US Expat Taxes for Americans Living in Portugal – Everything You Need to Know
It has been estimated that there are several thousand Americans living in Portugal.
Living in Portugal is an wonderful experience for a number of reasons, including the friendly locals, the climate, the beaches, and the quality of life. Many Americans working remotely have chosen to take advantage of Portugal’s self-employment visa. As an American expatriate living in Portugal though, what exactly do you need to know regarding filing US expat (and Portuguese) taxes?
All US citizens and green card holders who earn a minimum of around $12,000 (or just $400 for self-employed individuals) anywhere in the world are required to file a US federal tax return and pay taxes to the IRS, regardless of where in the world they live or their income is generated.
The good news is that there are various exclusions and exemptions available to reduce your US tax bill.
US taxes – what you need to know
If you earn over around US$12,000 (or just $400 of self-employment income), wherever the income originates in the world you have to file IRS form 1040. While any US taxes due are still due by April 15th, expats get an automatic filing extension until June 15th, which can be extended further on request until October 15th.
If you have overseas assets worth over US$200,000 per person, excluding your home if it is owned in your own name, you also have to file form 8938 to declare them.
If you had a total of at least US$10,000 in one or more foreign bank and/or investment accounts at any time during the tax year, you also have to file FinCEN form 114, otherwise known as a Foreign Bank Account Report or FBAR.
“Portugal’s mild climate – with more than 300 days of sunshine per year – ranks among the top reasons Americans decide to move to Portugal.” – PwC
If you pay income tax in Portugal, there are several exemptions that allow you to pay less (or no) US income tax on the same income to the IRS. The main one is the Foreign Earned Income Exclusion, claimed on Form 2555, which lets you exclude the first around US$105,000 of foreign earned income from US tax if you can prove that you are a Portuguese resident. Alternatively, the Foreign Tax Credit, claimed on Form 1116, gives you a $1 tax credit for every dollar of tax you’ve paid in Portugal. These exemptions can be combined if necessary, although not applied to the same income. Remember though that even if you don’t owe any tax to the IRS, if your income is over around US$12,000 (or $400 if you’re self-employed, or just $5 if you’re married but filing separately to a foreigner), you still have to file a federal return.
There is a US-Portugal Tax Treaty, however it doesn’t prevent expats from having to file US taxes. Some expats may be able to claim a provision in it though on specific types of income, such as dividends and royalties. If also contains a clause allowing the US and Portuguese governments to share taxpayer information, and Portuguese banks pass on US account holders’ account info to the IRS too, so it’s not worth not filing or omitting anything on your return or FBAR. The penalties for incorrect or incomplete filing for expats are steep, to say the least.
If you’re a US citizen, green card holder, or US/Portuguese dual citizen, and you have been living in Portugal but you didn’t know you had to file a US tax return, don’t worry: there’s a program called the IRS Streamlined Procedure that allows you to catch up on your filing without paying any penalties. Don’t delay though, as the program is only available before the IRS contacts you.
Portuguese taxes – what you need to know
Portuguese residents are taxed on their worldwide income on scale from 14.5% to 48%. There’s an additional Solidarity Tax for higher earners ranging from 2.5% to 5%. Non-residents are only taxed on Portuguese sourced income.
Foreigners living in Portugal are considered a resident for tax purposes if they spend more than 183 days in Portugal in any 365 day period or if thy maintain a residence in Portugal.
The Portuguese tax year is the same as in the US, which is to say the calendar year. Income tax returns are due by June 30th. The Portuguese tax authority is known as Financas.
We strongly recommend that if you have any questions or doubts about your tax situation as a US expat living in Portugal that you contact a US expat tax specialist.