The End of the Non-Habitual Resident (NHR) regime: What US Expats Need to Know
Portugal has long been a popular destination for Americans, largely due to the Non-Habitual Resident (NHR) regime, which offered generous tax benefits to new expats. However, as of 2024, the original NHR program has been phased out and replaced by a more limited version, often referred to as “NHR 2.0,” officially known as the Incentivized Tax Status (ITS), offering fewer tax breaks.
So what does this mean for Americans who benefited under the old regime, and how does the new system compare when it comes to tax savings and its interaction with US taxes?
In this article, we break down how the old NHR worked, what to expect under the new ITS regime, and how US taxes tie in, so you can stay compliant and avoid double taxation.
What Were the Tax Benefits of NHR in Portugal?
Under the original NHR regime, many types of foreign-sourced income, such as employment income, dividends, and capital gains, could be exempt from Portuguese tax, provided they were taxed in the source country under a tax treaty. This made Portugal a very attractive option for expats with income abroad.
Portuguese-sourced income, however, was still taxed, typically at a reduced 20% flat rate for qualifying professions or Portugal’s progressive rates. Foreign pensions were initially exempt, but later subject to a flat 10% tax.
American expats especially benefited from how NHR rules interacted with US taxation, as foreign employment income could be exempt in Portugal if it was taxable elsewhere. Since the US continued to tax its citizens on worldwide income, expats could still be taxed on this income. However, because the work is performed outside the US, it is treated as foreign-earned, allowing the use of the Foreign Earned Income Exclusion (FEIE) to exclude the income from US taxation, often resulting in no tax overall.
This advantage was more limited for expats from residency-based tax countries, where income was not always considered taxable elsewhere and could therefore be taxed in Portugal.
Is NHR Still Available in Portugal?
The Non-Habitual Resident (NHR) regime officially closed to new applicants on December 31, 2023. However, individuals who met transitional eligibility criteria, such as taking concrete steps to relocate before that date, were allowed to apply until March 31, 2025 if they met the criteria and moved to Portugal in 2024, they would still benefit from the regime for up to 10 years.
Which Program Replaced NHR in Portugal?
In 2024, Portugal replaced the NHR regime with the Incentivized Tax Status (ITS), also known as the IFICI regime. Like NHR, the new regime is granted for a non-renewable period of 10 years. While it still offers tax benefits for new residents, who are still in activity, it is more targeted at younger professionals , rather than retirees and comes with lots more bureaucracy.
Unlike NHR, which broadly applies to many expats, ITS is primarily aimed at highly skilled professionals working in specific sectors such as technology, research, and innovation. As a result, many individuals who would have qualified under NHR may not be eligible under the new system, especially retirees.
In terms of tax treatment, the key difference is that ITS does not offer exemption from pension income but does offer exemption from capital gains, which the old NHR regime did not.
While qualifying Portuguese-sourced employment income may still be taxed at a reduced 20% flat rate, most other income is taxed under Portugal’s standard rules.
This means foreign income, such as pensions are now taxed at the progressive tax rates which could reach up to 48% .
US Tax Obligations For Expats in Portugal
US citizens and Green Card holders must report their worldwide income and file a US tax return annually, regardless of where they live, including Portugal. The US–Portugal tax treaty helps determine which country has the right to tax certain income and supports the use of tools such as the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) to avoid double taxation.
With the shift from the NHR regime to the new ITS system, more income may now be taxed in Portugal and at higher tax rates. As a result, understanding the best strategy to reduce double taxation for your particular situation has become even more important.
The Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion (FEIE) is an expat tax break designed to reduce or eliminate double taxation on foreign earned income. For the 2025 tax year, US expats can exclude up to $130,000 of foreign income from US taxation. This FEIE applies to wages, salaries, self-employment income, and professional fees. If you are being taxed at the reduced flat rate of 20% under the new regime, you may be able to exclude a significant portion, or in some cases all, of your foreign earned income from US taxation.
The Foreign Tax Credit
The Foreign Tax Credit (FTC) works a bit differently and on broader income sources. The FTC provides a dollar-for-dollar credit on US taxes for income taxes paid to Portugal on the same income.
The FTC applies to both earned and passive income, including pensions, dividends, and investment income. For example, if you have investment income that has been taxed in Portugal, or if your employment income exceeds the FEIE limit, the Foreign Tax Credit may be a better option to reduce your US tax liability.
You can use both the FEIE and the FTC, just not on the same income, and in some cases, this is the best strategy.
It’s important to note that neither the FEIE nor the FTC eliminates US self-employment tax, which may still apply to freelance or business income unless covered by a Totalization Agreement.
International Reporting Obligations
One area easily overlooked is the requirement to report certain foreign bank accounts and assets.
The Foreign Bank Account Report (FBAR)
If you have bank accounts in Portugal, as most expats do to hold employment income and pay local bills, you may be required to file an FBAR.
If your foreign bank accounts have a combined value of $10,000 or more at any point during the year, you must report them on FinCEN Form 114. The FBAR is filed separately from your tax return through the Financial Crimes Enforcement Network (FinCEN) system.
FATCA Reporting (Form 8938)
In addition to the FBAR, some expats may also need to report foreign financial assets under FATCA by filing IRS Form 8938 with their US tax return.
For single filers living abroad, this requirement applies if the total value of your foreign financial assets exceeds $200,000 on the last day of the tax year or $300,000 at any point during the year.
Foreign financial assets can include bank accounts, investment accounts, foreign pensions, and certain ownership in foreign entities. Unlike the FBAR, Form 8938 is filed with your tax return and attached to Form 1040.
Both the FBAR and Form 8938 are only a reporting mechanism, and no taxes are due; however, failing to file, even non-willfully (meaning you didn’t know you had an obligation), can result in penalties as high as $10,000 per missed report, with additional penalties for continued non-compliance.
US Tax Filing Deadlines for Expats
US expats receive an automatic 2 month extension to file their federal tax return until June 15. If additional time is needed, you can request a further extension to October 15 by filing Form 4868.
However, it’s important to note that any taxes owed are still due by April 15. Even if you file later, interest may accrue on unpaid balances from this date.
Specialized Expat Tax Support For Americans in Portugal
With more income now subject to Portuguese taxation under the new Incentivized Tax Status (ITS), understanding how to avoid double taxation while meeting ongoing US tax obligations is essential.
Working with a trusted expat tax software like MyExpatTaxes can help simplify your US tax obligations, ensuring you remain compliant while optimizing your tax strategy as you settle into life in Portugal.
Written by Nathalie Goldstein, EA
Leading expert on US taxes for Americans living abroad and CEO and Co-Founder of MyExpatTaxes. She contributes to Forbes, Entrepreneur, and Fast Company and has also been featured in CNBC and Yahoo Finance, among others, discussing US expat tax.