If you’re a U.S. citizen planning to relocate to Portugal, it’s crucial to understand your tax obligations both in the U.S. and Portugal. While Portugal offers a favorable tax regime, especially for expatriates, U.S. citizens are still required to adhere to U.S. tax laws, which require reporting worldwide income. This article outlines the tax obligations of U.S. citizens residing in Portugal, comparing the tax systems of both countries, and highlighting key deadlines, reporting requirements, and options available for filing taxes.
Tax Obligations for U.S. Citizens
As a U.S. citizen, you are subject to worldwide taxation. This means you must report all of your income from both the U.S. and abroad, including income from Portugal. Despite living in Portugal, the U.S. taxes its citizens on global earnings, and filing requirements continue to apply even if you become a tax resident of Portugal.
U.S. Tax Obligations for Expats
- Tax Filing Requirement: U.S. citizens must file an annual tax return with the Internal Revenue Service (IRS). This includes all income—regardless of where it is earned—such as wages, investment income, rental income, and pensions.
- Filing Deadline: The typical deadline for filing a U.S. tax return is April 15 each year. However, U.S. expats living abroad are automatically granted a 2-month extension, moving the deadline to June 15. If additional time is needed, you can apply for an extension until October 15. It’s important to note that this extension applies only to filing, not to payment. Any taxes owed must still be paid by April 15 to avoid penalties and interest.
Portuguese Tax Obligations for U.S. Expats
As a tax resident in Portugal, you will be required to file a Portuguese tax return and report your global income. However, the rules differ slightly from U.S. tax laws:
- Tax Residency: You are considered a tax resident in Portugal if you spend 183 days or more in the country during a calendar year, or if you have a permanent home available to you in Portugal.
- Filing Deadline: The filing deadline for Portuguese taxes is usually June 30 of the year following the tax year (e.g., June 30, 2025, for income earned in 2024). However, deadlines may vary slightly each year. Portugal allows you to file online through the Portal das Finanças, the official tax platform.
- Taxable Income: Portugal taxes residents on their worldwide income, which includes income earned in the U.S. This means that your U.S. salary, pensions, investment income, and other sources of income must be reported on your Portuguese tax return.
Tax Filing Options in the U.S. and Portugal: Joint vs. Single Filing
Filing Jointly or Single in the U.S.
In the U.S., you have the option to file taxes as either single or married filing jointly. The filing status you choose can significantly impact your tax rate, deductions, and credits.
- Single: If you’re unmarried or not living with a spouse, you’ll file as single, and your income will be subject to the U.S. progressive tax rates.
- Married Filing Jointly: If you’re married, you may file jointly, which often results in a lower combined tax liability. For expatriates, filing jointly may be advantageous if both spouses are U.S. citizens or residents, as they can claim additional credits and deductions.
For tax year 2023, the standard deduction for single filers is $13,850, and for married couples filing jointly, it is $27,700. The tax brackets in the U.S. range from 10% to 37%, depending on your income level.
Filing in Portugal: Individual vs. Joint Taxation
In Portugal, the tax system also allows for filing jointly or individually. However, the rules are different:
- Single Filing: If you file individually, your income will be subject to the Portuguese progressive tax rates, which range from 14.5% to 48%.
- Married Filing Jointly: Married couples can opt to file jointly, but Portugal taxes couples based on the family unit. Income is combined, and the overall tax liability is determined by the total income of both spouses. This may allow for certain tax benefits, such as a potential reduction in the overall tax rate if income is split efficiently.
In general, Portugal’s tax system provides fewer tax breaks for married couples filing jointly than the U.S., but the option exists for those who prefer to file together.
Fiscal Transparency in Portugal
Portugal has a system of fiscal transparency for certain types of entities, such as businesses or partnerships. This means that income earned by these entities is attributed directly to the owners or shareholders, who are responsible for reporting and paying taxes on their share of the income.
If you own a business in Portugal, it’s important to understand how Portugal’s fiscal transparency rules apply to your business structure:
- Sole Proprietorships and Partnerships: These entities are generally transparent for tax purposes. This means that any profits or income generated by the business will be taxed directly at the individual level (on your personal tax return), not at the entity level.
- Corporations (e.g., SA or Lda.): In contrast, corporations are taxed separately from their owners. Corporate income is subject to corporate tax rates, and dividends distributed to shareholders are subject to withholding tax.
In both cases, business profits are subject to Portugal’s corporate tax rate (which is typically 21%), but for pass-through entities, such as sole proprietorships and partnerships, the profits flow through to your personal tax return.
Business Profits and Self-Employment Income
If you’re self-employed or run a business in Portugal, you’ll report your income on your Portuguese tax return and may qualify for tax benefits under the Non-Habitual Tax Regime (NHR).
For self-employed individuals, Portugal offers a flat tax rate of 20% on income derived from high-value added activities, such as IT, engineering, and other specialized professions. These benefits are typically available for up to 10 years for qualifying individuals.
- Income from Business Profits: If you operate a business in Portugal, the profits will be taxed under the corporate tax system (if structured as a corporation) or as personal income (if structured as a sole proprietorship or partnership).
- VAT (Value Added Tax): If your business provides goods or services, you may need to register for VAT and collect VAT on your sales. The standard VAT rate in Portugal is 23%, though reduced rates may apply in some cases.
Double Taxation and Tax Credits
As a U.S. citizen living in Portugal, one of the key benefits is the Double Taxation Treaty (DTT) between the U.S. and Portugal. This treaty ensures that you are not taxed on the same income in both countries. Specifically:
- You can use the Foreign Tax Credit to offset U.S. tax liability with taxes paid to Portugal on your income.
- Certain types of income, such as pensions, may be taxed only in the country of residence (Portugal), depending on the specifics of the treaty.
In addition to the DTT, you may also be eligible for the Foreign Earned Income Exclusion (FEIE), which allows you to exclude up to $120,000 of foreign-earned income from U.S. taxation, provided you meet the requirements.
Conclusion
U.S. citizens moving to Portugal will need to comply with both U.S. and Portuguese tax laws, including reporting worldwide income and meeting filing deadlines. Key U.S. tax obligations include filing an annual return by April 15 (with extensions to June 15 or October 15), and paying taxes on global income. Meanwhile, Portuguese tax residents must file a return by May 31 and report all worldwide income.
Options for filing include joint or individual tax filing in both countries, with specific considerations for business profits and self-employment income. Portugal’s Non-Habitual Tax Regime (NHR) offers additional benefits for expatriates, including tax exemptions on foreign pensions and a flat tax rate for professionals in certain high-value activities. Understanding both systems is essential to ensure compliance and optimize tax liability.
If you’re unsure about how to navigate both U.S. and Portuguese tax obligations, it’s advisable to consult with a tax professional familiar with the tax laws of both countries.