Introduction
The US is one of only two countries in the world that taxes based on citizenship rather than residence. Understandably, one of the questions we therefore get the most is “will I be taxed twice if I move to Portugal?”
As an American living in Portugal, you will need to file a tax return in both countries. But here’s the most important part: filing in two places is not the same as paying twice. Most of our American clients end up owing $0 in US federal tax once everything is accounted for, largely because Portuguese tax rates are generally higher than US rates. The US-Portugal Treaty on Double Taxation and the credit system is built specifically to stop you being taxed twice on the same income. It’s a little complicated, but this article is designed to help you understand how the system works.
Disclaimer: I’m not a tax advisor, and nothing here is financial or tax advice. This is an overview to help you understand the system, based on what we see with our clients day to day. Please speak to a qualified accountant who understands both US and Portuguese tax before making any decisions.
Double Filing vs Double Taxation: The Key Distinction
Double filing means you submit a tax return in both the US and Portugal every year. This is mandatory. There is no way around it as a US citizen living in Portugal, unless you renounce your US citizenship entirely, which is a drastic step with many implications.
Double taxation means actually paying full tax twice on the same income. This is the part that, in the vast majority of cases, does not happen. The US and Portugal have a tax treaty and a separate totalization agreement, and between the two of them, most people end up paying tax once, even though they’re filing paperwork twice.
The mechanism that makes this possible is the Foreign Tax Credit (FTC), alongside the Foreign Earned Income Exclusion (FEIE), both of which I’ll break down properly below. Having a treaty in place doesn’t automatically protect you from double taxation on its own. It’s how you use the credits and exclusions that does the real work.
When Do You Actually Become a Portuguese tax resident?
Portugal decides whether you’re a tax resident using two tests, and you only need to trigger one of them:
- The 183-day rule. If you spend more than 183 days in Portugal in a calendar year, even if those days aren’t consecutive, you’re a tax resident.
- The habitual residence test. If you maintain a home in Portugal at any point in the year that suggests it’s your main base, you can be considered a resident without hitting 183 days.
If either applies, you’re taxed in Portugal on your worldwide income, at Portugal’s progressive rates. If neither applies, you’re a non-resident and only pay Portuguese tax on income sourced within Portugal, at a flat 25%.
For most of our clients on a D7 or D8 visa, this isn’t really a grey area. If you’ve relocated your life here, you’re a tax resident.
The Tax Year and Filing Deadlines in Each Country
In Portugal, the tax year matches the calendar year, running from 1 January to 31 December. The filing window opens on 1 April and closes on 30 June, and any tax owed is due by 31st August. Your Portuguese return is called the Modelo 3.
In the US, the tax year is also the calendar year, but the standard filing deadline is 15 April. However, US citizens living abroad automatically get an extension to 15 June, without needing to file anything to request it.
The US-Portugal Double Taxation Treaty
The tax treaty between the US and Portugal exists to stop the same income being fully taxed by both countries. It sets out which country gets first right to tax different types of income, and it’s the framework that everything else in this article sits underneath.
However, the Treaty includes a “saving clause.” In plain terms, this allows the US to tax its citizens as if the treaty didn’t exist at all. It sounds alarming, but in practice it just means you can’t rely on the treaty alone to reduce your US bill. That’s what the Foreign Tax Credit (FTC) and Foreign Earned Income Exclusion (FEIE) are for. This is why most cross-border tax advisors will tell you the treaty sets the stage, but the FTC and FEIE do the actual heavy lifting.
Foreign Tax Credit (FTC)
The FTC gives you a dollar-for-dollar credit on your US return for income tax you’ve already paid to Portugal. You claim it using IRS Form 1116.
A few things make the FTC particularly useful for anyone in Portugal:
- There’s no minimum time abroad required to qualify. You just need to have paid a qualifying foreign income tax.
- It applies to both earned income (salary, self-employment) and passive income (dividends, interest, rental income, capital gains).
- If your Portuguese tax bill exceeds what you’d owe the US on the same income, the excess doesn’t disappear. You can carry it forward for up to 10 years, or back 1 year.
Because Portuguese tax rates are, in most brackets, higher than equivalent US rates, this is precisely why the majority of our clients end up owing nothing to the IRS.
Rough Example: Say you earn the equivalent of $90,000 working for a Portuguese company, and you pay around $24,500 in Portuguese income tax on it. Your US tax on that same $90,000 would likely be somewhere around $14,000. The Foreign Tax Credit absorbs that entirely, leaving $0 owed to the IRS and roughly $10,500 in unused credit to carry forward.
Foreign Earned Income Exclusion (FEIE)
The FEIE lets you exclude a set amount of foreign earned income from US taxation entirely. For the 2025 tax year, the cap is $130,000 per qualifying person, rising to $132,900 for 2026. You claim it on Form 2555. It generally works best if you’re residing in a country with low or no income tax (not Portugal), as illustrated below.
To qualify, you need to pass one of two tests:
- The Physical Presence Test, meaning you spend at least 330 full days outside the US in any 12-month period; or
- The Bona Fide Residence Test, meaning you’re a genuine resident of a foreign country for an unbroken period covering a full tax year.
There are two important limits on the FEIE that trip people up. First, it only applies to earned income, meaning salary, wages, and self-employment income. It does nothing for passive income, i.e., dividends, interest, rental income, or capital gains. Second, because it reduces your Adjusted Gross Income, it can also reduce or disqualify you from certain benefits, such as the refundable portion of the Child Tax Credit, or your ability to contribute to an IRA.
Rough Example: If you’re earning the equivalent of $120,000 in a country with no income tax, like the UAE, excluding the full amount under the FEIE could bring your US federal tax bill straight to $0. It’s a genuinely powerful tool, but it’s built for a different scenario to the one most people in Portugal are in.
FTC vs FEIE in Portugal
As a general rule, the FEIE suits people living in low-tax or no-tax countries, such as the UAE, Singapore, or Panama. The FTC suits people living in higher-tax countries, such as Portugal, the UK, Germany, and France.
Since Portuguese income tax rates typically exceed the equivalent US rates, the FTC almost always produces the better outcome for our clients. It’s also more flexible, since it isn’t restricted to earned income only.
That said, plenty of people use both together. A common approach is applying the FEIE to earned income up to the cap, then using the FTC to cover anything above that threshold, plus any passive income the FEIE doesn’t touch anyway.
To understand which would work best for you, feel free to get in touch and we’ll put you in contact with our trusted Portuguese accountant.
The Key Things to Take Away
1. You will always file in both the US and Portugal as an American living here.
2. Filing twice does not mean paying twice. The Foreign Tax Credit and Foreign Earned Income Exclusion exist specifically to prevent that.
3. The FTC is usually the stronger option for anyone living in Portugal, given Portuguese tax rates typically exceed US rates.
Final Thoughts
Our recommendation, every time, is to have a reliable accountant in both countries, ideally ones who understand how the two systems interact with each other rather than working in isolation. It’s a relatively small cost against the risk of getting it wrong, and it means you can actually enjoy the move rather than spending your first year in Portugal worrying about the IRS.
If you’re planning a move to Portugal, feel free to get in touch for a free consultation.
Disclaimer: This content is for informational purposes only and does not constitute tax or financial advice. Please consult a qualified accountant familiar with both US and Portuguese tax law before making any decisions.