Overview of US Taxation for American Expats in Portugal
Posted on 01-02-2023 11:30 AM
Here's my take on tax neuances for American expats in Portugal that I obtained from Derren Joseph at HTJ.tax
As an American expat living in Portugal, it is essential to understand your tax obligations in both the United States and Portugal. Failure to comply with these obligations can result in significant penalties and fines. This article aims to provide an overview of US taxation for American expats in Portugal and provide some helpful tips to ensure tax compliance.
US Tax Residency Status
The United States uses a “citizenship-based” taxation system, which means that all American citizens are subject to US taxation, regardless of where they live. To determine your tax residency status, the IRS uses two tests: the Green Card test and the Substantial Presence Test. The Green Card test applies to permanent residents of the United States, while the Substantial Presence Test applies to non-resident aliens who spend a significant amount of time in the United States.
US Tax Filing Requirements
As an American expat in Portugal, you are required to file a federal tax return each year, regardless of your tax residency status. The types of income you report on your tax return depend on your tax residency status. If you are a tax resident of Portugal, you must report all worldwide income on your US tax return. Additionally, if you have foreign bank accounts, you may be required to file a Report of Foreign Bank and Financial Accounts (FBAR). If you are a US citizen or green card holder with foreign financial assets over $50,000, you may also be required to file a Foreign Account Tax Compliance Act (FATCA) form.
Portuguese Tax Obligations
As a resident of Portugal, you are subject to Portuguese tax law, which requires you to file a tax return each year and report all worldwide income. Portugal has a progressive tax system, with tax rates ranging from 14.5% to 48%. Portuguese tax credits and deductions may also be available to reduce your tax liability.
Dual Taxation
One of the challenges of being an American expat in Portugal is the risk of dual taxation. To address this issue, Portugal and the United States have signed a tax treaty, which outlines the tax obligations of each country. The tax treaty aims to avoid double taxation by determining which country has the right to tax certain types of income.
In conclusion, being an American expat in Portugal requires a clear understanding of US and Portuguese tax obligations. It is essential to stay compliant with these obligations to avoid penalties and fines. If you are unsure about your tax obligations, it is recommended to seek the advice of a US tax preparer in Portugal like Derren from HTJ.tax who can provide guidance and help ensure that you remain tax compliant.