Living and working in Portugal means you will be dealing with both Portuguese and US Taxes.
DISCLAIMER: Believe me, NONE of this should be taken as professional advice. This is my heads up to you based on my experience. Consult a licensed, competent professional. Maybe several.
Money Earned in Portugal is Taxable in Portugal. And the US.
Taxes are never straight-forward, I don’t care what country we’re talking about. And I am DEFINITELY NOT the person to take tax advice from. I have an accountant here do my taxes and I do my own taxes in the US but basically, I send them in and then wait for the IRS in either or both countries to tell me I was wrong. Then I send them whatever the difference is or get a lovely little surprise reimbursement. This past year, Portugal taxed me €125 for something. My accountant told me that I didn’t really owe it—a misunderstanding on the Portuguese Finances side, but it would cost me more for her to argue the point. You pick your battles with the IRS in any country.
Portugal and the US have a tax treaty which protects you from paying double taxes. BUT… if the taxes you would owe in Portugal are more than what you owe in the US, be prepared to pay that difference to Portugal. And vice versa.
What About that NHR Thing?
A major blow to people immigrating to Portugal is the discontinuance of the NHR (Non-Habitual Resident) tax scheme, closing at the end of 2023. The NHR provided favorable tax breaks for certain professions for the first ten years of residency. Those who qualified for NHR are grandfathered in; everyone else is left out in the cold.
While you may be living in Portugal, most likely you will still be working in the States. However, Portugal considers any income earned when you are physically in Portugal as taxable and Portuguese taxes are steep.
The graduated tax brackets go up to 48% of your income. Where the US doesn’t start taxing until you earn around $12,000 or so, Portugal starts taxing earnings at €0. The rate is 14.5% from zero to about €7,500. It then escalates up to 28% pretty quickly (€20,000) and tops out at 48% at just under €80,000. There’s an additional “solidarity rate” between 2.5% to 5% for earnings over €80,000. Keep in mind that’s earned income.
Your Social Security from the US is taxed here at 20%. If you have NHR status, it is taxed at 10% for the first ten years. Even at 10%, this tax has a sobering effect on retirees. Private pensions, royalties, and distributions from corporations are not taxed. And yes, there are some conditions to that. If you’re self-employed, talk to a competent CPA and attorney about establishing a US corporation. (You will need someone in the US to be a corporate officer.) You may have to hold that corporation for two years before your distributions become tax free. Best to configure these things earlier rather than later.
So Which Country Do You Pay First?
The fun part is that the United States is one of only two countries in the world that taxes its citizens on all world-wide income. With the tax treaty, you won’t be paying double taxes, but if you have taxable income (earnings and investments) you may find yourself paying taxes in both countries.
I have seen in forums that you pay the US first. I have also seen that you pay Portugal first. (You see why this is so much fun, right?) As near as I can establish, you pay taxes to the country you are residing in first. For me, that’s Portugal. Right now, because I have NHR status, my Portuguese taxes are minimal. But, because I am self-employed, I still owe self-employment taxes as well as income tax in the US. I pay Portugal what I owe them and, because I owe the US more, I pay the US what I owe them less what I paid Portugal. In actuality, I just pay the US what I owe them and let them rebate me any overage. Every accountant and tax sharpie in the US just threw up a little bit in their mouths. Right now it’s a minimal difference. Next year, because I have restructured my business, it will be even less.
I Won’t Lie: There’s No Clarity on Taxes
Be prepared for no clear answers on Portuguese taxes. You get different answers from different accounting firms. In the US, if you have a major tax issue and you don’t like what the regional IRS office is saying, your savvy tax attorney applies to different regional offices until they get the answer they want. If you call the IRS hotline with the same question and ask five different times, you will likely get five different answers. Portugal is no different.
Let’s get real: Nobody understands taxes anywhere. Smart tax attorneys and shady members of Congress understand loopholes. The US tax code is over 6,800 pages. When you include the tax regulations and guidelines from the IRS, it goes up to about 75,000 pages. All of them seemingly written by James Joyce.
You don’t want to be too smart for your own good. Find the best professional help you can and follow their guidance. Pay your damn taxes.