Managing taxes in both the US and Portugal is essential for a smooth transition into retirement. From the Non-Habitual Resident (NHR) tax regime to navigating the complexities of US tax obligations, this guide provides a roadmap for retirees seeking financial clarity while living abroad.


Understanding the Non-Habitual Resident Tax System



What is the NHR Program?

The Non-Habitual Resident (NHR) program is a tax incentive scheme introduced by Portugal to attract foreign nationals, including retirees, to the country. It offers favorable tax conditions to individuals who have not been tax residents in Portugal for the last five years.

By applying for NHR status, US expats can benefit from reduced tax rates and exemptions on certain types of income, making it an attractive option for those looking to minimize their tax burden.

To qualify, expats must become Portuguese tax residents, which generally means spending more than 183 days a year in the country or establishing permanent residence there.



Tax benefits under the NHR program

The NHR plan offers several tax advantages for US retirees. Key benefits include:

  • Many types of foreign income - such as pensions, dividends, and royalties - may be exempt from Portuguese taxation for up to ten years.
  • For certain high-value professions, local income earned in Portugal may be taxed at a flat rate of 20%, which is much lower than the progressive rates applied to other residents.
  • Portugal does not impose wealth taxes, providing further financial incentives for retirees with significant assets.

By utilizing NHR status, US retirees can optimize their tax situation and potentially pay little to no tax on their US-sourced income in Portugal.


US tax obligations while living in Portugal


Filing US taxes as an expat

Despite moving abroad, US citizens and green card holders are still required to file US taxes annually. As part of US expat taxation, if you're a US expat in Portugal, you'll need to file Form 1040, along with additional forms such as FBAR (Foreign Bank Account Report) and FATCA (Foreign Account Tax Compliance Act) if your foreign assets exceed certain thresholds.

The Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit can help reduce your overall tax burden by excluding or crediting certain foreign income.


The US-Portugal Tax Treaty

The tax treaty between the United States and Portugal exists to help avoid double taxation for expats. Under this treaty, US retirees living in Portugal can claim foreign tax credits for taxes paid in Portugal to offset their US tax liability.

The treaty also clarifies which country has the right to tax various types of income, such as pensions or social security.

It's important to note, however, that even with the treaty, US expats must still file US taxes and report their worldwide income.


Portugal's local tax obligations


Portugal's tax residence status

In Portugal, tax residency status is a key factor in determining your local tax obligations. Generally, you are considered a tax resident if you spend more than 183 days in Portugal during a calendar year or if you maintain a permanent residence in the country.

Portuguese tax residents are taxed on their worldwide income, while non-residents are taxed only on their Portuguese-source income. It's important to clarify your tax residency status to understand the extent of your tax obligations in Portugal.


Portugal's tax rates and thresholds

Portugal has a progressive income tax system with rates ranging from 14.5% to 48% depending on your income level. In addition to income tax, retirees may also have to consider capital gains tax if they sell property or other assets in Portugal.

However, under the Non-Habitual Resident (NHR) regime, foreign-source income, such as US pensions, may be exempt from Portuguese tax for up to ten years, significantly reducing your tax burden.


Taxation of retirement savings and assets


Retirement account tax treatment

For US expats in Portugal, the tax treatment of US retirement accounts such as IRAs, 401(k)s and other pension plans can vary.

While these accounts are generally taxed by the US when distributions are made, Portugal may also tax these withdrawals depending on your residency status and the NHR regime.

Under the NHR status, certain foreign-source pensions may be exempt from Portuguese taxation. However, it's important to understand how Portugal and the US interact in taxing retirement savings.


Capital gains on investments

Capital gains from investments - whether from the sale of real estate, stocks, or other assets - may be subject to taxation in both Portugal and the United States.

Portugal applies a flat capital gains tax rate of 28% for individuals, but this can vary depending on specific exemptions or deductions available.

US expats should be aware of the potential for double taxation and use tools such as foreign tax credits to avoid being taxed on the same income in both countries.


Bottom line


Retiring as a US expat in Portugal offers a mix of financial benefits and obligations. The NHR system can significantly reduce taxes on foreign income, but expats still need to navigate US tax filing requirements and understand how Portuguese tax laws apply to their income, retirement savings, and investments.

By staying informed about both countries' tax systems and seeking professional advice, US retirees can ensure a financially secure and stress-free retirement in Portugal.