Expat Tax Guide for Americans Living in Portugal

Portugal is a top spot for Americans moving abroad. With its sunny weather, stunning coastlines, and laid-back lifestyle, it’s easy to see why so many Americans choose to live in Portugal. From exploring Lisbon’s cobblestone streets to relaxing on an Algarve beach, Portugal offers something for everyone.

But just because you’ve moved to Portugal, it doesn’t mean you’re off the hook with US taxes. If you’re a US citizen or green card holder, you still need to file a US tax return. On top of that, you’ll likely have to pay Portuguese taxes if you’re considered a resident there.

To make your life easier, we’ve created a guide to US taxes for Americans living in Portugal. In it we answer common questions, explain how to avoid double taxation, and provide tips to help you save money.

Table of Contents

• Do US expats living in Portugal have double taxation?
  • Foreign Earned Income Exclusion
  • Deduct or exclude housing expenses
  • Foreign Tax Credit 
• Is the FEIE or Foreign Tax Credit better for US expats in Portugal?
• Running your own business as American living in Portugal
  • LLC vs S Corporation for expats in Portugal
  • American freelancers in Portugal
• Do Americans living in Portugal need to file a Portuguese tax return?
• Filing taxes in Portugal and to the US – Where to file first?
• Portugal’s new expat tax incentives (post-NHR)
• US – Portugal tax treaty and totalization agreement 
• Foreign bank accounts and assets reporting – FBAR and Form 8938
• Other US reporting requirements for Americans living in Portugal
• Filing US expat taxes while living in Portugal

Do US expats living in Portugal have double taxation?

If you’re a US citizen or green card holder, you still need to file a US tax return, no matter where you live. Whether you’re retiring in Portugal, working for a local company, or working remotely, the same rules apply if your income meets the filing thresholds. If you have bank accounts or financial assets in Portugal (or anywhere outside the US) that exceed certain limits, you’ll also need to report those. If you qualify as a Portuguese tax resident meanwhile, you’ll also have to pay Portuguese taxes.

The good news? You can avoid double taxation by using IRS provisions like the Foreign Earned Income Exclusion (FEIE), the Foreign Tax Credit, and the benefits in the US-Portugal tax treaty.

Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion is one of the easiest ways to reduce your US tax bill. For the 2024 tax year, if you qualify, you can exclude up to $126,500 in foreign-earned income from US taxes. Married couples filing jointly can each exclude up to $126,500 for a total of $253,000 if both qualify (and each has earned income). To use it, you’ll need to meet one of two tests: the physical presence test or the bona fide residence test.

The physical presence test focuses on time spent abroad. You qualify if you’re outside the US for at least 330 full days in a 12-month period.

The bona fide residence test is about showing Portugal is your main home. You can still visit the US, but you need to prove that Portugal is where you live full-time. This test offers more flexibility on trips back to the US, but it’s harder to prove if the IRS audits you.

By claiming the FEIE, you can lower your taxable income and avoid paying taxes twice. It’s a key tool for Americans living in Portugal.

Deduct or exclude housing expenses

If your income exceeds the 2025 Foreign Earned Income Exclusion limit, you can reduce your US taxes even more with the Foreign Housing Exclusion or Deduction. This lets you exclude or deduct qualifying housing costs like rent, utilities, and furnishings while living abroad.

The standard limit for housing expenses is 30% of the FEIE threshold, which comes out to $37,950 for 2024. But this amount can change depending on where you live in Portugal, since high-cost locations can have a higher limit. In Portugal, this applies only to Lisbon and Alverca, which both have a limit of $41,800. How many qualifying days you spent abroad that year also impacts the limit.

To claim the Foreign Housing Exclusion (or Deduction if you’re self-employed), you’ll need to file IRS Form 2555.

Foreign Tax Credit

The Foreign Tax Credit (FTC) is another way to avoid double taxation. You can claim it on IRS Form 1116 to get US tax credits equal to the Portuguese taxes you pay.

Since Portugal’s tax rates are often higher than US rates, the FTC can usually reduce or eliminate your US tax bill.

Is the FEIE or Foreign Tax Credit better for US expats in Portugal?

As mentioned, in high tax countries like Portugal, using the Foreign Tax Credit usually makes more sense. Because you pay higher taxes in Portugal than you would in the United States, taking a credit offsets your US taxes

Besides tax optimization, it also has other advantages over the Foreign Earned Income Exclusion:

• No cap on the tax credits you can claim. 
• Covers all income types, not just earned income like salaries or self-employment.
• You can still contribute to US retirement plans and claim refundable US credits like the Child Tax Credit. 
• No requirements to qualify for it, unlike the FEIE’s physical presence test or bona fide residence test.

These benefits often make the tax credit a better option for expats in Portugal. But every situation is unique.

Consult with experienced expat tax advisors (like us) for the best strategy for lowering your taxes and maximizing your benefits.

Running your own business as American living in Portugal

Many Americans in Portugal run their own business, either as a side hustle to supplement retirement income, or as their main source of income. Portugal treats US business entities a bit differently than the US.

American LLCs set up as partnerships and S Corporations are disregarded entities, or pass-through entities, for US tax purposes. What this means is that the income of the entity flows through to its owner. The business itself doesn’t pay income taxes but must still file specific tax forms. The business owner pays income tax and self-employment tax directly as an individual. 

Portugal does not have the equivalent of disregarded entities. It looks at LLCs and S Corps differently. 

Importantly, Portugal taxes the income based on where the work is being performed, not where the company is located. So when an expat performs work for a US company from Portugal, it is taxable in Portugal. 

LLC vs S Corporation for expats in Portugal

To optimize for US tax purposes, tax accountants often advise to have an LLC taxed as an S Corporation, when the income exceeds a certain amount. This can significantly save on US self-employment taxes. However, this can pose a problem in Portugal. 

In this scenario, the S Corp owner is actually a W-2 employee of their own company. An employee of a foreign company cannot perform work from Portugal without the company having a presence there. This means establishing a Portuguese company and paying corporate taxes there, which can be expensive. (That’s why companies typically don’t want their W-2 employees to work from abroad.)

LLCs don’t have to pay a salary to the owner. Instead, the owner can receive a distribution, which is taxed at different (more favorable) rates in Portugal. However, the LLC situation has other complexities there.

Make sure to consult a Portuguese tax expert to fully understand your options and their local tax impacts when running your own business from Portugal. 

American freelancers in Portugal

Freelancers must register with Finanças and declare their activities. They will have to issue receipts and potentially charge VAT (value-added-tax) for their services.

Freelancing income is taxed at progressive rates (13% – 48%), after certain deductions. In addition, self-employed workers may have to pay social security contributions, 21.4% on part of the income after the first year. 

Seek professional advice to set this up correctly.

Do Americans living in Portugal need to file a Portuguese tax return?

Americans in Portugal might need to file a tax return depending on their residency status and income. Portugal ‘s tax office, the Autoridade Tributária e Aduaneira, also called IRS, handles tax filings.

Tax residents in Portugal pay taxes on worldwide income. 

Non-residents only pay taxes on income from Portuguese sources. You’re usually a resident if you spend 183 days or more in Portugal in a year. But even if you stay less, you could still count as a resident if Portugal is your main home or if you have strong ties, like owning property, having family, or running a business there.

Portugal’s income tax rates go from 13% to 48%, depending on how much you earn. Social security contributions can increase your taxes, too. If you meet residency rules or earn taxable income in Portugal, you’ll probably need to file a return.

Tax rules can be tricky, especially when you also need to file US taxes. A Portuguese tax advisor can help you make the most of any local tax benefits. As a US expat tax firm, our focus and expertise are on US tax laws for Americans abroad. We provide high-level information about other countries’ tax system as it may pertain to Americans living there. Every situation is unique. Please consult with a certified tax advisor.

Filing taxes in Portugal and to the US – Where to file first?

If you’re a US taxpayer living in Portugal, you’ll usually file your Portuguese tax return first. This is because claiming the Foreign Tax Credit on your US return requires details about taxes you’ve paid abroad. But the different tax deadlines can make this tricky.

In Portugal, the tax year is the calendar year, and returns are usually due by June 30 of the following year. If you file online, it’s faster, but complex tax situations may take more time to sort out. For the US, the tax year is also the calendar year, with taxes due April 15. Americans abroad get an automatic extension to June 15.

If your Portuguese tax return isn’t finalized before the US deadline, you can request an extension for your US return to October 15. Just note that late payments might lead to penalties unless you’ve paid estimated balances due by April 15.

Our team has strong experience with Americans living in Portugal and their tax situations. In addition to our deep inhouse expertise in US taxation, we have a network of local tax advisors that work with US expats. This way, you get in-depth knowledge of both (very complex) tax systems. 

We’ll help you avoid mistakes and make the process smoother.

Portugal’s new expat tax incentives (post-NHR)

The NHR (Non-Habitual Resident) tax regime made Portugal popular with expats, especially retirees. It provided significant tax savings for 10 years, including reduced tax rates on retirement income and zero tax on US dividends. Unfortunately, the NHR ended at the beginning of 2024 for newcomers. If you already had NHR, it will be valid for the remainder of your 10 years.

Portugal replaced the old NHR with the Fiscal Incentive for Scientific Research and Innovation (IFICI) Program, also called NHR 2.0. The program gives a tax break to attract skilled talent to Portugal and help boost innovation and research. 

Unlike the old NHR, IFICI does not provide any tax breaks for retirement income. 

The IFICI program sets a flat 20% tax rate on income from jobs or self-employment in Portugal. To qualify, you can’t have been a tax resident in Portugal in the prior five years. You also need to work in an eligible activity. People who’ve used the previous non-habitual resident (NHR) regime or the “Programa Regressar” tax regime don’t qualify.

The 20% rate replaces the usual tax rates, which range from 13% to 48%. This can mean big savings for those in higher tax brackets.

US – Portugal tax treaty and totalization agreement

The US and Portugal have a tax treaty to prevent double taxation and simplify cross-border income rules. It covers things like pensions, dividends, and corporate income, to name a few. The treaty also explains how both countries treat retirement savings.

In addition, the US and Portugal have a Totalization Agreement to prevent double social security contributions. It stops you from paying into both systems at the same time. This agreement lets your contributions in one country count toward qualifying for benefits in the other, depending on where you retire.

Foreign bank accounts and assets reporting – FBAR and Form 8938

If you’re a US citizen or resident living in Portugal, you need to report your foreign financial accounts if their total value goes over $10,000 at any point during the year. This includes bank accounts, joint accounts, pension accounts, and business accounts where you have signatory authority. To report these, you’ll file FinCEN Form 114 (FBAR) directly with the US Treasury. It’s separate from your tax return.

You might also need to file Form 8938 (Statement of Specified Foreign Financial Assets) with your US tax return. This applies if your foreign assets are worth more than $200,000 at the end of the year or $300,000 at any time during the year if you’re filing as a single person. For married couples filing jointly, the limits double. Real estate doesn’t count, but things like stocks, bonds, bank balances, and business interests do.

Other US reporting requirements for Americans living in Portugal

If you’re an American living in Portugal, you might need to report any non-US-registered corporations you own or control 10% or more of. This includes LLCs and other types of businesses. Certain Portuguese investments, like mutual funds or other financial products, may also need to be reported to the IRS, and these types of investments can also trigger an additional US tax liability.

These rules can get complicated, so it’s important to work with a US tax professional who is familiar with the tax rules for Americans in Portugal.

Keep in mind that Portuguese banks and financial institutions share information about US citizens with the US government. The Portuguese tax authority also exchanges data under international agreements and US tax laws.

Filing US expat taxes while living in Portugal

Filing US taxes as American living in Portugal can be tricky. You’re taxed by both the US and Portugal. But you can reduce double taxation with tools like the Foreign Earned Income Exclusion, the Foreign Tax Credit, and the US-Portugal tax treaty. 

If you missed filing your US taxes because you didn’t know you had to, you can catch up penalty-free using the IRS Streamlined Offshore Filing Procedures.

We highly recommend working with an experienced expat tax firm, especially if you also run a business from abroad. Make sure you stay compliant and optimize your tax position.