Avoiding Double Taxation on US Capital Gains for US citizen residing in Portugal

Question

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.

Answer 1

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.