US taxes while living in Portugal: FBAR, FEIE and tax credits

Moving to Portugal does not end your relationship with the IRS. The United States taxes its citizens on worldwide income wherever they live, so an American resident in Portugal files a US return every year, often alongside a Portuguese one. The good news is that the US system has tools that usually prevent paying full tax twice. This guide covers the US side: what you file, the main relief options, and the foreign account reports that trip people up.

You still file a US return

The IRS states that if you are a US citizen or resident alien living abroad, the rules for filing income, estate and gift tax returns and paying estimated tax are generally the same as for people living in the US, and your worldwide income is subject to US income tax.

The filing calendar has one helpful difference:

• the regular due date for calendar-year filers is April 15;
• if you live outside the US on that date, you get an automatic two-month extension to June 15, without filing a request;
• you still owe interest on any tax not paid by April 15;
• if you need more time, file Form 4868 before June 15 to extend to October 15.

Portugal's own return, the IRS Modelo 3, is filed between 1 April and 30 June. Many Americans finish the Portuguese return first so they know the final Portuguese tax when they claim the foreign tax credit.

Relief option 1: the foreign earned income exclusion (FEIE)

The FEIE lets you exclude a capped amount of foreign earned income from US income tax. The IRS sets three conditions:

• your tax home is in a foreign country;
• you meet the bona fide residence test (a resident of a foreign country for an uninterrupted period that includes a full tax year) or the physical presence test (physically present in foreign countries for at least 330 full days during any 12 consecutive months);
• the income is earned income: wages, salaries, professional fees or self-employment income for services performed abroad.

Limits worth knowing, all from the IRS:

• the exclusion does not apply to pensions, annuities, Social Security, dividends, interest or rental income;
• it does not reduce self-employment tax, so freelancers still owe US Social Security and Medicare tax on net earnings unless the US-Portugal totalization agreement assigns their coverage to Portugal;
• if you claim the exclusion, the tax on your remaining income is figured at the rates that would apply if you had not excluded anything.

The exclusion amount is adjusted each year for inflation. Check the current figure on the IRS FEIE page and Form 2555 instructions for the year you are filing.

Relief option 2: the foreign tax credit (FTC)

The FTC is the main tool for retirees and investors, and often for workers too. The IRS explains:

• if you paid or accrued foreign income tax and are subject to US tax on the same income, you can take either a credit or an itemized deduction;
• a credit reduces your US tax liability dollar for dollar; a deduction only reduces taxable income, and the IRS notes that in most cases the credit is more advantageous;
• you claim it on Form 1116;
• only income, war profits and excess profits taxes qualify, so Portuguese IRS income tax is the relevant tax, while property taxes like IMI do not qualify.

Two interactions to note:

• you cannot claim the FTC on income you excluded with the FEIE;
• Portugal taxes residents at progressive rates, so for many Americans with earned income, claiming the FTC instead of the FEIE removes most or all of the US tax on that income and builds carryover credits.

The US-Portugal tax treaty

The IRS lists an income tax treaty with Portugal on its treaty A to Z page. Treaties assign taxing rights for specific income, such as pensions and dividends. US treaties also contain a saving clause that lets the US tax its citizens as if the treaty did not exist, with specific exceptions. In practice, the treaty helps decide which country taxes first, and the FTC handles the rest.

FBAR: reporting your Portuguese bank accounts

The FBAR (FinCEN Form 114) is not a tax return. It is a report to the Financial Crimes Enforcement Network. According to the IRS comparison of FBAR and Form 8938:

• you must file if the aggregate value of your foreign financial accounts exceeded $10,000 at any time during the year;
• the threshold counts all accounts combined, so a Portuguese checking account and a savings account together can cross it;
• it is filed electronically through FinCEN's BSA E-Filing System, not with your tax return;
• it is due April 15, with an automatic extension to October 15.

Once you open a Portuguese bank account and move money for rent, deposits and daily life, crossing $10,000 at some point in the year is common.

Form 8938: specified foreign financial assets

Form 8938 comes from FATCA and is filed with your tax return. For taxpayers living abroad, the IRS lists these thresholds:

• single or married filing separately: more than $200,000 on the last day of the year or more than $300,000 at any time;
• married filing jointly: more than $400,000 on the last day or more than $600,000 at any time.

The IRS notes some items that are not reported on Form 8938: foreign real estate held directly, such as an apartment in Porto in your own name, and foreign social security benefits. A penalty of up to $10,000 applies for failure to file, plus up to $10,000 for each 30 days of continued failure after notice, up to $60,000.

FBAR and Form 8938 overlap but are separate obligations; many people file both.

Why your Portuguese bank asks about US status

FATCA, the Foreign Account Tax Compliance Act, requires foreign financial institutions to report accounts held by US taxpayers to the IRS, according to the IRS FATCA page. That is why a Portuguese bank will ask whether you are a US person and request US tax forms when you open an account. It is routine.

Self-employment and social security

If you freelance from Portugal, you may face two social security systems. The US-Portugal totalization agreement, in force since 1989, assigns self-employed workers who live in Portugal to Portuguese coverage, according to the Social Security Administration. To be exempt from US self-employment tax, you need a certificate of coverage from the Portuguese social security system and attach a copy to your US return each year.

A yearly calendar

• January to March: collect US 1099s and Portuguese income statements.
• 1 April to 30 June: file the Portuguese Modelo 3.
• April 15: pay any US tax owed to avoid interest.
• June 15: automatic US filing deadline for citizens abroad.
• October 15: extended deadline for the US return (with Form 4868) and the FBAR.

Common questions

Do I still file a US tax return if I live in Portugal? Yes. The IRS says US citizens living abroad are taxed on worldwide income and follow generally the same filing rules, with an automatic extension to June 15 if they live outside the US on April 15.

Can I use the foreign earned income exclusion on my Social Security or pension? No. The IRS limits the exclusion to earned income such as wages and self-employment income. Pensions, Social Security, dividends and interest do not qualify.

When do I need to file an FBAR for my Portuguese accounts? When the combined value of your foreign financial accounts exceeded $10,000 at any time in the year. It is filed with FinCEN, due April 15 with an automatic extension to October 15.

Is a home I own in Portugal reported on Form 8938? Not if you hold it directly in your own name. The IRS lists foreign real estate held directly as not reportable on Form 8938.