U.S. Social Security for Americans Living in Portugal: Which Country Gives the Foreign Tax Credit?

For U.S. citizens who are tax resident in Portugal, U.S. Social Security can create an unusual double-taxation problem. Both Portugal and the United States may tax the same benefit, but the key question is not simply whether a Foreign Tax Credit, or FTC, is available.

The real question is:

Which country is required to give the credit?

For U.S. Social Security paid to a U.S. citizen who is resident in Portugal, the treaty generally points to Portugal as the country that must relieve the double taxation.

This is different from the treatment of some U.S.-source dividends, interest, or other income, where the U.S. may sometimes allow a credit for Portuguese tax through treaty re-sourcing.

Short answer

A U.S. citizen resident in Portugal may be taxed by both countries on U.S. Social Security.

However, under the U.S.–Portugal tax treaty:

• the United States retains the right to tax U.S. Social Security;
• Portugal may also tax the benefit because the individual is Portuguese tax resident;
• Portugal is generally responsible for granting relief for double taxation by allowing a credit for the U.S. income tax attributable to the Social Security benefit.

The IRS itself has addressed this specific situation and stated that where a U.S. citizen resident in Portugal receives U.S. Social Security, the United States retains the primary taxing right and Portugal must provide the double-tax relief.

Why can both Portugal and the United States tax U.S. Social Security?

The starting point is Article 20 of the U.S.–Portugal Income Tax Treaty.

Article 20(1)(b) provides that Social Security benefits and certain public pensions paid by one contracting state to a resident of the other state, or to a U.S. citizen, may be taxed in the paying state.

Therefore, U.S. Social Security paid by the United States to a Portuguese resident can still be taxed in the United States.

This is important because the U.S. taxing right does not arise only because the recipient is a U.S. citizen. The treaty itself independently preserves the U.S. right to tax the benefit.

That distinction becomes critical when determining which country gives the FTC.

What does Article 25 of the treaty do?

Article 25 contains the treaty’s double-tax-relief rules.

For a Portuguese resident, Article 25(3)(a) essentially provides that where Portugal taxes income that may also be taxed in the United States under the treaty, other than solely because of U.S. citizenship, Portugal must allow a credit for the U.S. income tax paid on that income.

The credit is limited to the Portuguese tax attributable to the same income.

That wording is central to U.S. Social Security.

The United States can tax the benefit because Article 20 already gives it that right. It is therefore not a case where the United States is taxing the income solely by reason of citizenship.

The practical consequence is usually:

U.S. tax first → Portuguese FTC second.

Practical example

Assume a U.S. citizen is resident in Portugal and receives:

• U.S. Social Security: €30,000
• Portuguese tax attributable to the Social Security: €3,000
• U.S. federal income tax attributable to the same benefit: €1,800

Portugal initially calculates €3,000 of tax.

The treaty then requires Portugal to recognize the U.S. tax, subject to the Portuguese FTC limitation.

The result would broadly be:

The taxpayer does not obtain a €3,000 U.S. credit for the Portuguese tax. Instead, Portugal reduces its tax by the qualifying U.S. tax.

If the U.S. tax were €4,000 while the Portuguese tax attributable to the benefit were only €3,000, the Portuguese credit would generally be capped at €3,000.

Portugal would therefore reduce its tax to zero, but the excess U.S. tax would not normally create a Portuguese refund beyond the Portuguese tax charged on that income.

Why is this different from U.S. dividends?

This is where many taxpayers and even practitioners can become confused.

A U.S. citizen resident in Portugal may also receive dividends from a U.S. corporation.

Those dividends are also U.S.-source income. But the treaty treatment is materially different.

Under the treaty article dealing with dividends, the United States’ source-country taxing right is generally subject to a treaty rate limitation.

For example, assume:

• U.S. dividend: $100,000
• treaty source-country rate: 15%
• Portuguese tax: 28%
• U.S. tax under normal citizenship rules: 23.8%

The United States may have an initial source-country taxing right of 15%.

Portugal then gives credit for that first layer of U.S. tax.

But the additional U.S. tax above the treaty source-country rate may arise only because the taxpayer remains subject to U.S. tax as a citizen.

That is where treaty re-sourcing may become relevant.

The IRS expressly recognizes a category called:

Certain Income Re-Sourced by Treaty

and explains that certain U.S.-source income can be treated as foreign-source income for FTC purposes where a treaty requires it. Portugal is among the treaty countries that can trigger this mechanism.

This is the technical reason a Portuguese tax credit may sometimes be available in the United States for U.S.-source dividends, while the same conclusion does not automatically apply to U.S. Social Security.

What is treaty re-sourcing?

Normally, the U.S. Foreign Tax Credit under Form 1116 is limited by reference to foreign-source income.

That can create a problem where Portugal taxes income that is classified as U.S.-source under U.S. domestic law.

Certain tax treaties solve that problem by allowing part of the income to be treated as foreign-source solely for purposes of the FTC limitation.

The IRS Form 1116 instructions expressly provide for this category and state that a separate FTC limitation may need to be calculated for income re-sourced by treaty.

This mechanism is sometimes referred to informally as part of the three-bite rule for U.S. citizens resident in treaty countries.

Conceptually:

1. the United States takes the tax it is entitled to as source country;
2. the country of residence taxes the same income and gives credit for that first U.S. tax;
3. if the United States imposes additional tax only because the individual is a U.S. citizen, treaty re-sourcing may allow a U.S. FTC for the residual residence-country tax.

Why treaty re-sourcing generally does not solve the Social Security issue

The critical test is:

How much U.S. tax could apply if the person were not a U.S. citizen?

For many dividends, the answer may be limited by the treaty to a specific source-country rate.

Any U.S. tax above that level may be attributable to citizenship.

For U.S. Social Security, the treaty already gives the United States an independent right to tax the benefit under Article 20.

That means there may be no separate layer of U.S. tax that exists solely because of citizenship.

Without that citizenship-only layer, there is generally no basis for using the treaty re-sourcing mechanism to shift the Portuguese tax into the U.S. FTC system.

The IRS reached the same overall conclusion in a 2015 Chief Counsel information letter dealing specifically with U.S. Social Security paid to U.S. citizens resident in Portugal.

It stated that both countries may tax the benefit, but that the United States retains the primary taxing right and Portugal must alleviate the double taxation.

Can Portuguese tax on U.S. Social Security ever be claimed on Form 1116?

As a general rule, taxpayers should be very cautious about doing so.

The IRS does allow foreign tax credits for some U.S.-source income where an applicable treaty re-sources that income. The Form 1116 instructions expressly recognize this category.

But U.S. Social Security is different because the U.S.–Portugal treaty independently preserves U.S. taxing rights over the benefit.

Accordingly, the stronger treaty interpretation is usually that Portugal, not the United States, must grant the credit.

A U.S. taxpayer should therefore not assume that Portuguese tax paid on U.S. Social Security can simply be entered on Form 1116 in the same way as foreign tax on other income.

What should a taxpayer actually do?

In practice, the sequencing can matter.

A Portuguese resident who is also a U.S. citizen may need to:

1. report the Social Security in both countries where required;
2. finalize the U.S. tax return;
3. determine the amount of U.S. income tax actually attributable to the Social Security benefit;
4. use that figure to calculate the Portuguese foreign tax credit;
5. amend the Portuguese return if the U.S. liability was not known when the Portuguese return was originally filed.

The Portuguese credit should be calculated by reference to the tax actually attributable to the same income and remains subject to the Portuguese limitation.

This is not necessarily the same as taking the taxpayer’s overall U.S. effective tax rate and multiplying it by the Social Security benefit.

A proper allocation of U.S. tax may therefore be required.

Does this mean taxpayers should always file the U.S. return first?

Not necessarily.

For taxpayers with multiple income sources, the optimal filing sequence may depend on:

• U.S. Social Security;
• U.S. pensions and IRA distributions;
• W-2 income;
• dividends and interest;
• capital gains;
• Portuguese NHR or other special tax regimes;
• foreign tax credit carryovers;
• treaty re-sourcing.

Filing the U.S. return first can make the Portuguese FTC calculation easier where Portugal is clearly the credit country.

But other income categories may work in the opposite direction.

For internationally mobile U.S. citizens, the filing sequence should therefore be considered as part of the overall cross-border tax strategy rather than decided income-by-income in isolation.

Key takeaway

For a U.S. citizen who is tax resident in Portugal:

U.S. Social Security is not treated in the same way as every other item of U.S.-source income.

The U.S.–Portugal treaty specifically preserves the U.S. right to tax Social Security. Because that taxing right does not arise solely from U.S. citizenship, the treaty generally requires Portugal to provide the foreign tax credit for U.S. tax paid on the benefit.

By contrast, certain U.S.-source dividends and other income can involve an additional U.S. tax layer attributable to citizenship, opening the door to treaty re-sourcing and a U.S. FTC for Portuguese tax.

That distinction is one of the most important points for Americans retiring or relocating to Portugal.

Frequently Asked Questions

Is U.S. Social Security taxable in Portugal?
Potentially yes. A Portuguese tax resident is generally subject to Portuguese taxation on worldwide income, subject to domestic exemptions, special regimes and treaty rules.

Can the United States tax Social Security paid to a resident of Portugal?
Yes. Article 20 of the U.S.–Portugal treaty expressly preserves the U.S. taxing right over U.S. Social Security.

Which country normally gives the Foreign Tax Credit?
For U.S. Social Security paid to a U.S. citizen resident in Portugal, the treaty generally places the double-tax-relief obligation on Portugal.

Can Portuguese tax on U.S. Social Security be claimed on Form 1116?
Generally, that is difficult to support because the U.S. taxing right does not arise solely from citizenship. Treaty re-sourcing is therefore generally unavailable for this purpose.

Is this the same treatment as U.S. dividends?
No. Dividends may be subject to a treaty-limited U.S. source-country tax, while additional U.S. tax caused by citizenship can potentially qualify for treaty re-sourcing.

What IRS form is used for treaty re-sourced income?
Form 1116 contains a specific category for Certain Income Re-Sourced by Treaty.

Should the Portuguese return be amended after the U.S. return is finalized?
Potentially. If the final U.S. tax attributable to the Social Security was not known when the Portuguese return was filed, an amended Portuguese return may be necessary to claim the appropriate credit.

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This article is for general informational purposes and does not constitute individualized U.S. or Portuguese tax advice. Cross-border tax treatment depends on the taxpayer’s residence, citizenship, income classification, treaty position and the specific tax actually paid in each jurisdiction.