Does Portugal Tax US Social Security Benefits?
For US expats in Portugal, the tax treatment of Social Security is determined by its country of origin, creating distinct obligations in both nations.
The tax obligations for United States citizens who retire to Portugal are shaped by the laws of both nations. The treatment of U.S. Social Security benefits is governed by an international agreement, and tax liability is determined by the U.S.-Portugal Tax Treaty, an individual’s residency status, and domestic tax laws. Understanding how these elements interact is the only way to determine where and how U.S. Social Security income is taxed.
The US-Portugal Tax Treaty’s Rule on Social Security
The foundation for taxing U.S. Social Security for an American in Portugal is the U.S.-Portugal Tax Treaty. Article 20 of this agreement addresses pensions and social security payments. The treaty allows both the source country (the United States) and the residence country (Portugal) to tax the benefits.
This provision for concurrent taxing rights creates the potential for double taxation. To prevent this, the treaty specifies that the country of residence, Portugal, is obligated to eliminate the double tax. It accomplishes this by requiring Portugal to grant a foreign tax credit to its resident for the income taxes paid to the United States on the Social Security benefits.
The U.S. first has the right to apply its domestic tax laws to the Social Security income of its citizen. Afterwards, Portugal may also tax that same income as part of the resident’s worldwide income. Portugal must then reduce its own tax on that income by the amount of tax already paid to the U.S. government.
Taxation of US Social Security by the United States
The United States taxes its citizens on their worldwide income, regardless of where they live, and this includes Social Security benefits. The portion of benefits subject to U.S. federal income tax depends on the recipient’s “combined income.” Combined income is defined as your Adjusted Gross Income (AGI), plus any non-taxable interest, plus one-half of your Social Security benefits for the year.
The Internal Revenue Service (IRS) has established specific income thresholds. For an individual filing as single, if your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If your combined income is more than $34,000, up to 85% of your Social Security benefits could be taxable.
For those married filing jointly, the 50% threshold applies to a combined income between $32,000 and $44,000. The 85% threshold applies to income over $44,000.
The Role of Portugal’s Non-Habitual Resident (NHR) Regime
Portugal’s tax landscape for new residents changed at the beginning of 2024 with the discontinuation of its original Non-Habitual Resident (NHR) regime. The former NHR program was known for offering a flat 10% tax rate on most foreign pension income, which includes U.S. Social Security benefits. This rate is no longer available to individuals becoming tax residents in Portugal.
Individuals who successfully registered for NHR status before January 1, 2024, are grandfathered in and can continue to benefit from the 10% tax rate for the remainder of their 10-year NHR term. A brief transitional period also allowed individuals who became tax residents in 2024 to apply for the old NHR status until March 31, 2025, provided they met specific criteria.
For new residents, the original NHR program has been replaced by a new incentive for scientific research and innovation. This new regime is aimed at individuals in specific high-value professional fields and does not offer the broad pension tax benefits that the old NHR program provided. As a result, most new American retirees in Portugal will have their U.S. Social Security income taxed at Portugal’s standard progressive tax rates, which can be as high as 48%.
Reporting Requirements in Portugal and the US
Fulfilling tax obligations in both countries requires accurate reporting. In Portugal, a tax resident must file a Modelo 3 income tax return annually, declaring their worldwide income. U.S. Social Security benefits must be reported on this form. The gross amount of the benefits is declared on Anexo J, the schedule for foreign-source income.
To claim the foreign tax credit, the tax paid to the U.S. must also be reported on the Modelo 3 return. For the United States, citizens residing abroad must continue to file a U.S. federal tax return, Form 1040, each year they meet the filing threshold. On this return, they report their Social Security benefits just as a U.S. resident would.
The Social Security Administration provides an annual benefit statement, Form SSA-1099, which shows the total benefits received and is used for this calculation. Some taxpayers wonder about Form 8833, Treaty-Based Return Position Disclosure. Since the treaty allows the U.S. to tax the income fully under its own laws, the taxpayer is not using the treaty to reduce U.S. tax, and filing Form 8833 is generally not required for this situation.