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Will I have to pay state income tax after I move to Portugal?

You don't need to move to South Dakata first!
Will I have to pay state income tax after I move to Portugal?
Important disclaimer! I am not a lawyer nor am I an accountant. Even if I was, I am not your accountant nor am I your lawyer. This is incredibly important for you to understand. The advice and information I present in this article is based on my experience and my research into this topic over the years. If you are preparing for a move to Portugal or have recently moved here and have additional questions, your best option is to speak with a qualified professional who can review all of the critical details of your specific situation and provide actionable advice specifically for you. I’m writing this article because I see a lot of people operating under some bad assumptions, which can cause significant problems. I hope this article will help you ask the right questions when you consult with a qualified professional to review your specific needs.

I’ve seen this question come up recently on some popular online communities for Americans moving to Portugal. This is a reasonable question to ask, but unfortunately I’ve seen a LOT of really terrible answers. Some shockingly bad advice being handed out in the comments section. So, to answer the question, no, in nearly every situation, you will not have to pay state income tax after you move to Portugal. Are there exceptions? Yes, there are. Should you sit down with a qualified tax expert to plan this out before moving? Hell yes. So read on to get a better understanding of the factors you need to consider and discuss with your qualified tax expert when planning your move.

Expat, immigrant, or digital nomad?

Definitions matter, and this will become especially important later in this article.

Immigrant. Moves to Portugal permanently, builds a life here, treats Portugal as home.

Expat, my narrow definition. Here on a temporary work assignment with a defined timeline for returning home. Possibly retains US domicile through the assignment. Some states offer specific safe harbors for this fact pattern.

Digital nomad. No fixed home base by design. Rotates between countries and never settles.

If you move to Portugal with the intention of living here, making Portugal your home, then you are an immigrant. If you have a fairly specific return date in mind, with the intention of re-establishing your life back in the States, I would consider you an expat, and the answer might differ significantly for you.

A final note on digital nomads. If your intention is keep moving and avoid establishing tax residency, your income source matters a LOT. If you intend to work, Portugal is not a good place for digital nomads. You cannot legally work in Portugal while here as a tourist (even if your clients are back in the States). If you have passive income sources like dividends, rental income, or royalties, that might be okay.

Domicile vs residence

This is the key concept to understand. Each state has their own specific definition of domicile, but the core concept is that your domicile is your one, true home. California's state tax agency, the Franchise Tax Board or FTB, in publication 1031, offers this definition:

"the place where you voluntarily establish yourself and family, not merely for a special or limited purpose, but with a present intention of making it your true, fixed, permanent home and principal establishment. It is the place where, whenever you are absent, you intend to return."

You have exactly one domicile at a time. You keep your current domicile until you establish another. To change domicile, California requires all of the following:

  • Abandonment of your prior domicile
  • Physically moving to and residing in the new locality
  • Intent to remain in the new locality permanently or indefinitely, shown by your actions

You can find your state’s definition of tax residency and domicile on their respective websites. You will find that they all follow this basic approach; tax residency is determined by your domicile. A person can only have one domicile at a time. When you move to Portugal, you establish your domicile here, ending your domicile in your former US state.

”Sticky” states

Some states have the reputation as “sticky”, in that they have very stringent requirements to ensure you have actually established your domicile somewhere else. When people discuss stick states, these typically include California, New Mexico, New York, South Carolina, and Virginia. If you are moving from one of these states, you should take some extra care to clearly establish and document your new domicile. Buying or renting with a long-term lease here in Portugal, establishing Portuguese residency, getting your NIF, NISS, and SNS, and generally fulfilling the Portuguese residency process is more than enough to show you have established your domicile here. If you maintain ties to one of these states, that could make the process a bit more challenging. For example, if you keep your drivers license, own property in that state, have a storage unit in that state, the state’s tax authorities could take that as a sign that you intend to return some day, that you’re an “expat” and not an immigrant.

Many states provide some sort of mechanism to file a partial year tax return, where you can indicate where your new domicile is. Working with a qualified tax professional will help ensure you fill this out correctly. For example, in California, you would use Form 540NR; This filing is how you formally tell the state you've left. Your tax professional should help you if this is needed in different states.

But know this, when you become a Portuguese resident, you typically check every box needed to establish your domicile here (and more):

  • You register with AIMA, the Portuguese immigration authority (aima.gov.pt)
  • You get a NIF (tax identification number) and register with the Portuguese tax authority, Autoridade Tributária (info.portaldasfinancas.gov.pt)
  • You register as a Portuguese tax resident, which triggers worldwide taxation in Portugal under Portuguese law
  • You lease or buy a home. You put utilities in your name at that Portuguese address
  • You exchange your US driver's license for a Portuguese one within the required window after residency
  • You open Portuguese bank accounts and route income there
  • If you have kids, you enroll them in Portuguese schools
  • You register with a Portuguese doctor and get an SNS user number, or take out Portuguese private health insurance
  • You file Portuguese tax returns annually as a fiscal resident
  • You spend more than 183 days a year in Portugal

California’s tax authorities clearly describe a similar situation in one of the documented examples provided in FTB Publication 1031 (2024), Section H, Example 5:

"You receive and accept a permanent job offer in Spain. You and your spouse/RDP sell your home in California, pack all of your possessions and move to Spain on May 5, 2024, with your children. You lease an apartment and enroll your children in school in Spain. You obtain a driver's license from Spain and make numerous social connections in your new home. You have no intention of returning to California.
Determination: You are a part-year resident. Through May 4, 2024, you were a California resident. On May 5, 2024, you became a nonresident."

The Portuguese residency process doesn't just satisfy the domicile test. It documents that you satisfied it, with dated paperwork from AIMA and the Autoridade Tributária (the Portuguese tax authorities).

What not to do - relocate to a state without income tax

First, to clarify; this only applies to us immigrants. People moving to Portugal to make Portugal our new home. Short-term work assignment? Digital nomad? Different story. But if you immigrate to Portugal, that means you establish your domicile here in Portugal, and that means from that date forward, you are no longer considered a tax resident in your former state.

Over and over though, I see people claiming that you have to first move to South Dakota, Texas, Florida, or some other state to break the income tax claim from their current state. This is simply not true. When you move to Portugal, you cleanly and honestly establish your domicile here, making any other effort completely pointless. Your domicile in Portugal is honest and defensible.

But, any attempt to fake residency in one of these states will not stand up to any scrutiny. It is designed to deceive from the start. Spending a few months in an AirBnB in Texas, or a couple nights at an airport hotel in South Dakota will not convince any California tax auditor, and it is foolish to even think it would have a chance. If your South Dakota story falls apart under audit, it doesn't just fail on its own terms. It calls the credibility of your entire domicile-change story into question, including your move to Portugal.

In short, relocating to a state without income tax prior to immigrating to Portugal is a dumb move.

Important things to remember

While immigrating to Portugal offers you a clean way to end tax residency in your state by cleanly establishing your domicile in Portugal, it does not clear up all state tax issues. The type and source of income matters here. For example, certain kinds of income can still be California-source and taxable in California even after you've moved to Portugal. Rental income from a California property. Gains on the sale of California real estate. Income from a California-based business you still control.

Certain kinds of California-source income continue to owe California tax regardless of where the owner lives. Anyone with California rental property owes California tax on the rental income, whether the owner lives in Portugal, South Dakota, or Nevada.

Again, all the more reason to work with a qualified tax professional to help plan your move. Also important to note that “moving” to a state without income tax will not provide any relief. The tax obligation is determined entirely by the source of the income and not your domicile or tax residency. That rental income from a property in California would still be an issue whether you lived in Lisbon, Portugal or Brookings, South Dakota.

Closing thoughts

Make sure you understand the concept of domicile and the role it plays in determining your tax residency and tax obligations. Some types of income might be seen as sourced from a specific state, and still subject to income tax in that state, so closely and carefully document and understand all income sources. Understand that for some people, this can be very complicated, so hiring a qualified tax professional is critical to making sure you plan things correctly. On the other hand, moving to a non-tax state is a completely pointless waste of time and money and may actually do more harm than good.

For most people immigrating to Portugal from the US, these things can be handled with very little fuss. You can still vote overseas, you don’t have completely sever all ties to your former home, just make sure you clearly and cleanly establish your domicile in Portugal, and plan things out with the help of a tax expert knowledgeable in tax issue for US citizens living outside the US.

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