US Expat Taxes in Portugal Explained
Posted on 03-01-2023 05:38 PM
So, I was recently talking with my good friend and US Tax / Portugal tax expert Derren from Htj.tax and decided to shoot a summarized article for those of you who could benefit.
There are several different types of taxes that you may face when living in Portugal, and it's important to know how to keep your finances in order. The type of tax you'll need to pay depends on whether or not you're a Portuguese resident, or a non-habitual Portuguese resident. If you're a non-habitual resident, you'll be responsible for paying income and property wealth taxes on the income you earn from Portugal.
Non-residents are taxed on the portion of income that's allowable in both countries
Many a taxpaying resident has been subjected to the taxman's whimsies. While this may seem like an unfair treatment, the US tax code provides many tax incentive programs to keep its taxpayers in business. One such program is the Foreign Earned Income Exclusion, or FEE, which allows foreigners who are working in the US to avoid paying income taxes on their offshore earnings. The FEE is not for everyone, however, so be sure to check with your financial planner before signing up.
In addition to the FEE, the IRS imposes an annual tax on dividends, interest, and other similar monetary awards paid out of a taxpayer's pocket. A few states offer a flat income tax rate, but most are more of a graduated scale, with higher rates applying to higher income brackets. Some states are a bit more generous in allowing foreigners to offset this income tax by transferring funds to a US trust. This can be a boon for those who have accumulated a substantial amount of cash in the form of interest and dividends over the years.
The best way to calculate your actual taxes is to use a third party tax preparation service. This will ensure that you are not blindly signing up for an expensive tax bill.
Non-habitual residents are liable to income tax only on Portuguese-source income
The Non-habitual residents' tax regime in Portugal was introduced in 2009. The purpose of this tax regime is to attract high-value professionals and individuals. It provides substantial tax savings for non-residents.
Non-habitual residents' income must be sourced in Portugal. This includes remuneration received from Portuguese companies and permanent establishments. Foreign source income, however, is not eligible.
Those earning Portuguese-sourced income must file a tax return. They are also permitted to deduct their property municipal taxes.
Taxation is levied on a progressive scale. Tax rates range from 14.5% to 48 percent. There are certain exemptions for pensions, royalties, and dividends. Income is taxed separately for spouses and de facto couples.
There are also special tax rates on employment income, royalties, rental income, and self-employment income. Interest on savings, dividends, and capital gains are also exempt.
Residents of Portugal must file a tax return between April and June. For the year of residence, an automatic tax return may be sent to you. You can choose to make payments yearly or on a monthly basis. If you are a de facto couple, you can choose to be taxed jointly.
In order to apply for a non-habitual resident status, you must own a home in Portugal. A non-habitual resident may have been in Portugal for a minimum of 183 days and no longer than five years.
Here a few videos on US tax Portugal: