Tax Treaty Portugal & USA: Comprehensive Overview and Updates

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Tax Treaty Portugal & USA: Comprehensive Overview and Updates

by | Wednesday, 26 June 2024 | Corporate Income Tax, Immigration, Personal Income Tax

Tax Treaty Portugal & USA: Comprehensive Overview and Updates

If you’ve recently relocated to Portugal, it’s important to understand the taxes you’ll face as an expat under the tax treaty Portugal – USA. The good news is that your tax situation should be fairly simple if you’re a U.S. citizen. However, while it may seem straightforward in theory, the actual process of filing your taxes can be a bit tricky.

This article will cover the types of taxes that apply to income earned by U.S. expats living in Portugal. We’ll also provide tips on preparing to file them because even the simplest tax forms can be intimidating if you’re unfamiliar with them!

What Is A Resident Alien, Expatriate, Or Non-Resident Alien?

To understand U.S. expat tax rules, you must know the difference between a resident, expatriate, and non-resident alien.

A resident alien does not have U.S. citizenship but lives in the United States for an extended period (183 days or more). The IRS taxes a resident alien’s worldwide income. They can also deduct their foreign housing costs from their income taxes.

An expatriate has chosen to live and work in a country other than where they legally reside. This includes people who have given up their green card to live abroad. An expatriate is subject to double taxation because they are still taxed by both countries – in this case, Portugal and America – depending on where they spend most of their time during each taxable year. Since 2017, it has been easier for some former Americans living abroad by allowing them two years before being labelled “expatriates,” as long as they don’t fall under any other category, such as “high net worth individuals” or having $300k+ physical assets abroad.

Non-residents do not live within U.S. borders but may own property there, which must be declared if its value exceeds the legal limit at any point during your taxable year (stateside).

Paying Taxes In Portugal

When paying taxes in Portugal, you might be surprised by how easy the process can be. If you are an American citizen living abroad, your U.S. tax obligations may differ from those of a U.S. citizen living in the States. Because of this, expats need to understand how their financial status is affected by moving overseas and how they should file taxes in Portugal.

While several factors must be considered when filing taxes from abroad (such as whether your income was earned within or outside of Portugal), this guide will help you pay your U.S. federal income taxes.

Tax treaty Portugal – USA

You are not required to pay U.S. income taxes on your Portuguese-source income. This is because the United States and Portugal have a bilateral tax treaty. The treaty provides that you won’t be taxed in either country on your wages, salaries, tips, and other compensation from a Portuguese source if you’re an employee of a U.S. company that has a permanent establishment in Portugal or if you live in Portugal for 183 days or more during a consecutive period of 12 months.

In addition, if you’re self-employed (a freelancer) and live in Portugal for 183 days or more during any 12-month period, under the treaty with the United States, you won’t have to pay U.S. tax on profits from self-employment or professional activities earned while living outside of the U.S., provided they are effectively connected with foreign business activities carried out by an individual through one or more fixed places of business outside their country of residence at which such services are performed. This includes work done online through digital platforms like Upwork and Fiverr as long as these platforms can be considered fixed places of business under local law.

Tax Rates In Portugal

Taxes On Income Earned Outside Of Portugal By Expats In Portugal

If you are a U.S. expat living in Portugal and earning income outside of Portugal, you might have to pay taxes. The US tax law allows you to exclude up to a certain foreign-earned income from your U.S. tax return per year from all countries combined.

However, if you exceed the legal limit or don’t use it all up and want to pay some taxes on the rest of your foreign-earned income at a lower rate than what would have applied back in the USA, you can do so.

Taxes On Social Security Income By Expats In Portugal

Social Security Benefits are taxed at the same rate as your salary but not higher than 52%. This amount is determined by multiplying a percentage of the total Social Security tax paid by your income bracket. The Portuguese government also offers a rebate program to return money to the expat.

Even Though Portugal has lower tax rates, you should take advantage of the tax treaty.

If you are a U.S. citizen living in Portugal and want to avoid double taxation, you must ensure your income is not taxed twice. A tax treaty between the U.S. and Portugal helps prevent this. The treaty allows for the exchange of information between the two countries so they can collect their taxes on income earned within the country where it was earned.

Ultimately, changing your tax residency is a significant undertaking, requiring you to make major life changes. That said, if you’ve considered moving overseas and becoming a digital nomad, you might find it easier than you thought with help from experts like Greenback Expat Tax Services. After all, many people have successfully done so without having to put down roots in Portugal or elsewhere.

Conclusion

Professional, expert advice is critical when planning and managing your finances, particularly if there are possible cross-border jurisdictions and language issues to consider.

Portugal’s taxation and succession laws differ remarkably from those in other countries. Sometimes, they may work to your personal advantage, but at other times, they may not. Only by carrying out a full analysis of your situation and careful planning can you feel confident of achieving a balance that most closely aligns with your and your family’s interests.

At MCS, we understand that everyone is different, and it is important that your adviser understands you, your circumstances, your long-term goals, and your cash flow needs. We take the time to get to know you and will answer all your investing, saving, and retirement planning questions so that we may provide a truly bespoke service.

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