Living in Portugal as a U.S. expat offers a great lifestyle, but it also comes with tax responsibilities. As a U.S. citizen, you must report worldwide income to the IRS, while also filing taxes in Portugal. Fortunately, there are options to avoid double taxation and benefit from Portugal's expat tax advantages.
U.S. Tax Obligations for Expats Living in Portugal
Living in Portugal doesn’t free you from U.S. tax obligations. The U.S. taxes its citizens worldwide, regardless of where they live, but there are ways to avoid double taxation. Here's a breakdown of your U.S. tax responsibilities and options to reduce your tax burden.
The U.S. tax system requires citizens and resident aliens to report global income, including:
Employment Income: Wages, salaries, and bonuses earned in Portugal or abroad.
Self-Employment Income: Freelance earnings or business income earned in Portugal.
Investment Income: Interest, dividends, capital gains, and rental income from both U.S. and foreign sources.
All income, regardless of its origin, must be reported to the IRS. For instance, if you earn €120,000 in Portugal, you must report that income to the IRS, even if it has already been taxed in Portugal.
Filing Requirements and Thresholds
Whether you need to file a U.S. tax return depends on your filing status, age, and income.
For the tax year 2024, the following thresholds apply:
Single Filers: File if gross income is at least $13,850.
Married Filing Jointly: File if combined income is at least $27,700.
Married Filing Separately: File if gross income is at least $5.
Head of Household: File if gross income is at least $20,800.
These amounts are adjusted annually for inflation, so it’s essential to check the current year’s requirements.
Key Tax Exclusions and Credits for Expats in Portugal
Paying taxes in both Portugal and the U.S. can be complicated, but there are provisions to help you avoid double taxation. Here are key tools that can reduce your U.S. tax liability:
Foreign Earned Income Exclusion (FEIE)
The Foreign Earned Income Exclusion (FEIE) lets qualifying U.S. expats exclude up to $126,500 of foreign-earned income from U.S. taxation (for 2023).
To qualify, you must meet one of the following criteria:
Physical Presence Test: Spend at least 330 full days in Portugal (or another country) in a 12-month period.
Bona Fide Residence Test: Be a resident in Portugal for at least 330 full days during any 12-month period.
To claim the FEIE, file Form 2555 with your U.S. tax return.
For example, if you earn €50,000 working in Portugal, you could exclude the entire amount from U.S. taxes using the FEIE, meaning no taxes owed on that income in the U.S.
Foreign Tax Credit (FTC)
The Foreign Tax Credit (FTC) allows you to reduce your U.S. tax liability dollar-for-dollar for income taxes paid in Portugal. This is especially beneficial since Portugal’s tax rates are often higher than those in the U.S.
Example: If you owe €10,000 in taxes to Portugal and $8,000 in U.S. taxes, the FTC can reduce your U.S. tax bill to zero by offsetting the $8,000 U.S. tax liability with the taxes paid in Portugal.
Foreign Housing Exclusion
The Foreign Housing Exclusion allows U.S. expats living in Portugal to deduct certain housing expenses, such as rent, from their U.S. taxable income. This exclusion is particularly helpful in higher-cost areas like Lisbon.
Example: If your rent in Lisbon is $2,000 per month, you can exclude a portion of that amount from your U.S. taxable income, reducing your overall tax liability.
Foreign Housing Exclusion
The Foreign Housing Exclusion allows U.S. expats living in Portugal to deduct certain housing expenses, such as rent, from their U.S. taxable income. This exclusion is particularly helpful in higher-cost areas like Lisbon.
Example: If your rent in Lisbon is $2,000 per month, you can exclude a portion of that amount from your U.S. taxable income, reducing your overall tax liability.
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