Guide to U.S. expat taxes in Portugal

Portugal has become a favorite destination for U.S. expats, with its sunny weather, rich history, and welcoming lifestyle. Whether you’re strolling through Lisbon’s charming streets or enjoying the tranquility of the Algarve, life in Portugal has so much to offer. But along with the perks come responsibilities—like managing your taxes in both the U.S. and Portugal.

As a U.S. citizen, you’re required to report your worldwide income to the IRS, even if you live abroad. At the same time, if you’re a resident in Portugal, you’ll need to file taxes there too. The good news is that there are ways to avoid paying taxes twice and even take advantage of Portugal’s special tax benefits for expats.

U.S. federal tax obligations for expats

Living in Portugal doesn’t mean you can leave your U.S. tax obligations behind. The U.S. is one of the few countries that taxes its citizens no matter where they live. But don’t worry—there are tools to help you avoid paying taxes twice. Let’s break down your U.S. tax responsibilities step by step.

The U.S. tax system mandates that citizens and resident aliens report all income from global sources. This includes:

• Employment Income: Salaries, wages, bonuses, and commissions earned in Portugal or any other country.
• Self-Employment Income: Earnings from freelance work or business operations conducted abroad.
• Investment Income: Interest, dividends, capital gains, and rental income from both U.S. and foreign sources.

Regardless of where the income is earned or where you reside, it must be reported to the Internal Revenue Service (IRS).

Example: If you earn R$120,000 working in Portugal, that income must be reported to the IRS, even if you already paid taxes on it in Portugal.

Filing requirements and thresholds

The requirement to file a U.S. tax return depends on your filing status, age, and gross income. For the tax year 2024, the thresholds are as follows:

• Single Filers: Must file if gross income is at least $13,850.
• Married Filing Jointly: Must file if combined gross income is at least $27,700.
• Married Filing Separately: Must file if gross income is at least $5.
• Head of Household: Must file if gross income is at least $20,800.

These thresholds are subject to annual adjustments for inflation. It’s crucial to verify the current year’s thresholds to ensure compliance.

Key tax exclusions and credits

Paying taxes in both Portugal and the U.S. might sound like a hassle, but don’t worry—there are tools to help you avoid paying twice on the same income. By understanding and using these strategies, you can save money and stay compliant with tax laws in both countries.

Foreign Earned Income Exclusion (FEIE)

The FEIE allows qualifying U.S. expats to exclude a certain amount of foreign-earned income from U.S. taxation. For 2023, this exclusion amount is up to $126,500.

To qualify, you must meet one of the following tests:

• Physical Presence Test: You’ve spent at least 330 full days in Portugal (or another foreign country) during any 12-month period.
• Bona Fide Residence Test: You’ve spent at least 330 full days in Portugal (or another foreign country) during any 12-month period.

To claim the FEIE, file Form 2555 with your U.S. tax return.

Example: If you earn €50,000 working in Portugal, you could exclude the entire amount using the FEIE, leaving you with no U.S. taxes owed on that income.

Foreign Tax Credit (FTC)

The FTC lets you reduce your U.S. taxes dollar-for-dollar for income taxes paid in Portugal. This is particularly useful because Portugal’s tax rates are often higher than U.S. rates.

Example: If you owe €10,000 in Portuguese taxes and $8,000 in U.S. taxes, the FTC can reduce your U.S. tax bill to zero.

Foreign Housing Exclusion

If you’re living in Portugal, you can deduct certain housing expenses, like rent, from your U.S. taxable income. This exclusion is especially useful in higher-cost cities like São Paulo or Rio de Janeiro.

Example: If your rent in Lisbon is $2,000/month, you can exclude a portion of that cost to further reduce your taxable income.

State tax obligations for the U.S. expats in Portugal

Federal taxes aren’t the only thing to consider when moving abroad. If you lived in the U.S. before relocating to Portugal, you might still owe taxes to your former state—depending on where you lived and whether you’ve officially severed ties.

Determining state domicile

State tax obligations depend on whether your previous state of residence considers you a tax resident. Generally, your state of domicile—your permanent home—determines whether you owe state taxes. If you’ve moved to Portugal but still maintain strong ties to your former state, such as owning property or holding a driver’s license, you may still be considered a tax resident.

To avoid ongoing state tax obligations, it’s often necessary to formally sever ties with your previous state of residence.

Here’s a breakdown of states by tax treatment:

States with no tax on worldwide income for non-residents

These states provide favorable tax treatment for expats, as they do not impose taxes on global income if you can establish non-resident status:

• Colorado
• Connecticut
• Delaware
• Massachusetts
• Minnesota
• Missouri
• North Dakota
• Oregon
• Pennsylvania
• Virginia
• West Virginia

Expats from these states may not need to take significant steps to maintain their non-resident status once they relocate. This group of states offers considerable savings by not taxing worldwide income, making them favorable options for expats.

States that tax worldwide income but offer FEIE

These states tax worldwide income but provide some relief to expats by allowing a Foreign Earned Income Exclusion (FEIE). For the 2024 tax year, the FEIE lets expats exclude up to $126,500 of foreign-earned income from state income tax.

• Alabama
• Arizona
• Georgia
• Idaho
• Illinois
• Indiana
• Iowa
• Kansas
• Kentucky
• Maine
• Michigan
• Ohio
• Oklahoma
• Rhode Island
• South Carolina
• Utah
• Vermont

While these states tax global income, expats can reduce their tax liability with the FEIE, which allows them to exclude a significant portion of their foreign earnings.

States that tax worldwide income with no FEIE

These states tax worldwide income but do not provide a Foreign Earned Income Exclusion, resulting in higher potential tax burdens for expats, as there is no mechanism to offset foreign-earned income:

• Arkansas
• Indiana
• Kentucky
• Louisiana
• Maine
• Maryland
• Mississippi
• Montana
• Nebraska
• New Mexico
• North Carolina
• Wisconsin

Expats domiciled in these states face more significant tax liabilities on their global income due to the lack of FEIE, which makes establishing domicile elsewhere more appealing.

States with the highest tax burden for expats

Some states impose the most stringent tax policies on expats, including high income tax rates and no exclusions for foreign-earned income. If you’re domiciled in one of these states, relocating your domicile to a more tax-friendly state can lead to substantial savings.

• California
• Hawaii
• New Jersey
• New York

These states have high income tax rates and tax worldwide income with no exclusions, making them the least favorable for expats in terms of tax savings.

Steps to reduce state tax obligations

If you plan to avoid state tax obligations, especially from states that tax worldwide income without providing relief, consider these steps:

1. Establish domicile in a tax-friendly state: Moving your official residence to a state with no income tax, like Florida, Nevada, Texas, or South Dakota, can significantly reduce your tax burden.
2. Update official documents: Cancel voter registration, update your driver’s license, and transfer financial accounts to reflect your new domicile.
3. File a final tax return in your previous state: This signals the end of your tax residency and helps prevent future state tax liabilities.

Additional U.S. reporting requirements – FATCA and FBAR

Living in Portugal as a U.S. expat comes with extra responsibilities, especially when it comes to reporting foreign bank accounts and assets. The U.S. government has strict rules to ensure taxpayers disclose their financial activities abroad. While this might sound intimidating, staying compliant is straightforward if you understand the requirements.

FATCA (Foreign Account Tax Compliance Act)

The Foreign Account Tax Compliance Act, or FATCA, was introduced to help the IRS prevent tax evasion by U.S. citizens using foreign accounts. FATCA requires U.S. taxpayers to report certain foreign assets to the IRS. Here’s what you need to know about FATCA and its requirements:

Who needs to file under FATCA? 

If you have foreign assets that exceed certain thresholds, you’ll need to report them on Form 8938, which is submitted along with your regular tax return. For single filers living abroad, the threshold is $200,000 on the last day of the tax year or $300,000 at any point during the year. For married couples filing jointly, the thresholds are doubled.

What needs to be reported? 

Reportable assets under FATCA include foreign bank accounts, investment accounts, foreign stocks, and even certain pensions. Generally, any financial assets held outside the U.S. should be reviewed to determine if they need to be reported.

How to file FATCA (form 8938? 

If you meet the reporting threshold, you’ll complete Form 8938 and submit it with your regular tax return (Form 1040). The form requires details like account numbers, maximum account values, and the financial institution’s location.

Example: If you hold €300,000 in Portuguese bank accounts and investments, you’ll likely need to file Form 8938.

FBAR (Foreign Bank Account Report)

The Foreign Bank Account Report (FBAR) is another requirement for U.S. citizens with overseas accounts. While FATCA applies based on the value of financial assets, the FBAR requirement is specifically tied to foreign bank accounts. Here’s a breakdown:

Who needs to file FBAR? 

If the combined balance of all your foreign bank accounts exceeds $10,000 at any point during the year, you’re required to file an FBAR. This rule applies even if you just temporarily crossed the $10,000 threshold. For instance, if you have two accounts—one with $5,000 and another with $6,000—you would need to file an FBAR, as the combined balance is over $10,000.

Example: If you have €5,000 in a checking account and €6,000 in a savings account, their combined value exceeds $10,000, and you must file an FBAR.

How to file the FBAR (fincen form 114)? 

The FBAR is filed separately from your tax return and is submitted online through the Financial Crimes Enforcement Network (FinCEN). The form, FinCEN Form 114, requires you to report details about each foreign account, including the bank name, account number, and maximum balance during the year.

Important deadlines and penalties 

The FBAR filing deadline is April 15, but there is an automatic extension until October 15 for those who miss the initial deadline. Be mindful of FBAR filing, as the penalties for not reporting eligible accounts can be severe, with fines starting at $10,000 for each unreported account.

Understanding the difference between FATCA and FBAR

While FATCA and FBAR both aim to provide the IRS with information about foreign financial accounts, they have distinct differences:

• Different thresholds: FATCA requires reporting if your foreign assets exceed $200,000 as a single filer, while FBAR applies if the total balance in all foreign accounts exceeds $10,000.
• Different filing locations: FATCA reporting (Form 8938) is filed with your federal tax return, whereas the FBAR is filed separately through FinCEN.
• Types of assets reported: FATCA requires reporting a broader range of foreign financial assets, while FBAR focuses only on foreign bank accounts.

Why do FATCA and FBAR matter for U.S. expats?

Failing to file FATCA and FBAR can result in significant penalties, so it’s essential to understand whether you’re required to report these assets. While it may seem like an extra step, filing these forms can help ensure compliance with IRS regulations and avoid unnecessary fines.

If you have foreign bank accounts or financial assets, it’s a good idea to consult a tax professional to ensure you’re meeting all reporting requirements.

Portugal tax obligations for U.S. expats

As a U.S. expat in Portugal, understanding your tax obligations is essential for staying compliant and avoiding unnecessary penalties. Portugal’s tax system applies to both residents and non-residents, with tax residency determining whether you’re taxed on worldwide income or only on income earned in Portugal.

For many expats, the Non-Habitual Residency (NHR) program offers substantial tax benefits, especially for those who obtained this status under the original rules before 2024.

Determining tax residency in Portugal

Portugal determines tax residency based on these criteria:

• 183-Day Rule: You’re considered a tax resident if you spend 183 days or more in Portugal within a calendar year.
• Primary Residence: If Portugal is your main home or the center of your economic activities, you may also be deemed a resident.
• Voluntary Declaration: You can declare yourself a resident if you meet certain criteria, even if you don’t spend 183 days in the country.

As a tax resident, you’ll need to report your worldwide income to Portuguese tax authorities. Non-residents are only taxed on income earned within Portugal.

Portugal’s income tax rates

Portugal uses a progressive tax system to calculate income tax. Here are the rates for 2024:

• Up to €7,479: 14.5%
• €7,480 to €11,284: 23%
• €11,285 to €15,992: 26.5%
• €15,993 to €20,700: 28.5%
• €20,701 to €26,355: 35%
• €26,356 to €38,632: 37%
• €38,633 to €50,483: 43.5%
• Over €50,483: 48%

Example: If you earn €45,000 annually, your income is taxed progressively across these brackets, with only the amount above €38,633 taxed at 43.5%.

Additional Taxes and Contributions

• Solidarity Tax: A surcharge on high earners:
  • 2.5% on income between €80,000 and €250,000.
  • 5% on income exceeding €250,000.
• Social Security Contributions:
  • Employees contribute 11% of their gross salary.
  • Employers contribute 23.75% on behalf of employees.
  • Self-employed individuals contribute at a flat rate of 21.4%, based on declared income.
• Capital Gains Tax:
  • Residents: Progressive rates apply.
  • Non-residents: Flat rate of 28%.
• Wealth Tax (AIMI): Applies to real estate holdings exceeding €600,000, with rates ranging from 0.4% to 1%.
• Value Added Tax (VAT):
  • Standard rate: 23%.
  • Reduced rates: 13% and 6% for specific goods and services.

Non-Habitual Residency (NHR) program

If you obtained Non-Habitual Residency (NHR) status before the 2024 changes, you can still enjoy its benefits until your 10-year period ends. The original NHR program was a major draw for retirees and professionals, offering significant tax savings.

Key features of the original NHR:

• Foreign-Sourced Income Exemptions:
  • Certain foreign-sourced income, such as pensions, dividends, royalties, and interest, were exempt from Portuguese taxes.
  • U.S. expats still need to report this income to the IRS, but the exemption in Portugal prevents double taxation.
• Flat 20% Tax Rate for High-Value Professions: Professionals in qualified fields (e.g., IT, engineering, healthcare) paid a flat 20% tax on Portuguese-sourced income instead of the progressive rates.
• Pension Taxation: Foreign pensions were exempt from Portuguese taxation if they were taxable in the country of origin (e.g., the U.S.).

Example: A retiree receiving $60,000 annually from a U.S. pension could enjoy full tax exemption in Portugal while only paying U.S. taxes on that income.

Who qualifies for the original NHR?

To retain the benefits:

• You must have applied for NHR status before the 2024 changes took effect.
• You must not have been a tax resident in Portugal during the 5 years prior to your application.

Recent changes: the new NHR 2.0 program

Starting January 2024, Portugal replaced the original NHR program with NHR 2.0, which focuses on attracting professionals in high-value sectors. However, this new program excludes passive income such as pensions, dividends, and capital gains.

Key features of NHR 2.0:

• Flat 20% Tax Rate: Only applies to Portuguese-sourced income from scientific, technical, and high-value activities.
• Exclusions: Passive income streams, including pensions and investment income, no longer receive favorable tax treatment.

While NHR 2.0 is beneficial for active professionals in specific fields, the original NHR remains more advantageous for those who qualified before 2024.

Filing deadlines and tax year in Portugal

• Tax Year and Deadlines:
  • Portugal’s tax year runs from January 1 to December 31.
  • The filing deadline is typically June 30 of the following year.
• What to Declare:
  • Tax residents: Income from all global sources.
  • Non-residents: Only Portuguese-sourced income.
• How to File:
  • Use the Portuguese tax authority’s online portal (Portal das Finanças).
  • Hire a local accountant to simplify the process, especially if you’re unfamiliar with Portuguese tax laws or language.

U.S.-Portugal tax treaty

The U.S.-Portugal Tax Treaty is an agreement between the two countries that helps U.S. expats avoid double taxation and simplifies the tax rules for income earned across borders.

By understanding the treaty’s provisions, you can reduce your tax burden and ensure compliance in both countries.

Key benefits

• Avoiding Double Taxation:
  • The treaty ensures you’re not taxed on the same income in both the U.S. and Portugal. It provides mechanisms, like credits and exemptions, to prevent this.
  • Income is generally taxed in the country where it’s earned, with the other country offering credits or exemptions.
• Reduced Withholding Taxes:
  • The treaty reduces withholding tax rates on certain types of income, such as:
    • Dividends: Maximum rate of 15%.
    • Interest: Taxed only in the country of residence.
    • Royalties: Capped at 10%.
• Special Provisions for Pensions and Retirement Income:
  • Social Security benefits are taxable only in the country of residence.
  • Private pensions may be taxed in the U.S. or Portugal, depending on specific circumstances.
• Definition of Residency: The treaty includes “tie-breaker” rules to determine tax residency when both countries consider you a resident. This helps clarify where you should pay taxes if you meet residency requirements in both countries.

How the treaty applies to different types of income

• Employment Income:
  • Salaries earned in Portugal are typically taxed in Portugal.
  • The U.S. allows you to use the Foreign Tax Credit (FTC) to offset U.S. taxes on this income.
• Dividends, Interest, and Royalties:
  • These types of passive income benefit from reduced withholding rates under the treaty.
  • Example: Dividends paid by a U.S. company to a Portuguese resident are subject to a maximum 15% withholding tax, rather than the standard rate.
• Pensions:
  • U.S. Social Security benefits are only taxable in the U.S., not Portugal.
  • Private pensions may be taxable in Portugal if you’re a tax resident, but exemptions might apply if you’re under the Non-Habitual Residency (NHR) program.
• Capital Gains:
  • Gains from selling property are usually taxed in the country where the property is located.
  • Example: If you sell a home in Portugal, you’ll pay Portuguese capital gains tax, but the U.S. will allow you to claim credits for those taxes.

Tie-breaker rules for residency

If both the U.S. and Portugal consider you a resident for tax purposes, the treaty provides rules to determine your primary residency:

• Permanent Home: Where you maintain a permanent home takes priority.
• Center of Vital Interests: If you have homes in both countries, the country where your economic and personal interests are strongest takes precedence.
• Habitual Abode: If the above doesn’t resolve the conflict, the country where you spend the most time will be your tax residency.

Social Security Agreement (Totalization Agreement)

In addition to the tax treaty, the U.S. and Portugal have a Totalization Agreement to:

• Prevent double social security contributions. Example: If you’re a U.S. expat working in Portugal for less than five years, you can remain in the U.S. Social Security system and avoid contributing to Portugal’s system.
• Combine work credits from both countries. Example: If you worked in the U.S. for 7 years and in Portugal for 8 years, the agreement allows you to combine these credits to qualify for retirement benefits in either country.

Portugal tax filing process for U.S. expats

If you’re a resident in Portugal, you must report your worldwide income to the Portuguese tax authorities. If you’re a non-resident, you’ll only need to report income earned within Portugal.

Tax year and deadlines:

• Tax Year: January 1 to December 31.
• Filing Deadline: Typically June 30 of the following year.

Required documents:

• Proof of income (e.g., salary statements, rental income records).
• Bank and investment account details.
• Documents for deductions (e.g., health expenses, education costs, or dependent records).

How to file:

• Online: Use Portugal’s tax portal (Portal das Finanças) to submit your return electronically.
• In-Person: Visit a local tax office if you’re unfamiliar with the online system.
• Professional Help: Many expats hire accountants to handle Portuguese tax filings, especially if they’re navigating the language barrier or complex finances.

Deductions you can claim:

Portugal allows deductions to lower your taxable income:

• Health Expenses: Includes medical and dental costs, as well as insurance premiums.
• Education Costs: Tuition and school-related expenses for dependents.
• Dependents: Fixed deductions for each dependent child or family member.

Social Security Contributions: Amounts paid into Portugal’s social security system.