If you are an American citizen who becomes a tax resident in Portugal, you are required to file tax returns in both countries: Portugal and the United States. However, the first tax return you should file depends on the tax year and your specific tax residency status in both countries.
Here’s a step-by-step explanation of what you need to consider:
- Filing a Tax Return in Portugal
As an American citizen who is now a tax resident in Portugal, you will be subject to Portuguese tax laws. Your first tax return in Portugal will generally be for the year you become a tax resident in Portugal, which means the year after you establish residency. The key requirements are:
- Tax Residency in Portugal: If you meet the criteria for tax residency (e.g., spending more than 183 days in Portugal or having a permanent home available to you), you will be considered a tax resident and must file your Portuguese tax return (IRS) the year after you become a resident.
- Worldwide Income Reporting: As a Portuguese tax resident, you must report all worldwide income on your Portuguese tax return, including income from the U.S. and other countries. This includes employment income, rental income, dividends, interest, pensions, etc.
Filing Deadline in Portugal:
- Deadline: The typical deadline for submitting your IRS (Personal Income Tax) return in Portugal is between April 1st and June 30th of the year following the tax year. For example, if you become a tax resident in 2024, you will file your tax return for that year in 2025, usually by June 30th, 2025.
- Tax Year: The tax year in Portugal is the calendar year (January 1st to December 31st).
- Filing a Tax Return in the United States
As a U.S. citizen, you are required to file a tax return with the Internal Revenue Service (IRS), regardless of where you live. The U.S. taxes its citizens on their worldwide income, meaning you must report all income earned globally, including income from Portugal.
U.S. Filing Requirements for Citizens Living Abroad:
- Form 1040: You must file Form 1040 (U.S. Individual Income Tax Return) to report your worldwide income.
- Foreign Earned Income Exclusion (FEIE): As a U.S. citizen living in Portugal, you may be eligible to exclude a portion of your foreign earned income from U.S. taxation under the Foreign Earned Income Exclusion (FEIE) by filing Form 2555. This allows you to exclude up to a certain amount of your foreign income (e.g., $112,000 in 2022) from U.S. taxes.
- Foreign Tax Credit: If you pay taxes in Portugal, you may also be eligible to claim a Foreign Tax Credit (using Form 1116) to avoid double taxation.
Filing Deadline in the U.S.:
- Deadline: The usual deadline for filing your U.S. tax return is April 15th of the following year. However, if you are living abroad, you can automatically extend this deadline to June 15th, and in some cases, you can apply for an additional extension (until October 15th).
- Tax Year: The U.S. tax year follows the calendar year (January 1st to December 31st).
- When to File in Portugal vs. the U.S.
- First Filing in Portugal: If you have established tax residency in Portugal in 2024, you would file your first Portuguese tax return in 2025 by the deadline, typically June 30th, 2025. You will need to declare your worldwide income from all sources, including the U.S.
- First Filing in the U.S.: You must file a U.S. tax return for the year 2024 by the deadline of April 15th, 2025. This return will include your worldwide income for the year 2024, but you may be eligible for exclusions and credits to reduce your U.S. tax liability, thanks to mechanisms like the Foreign Earned Income Exclusion or Foreign Tax Credit.
Note: Although the U.S. taxes its citizens on worldwide income, the tax treaty between the U.S. and Portugal helps prevent double taxation by allowing you to offset taxes paid in Portugal against U.S. taxes through the Foreign Tax Credit or by excluding certain amounts of foreign-earned income under the FEIE.
- Key Considerations
- Social Security: As an American citizen in Portugal, you may also be subject to Social Security taxes in both countries, but the Totalization Agreement between the U.S. and Portugal helps avoid dual contributions. Typically, you would contribute to the Portuguese social security system if you are working in Portugal, and the agreement may allow you to be exempt from U.S. social security contributions, depending on your circumstances.
- Tax Treaty: Be aware that the U.S.-Portugal tax treaty plays a key role in determining how income is taxed in both countries. It provides guidance on which country gets the right to tax certain types of income and how to claim relief from double taxation.
- Professional Help: Due to the complexity of filing tax returns in both countries, it is highly advisable to seek professional assistance from a tax advisor who is familiar with both U.S. and Portuguese tax laws. A tax professional can help you navigate the intricacies of both systems, ensure you comply with all obligations, and help optimize your tax situation.
Conclusion
As an American citizen now a tax resident in Portugal, you will need to file both a Portuguese tax return and a U.S. tax return. Your first filing in Portugal will be for the year you establish tax residency (e.g., 2024), and you must file your return by June 30th, 2025. Similarly, you must file a U.S. tax return for the same year by April 15th, 2025 (with an extension to June 15th available for those living abroad).
Be mindful of both countries’ tax laws, including available tax credits and exclusions, to ensure you don’t pay taxes twice on the same income. Seek professional advice to navigate both the Portuguese and U.S. tax systems effectively.