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US State Income Tax in PT


Posts: 13
 Riri
Community Member
Topic starter
(@riri)
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Joined: 1 year ago

hello! i currently live in texas where we do not have state income tax. my husband and i have thought about moving to another state for 1-2 years before moving to portugal. we already knew other states charged state income tax but we had not thought about the fact that we may have to continue to pay this state income tax after moving to portugal.

example scenario:

we move from texas to michigan, get jobs in michigan and therefore have to pay state income tax while living there. then we move to portugal and continue working for our jobs which would be based in michigan (we hope to get jobs that we can do remotely anywhere in the world).

i believe we could do the NHR scheme where we don't pay PT taxes on our US income (or if we do it is less than it would be otherwise?) but it sounds like we would have to continue to not only pay federal income tax but ALSO state income tax to michigan, correct?

what i have read so far is that it would be best to be a resident of a state in the US that does not charge state income tax (there are 7 including TX and Florida) before moving to PT otherwise you're on the hook for that state's income tax for the rest of the time you live in PT - unless you become a citizen of PT maybe (after 5 years)?

thank you!

15 Replies




Posts: 48
Premium Member
(@emergentt)
Eminent Member
Joined: 7 months ago

Hi. Ok here goes. Caveat, not an accountant but have a little knowledge/opinion in this area. 

The US requires its citizens to pay taxes regardless of where they live in the world. It joyfully is one of the few countries to do so. If you make income in any state which also charges state taxes (Ca or Michigan for instance), you also have to pay that state tax.

The NHR is (mostly) designed to attract expats from countries where you only get charged tax if you live within the country you reside. The US is NOT one of these countries and asks for taxes regardless of where you live. The NHR in Portugal charges a 10% tax on incomes BUT there is a tax treaty with the US to avoid double taxation so they wouldn't charge you the 10% IF you are already paying at least 10% in your home country, the US.

So... in your example if you work remotely from Michigan but the Michigan company pays you and reports your income to the state of Michigan in addition to the US, you'll pay tax BOTH to the US and Michigan but I assume the taxes will be over 10% of your total income so you probably won't have to pay any extra to Portugal. Income can be any form of income like 401k distributions, social security at some level, etc.

Also the NHR only lasts for 10 years so after that, your tax can go up as high as 45ish percent I think (maybe 48%) if you still are a Portugal resident at that time.

Clear as mud? Gene

 

 

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2 Replies
 Riri
Community Member
(@riri)
Joined: 1 year ago

Active Member
Posts: 13

@emergentt ah ok so we're kind of talking about two separate things here.

first off, i did not realize that u.s. citizens don't usually do the nhr thing if they already pay more than 10% taxes to the us.

so if you already pay over 10% of federal income tax to the u.s. then you don't pay income tax in PT - ever?

is this just on u.s. earned income? what if you work for a PT company? i assume you would pay PT taxes on that income?

secondly, it looks like there is no way around paying state income tax if you move from one of those states straight to PT.

i wonder if you are in PT long enough or become a dual citizen, if a state will stop charging state income tax....like what if you stop working for a company in that state and you have been in PT 5 years or more, i wonder if they ever stop charging state income tax.

thank you!

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Premium Member
(@jeanne)
Joined: 1 year ago

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Posts: 274

@riri   hi.  Regarding

(1) "ever stop charging state income tax." , it can deepened on the particular state. Some US states, such as California, are notoriously "sticky" and do not make it easy to escape their grasp.  It is not only earning income in a state that can make them try to hold on to you, i.e. Tax you. It depends on whether  you maintain "ties", which may mean, do you still own real estate there,  do you have a bank account there, do you still  have a motor vehicle registered in the state, etc.  Check the website for your state's taxing authority, where you might be able to find the criteria by which they determine what they view as ties. 

(2) "so if you already pay over 10% of federal income tax to the u.s. then you don't pay income tax in PT - ever?". NO - the benefit of the NHR lasts only ten years. After that you will be liable for standard PT tax rates which, as indicated by Emergebtt, can go seriously up into the 40% range, depending on your income.

(3) "I did not realize that u.s. citizens don't usually do the nhr thing if they already pay more than 10% taxes to the us." If you want to pay only 10% tax in PT, you MUST be in the NHR.  Otherwise, you are liable for full PT tax rates from day one. 

Whether any of all of this will be a concern will depend on your level of taxable income.

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Posts: 48
Premium Member
(@emergentt)
Eminent Member
Joined: 7 months ago

@jeannemarie is right. If you cut all ‘ties’ to a particular state, earn no income within it, then you would only pay US tax. 

People still apply for NHR status because for example if you make 100k in the US and your total US tax rate is let’s say 25%, if you don’t have NHR status you will have to pay an additional 20%ish to Portugal as soon as you are a resident. 

if during the NHR, you pay more than 10% US tax then you’ll have no additional tax in Portugal until your NHR expires. Then it changes drastically. 

Once you start making money in Portugal from Portuguese sources, then things get more funky and I can’t comment. Sorry.  Gene

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5 Replies
 Riri
Community Member
(@riri)
Joined: 1 year ago

Active Member
Posts: 13

@emergentt ah ok - I think I was confused about the NHR. If you do it then you don't pay tax in PT for 10 years and you DO pay at least 10% tax or more to the u.s.

After 10 years PT starts taxing you according to their normal tax codes. But doesn't the u.s. continue to take federal income tax from you forever? (Unless you renounce citizenship?) So after 10 years you begin to be double taxed? 

And as far as the state income tax - I suppose over time if you were able to cut all ties with the former state and show you planned to stay in PT forever then they would eventually stop charging you state income tax.

Thanks again!

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 Zoom
(@zoom)
Joined: 10 months ago

Member
Posts: 110

@riri This is what I've found out so far. Think of the NHR as a 10-yr tax holiday from Portuguese taxes (except for pensions, which are subject to a 10% flat rate). US citizens are subject to taxes worldwide, so you'd keep filing and paying Federal taxes (incl SS and Medicare) on all of your income. You will ALSO have to file in Portugal, so unless you do it yourself, there is a small accounting cost during the NHR period. Once the 10-yr period is over, Portugal will also start taxing you, but now the tax treaty will kick in, so if you pay say 30% to the US, Portugal will collect the rest (the max rate that gets mentioned is a MARGINAL rate, so not applied to all of your income, only the part that's over a certain amount, and there are some deductions, though not as generous as the US system). For example, capital gains are taxed at 15-20% in the US currently, but at 28% in Portugal (but only on 50% of it) - so if you have only capital gains income after 10-yrs, (such as stock sales), then you'd be on the hook to Portugal for 14% (28% of 50%) and another 1-6% to the US.

One positive aspect of earning an income from a US company is that the US allows about $108,000 to be excluded from taxation if you're an expat. There is also a foreign housing/rent deduction.

State taxes are a bit more complicated, because its not just about residency, it also depends on where your employer is registered and paying you from. California for example charges state income taxes for employees of California companies, but then you can file a return proving you're not a resident, and you get almost all of it back. Its much easier with SS and IRA distributions.

Of course, I'm not an accountant, so please get professional advice, because for every loophole, there's a gotcha...

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 Jst
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(@jst)
Joined: 3 months ago

Active Member
Posts: 7

@emergentt  I wonder if establishing a virtual mailbox and bank account, etc. in a no-income tax state would qualify as 'cutting all ties to a state' that does have income tax. 

For instance if someone moved to Portugal from, say, Michigan but set up these services in Texas, would they ever have to pay Michigan state income tax?  Theoretically, this sounds feasible, but I'm sure there some strings attached or waiting periods.

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Premium Member
(@jeanne)
Joined: 1 year ago

Reputable Member
Posts: 274

@jst   You need to check the guidelines for any specific state you are considering.  It's my understanding that each individual state sets own rules. It is not simply where you have your mailing address.  See for example this list for MN, which considers a whole slew of items. 

https://www.revenue.state.mn.us/domicile-residency-individuals

 

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 Zoom
(@zoom)
Joined: 10 months ago

Member
Posts: 110

@emergentt I believe during the NHR period you won't pay Portuguese taxes on any income other than pensions, even if you pay zero to the US.

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Posts: 48
Premium Member
(@emergentt)
Eminent Member
Joined: 7 months ago

@riri. Yes very close. 

After 10 years you will still be taxed as US rates BUT Portugal will take what is over and above those rates to reach their rate which, again goes to 48%. So after paying the US rates of maybe 25%ish, and additional 23% will have to be paid to Portugal. You aren't double taxed on the same income but the tax treaty says if Portugal thinks you should be paying 48%, the US can collect their share first and the rest will go to Portugal.

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 Riri
Community Member
(@riri)
Joined: 1 year ago

Active Member
Posts: 13

@emergentt I finally get it! Lol thank you! So complicated! 😆

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Posts: 73
Premium Member
(@kkcwalton)
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Joined: 9 months ago

@riri Just a thought... we're planning to do this.  Once we complete our scouting trip next spring and commit to move, we intend to rent a room from our niece in a non-tax state, transfer our domicile to her house, rewrite our trusts in the new state, forward all our mail, get driver's licenses, transfer insurance, etc. and maintain that as our US address.  We've learned from the RV community in the US that there is a legal difference between your domicile and your residence.  There are several articles about it on Escapees.com.

The good news for you is that Texas is one of the top states for establishing your non-resident domicile, even if you choose to live outside the state.  We have yet to work out all the details, but we intend to establish our domicile in a non-tax state and our residence in Portugal.  I'm not an attorney, so buyer beware, but this is what we're thinking to date.  Hope this helps and please lmk if I have this wrong!

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3 Replies
Premium Member
(@alleycat)
Joined: 3 months ago

Eminent Member
Posts: 39

@kkcwalton Hi Folks, it sounds like you have planned well. Our strategy for our path to retirement in PT (hopefully by late Spring), was moving from CA to TX to ride out the pandemic and establish our domicile in a non-taxing state. We've been here for 10 months now, so that is accomplished.  We now need to figure out how to maintain "an address" in the US for the sake of bank accounts and any other important mail. We'll explore Escapees.com for good info, thanks for that.

 

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Premium Member
(@kkcwalton)
Joined: 9 months ago

Trusted Member
Posts: 73

@alleycat @riri Escapees.com also has a service that allows you to use their addresses for your permanent address, plus mail forwarding, etc.  It's worth checking out.  Good luck!

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Premium Member
(@kkcwalton)
Joined: 9 months ago

Trusted Member
Posts: 73

@alleycat @riri Also, a full time RV friend uses America's Mailbox in South Dakota for domicile and mailing address.  She has had a very good experience with them and keeps recommending that I establish SD residency instead.  I just reviewed their website and they really look like they have it dialed in.  Residency requirement is to stay in state (hotel is fine) 1 night every 5 years.  SD has no state tax, no inheritance tax, no pension tax.  Good luck!

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