US Expat Taxes in Portugal

1. NHR and IFICI change the Portuguese side, not the US side

Portugal repealed the Non Habitual Resident regime for new applicants beginning January 1, 2024, subject to transitional rules. People who qualified under the transitional rules can continue receiving the applicable NHR benefits for the remainder of their eligible period.

For NHR taxpayers, qualifying foreign pension income is taxed at a special 10 percent Portuguese rate, or remains exempt for some who registered before the April 2020 change and did not opt into the 10 percent rate. Certain other foreign source income receives special treatment when the Portuguese requirements are met.

The replacement IFICI regime (the Incentive for Scientific Research and Innovation) applies to individuals who meet the statutory requirements, including conditions on prior Portuguese tax residence and qualifying professions or activities. Under IFICI, qualifying Portuguese Category A and B income is taxed at a 20 percent special rate, and qualifying foreign source income may be exempt, subject to important exceptions. Foreign pension income is specifically excluded from the foreign source exemption.

None of this changes the US side. US citizens are taxed on worldwide income regardless of Portuguese status. The US Portugal treaty coordinates taxing rights and relieves double taxation, but its saving clause preserves the United States’ right to tax its own citizens, so the treaty is not a way to opt out of US tax.

The planning question is therefore not whether Portugal taxes the income. It is how the Portuguese rules, the treaty, the Foreign Tax Credit and the US rules interact.

2. Retirement account withdrawals are taxed in both countries, and the FEIE does not help

Traditional 401(k) and IRA withdrawals are ordinary income on your US return. The Foreign Earned Income Exclusion only covers earned income such as wages and self employment, so it does nothing for retirement distributions. Retirees who relied on the FEIE while working can therefore see their US taxable income change significantly when consulting or employment income is replaced by retirement distributions, even if their spending stays the same.

Portugal also taxes retirement income received by a Portuguese resident. Under the transitional NHR regime, qualifying foreign pension income gets the 10 percent rate. Outside NHR, pension income is subject to Portugal’s ordinary progressive rates, which reach 48 percent at the top bracket.

The treaty provides rules for pensions and relief from double taxation, but the result depends on the type of account, the nature of the distribution, your residency and citizenship, and the Portuguese treatment. The Foreign Tax Credit on the US side also depends on the foreign tax actually imposed and the applicable credit rules.

Under the transitional NHR regime, qualifying foreign pension income gets the 10 percent rate, or the earlier exemption for some who registered before April 2020.

3. Roth accounts and Social Security require separate analysis

A qualified Roth IRA or Roth 401(k) distribution is tax free in the United States. Portugal has no direct equivalent to a Roth, so do not assume a distribution that is tax free at home receives the same treatment there. The Portuguese analysis looks at the account, the contributions, the earnings and the nature of the distribution, and preparers do not all reach the same answer. Confirm the treatment with your Portuguese tax advisor before relying on Roth funds as tax free income in Portugal.

US Social Security is covered by specific treaty rules. Article 20 of the US Portugal income tax treaty allows the United States to tax US Social Security benefits paid to a resident of Portugal or to a US citizen. Portugal may also tax the benefits as the country of residence, with treaty relief to prevent double taxation. Moving to Portugal does not make your Social Security tax free in the United States.

We coordinate the US reporting with the Portuguese treatment so the same income is not taxed twice without the relief the treaty provides.

4. Working in Portugal: FEIE, the totalization agreement and business structure

If you work in Portugal as an employee or contractor, the Foreign Earned Income Exclusion applies once you meet the physical presence or bona fide residence test. The maximum exclusion for 2026 is $132,900 per qualifying person. It covers earned income only, not retirement distributions, dividends, interest or capital gains.

Portugal and the United States have a Social Security totalization agreement. For self employment, the agreement assigns coverage to the country of residence when the work would otherwise be covered by both systems. A self employed US citizen resident in Portugal is therefore covered by Portuguese Social Security rather than US self employment tax, provided the requirements are met. A certificate of coverage documents the exemption and is attached to the US return when the exemption is claimed.

Business structure is the other layer. A Portuguese Lda is a foreign corporation for US purposes, and depending on your ownership it will create Form 5471 filing obligations. If you operate a US LLC, S Corporation or C Corporation while living in Portugal, the ownership, activities, payments and relationship between the entities determine which US international forms apply. Most of those forms carry penalties of $10,000 or more for not filing, so we map the structure before the first return rather than discovering the requirements after the fact.

5. Portugal files its tax return after the US automatic extension

Portugal’s individual return, Modelo 3, is filed electronically between April 1 and June 30 of the following year, and Portuguese residents report worldwide income on it.

The US calendar is different. US citizens and resident aliens living abroad receive an automatic two month extension to June 15, and a further extension to October 15 is available by filing Form 4868. The extension is an extension to file, not an extension to pay.

Because the Portuguese figures are often not final when the US return would otherwise be prepared, most Americans in Portugal extend the US return. It does not always have to wait: the Foreign Tax Credit rules determine when foreign taxes can be claimed, and the right approach depends on whether you use the paid or accrued method and on the income involved.

We plan the US filing and estimated payments around the Portuguese calendar so you are not surprised by a US balance due in April.

6. Foreign account and investment reporting

Portuguese bank accounts, savings accounts and other foreign financial accounts create US reporting requirements. If the combined maximum value of your foreign financial accounts exceeds $10,000 at any point during the year, you must file an FBAR. Form 8938 applies when specified foreign financial assets exceed the thresholds. For taxpayers living abroad, those are $200,000 at year end or $300,000 at any time for unmarried taxpayers, and $400,000 at year end or $600,000 at any time for married taxpayers filing jointly.

Wise, Revolut and similar accounts need to be evaluated based on how the account is structured and whether it is a foreign financial account for FBAR and Form 8938 purposes.

7. Portuguese investment funds and PPRs can create PFIC problems

Most non US mutual funds and ETFs are Passive Foreign Investment Companies for US tax purposes, and that can include Portuguese investment funds, PPR structures and other European products. The exact classification depends on the legal structure and the underlying investments.

If an investment is a PFIC, Form 8621 reporting is required and the US tax treatment is significantly worse than for a comparable US investment. Do not assume a product that is tax efficient in Portugal is tax efficient for a US citizen. Check the US classification before you invest.

Portuguese real estate is different. Property itself is not a PFIC, although rental income, depreciation, foreign taxes and any gain on sale all have US reporting and tax consequences.