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USA Social Security Tax Liability


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(@bonniem)
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Considering recent changes in Portugal for retirement income taxation, if USA Social Security income is your only source of yearly retirement income, does the new 10% tax apply? If it is subject to the 10% tax, does the Non-Habitual Resident scheme protect you from paying it for 10 years? (I have savings in the States, but they are not subject to Portuguese income tax.)

I have had consultations with two tax professionals here in Portugal and am not comfortable with the mixed answers I'm getting.

One wanted to know if my Social Security income came from self-employment (independent contractor or sole proprietorship), federal employment or private company employment. That question alone is a dead giveaway that Portuguese tax pros may not understand how our Social Security system works. I'm getting the impression that they are used to dealing with people from the UK and terminology from there may differ from USA definitions. So, just to be clear, USA Social Security is based on total earnings over many years and it makes NO difference where the earnings came from (private companies, self-employment, or federal jobs).

One consultant actually told me that, even though with the new rules under NHR,  Social Security would be taxed at 10%, he could find a way around it!!  I'm not trying to do something to "skirt" paying taxes I just want to know what to expect via the any new tax laws!

Appreciate knowing what others have experienced with this issue.

Thanks,

Bonnie

  

33 Replies




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(@x-camone)
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If you don't have NHR status, your pension (along with any other income) will be taxed at normal Portuguese income tax rates, taking into acount any provisos in the double taxation agreement between the 2 countries. There are some PT specific allowances applied when the tax is calculated in this scenario.

 

If you do have NHR status, your tax on the pension income will be a flat 10% and some (most?) other categories of passive income from abroad will be PT tax exempt but you will forfeit the PT allowances which apply under the general tax regime.

 

When completing a PT tax return, there are check boxes to indicate where a pension is in respect of government service (which are normally, under DTA rules, taxable only in the country of origin) or is a Social Security pension.

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8 Replies
 MaxG
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@x-camone Interesting. All of our income is from govt pensions and social security. We just got the NHR. Now I'm wondering if we really needed it, or was even a detriment.

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@maxgravy

It'll depend on the amount of each as to whether it's advantageous to you or not. Social Security pensions are usually taxable in the country of residence under the DTAs and even though government service pensions are usually taxable only in the country of origin, they are taken into consideration in calculating the rate at which other income should be taxed (eg if you have 15,000€ of each, you don't get taxed on the SS pension as though it were your sole income. Your starting point for that on the tax scales would be the applicable rate(s) from 15,000 to 30,000. Hope that makes sense!)

 

In any case, even if you have successfully applied for NHR, you can opt to be taxed in any year for which it applies under the general regime instead.

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(@bonniem)
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@x-camone

Can you please clarify regarding my particular circumstance regarding NHR status only? I don't understand why having government service under DTA rules is mentioned as I have no government service in my past work history. This is where, I believe the terminology factor (differences)  comes in and confuse things. The USA gives a standard deduction before adjustment taxable income is assessed to determine if an additional amount is payable or not. I do not owe anything additional at the end of the tax year in the USA. 

Are yo saying that with NHR status and even though I owe nothing more at the end of the year in the USA that I will still have to pay 10% of my gross social security benefit  to Portugal? I have no other passive or any type of income that would be a consideration. And what PT allowances would I forfeit under the general tax regime? 

Thanks,

Bonnie

 

 

p

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 Bert
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@bonniemHi Bonnie, I can’t answer specifically for you. And if you already receive social security then you know whether you pay tax on part of it or not. I believe much of it has to do with your other income sources added to social security income which determines if you owe taxes. See ssa.gov. 

I too have found the Expats website to lean UK heavy when talking about this subject so I recommend you search out an accountant in PT that does a lot of US tax returns.

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(@bonniem)
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@bert

Thanks fore your reply. However, as I have said previously, I have no other income sources. I'm really having a difficult time getting an answer from PT accountants....that's the worry! Pretty straightforward, simple income stream from one source. If the tax pros/accountants here can't answer one basic question, how reliable are their services to make sure the correct taxes are paid.

Also, when you have retirement income and they want 10% (especially considering that I don't owe any taxes in the States on it), doesn't that seem like a big hit on retirees? I would owe more here on money from the States as an expat than I do there!! What's wrong with that picture? Especially astounding if you have NHR status!!

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(@jeanne)
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@bonniem. There is nothing astounding about paying tax in a country where one is a tax resident. That's how local services - which are also used by ex pats - get paid for. What I think is astounding is that the USA taxes its citizens regardless of where in the world they reside. But no escaping that...

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(@bonniem)
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@jeanne You have to wonder then why they have the NHR scheme at all. So far, the tax structure here would tax me more than the USA, which loves to collect taxes!

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@bonniem

I was attempting to clarify the significance of those things you mentioned in your opening post, as opposed to confusing anything.

If you have paid tax on your US pension and that is as it should be under the DTA (you'll have to check that out), that will be taken into account in determining PT tax, whether under NHR or in the general regime. So, eg, if you're filing under NHR and tax equivalent to or greater than a flat 10% has been deducted in the States, you won't owe anything in PT. 

The allowances that don't apply under NHR but do in the general regime are 4,104€ deducted from pension income prior to calculation of tax, and deductibles accrued from associating your tax id with purchases in various categories, which will amount to 250€ as an absolute minimum and be taken off the tax thus calculated.

BTW, this is just what I have gleaned from reading information published etc - I'm not an adviser or expert of any sort, nor am I a US citizen, nor am I (nor have I ever been) a beneficiary of NHR. I do file my own tax returns here, though.

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 Bert
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My understanding from my US accountant who is also a Portuguese citizen and does taxes for peeps like us in both places that under the NHR we are subject to the 10% tax under the NHR in Portugal. We are subject to normal US taxation (federal only if we are PT residents) depending on our individual income circumstances. I am not completely sure of all of the income types that are exempt from the pension definition but due to the dual tax treaty what is paid in tax on the one side is credited by the other. 

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21 Replies
 MaxG
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@bert Thanks Bert. It's probably a wash since we'll owe more than 10% in the US. I'd rather see that money stay here in Portugal. 

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(@bonniem)
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@bert. It seems the confusion comes when social security benefits and other types of pensions are lumped into one definition. I owe no additional tax on my sole source of income (social security benefits) in the United States, to offset taxes that might be due in Portugal. So what's the point of NHR if you can't reduce your tax liability if you'ee on social security?

This seems to add up to a situation where I don't owe taxes in my own country, but a whopping 10% of my overall retirement gross in Portugal.  NHR scheme doesn't seem to be much of a benefit for me.

Am I missing something?

Thanks,

Bonnie

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(@jeanne)
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@bonniem. The NHR may still be advantageous to you, depending on your level of USA income. If you do NOT have NHR and are PT tax resident, all if your income gets taxed under the regular, domestic PT tax rates, which I understand run 14.5-48%. With NHR, yes you will have to pay the 10%, but (for ten years) not 14.5-48%

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(@bonniem)
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@jeanne

Seems ludicrous that I would owe more on taxes under the NHR scheme in Portugal than I do on money from my home country! Due to standard pre-tax personal deductions allowed in the USA at the end of the year, I don't owe any additional taxes at all on my (sole) social security income. (My savings don't count for tax purposes.)

So what everyone seems to be saying is that retirees really take a bit hit in Portugal with or without the NHR scheme  and there is really NO tax break at all for anyone in my situation. Nice plan, huh?

That should discourage those pesky retirees from spending their retirement money here!!

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 Zoom
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@bonniem I think you should speak to a tax accountant who is familiar with both sets of tax laws. There are some "deductions" allowed under Portuguese law too, I believe, but I hasten to add I have just started looking into this. Also, given the lower cost of living and healthcare, you may still come out ahead (though I understand the pain of paying taxes on your hard-earned social security) - it may end up being similar to moving to a US state that taxes social security but has an overall lower cost of living.

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Posted by: @bonniem

@jeanne

Seems ludicrous that I would owe more on taxes under the NHR scheme in Portugal than I do on money from my home country! Due to standard pre-tax personal deductions allowed in the USA at the end of the year, I don't owe any additional taxes at all on my (sole) social security income. (My savings don't count for tax purposes.)

So what everyone seems to be saying is that retirees really take a bit hit in Portugal with or without the NHR scheme  and there is really NO tax break at all for anyone in my situation. Nice plan, huh?

That should discourage those pesky retirees from spending their retirement money here!!

Some recent history may be in order here.

Originally, NHR gave a complete exemption from PT tax on these sorts of pensions but some high profile cases of wealthy individuals relocating to Portugal to escape taxes in their home countries generated some strong feelings in some of Portugal's fellow EU member states, to the point where at least one renegotiated its DTA with Portugal to eliminate the benefit. Had a compromise not been agreed upon, others may well have followed suit, hence the 10% flat rate being introduced last year.

If you were resident prior to 31st March 2020, you would have been eligible for that original regime, which could still be applied for up to 31st March 2021. If you became resident post 31st March 2020, you would only be eligible for the new regime but you can opt, in any of those years during its lifetime, to be taxed under the general regime, should that be more beneficial to you.

So the pertinent point from here on is not whether you are taxed more or less than you would be if you were residing in the US (a matter for which there is a very simple solution if it matters greatly) but which is the better choice out of the options currently available to you.

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@x-camone. Good summary, thank you.  Further, Expat retirees not only spend money locally, they also consume resources that need to be paid for somehow, e.g. "free" healthcare. I think it only fair to contribute. 

Having said that, I think the (USA) retirement income issue will become more clear down the road, once people start filing taxes under the 10%NHR regime and can report back on their experiences. It may take a while for this to shake out. 

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(@bonniem)
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@x-camone So why even have the NHR scheme  then? It's just a bit odd to pay more in taxes in the country in which it was not earned then in your home country.

I understand the history already, but the USA specifically hasn't ever let peoplerich or otherwise off the hook as far as taxes. They just recognize that retirement income alone has a threshhold where they recognize you need a certain amount to live on. 

The only reason I'm in this situation financially is because I had to pay out my retirement savings for medical bills that cost me almost a half a million dollars as my insurance company wouldn't pay for a surgery that was considered "experiemental" at the time, it depleted my retirement money, but saved my life.

So, you can see why it is an issue for me financially now. 

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Posted by: @bonniem

@x-camone So why even have the NHR scheme  then? It's just a bit odd to pay more in taxes in the country in which it was not earned then in your home country.

 

Because a) it covers a great deal more than pension income alone and b) even with regard to pension income, it may well be a good deal more benevolent than the general tax regime. As has now been said several times, it is that latter comparison you need to make to realise the potential benefit of NHR on pension income.

It is not in the least bit unusual for the country in which one resides to have first dibs (or sole dibs) on income, as opposed to the country in which it arises - that is a very general norm under the OEDC standard for DTAs.

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(@bonniem)
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@x-camone It IS the latter comparison I'm making and I understand completely now! Even when something is said several times.... Who would have ever guessed that the good old USA would be more benevolent (read understanding) than  another country's  "benevolent" tax scheme as they understand retirees need a livable threshhold amount upon which to live  decently. They simply  implement a gradual payment scale with limits ao you still have something left to take care of basics. Sounds like the NHR should be scrapped so people who can really pay up add lots more to the country.

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@bonniem

The general tax regime in Portugal treats pension income in exactly the same way as income earned from dependent employment.

Tax starts being deducted for both at around 9,300€ per annum. Minimum wage earners, who make up a good chunk of the workforce, don't earn enough to pay income tax, although deductions are made for social security contributions.

Does that help to put things in context? Or would some worked examples comparing income tax applicable for various sums under both the general regime and NHR help to highlight where the benefits are to be seen?

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@bonniem. Just because the NHR doesn't work out for some people, that's no reason for it to be "scrapped" for many others for whom it does work out to be beneficial.  It is what it is, and we each need to decide what level of taxation and risk we are comfortable with.  I understand that there are countries that do not tax US retiree income, but PT is not on that list since the recent 10% NHR change. 

I wouldn't sing the praises of the "good old USA" too loudly, as you have just pointed out that in the "good old USA" lots of people are ruined financially as a result of astronomical medical expenses.  Does not sound very benevolent to me (and I am a USA citizen). The scandal is not the new 10% NHR rule, the real scandal is that in the US the medical industrial complex bankrupts so many people. 

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 Zoom
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@bonniem @jeanne even looking at social security alone, when I retire we'd still be paying the US about 12-15% in federal taxes, so the 10% that Portugal charges would be credited against that under the NHR regime, and we'd pay the remainder to the US. And all the while we'd be getting free healthcare in Portugal. The NHR is a pretty good deal!

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@zoom. That was precisely my point- it depends entirely on one's personal situation whether NHR is beneficial or not.  I have made the same calculation as you and come to the same conclusion - the 10% NHR can be offset against what I will owe in the USA, so in the end it will not cost me anything more.  And I will be more confident that BIG medical bills won't ruin me.

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(@bonniem)
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@jeanne. Well, apparently, both are a bit of a problem! And you're right about the medical. One night in the hospital was $71,000. Didn't include doctors' surgery costs or peripheral expenses.

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Posted by: @bonniem

@jeanne. Well, apparently, both are a bit of a problem! 

One will almost certainly be a bit more of a problem for you than the other, unless you're right in the income range where the 2 are virtually inseperable in terms of end result.

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@bonniem. I find it absolutely shameful that someone would need to raid their retirement savings to pay for medical care. Market forces gone off the rails.

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@bonniem

One other small point here :

Posted by: @bonniem

Due to standard pre-tax personal deductions allowed in the USA at the end of the year, I don't owe any additional taxes at all on my (sole) social security income. (My savings don't count for tax purposes.)

 

Any income from savings and investments, like interest or whatever, should be declared to the PT tax authority along with other income, no matter where it arises or how small the amount. 

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(@bonniem)
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@x-camone That's standard in any country, so as I said (or at least meant), the savings totals are not taxed....Understandably, just the interest amount they earn.... same as anywhere.

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@bert would you care to share the contact info for your tax accountant?

 

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@bert Hi Bert, Would you share the name and contact number of your US accountant with us?  We're planning a move but it would give us great confidence to have an accountant who can navigate both Portuguese and US tax codes!  Thank you

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(@helloelena)
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After reading all these comments, I really think I need to change to an accountant that is familiar with both countries.  Can anyone recommend one?

 

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(@jeanne)
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I've come across two informative interviews on the Expats Everywhere YouTube channel, one with  a PT tax specialist that talks about the NHR aspect and another one with someone specialized in USA taxation issues for USA expats.  Both are worth watching.

The PT tax specialist said that USA Social Security benefits definitely do fall under "pension" that would be subject to 10% taxation under the new NHR. 

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