Dorothy J. Says:
I enjoyed Jeff Opdyke’s recent article that explained the reduced tax structure while living for the first 10 years in Portugal. If I’m also a U.S. citizen will I also have to pay taxes in the United States? If I am understanding correctly, I will be paying taxes in two countries but at a reduced rate in Portugal vs other European countries that might be higher?
IL Personal Finance Expert Jeff Opdyke Says:
Hi, Dorothy,
Your tax situation will depend on your income situation. If you are a retiree, then you will owe taxes in Portugal at a flat 10% per year for 10 years on pension income/Social Security.
But the U.S. has a tax treaty with Portugal, so whatever taxes you pay to Portugal you write off in the U.S., so you are not taxed twice.
If for instance, you owe $10,000 in taxes in the U.S., and you’ve paid $7,000 to Portugal, you will write that off and will owe the U.S. generally in the neighborhood of $3,000. (Obviously, you should consult a tax professional about specific issues relevant to your circumstances.)
If you are working and earning an income digitally in Portugal—like as a writer, graphic artist, or consultant—for some companies back in the U.S., you pay a flat 20% tax rate in Portugal (same double taxation issues apply).
However, if you were to structure that income so that it comes to you as a dividend through an LLC based outside of Portugal, then your tax rate in Portugal is 0%.
Moreover, because you’re bringing in “earned income,” you’re eligible for the Foreign Earned Income Tax Exclusion in the U.S., which allows you to write off the first $120,000 in personal income. So you have a 0% personal tax rate up to $120,000. Anything above $120k is taxed at whatever your marginal tax rate is (the highest tax rate applicable to your income level).
And although you’ll owe 0% on that first $120,000, you will still owe Self-Employment Tax in the U.S., which is 15.3%. However, the income on which you pay that tax is reduced by your expenses, home-office deductions, etc. So your effective tax rate is lower than 15.3%.
Again, before putting into place any of the above you should consult a tax professional regarding your specific situation.
It could also be worth your while picking up a copy of Expat Taxes Made Easy: The Complete Guide To U.S. And Foreign Taxes For The American Overseas.
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