The Importance of a Certified Tax Preparer

For U.S. expatriates living in Portugal, fulfilling tax obligations in both countries can be a complex and challenging process. The Portuguese individual tax return, IRS3, is required for residents in Portugal, while U.S. citizens and permanent residents must also file a Form 1040 with the Internal Revenue Service (IRS) to report their worldwide income. Navigating the tax laws of both nations requires careful planning to avoid double taxation, penalties, and unnecessary complications. This is why working with a certified tax preparer who understands both the Portuguese and U.S. tax systems is crucial for compliance and peace of mind.

Tax Obligations in Portugal: The IRS3

Portugal requires all tax residents to file an IRS3 tax return, which reports worldwide income and determines the amount of tax owed to the Portuguese government. The key aspects of IRS3 include:

• Tax Residency Determination: Individuals who spend more than 183 days in Portugal within a calendar year are considered tax residents and must declare their global income.
• Income Categories: IRS3 requires the reporting of employment income, self-employment income, rental income, capital gains, pensions, and other sources of revenue.
• Progressive Tax Rates: Portugal applies a progressive income tax rate system, ranging from 14.5% to 48%, depending on income levels.
• Non-Habitual Resident (NHR) Regime: This special tax regime provides attractive benefits for qualifying foreign residents, including reduced tax rates on foreign-sourced income.

Filing IRS3 correctly is essential to avoid penalties, overpayments, or potential audits by the Portuguese Tax Authority (Autoridade Tributária e Aduaneira).

U.S. Tax Obligations: Form 1040

Even if U.S. citizens or green card holders reside in Portugal, they remain subject to U.S. tax laws. The IRS requires individuals to file Form 1040, reporting all worldwide income. Key requirements include:

• Foreign Earned Income Exclusion (FEIE): U.S. expats may exclude up to $126,500 for 2024 ($126,500 for 2025) of foreign-earned income if they meet residency tests.
• Foreign Tax Credit (FTC): Allows taxpayers to claim a credit for taxes paid to Portugal, reducing U.S. tax liability.
• FBAR (FinCEN Form 114): Required for individuals with foreign financial accounts exceeding $10,000 at any point during the year.
• FATCA (Form 8938): Must be filed if specified foreign assets exceed certain thresholds.

Failure to file or inaccurately reporting income can result in severe penalties from the IRS, including fines and potential legal action.

Why Use the Same Certified Tax Preparer for IRS3 and Form 1040?

Given the complexities of filing taxes in both Portugal and the U.S., using a certified tax preparer experienced in both jurisdictions offers multiple advantages:

1. Avoiding Double Taxation

Proper coordination between IRS3 and Form 1040 ensures that foreign tax credits and exclusions are applied correctly, preventing taxpayers from paying taxes twice on the same income.

2. Ensuring Compliance with Both Tax Authorities

Each country has strict reporting requirements and deadlines. A tax professional familiar with both the Portuguese Tax Authority and the IRS ensures compliance, avoiding late filing penalties and audits.

3. Maximizing Tax Benefits

A tax preparer can identify tax-saving opportunities, such as utilizing the NHR regime in Portugal and claiming U.S. foreign exclusions or credits, reducing the overall tax burden.

4. Simplifying the Process and Reducing Errors

Filing separate returns with different preparers increases the risk of inconsistencies and errors. A single tax professional handling both IRS3 and Form 1040 ensures accuracy and a seamless process.

5. Efficient Handling of Tax Treaty Provisions

The U.S.-Portugal Tax Treaty provides guidance on taxation of income, pensions, and social security benefits. A knowledgeable preparer will ensure that the treaty’s provisions are correctly applied.

Consequences of Incorrect Tax Filings

Failing to meet tax obligations in either country can lead to serious financial and legal consequences, including:

• Hefty Fines and Interest Penalties: Late or incorrect filings can result in significant financial penalties.
• IRS Audits and Legal Issues: The IRS closely monitors international tax compliance and can impose severe consequences for non-compliance.
• Portuguese Tax Investigations: Errors or omissions in IRS3 filings can trigger audits by Portuguese authorities, leading to fines or additional tax assessments.

Conclusion

Expats living in Portugal must navigate the complexities of both the Portuguese IRS3 tax return and the U.S. Form 1040 to remain compliant with tax laws. Partnering with a certified tax preparer who understands the tax systems of both countries is the best way to ensure compliance, avoid double taxation, and maximize tax benefits. By working with a single tax professional for both filings, expats can simplify the process, minimize risks, and gain peace of mind knowing their tax obligations are handled efficiently and correctly.

Please do not hesitate to contact us, US Tax Consultants, for more information or just book a free consultation with any of our Tax prepares.