How is Income Tax calculated in Panama?

The calculation of income tax in Panama is a crucial issue for both individuals and businesses operating in the country. Understanding how this tax is determined can help streamline finances and ensure compliance with tax laws.

In this article, we will explain in a simple way the steps required to calculate income tax in Panama, from determining annual gross receipts to applying tax rates and allowable deductions.

Steps to Calculate Income Tax

To calculate income tax in Panama, it is essential to follow a series of steps that ensure an accurate and law-compliant calculation. Here’s a breakdown of each of them:

Determination of Annual Gross Income

The first step in calculating income tax is to determine the annual gross income. This income includes all earnings earned during the tax year, such as wages, rental income, interest, dividends, and any other type of income. It is important to record all of this income accurately to avoid errors in the tax calculation.

Allowable Deductions

Once the annual gross income has been determined, the next step is to identify and apply the deductions allowed by law. Deductions can include medical expenses, educational expenses, donations to nonprofits, among others. These deductions reduce the total amount of income that will be taxable, which can result in significant savings.

Calculation of the Tax Base

The taxable income is calculated by subtracting allowable deductions from annual gross income. This taxable base is the amount on which the tax rates will be applied to determine the amount of tax to be paid. Make sure that all applicable deductions have been correctly deducted to obtain an accurate taxable income.

Application of Tax Rates

Once the taxable amount has been calculated, the corresponding tax rates are applied. In Panama, tax rates vary depending on income level and are divided into different brackets.

Tax Rates in Panama

Steps to Calculate Income Tax
Steps to Calculate Income Tax

Income up to $11,000: 0%

Income not exceeding $11,000 is tax-exempt.

Income between $11,001 and $50,000: 15%

For incomes in this range, a 15% rate applies.

Income over $50,000: 25%

Income exceeding $50,000 is subject to a 25% rate.

Common Exemptions and Deductions

In addition to tax rates, it’s important to be aware of common exemptions and deductions that may apply to reduce the tax burden. These include:

Personal Waiver

This exemption applies to all taxpayers and reduces the taxable base by a fixed amount determined by law.

Medical & Educational Expenses

Medical and educational expenses can be deducted as long as certain requirements established by law are met.

Donations to Non-Profit Entities

Donations made to officially registered non-profit entities may be deducted from gross income, provided that appropriate receipts are presented.

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