United States citizens are required to pay taxes on their worldwide income. But those who live overseas at least 330 days of the year qualify for a Foreign Earned Income Exclusion which is $100,800 per person for 2015 tax returns. So that means that a couple living in Panama can deduct a $201,600 of income off their income tax return. Keep in mind that “income” is what that is left over after all expenses and deductions so you can actually earn much more than $201,600 and still owe no taxes. You do still have to report the income but you will not owe taxes on the income if it qualifies for the Foreign Earned Income Exclusion. For many that means they will own ZERO Taxes.
The foreign earned inclusion is granted because the US citizen does not live in the United States, therefore they are not using any of the services, the roads, the airports, national parks, etc. Even though there are millions of US citizens living abroad, they have no special representation in Congress.
The income must be “earned” income versus “passive” income. Foreign “Earned” income includes salaries, wages, commissions, bonuses, self-employment income. In addition, the income must be “foreign” earned meaning that the services were performed in a foreign country.
But income from rental properties or stock dividends will not qualify. It is possible to convert some passive income in to earned income by forming a management or consulting company to manage your passive investments. You can see other rules and restrictions at the IRS.GOV web site.
If the income is paid by a US corporation, you will still owe Social Security and possibly self-employment taxes. So it is best to be paid by an offshore corporation. You could have your US company hire your offshore company to do the work, then your offshore company pays you. Or, if you are self-employed, it is best to be paid by your own offshore entity.
In Panama, you will not owe any taxes to Panama unless you are selling a product or service in Panama. Many people have online companies in Panama. They sell products or services in the United States or Europe so they owe no taxes in Panama. There are many business opportunities in Panama. Even if you do owe taxes in Panama, they are much less than you would pay in the United States. And remember, most real estate has a 20-year property tax exemption in Panama. (no property taxes)
Yes! It is possible to live a tax free life in Panama.
Unfortunately, as long as you are a United States citizen, you will still have to file a tax return. It is best to hire a CPA who specilizes in expat taxes for advice and to file your tax return. I prefer working with a United States CPA who is also an expat because they thoroughly understand everything that is required to take full advantage of the Foreign Earned Income Exclusions.
When you combine a $201,600 income exclusion plus a much lower cost of living in Panama, it just makes sense for you to consider moving to Panama