Why US citizens keep paying US taxes abroad

The United States is one of the very few countries that taxes based on citizenship, not residence. If you are a US citizen or green-card holder, you must file a US federal return (Form 1040) reporting your worldwide income every year, wherever you live — including after you become a Portuguese tax resident. Moving to Portugal does not end your US filing obligation; it adds a Portuguese one.

Once you spend more than 183 days in Portugal (or keep a habitual home here), you are also a Portuguese tax resident, taxed on worldwide income through IRS. See our moving to Portugal tax guide for the residency rules. So a US expat in Portugal typically files two returns each year.

How the US-Portugal treaty prevents double taxation

The US-Portugal income tax treaty (in force since 1996) and the US foreign-tax mechanisms mean you rarely pay full tax twice on the same income. Two tools do the heavy lifting on the US return:

• Foreign Earned Income Exclusion (FEIE, Form 2555) — excludes a large slice of foreign earned income (around $130,000 for 2025, indexed) if you meet the physical-presence or bona-fide-residence test. It applies only to earned income (salary, self-employment) — not to dividends, interest, rental or capital gains.
• Foreign Tax Credit (FTC, Form 1116) — credits the Portuguese tax you paid against your US tax on the same income. Because Portuguese rates are often higher than US rates, the FTC frequently reduces the residual US tax to zero, and can be carried forward. For many higher earners the FTC is more valuable than the FEIE.

Choosing FEIE vs FTC (or a combination) is a US-side decision with long-term consequences — it is exactly the kind of thing your US CPA and your Portuguese accountant should coordinate, because the Portuguese tax you actually pay drives the US credit.

FBAR and FATCA: reporting your accounts

Beyond income tax, the US requires US persons to report foreign financial accounts:

• FBAR (FinCEN Form 114) — required if the aggregate value of your foreign accounts exceeds $10,000 at any point in the year. This includes Portuguese bank accounts, and often brokerage and some pension accounts. It is an information report, filed separately from your 1040.
• FATCA (Form 8938) — an additional report with higher thresholds (for US persons living abroad, broadly $200,000 single / $400,000 married at year-end, or higher amounts during the year). Portuguese banks report US-owned accounts to the IRS under FATCA, so mismatches get noticed.

Penalties for missed FBAR/FATCA filings are severe, so most US expats keep these current even in years with no US tax due.

The PFIC trap — think twice before buying European funds

This is the single most expensive mistake US expats make in Portugal. A PFIC (Passive Foreign Investment Company) is, in effect, almost any non-US pooled investment — European (UCITS) ETFs and mutual funds, and many insurance-wrapped and some Portuguese pension-style products (PPR). For a US person, PFICs trigger a punitive tax regime and an onerous annual filing (Form 8621) that can cost more in preparation than the investment earns.

The practical takeaways US advisors usually stress: hold US-domiciled funds or individual securities rather than EU-domiciled funds, and get advice before a Portuguese bank or "wealth manager" sells you a local investment or insurance wrapper. This is general information, not personalised investment advice — decisions should be made with your US tax advisor.

IFICI and US citizens: what it does and doesn't do

IFICI (the 20% flat-rate regime that replaced NHR) is still worth having as a US citizen — it lowers your Portuguese tax on qualifying income and exempts most foreign income on the Portuguese side. But it does not reduce your US tax: the US taxes your worldwide income regardless of any Portuguese exemption.

There is even a subtle interaction to plan for: because IFICI lowers the Portuguese tax you pay, it can lower your Foreign Tax Credit on the US side, potentially leaving a little more residual US tax. Whether IFICI is a net win therefore depends on your income mix and needs joint US-Portugal modelling. We cover eligibility on the IFICI guide.

Social security: the US-Portugal totalization agreement

The US and Portugal have a Social Security Totalization Agreement (in force since 1989). It prevents you from paying social security into both systems on the same work and coordinates benefit eligibility across the two. A Certificate of Coverage determines which country's system you contribute to. In practice, if you are covered by Portuguese Segurança Social under the agreement, you are generally exempt from US self-employment tax on that income (with the certificate on file) — a meaningful saving for freelancers and founders.

Self-employed and company owners: extra US traps

• Portuguese company (Lda/Unipessoal) — if you own a Portuguese company as a US person, US CFC / GILTI rules and Form 5471 can apply, taxing you in the US on the company's retained profits. Structure this deliberately before you incorporate — see opening a company as a foreigner.
• US LLC / S-corp left behind — a US single-member LLC or S-corp does not always behave the way you expect once you are a Portuguese resident director; Portugal may look through to the underlying income and even see a "place of effective management" here.
• Rental & property — US persons with Portuguese property report the rental income both places; see real estate investment tax in Portugal.
• State tax — some US states (California, New Mexico, others) can still consider you a resident after you leave. Break state residency cleanly on the US side.

How HVR works with your US CPA

HVR Business Consulting, founded in 2014 in Parque das Nações, Lisbon, supports 200+ clients including many American residents and founders. Hugo Ribeiro has been a Certified Accountant (OCC no. 64356) since 2000. Our role is clear and honest: we own your Portuguese obligations — NIF and fiscal representation, IFICI eligibility and application, activity or company registration, VAT, payroll and the annual IRS return — and we coordinate with your US CPA or Enrolled Agent so the Portuguese tax you pay lines up with your US Foreign Tax Credit. Monthly accounting plans start at €150 (see pricing).

Request a free consultation for US expats → We reply within 24 hours, in English.

Frequently asked questions

Do US citizens still pay US tax after moving to Portugal?

Yes. The US taxes citizens and green-card holders on worldwide income regardless of where they live, so you keep filing a US return. The Foreign Earned Income Exclusion and Foreign Tax Credit usually reduce or eliminate the actual US tax, but the filing obligation remains.

Will I be taxed twice on the same income?

Rarely in full. The US-Portugal tax treaty, the FEIE and the Foreign Tax Credit are designed to prevent double taxation. Because Portuguese rates are often higher, the credit frequently wipes out residual US tax on Portuguese-taxed income.

What is the PFIC problem for US expats?

Most non-US pooled funds — European ETFs, mutual funds, and some insurance and Portuguese pension products — are PFICs, which the US taxes punitively and which require complex Form 8621 filing. US persons usually hold US-domiciled funds or individual securities and take advice before buying local investment products.

Does IFICI (NHR replacement) help American citizens?

It lowers your Portuguese tax, but not your US tax — the US still taxes your worldwide income. IFICI can still be worthwhile, but because it reduces the Portuguese tax paid it can also reduce your US Foreign Tax Credit, so it needs joint US-Portugal modelling.

Do I have to report my Portuguese bank account to the US?

Yes, if your foreign accounts together exceed $10,000 at any point in the year (FBAR / FinCEN Form 114), and potentially FATCA Form 8938 above higher thresholds. Portuguese banks also report US-owned accounts to the IRS.

Does HVR file my US tax return?

No. HVR is a Portuguese certified accounting firm. We handle everything on the Portuguese side and coordinate with your US CPA or Enrolled Agent so the two returns are consistent.