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I am a US citizen retired and living in Portugal. I make a living investing in US stocks. I report this income to both the US and Portuguese IRS and pay taxes on both ends. Could someone tell me how I can avoid this double taxation?

I looked at the foreign tax credit (form 1116). https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit-choosing-to-take-credit-or-deduction

However, the instructions for 1116 specifically state this: "The foreign tax credit can only reduce U.S. taxes on foreign source income; it cannot reduce U.S. taxes on U.S. source income."

And I am not aware of any place on my Portuguese tax return where I can avoid double taxation by indicating that I have already paid $xxx to Uncle Sam.

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  • I believe stocks are personal property, and income from sale of personal property is sourced where your tax home is. So if your tax home is Portugal, the capital gains is non-US-sourced, and you can claim the US Foreign Tax Credit for it.
    – user102008
    Mar 29 at 0:13

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There's a tax treaty between the US and Portugal. You'll need to determine your residency status, based on the treaty (Article 4). The capital gains are also covered by the treaty (Article 14). Relief from double taxation is covered as well (Article 25).

You'll probably want to talk to a EA/CPA who's proficient with applying this treaty, but my reading is that you're Portuguese resident and can claim FTC since capital gains would be sourced to Portugal.

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  • Thanks littleadv and user102008 for the explaination. Convoluted and bureaucratic as it sounds, it makes sense, at least for a government tax form paired with a tax treaty between two proud bureaucracies. Now I am off to refile my returns for the last two years. And I must mail them in as this is a requirement for form 1116 - unless you are claiming $600 or less; in which case you claim it on form 1040.
    – Jey Ragusa
    Mar 29 at 17:26
  • You should be able to e-file with form 1116, I do it all the time
    – littleadv
    Mar 29 at 17:27
  • I filed my 2020 using olt.com. They do not seem to have the form online.
    – Jey Ragusa
    Mar 29 at 18:20
  • What software are you using that DOES allow filing online?
    – Jey Ragusa
    Mar 29 at 18:21
  • I have a CPA who does it for me, but AFAIK turbo tax definitely supports form 1116 efiling: care-cdn.prodsupportsite.a.intuit.com/forms-availability/…
    – littleadv
    Mar 29 at 18:30

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