A Taxing Situation: Paying Taxes as an American in Portugal By Linda Weygant, CPA During scores of consultations with Americans in or moving to Portugal, I’ve accumulated the most common questions and answered them for you. Am I double-taxed? USA taxes its citizens on their worldwide income. Portugal taxes its residents. As a US citizen in Portugal, this scenario creates anxiety over double-taxation. Fortunately, Portugal and USA have a tax treaty, so double-taxation between the two countries is significantly reduced or eliminated. How do I make sure I’m not double-taxed? There are two methods to protect against double-taxation: Foreign Tax Credits (FTC) - Applies to all income types. The taxes you pay to Portugal are subtracted from your US tax calculation. Generally speaking, people with dependents under 17 will use this method to open the ability to claim Child Tax Credits. Foreign Earned Income Exclusion (FEIE) is for the earned income only, such as employment (from either a US or a foreign employer) or self-employment. This does not include K1 income from any sources, but it can include Guaranteed Payments. This method subtracts up to the annual exclusion amount from your US income before taxes are calculated.
• If you have rental income of any amount, you must file. • If you have capital gain/loss transactions, you may or may not need to file (depending on type and amounts). Where do I pay my Social Security taxes? If you are resident in Portugal, generally speaking you would pay your Social Security taxes to Portugal. image: public domain This then makes you exempt from paying Social Security, Medicare, and Self-Employment taxes to the US. However, there are exceptions to this if you are still collecting your employment income from a US employer that is reporting your income on a W2 and you are considered to be “temporarily assigned” to Portugal. Consult with a tax professional knowledgeable in the tax laws of both countries.
You may not use both methods on the same income, but you can mix the two if you have different income sources. If you start using the FEIE and choose to switch to FTC, you may not switch back to the FEIE for five years. Make sure you understand not only which method is best for the current year, but also which method is best for the years to come.
Which country do I file in first? Will I need an extension? Generally speaking, you file in Portugal first. Portugal has the first right of taxation on all of its residents. The filing season in Portugal is from 1 April to 30 June, so it is unlikely that your Portuguese taxes will be completed in time for a US 15 April deadline. Overseas taxpayers have an automatic extended deadline until June 15. It is not necessary to file an extension on April 15 to take advantage of this extended deadline. When you indicate on your tax return that the extended deadline applies to you, the IRS will not assess late filing penalties.
Do I still have to file tax returns with the USA? Each year, the IRS publishes filing requirements which are based on type of income and amounts.
Note that an extension of time to file is not an extension of time to pay. If you think you will owe to the US, you should make an estimated payment by 15 April.
• If your only income is monthly Social Security Retirement Benefits, you will not need to file a US tax return. Exceptions exist for people who receive a lump sum catch-up benefit. • If your income is only Social Security, retirement, dividends and interest, and it falls under annual limits, you will not need to file. • If you have employment or self-employment income greater than annual limits, you must file to establish the use of the FEIE or the FTC.
Unable to meet the 15 June deadline? You can request an extension to 15 October.
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What about state taxes? Do I have to move to a nontax state before moving to Portugal? It is not necessary to establish residency elsewhere (California and New York are exceptions, discussed below) before relocating to Portugal. For the year you relocate, file a Part Year tax return with your state and indicate the date you moved. That effectively disconnects you from your state. For that Part Year return, it may be necessary to
