confusing those categories is where most of the trouble starts.

The Foreign Earned Income Exclusion, claimed on Form 2555, lets a qualifying person exclude foreign earned income from US taxation up to an annual ceiling that the IRS adjusts for inflation.

If you qualify for only part of a year — the usual situation in the year you move — the ceiling is prorated. The method is arithmetic rather than judgement: multiply the maximum for the year by your qualifying days, then divide by 365 (366 in a leap year).

There is also a housing element. The limitation on housing expenses is generally 30% of the maximum exclusion — $39,000 for 2025 and $39,870 for 2026 — though the IRS notes the limit varies with the location of your foreign tax home and your number of qualifying days.

This is the section to read twice, because the single most consequential fact about the FEIE is hidden in its middle word.

Foreign earned income is income you receive for services you perform. Salaries, wages, commissions, bonuses, professional fees, tips and business profits qualify. So do certain noncash benefits and allowances.

The IRS is equally explicit about what does not qualify:

• Pensions and annuities
• Social Security benefits
• Dividends, interest and capital gains
• Gambling winnings
• US government employee pay

Read that list against who actually moves to Panama and the implication is stark. The country’s best-known residency route is built specifically around a lifetime pension of at least $1,000 a month. Somebody qualifying for Panamanian residency on exactly that basis is, by definition, living on income the FEIE does not touch.

That is not a loophole or a technicality — it is the design. The exclusion exists to relieve people who work abroad, not people whose capital or entitlements sit abroad. A retiree relying on Social Security and a 401(k) drawdown gets nothing from Form 2555 no matter how many days they spend in Panama. The remote worker invoicing US clients from a laptop in Panama City is the person the provision was written for.

Your tax home must be abroad, and you must satisfy one of two tests. The bona fide residence test turns on establishing genuine residence in a foreign country. The physical presence test is mechanical, and mechanical means plannable.

The provision most people miss is the flexibility of the window. The 12-month period may begin on any day of the month — it does not have to start with your first full day abroad or align with the calendar year — and the IRS states plainly that you may choose the 12-month period that gives you the greatest exclusion.

That single sentence is worth more than most planning advice. In the year you move, the difference between a badly chosen window and a well chosen one is measured directly in qualifying days, and qualifying days are what the proration formula multiplies.

Americans abroad generally have two tools against double taxation: the exclusion above, and the foreign tax credit, which offsets US tax with tax actually paid to another country.

In most destinations the credit does heavy lifting, because the local authority takes a meaningful share first. Panama is structurally different. Under its territorial system, foreign-source income generally attracts no Panamanian tax at all.

The consequence is arithmetic rather than opinion: a credit for foreign taxes paid requires foreign taxes to have been paid. If Panama charges nothing on that income, there is nothing to carry into the credit. The tool most expat guides treat as interchangeable with the exclusion is, for this specific population, largely empty.

So the American in Panama tends to be in an unusual position: no local tax bill, and also no local tax credit — which concentrates everything onto whether the FEIE applies at all. Which returns us to section 03, and to the difference between working income and retirement income.

Everything above concerns income tax. If you are self-employed — the freelancer, consultant or remote contractor the FEIE is best suited to — there is a second tax, and the exclusion does not reach it.

The IRS states the rule without hedging: you must take all your self-employment income into account in figuring your net earnings from self-employment, even if all, or a portion of, gross income was excluded because of the foreign earned income exclusion.

Read that alongside section 02 and the shape of the problem appears. An American contractor in Panama City can exclude their earnings from income tax entirely, file a return showing no income tax due, and still owe self-employment tax on the same money. The exclusion worked exactly as designed; it simply was never aimed at this tax.

The mechanism that can relieve it is a totalization agreement. The IRS describes what these do: they eliminate dual coverage and dual contributions for the same work, generally ensuring Social Security taxes — self-employment tax included — are paid to only one country.

Whether one covers you is therefore the question to settle before assuming any relief, and it is a question with a definitive answer rather than an opinion. The Social Security Administration publishes the authoritative list of agreement countries. It is worth knowing before you look that the list is short — on the order of thirty countries worldwide, of which only four are in the Americas — so the base rate for relief in this region is low. Check the SSA list for your own situation rather than assuming either way, and if no agreement applies, budget for the self-employment tax as a standing cost of working for yourself from here.

The FBAR reports; it does not tax. That makes it easy to dismiss and expensive to forget.

Two words in that threshold do most of the damage. Aggregate means every account added together, so two accounts of $6,000 each cross a line neither crosses alone. At any time means a single day counts — a property deposit or a transfer that sits in a Panamanian account for a week triggers the obligation for the whole year, even if the balance is back to zero by December.

If you have opened a local account at all, assume you are in scope and check rather than assume you are not.

Form 8938 also reports rather than taxes, and it is routinely confused with the FBAR. The thresholds are far higher for people living abroad, which is the good news; the bad news is that satisfying one form does nothing for the other.

The differences that matter operationally: Form 8938 is filed with your annual income tax return and goes to the IRS, whereas the FBAR is filed separately to FinCEN. The two use different definitions and rules, and the IRS notes that some foreign financial accounts may appear on one form and not the other.

Treat them as two independent obligations that happen to overlap, not as one obligation with two names.