Foreign tax credit vs FEIE in Portugal: why Americans usually take the credit

For most Americans who are tax resident in Portugal, the foreign tax credit beats the Foreign Earned Income Exclusion (FEIE), because Portuguese income tax on the same income is usually higher than the US federal tax, so the credit cancels the US bill anyway. The exclusion only wins in years when your Portuguese tax is unusually low. This post compares the two mechanisms with the 2026 rules. It is an explanation, not tax advice, and a cross border tax adviser must confirm the choice for your own return.

Do US expats pay taxes in Portugal and in the US?

Yes, both. The United States taxes its citizens on worldwide income wherever they live, and Portugal taxes its residents on worldwide income. The two relief tools only decide how much of the US bill survives.

1. The FEIE (Form 2555) removes foreign earned income from your US gross income, up to 130,000 dollars for tax year 2025 and 132,900 dollars for tax year 2026, according to the IRS. On the physical presence test you need at least 330 full days in a foreign country during any period of 12 consecutive months.
2. The foreign tax credit (Form 1116) keeps the income on your US return and credits the foreign income tax you paid against the US tax on that same income.

They do not stack on the same dollars. The IRS says it plainly: "If you elect to exclude either foreign earned income or foreign housing costs, you cannot take a foreign tax credit for taxes on income you exclude." You are choosing, not combining.

Why does the foreign tax credit usually win in Portugal?

It wins because Portugal taxes harder than the US at the incomes most remote workers earn. According to PwC's 2026 summary, the Portuguese brackets run from 12.5 percent to 48 percent, the 44.6 percent band starts at 46,566 euros of taxable income, and a solidarity surcharge of 2.5 percent applies above 80,000 euros. The IRS 2026 table for a single filer has a 22 percent band from 50,400 dollars of taxable income and a 16,100 dollar standard deduction.

Here is an illustration, not advice, using those published tables and ignoring exchange rate movements.

The Portuguese share is more than three times the US one. When the foreign tax on a slice of income exceeds the US tax on it, the credit covers the whole US liability on that income and nothing is left to pay. Electing the exclusion instead gives the same zero on that income, with the side effects described below. Online Taxman reaches the same conclusion for Americans on ordinary Portuguese rates, and notes that the IFICI 20 percent rate leaves a thinner credit buffer.

For the Portuguese side in more detail, our post on 60,000 euros as an employee, a freelancer and under IFICI runs the same brackets through three structures.

When does the FEIE still beat the credit?

The exclusion wins in a year when your Portuguese tax is lower than your US tax. The clearest case is the first year of freelancing on the simplified regime.

Under Article 31 of the Portuguese IRS code, only 75 percent of professional services income is taxable under the simplified regime, and that coefficient is reduced by 50 percent in the tax year you start the activity (and by 25 percent the year after). As an illustration, 60,000 euros billed in year one gives taxable income of 22,500 euros and Portuguese income tax of about 3,946 euros on the 2026 brackets, or 6.6 percent of what you billed. That is less than the 8.4 percent US federal rate in the table above, so the credit falls short and a US bill remains. The exclusion, up to the ceiling, removes the income entirely.

Other years that can look like this:

1. The first year of freelancing, as above.
2. A year where most of your income arrived before you became Portuguese tax resident.
3. A sabbatical or low income year where Portuguese tax is small.

Outside those years, the credit is usually the better tool.

How do Form 1116 and Form 2555 interact with IRAs and later years?

The choice has side effects that a spreadsheet does not show, which is why it needs a professional.

1. Roth and IRA contributions. IRS Publication 590-A lists "foreign earned income and housing costs" you exclude as amounts that are not compensation. Exclude all of your pay and you can lose the ability to contribute for that year.
2. Revoking the election. The Form 2555 instructions say the choice stays in effect for future years until you revoke it, and that after revoking "you can't claim the exclusion(s) for your next 5 tax years without the approval of the IRS."
3. Passive income. Dividends, interest, rent and capital gains are not earned income, so the exclusion never covers them. The credit does the work there whatever you elect.
4. Self employment tax. Whether Portuguese social security relieves you of US self employment tax is a totalization question, separate from the FEIE or credit choice. Ask it separately.

Will Portugal tax US Social Security benefits?

The answer is disputed, so treat it as a question for your adviser. Relocate Handbook (March 2026) reads Article 20(1)(b) of the US Portugal treaty as giving the US the right to tax Social Security, while Portugal also taxes it as foreign pension income, with a credit so you pay the higher rate once. The Casual Capitalist reads the treaty as leaving it taxable only in the US. We show both readings rather than pick one.

What else do Americans in Portugal have to file?

Two filings catch most people.

1. FBAR. The IRS requires FinCEN Form 114 when your foreign accounts together exceed 10,000 dollars at any time in the calendar year. A Portuguese current account and a rent deposit can pass that together. It is due 15 April with an automatic extension to 15 October.
2. PFIC reporting. Most European domiciled funds are passive foreign investment companies in US eyes, reported on Form 8621 when you receive distributions or sell. This is why many Americans in Portugal hold US listed funds instead.

You also file the Portuguese return (Modelo 3) with a Portuguese accountant, since a US preparer will not do it. Our post on whether you still need a fiscal representative in Portugal covers the setup side. To check how euro amounts convert today, use the currency check tool.

Should you hire a cross border tax adviser?

Yes. This is the one area where we tell people to pay a professional rather than read another blog post, including this one. Two tax systems, one treaty, an election with a five year lock, Form 1116, the FBAR and PFIC rules add up to a decision that is expensive to get wrong in year one. We have no published price to quote for that service, so ask two or three cross border preparers for a written quote, and do it in the autumn, before the spring filing rush.

Everything above is an illustration of how the mechanisms work, not advice for your situation. A cross border tax adviser must confirm which election suits your return.

Updated on 25 September 2026. Rules and prices change: confirm with the official source linked above before you act.