First I would like to say we are a Real Estate Brokerage and our business is strictly limited to serving our clients either buying | selling or renting property in Portugal… The information in this post is an accumulation of many years of experience working closely with our clients and trusted attorney, as well as accountant, and you should always seek a Lawyer | Solicitor | Notary | Tax Attorney | Accountant or other professional for legal advice and representation, as this information is not to be considered any form of legal advice, and additionally the tax or Visa | residency laws are subject to change.
With that said, when it comes to taxes, Americans Moving to Portugal find themselves navigating a unique set of rules. Unlike many countries, the United States is among the few nations that tax their citizens on their global income, regardless of where they reside. This means that even if you pack your bags and establish a new life in Portugal, your U.S. tax obligations remain a constant.
However, these overarching tax principles are just the tip of the iceberg. Every situation is different, and it’s crucial to remember that what applies to one person may not apply to another.
We recommend that to fully understand your unique tax situation, seeking personalized guidance from a tax advisor is a wise step.
In this post, we will explore the essential tax considerations Americans should consider when making Portugal their new home. Let’s take a look!
Americans Moving to Portugal: US Tax System
The American tax system relies on citizenship rather than residency, so individuals with US citizenship are subject to taxation on their income worldwide, regardless of their place of residence. Nevertheless, there are tax advantages accessible to US citizens residing overseas like in Portugal.
Let’s take a look at the Foreign Earned Income Exclusion (FEIE), the Foreign Tax Credit (FTC), and the Streamlined Filing Compliance Procedure, advantages that Americans moving to Portugal can use.
The Foreign Earned Income Exclusion (FEIE)
The Foreign Earned Income Exclusion allows US citizens living in Portugal to exclude a portion of their foreign-earned income from US taxes, up to $120,000 for 2023. This amount is adjusted with inflation yearly.
According to the IRS, to be eligible for these benefits, you must meet specific criteria:
1. You must have income earned in a foreign country;
2. Your primary place of work for tax purposes must be in a foreign country;
3. You must fall into one of the following categories:
❖ A U.S. citizen who has established genuine residency in a foreign country for an unbroken period, including a full tax year;
❖ A U.S. resident alien who is both a citizen or national of a country that has an active income tax treaty with the United States and who has established genuine residency in a foreign country for an unbroken period, including a full tax year;
❖ A U.S. citizen or U.S. resident alien who has been physically present in a foreign country for at least 330 complete days within any 12-month consecutive period.
The Foreign Tax Credit (FTC)
The Foreign Tax Credit (FTC) is a protection available to U.S. expats to prevent double taxation on the same income. The FTC provides a means for U.S. expats to offset, dollar for dollar, the foreign taxes they have paid overseas, but it’s important to note that this credit only pertains to income taxes.
If you have already fulfilled your income tax obligations in a foreign nation, the FTC grants you a credit that can be applied to reduce your U.S. tax liability.
To calculate your tax credit, you’ll divide your foreign-sourced taxable income amount by your total taxable income, then multiply that result by your U.S. tax liability.
The Streamlined Filing Compliance Procedure
Many expats living abroad for years might not have realized their obligation to file annual US tax returns. If you find yourself in this situation, there’s no need to panic. The IRS has introduced a solution called the Streamlined Filing Compliance Procedures, which allows you to catch up on your taxes without incurring penalties.
To be eligible for the Streamlined Offshore Filing program, you must meet these requirements:
1. Demonstrate that your previous non-filing was “Non-Willful”: You must attest, under penalty of perjury, that your failure to comply with U.S. tax requirements was unintentional, stemming from either a mistake or a lack of understanding of your obligations.
2 Not have had a residence in the U.S. for one or more of the last three tax years;
3. Have been physically present outside the United States for a minimum of 330 full days during one or more of the three most recent tax years;
4. Possess either a Social Security Number or a Taxpayer Identification Number (ITIN). If you do not qualify for a Social Security Number and do not already have an ITIN, you can apply for one when submitting your tax documents under the Streamlined program.
Portuguese Tax System for Americans
Understanding the Portuguese tax system is extremely important as an American moving to Portugal. Keep in mind that if you stay in Portugal for 183 days consecutive or interpolated within a single calendar year, the Portuguese tax authorities will classify you as a tax resident.
Being recognized as a tax resident of Portugal entails the obligation to pay taxes on your income from all sources worldwide.
The Portuguese Social Security system secures citizens’ basic rights and ensures equality in opportunities, providing support measures such as unemployment allowances, paternal leave, and other financial support.
When you are employed in Portugal, you will need to contribute to the social security system which in turn, grants you access to the national health service, for example.
These contributions are divided between the employer and the employee. The employer covers 23.7% of the employee’s total salary, while the employee contributes 11%. If you are self-employed, you are responsible for paying your own contributions, which are higher at 21.4%.
Capital Gains Tax
As a general rule, Portugal taxes capital gains at a rate of 28%. However, there are a number of exemptions and deductions available.
For example, if you sell your primary residence in Portugal and reinvest the proceeds in another primary residence within a specified timeframe, you won’t be subject to capital gains tax on the profit from the sale.
Under the NHR regime, and I am assuming you moved to Portugal before 2023 ended to advantageously benefit from it as the NHR Tax regime is no longer available, you will not have to pay any tax on capital gains from outside Portugal.
Portugal abolished its inheritance tax in 2004. However, a 10% stamp duty tax applies when assets are gifted or passed on at death. Still, spouses and children are not liable for stamp duty when they inherit assets.
Moreover, your US assets will be exempt, as this only applies to inheritances in Portugal.
1. Seek Expert Guidance: Connect with a tax advisor well-versed in the Portuguese tax system. Their expertise can help you navigate the complexities and ensure compliance with local tax laws;
2. Study the Portuguese Tax System: Take the time to thoroughly research and understand the intricacies of the Portuguese tax system. Being informed will empower you to make well-informed financial decisions.
3. Maintain Detailed Records: Keep records of your income and expenses while living in Portugal. This record-keeping is invaluable for accurate tax reporting and deductions.
4. Timely Filing and Payment: It’s vital to meet tax deadlines. Make sure to file your taxes promptly and settle any taxes owed on time to avoid penalties and interest.
5. Utilize Tax Incentives: Familiarize yourself with available tax incentives
I’ll be more than happy to share my experience with you, after almost 23 years living in Portugal.
I’ll also walk you through Portugal using Google Maps, show you the best Cities or communities and neighborhoods that match your ideal lifestyle and budget, and go over the moving and buying process as well as the best Visa process to establish residency and ultimately Citizenship.
If you have not made up your mind that Portugal is the home for you, and want to learn all about Portugal’s rich culture, tantalizing gastronomy, exquisite wine culture, real estate opportunities, and the latest updates in the ever-evolving real estate landscape, then visit the Infinite Solutions BLOG, register and be the first to receive by e-mail any new posts. Join us on this exciting journey to discover your future home sweet home!!!
As a seasoned realtor with 23 years of firsthand experience living in Portugal, I am here to guide you through every step. From virtual tours using Google Maps to identifying the ideal cities, communities, and neighborhoods that match your lifestyle and budget, I’ll make your transition smooth and informed.
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