When I got off the webinar with Derren Joseph about 1040 US Portugal challenges, I felt I need to write. Here we go.
Portugal offers exquisite seafood cuisine and stunning 16th to 19th-century architecture that draws US expats, making it a desirable location to settle. However, tax matters may become complicated as you need to pay both US and Portugal income tax obligations.
Dividends paid to non-resident shareholders are subject to withholding tax at 20% or the treaty rate, while interest expenses can be deducted on an accruals basis.
Streamlined Filing Procedure
As Americans prepare to move to Portugal, they must remember that US tax rules still apply and consult a tax professional in order to assess any filing requirements or treaty benefits applicable in accordance with US tax treaty obligations.
The United States and Portugal have signed a Tax Treaty which can protect American expats living abroad from double taxation. This treaty covers various aspects of taxation such as income and social security taxes as well as how to determine which country can tax particular income sources.
General rule dictates that US citizens living overseas are required to file federal income tax returns each year they reside abroad, whether as US citizens, green card holders or dual citizens. The IRS offers the streamlined filing procedure which allows those who have fallen behind to file without incurring penalties - provided they do so before they are contacted by them directly.
The streamlined filing procedure isn't open to all taxpayers; eligibility requirements include having a valid social security number and bank account within the US, at least $10,000 assets in assets and no delinquent taxes or unpaid liabilities from previous years on your tax returns; additionally you must sign a declaration.
US expats seeking to take advantage of the simplified filing procedure should consult with a tax professional on how best to file their returns and foreign bank account reports, and ensure they have any necessary documents available in case of audits.
Expats living in Portugal must also file their local taxes - these include the personal income tax, VAT and solidarity tax.
Before moving to Portugal, it is also wise to consider estate planning. Due to different inheritance laws between countries, an American's current estate plan may not fit well with that of their new host nation. As soon as issues with dual citizenship or divorce arise, it's wise to consult a lawyer about how Portugal's laws might impact an individual's estate plan. An experienced international tax attorney can ensure that their wealth remains safe. An accountant can also provide insight into any potential issues with dual citizenship or divorce and how that might impact tax issues. Since tax law can be complex, it's best to prepare before making the move to avoid surprises later on.
Non-Habitual Residents
There is an increasing population of Americans living in Portugal. Many have arrived via one of Portugal's Golden or D7 visa programs while others may hold permanent residency permits of some type. No matter their immigration status, all Americans living in Portugal should know their rights and responsibilities when filing US expat taxes as well as Portuguese tax returns.
One important consideration between the United States and Portugal is their varying taxation regimes. For instance, US citizens earning income are subject to federal and state income taxes regardless of where they live; this applies to salaries, investments, pensions, interest income and any other source. However, if their earnings qualify for the $120,000/yr foreign earned income exclusion they don't need to pay tax on that portion. In Portugal however, taxation rules vary slightly more.
First and foremost, to qualify as a resident for tax purposes in Portugal, one must spend at least 183 days within any calendar year in Portugal - these don't need to be consecutive days - though non-residents of Portugal will be taxed at progressive rates of 14.5%-48% for individuals and 30%-54% for corporations; by comparison, non-residents in the US pay only 10% flat tax rate on all income.
Non-residents of Portugal who wish to opt out of the general income taxation system can apply for NHR (Non-Habitual Resident) status. Once granted, this status will last five years from when it became retroactively valid - from when an individual first moved into Portugal as a resident.
NHR status allows individuals to avoid higher general income tax rates and instead pay an agreed upon flat tax rate of 20% on any income earned from dependent and independent professional activities of high added-value which have scientific, artistic or technical characteristics in inland Canada.
When filing for Naturalized Housing Residency (NHR), individuals must submit a declaration through an online financial portal with their residency certificate and tax returns from past years, along with evidence from their doctor that shows their medical coverage in their current country of residence.
Once in Portugal, US citizens should make sure to file Form 1040NR and report all foreign bank accounts they hold, including those exceeding $10,000 total combined balances. They should also complete an FBAR form - for more complex legal matters it may be wise to consult a qualified US expat tax lawyer so all filings are accurate and complete.
Non-Residents
Living abroad presents unique issues, one of which is filing your taxes. For US citizens or green card holders living in Portugal, it's wise to seek advice from an international tax specialist prior to filing their returns.
United States of America taxes its citizens and legal permanent residents on all their worldwide income, regardless of any tax treaties between Portugal and the US. Although expats from Portugal may qualify for certain deductions or credits that reduce their US tax burden, filing their federal returns still makes good financial sense if possible.
Those living in Portugal face complex tax matters due to its residency tax requirements; residents will pay taxes on all their income, including social security contributions. Non-residents only pay tax on Portuguese-sourced income. Therefore, it may be more efficient for US citizens moving abroad to sell assets such as stocks prior to leaving home in order to reduce overall taxes payable in Portugal.
Once again, it's important to remember that estate planning laws vary between the US and Portugal. If you have set up a trust or entity in the US that holds assets, prior to moving abroad it would be prudent for it to be reviewed by an experienced US expat lawyer as each country may differ in terms of who inherits and can pass along an inheritance - this could have serious ramifications on your family if handled incorrectly.
As a US citizen or green card holder living in Portugal and if you have earnings in the US, you must file a return if any earnings occur there and may need to pay Medicare portion of Social Security tax; however, certain exemptions exist which can help mitigate your liability with the IRS - these include Foreign Earned Income Exclusion and Foreign Housing Exclusion.
One of the key things to remember when living and filing taxes in the US is filing your annual tax return, or facing serious penalties from the Internal Revenue Service (IRS). Fortunately, they offer a program called the Streamlined Filing Procedure which may allow you to catch up without incurring penalties; however this must be initiated prior to any contact from IRS and it should only be utilized if taken action before their representatives contact you - therefore it's best to consult a qualified international tax professional as soon as you move abroad in Portugal so as to prevent unpleasant surprises come tax time!
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