Expats in Portugal fall in love with Portugal’s long hot summers and beautiful, warm sandy beaches. Situated on the west of the Iberian Peninsula, the rolling beaches and landscapes astound visitors and residents alike. And with its modest population of 10 million people, there is plenty of room for expats to enjoy the lifestyle without the hustle and bustle of larger cities. But before you grab your towel and head off to Portugal, don’t forget about your US expat tax obligations! Here is what you need to know about filing Portugal taxes as a US expat!
Do You Have to Pay Taxes in Portugal?
While there are many different things to take into consideration when answering the question of do I have to pay taxes in Portugal, the simplest answer is typically “yes.” As you’ll learn more below about what it means to be a resident of Portugal, you must understand that, if you meet the qualifications to be considered a resident, you must then pay taxes on any income that you earn—anywhere. If you are not considered to be a resident of Portugal, then you will only need to pay taxes on the income that you earned from sources in Portugal.
Additionally, there is a tax treaty in place between the US and Portugal that will ensure you are not double-taxed or any other worrisome situations. There will also be more on that further in this article. Plus, there are often credits that can be quite helpful when determining your overall tax liability, if you qualify.
Residency for Portugal Income Tax
As mentioned above, residents of Portugal must pay taxes on worldwide income, while non-residents are only taxed on Portugal-sourced income.
You are officially a resident if you spend 183 days or more in Portugal over a 12-month period, or maintain an abode. An abode can be described as one’s home, habitation, residence, domicile, or place of dwelling. It does not mean your principal place of business. “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home,” when it comes to Portugal income tax.
Portugal Tax Rates
For non-residents, you’ll pay a flat tax rate of 25% while residents are taxed on a progressive scale from 14.5% to 48%.
Like the US, the Portugal tax year is the calendar year. Returns must be filed by March 31st and you are required to pay any additional tax owed by that date, as well.
There are 6 categories of income that are taxable:
- Business and professional income
- Investment income
- Real estate income
- Increases in net worth
Other Expat Taxes Portugal
There are a few additional expat taxes Portugal enforces:
- Stamp tax of .8% on the transfer of property
- For Portuguese residents, capital gains tax is assessed on only half the value of the property and the applicable tax rate is based on your individual income. For non-residents, capital gains tax is 25%.
- Gifts and inheritances tax of 10% (plus an additional .8% if the gift is real estate)
- There is also a solidarity rate which varies between 2.5% and 5%, this applies to taxable income above EUR 80,000.
- Self-employment income is subject to a contribution tax rate of 21.4% and should be reported quarterly in April, July, October, and January.
However, there is no wealth tax.
US Tax Filing Requirements
If you are a US citizen, you will still be required to file a US tax return each year. Fortunately, the US has put several deductions and exclusions in place to offset your US tax liability.
Foreign Earned Income Exclusion
For 2021, you can exclude the first $108,700 of foreign earned income from your US expat taxes if you qualify as an official US expat. You must qualify by either the Physical Presence test or the Bona Fide Resident test. The Physical Presence test is the way most expats qualify. You must be present in a foreign country (not necessarily just Portugal) for 330 of any 365-day period. Note, this isn’t limited to a tax year.
Foreign Tax Credit
You can offset the taxes you paid in Portugal with your US expat taxes dollar for dollar. However, you can’t use the Foreign Tax Credit on income that has already been excluded by the Foreign Earned Income Exclusion. Check out this article for more tips on how to save with the foreign tax credit.
Foreign Housing Exclusion
This exclusion allows an additional exclusion from income on US expat taxes for certain amounts paid for household expenses that occur as a consequence of living abroad. The amount of this exclusion varies depending on the country and city. For 2021, you can deduct a maximum of $127.40 per day if you live in Lisbon.
US Portugal Tax Treaty
The good news for any US expats is that there is a US Portugal tax treaty in place. It will be sure that money earned by US citizens is appropriated properly, depending on the type of income. You can find additional information here.
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