@coop
Thank You for your service! We have been actively researching this as US citizens so here is what we know.
The US and Eritrea are the only two countries in the world that tax their citizens for life. The US is the only country in the world which applies the same tax regime to all its citizens, regardless of where they live.
The NHR change from 0% taxation on pensions to a 10% tax on pensions was in response to EU pressures from members that do not tax citizens living abroad. That is my synopsis, but it is quite a bit more nuanced.
The US and Portugal double taxation treaty was written in recognition of the US ability to tax citizens regardless of where the live.
The Portugal NHR definition of “Pension” does not, in our opinion, have a direct correlation to the ways the US defines pensions.
I served in the US military as well. While I did not serve long enough to obtain a pension, I did pay social security on my military income. So, the social security payments I made while in the military are for my services to the US government.
Shannon and I have years of US tax experience, but we are slowly learning the Portugal rules. We started with reading the double taxation treaty that we found here. Then we found a technical explanation of the double taxation treaty here. It was clear that the initial treaty needed to be clarified in various areas. The US IRS we find to be as complicated as the Portugal IRS. They both make rules but any rule lacking specificity usually gets updated years later based on settled court rulings.
We have not identified any Portugal IRS settled tax cases regarding the taxation of US social security, so we are relying on experienced Portugal tax accountants. One of the tax accountants we have communicated with has a YouTube video here. He clearly states that US social security benefits are not taxable here in Portugal. We took advantage of our Expats Portugal Premium membership benefit for a free consultation with Carlos from All Finance Matters in the business directory. Carlos confirmed what we heard in the YouTube video.
We always use a tax service that will represent us to the taxing authorities. The US IRS will always try to interpret the code to their advantage, but a tax service will push back. The IRS will consider their stance based on a cost-benefit analysis before presented with getting a final ruling from a court. We always figure our taxes based on our tax service advice and what we think may be grey areas. We keep the difference in investments in case of an IRS ruling change and based on the time they have rights to go back on our returns.
We will follow our tax accountant's advice and not pay taxes on social security in Portugal.
