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IRS; NHR and Pensions; e-Faturas and deductions

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(@stevej)
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Hi - a quick IRS question (or two).

I am registered with the NHR scheme (since 2018) - I know the PT Government have changed things a bit with regard to pensions income. Am I correct in understanding that overseas pensions income (not the UK state pension, and not a "UK government pension") are now taxed at 10%, for all NHR people, or should those registered for NHR before the change still have pension income zero rated?

And secondly, regarding the e-faturas and deductions. For 2020 I have more than enough faturas registered to get the "General" 250€ deduction, and enough in other sections to qualify for some deductions. But, the "Liquidação" statement shows that no deductions have been made. Do these deductions apply only to IRS tax from certain types of income?

Thanks, Steve

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Thanks Pam and X-c for your replies. Steve

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 Ralf
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(@ralf)
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Greetings,

Planning on moving to Portugal in 2022.

So if I have a pension from the USA, and I pay income tax on that to the IRS (Say, 28%) then I have to pay an additional 10% of the pension income? So essentially, 38% of my pension income will be taxed?

Thanks in advance.

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@ralf 

I don't believe so, the dual taxation treaty in force between PT and the USA would prevent you being taxed twice.

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 Ralf
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@old-bloke Obrigado. Where do you live, Bloke? I am really trying to figure out where to make my home in Portugal. It is so difficult. There are so many lovely places.

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@ralf 

Central, very central (within 20 km of the Centro Geodésico de Portugal).

I was lucky, I stumbled across the ideal place for me by accident.

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 Ralf
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@old-bloke Lovely. I looked at a home in that area (Vila de Rei), but it sold. It’s such a nice area. Happy for ya.

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 Bert
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@ralf Coming from the US myself. My understanding of the dual tax treaty is that you will be assessed your appropriate tax from the US (whatever is appropriate for your financial circumstances), in Portugal if you have applied for NRH your tax will be accordingly per that NHR rule 10% on pension for 10 years (I think but not sure on private but not government pensions). But because of the dual tax treaty whatever you pay in one country will be credited in the other. Need to consult an accountant of course to discuss your particular circumstances.

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 Ralf
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@bert Thank you, Bert. I am so excited to make my home in Portugal. I hope you are well, and I hope your Portugal plans are on track.

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 Bert
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@ralf Yes currently in Portugal and investigating my landing spot. Happy to help with whatever knowledge of the process and place I have accumulated over time

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 Ralf
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@bert How exciting! Are you looking mostly in central Portugal?

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 Bert
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Yep. I highly recommend scouting trips. Has helped me immensely 

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 Ralf
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@bert Yes, there is much to see. I would like to find a house on a river in Central Portugal with enough land to have a big garden and some fruit trees. Fun to dream of it. Trying to work 11 more months. Yes, a long scouting trip is needed.

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 Coop
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@bert That's my understanding as well.

But anyone with a US pension should really look closely at the DTA between the US and Portugal. Some pensions are only taxable by the US (ie: Portugal cannot tax them), especially those for government service - like a military or government employee retirement pension.

And, for some reason, annuities are also only taxable by the country you live in. So if you have an annuity paid out by a US company... and you live in Portugal... then the US cannot tax it. Only Portugal can.

I'm attaching a copy of the US-Portugal DTA to my post, it might help clear things up.

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(@stevej)
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Hi,

I've just had the following response from Finanças via their e-Balcão system (the person in my local Finanças office didn't know whether the new 10% regime applied to pre-2020 NHR people or not):

Boa tarde, O regime só se aplica aos rendimentos de 2020 e seguintes, pelo que a tributação da pensão à taxa de 10% está correta e de acordo com a opção formulada no anexo L. Não existe tributação retroativa, a regra iniciou para os rendimentos de 2020, indepndentemente de ter obtido o estatuto de residente não habitual em 2018. A liquidação está certa, não se afigurando qualquer alteração a efetuar que lhe seja mais favorável.

 

The middle sentence translates as:

There is no retroactive taxation, the rule started for income from 2020, regardless of having obtained the non-habitual resident status in 2018.

Seeing as this is at odds with what my understanding was, and with the consensus on here, I wondered if anyone can confirm that they have successfully put in an IRS submission for 2020 and not had pensions income taxed at 10%.

Cheers, Steve

 

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13 Replies
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(@ttbritt22)
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@stevej were you able to sort through the retirement pension taxation and if the 10% is applied or negated by the Dual Tax Treaty? My wife and I will be arriving later this month and both have US Government pensions.

Thank you,

Tim.

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 Coop
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@ttbritt22 Tim,

I'm a military retiree living in Portugal now. I filed my first tax returns here with the Portuguese IRS (and I used what seems like a very good tax accountant to help me).

My military pension was not taxable at all, but it did have to be reported. My other, non-military pension income was taxed, but at the NHR rate of 10%.

So in your situation, if you have a pension from governmental service, then that will just need to be reported in the tax return. You won't actually be taxed on it, though.

If you work with a Portuguese tax accountant who tells you otherwise, I'd look for another accountant. For they're likely not familiar with this type of pension.

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Admin
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@coop Can you clarify non-military pension? You are a US citizen? The non-military pension was subject to US taxation?

Thanks!

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 Coop
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@jonesdn2020 Yes, I am a US citizen.

US federal tax law taxes you on everything you earn regardless of wherever you live. However, Dual-Tax Agreements (DTA) keep you from being taxed twice for the same income.

For the case of my military retirement pension, that is only taxed by the US, although I did have to report the income on my Portuguese taxes (they were just put into some category that rendered it non-taxable). The rest of my income, though, is taxable by Portugal under their NHR status rate of 10%.

However, I do get to report (and deduct) those taxes paid to Portugal on my US federal tax return. 

Please understand, though. that a government pension must be for services rendered to that government. In other words, the retirement pensions for military personnel and federal/state/city government employees.

This is NOT social security. You will be taxed by Portugal on any social security RETIREMENT income you receive.

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(@jeanne)
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@coop   thanks for confirming that SS does fall under the 10% tax rate. Do you know whether withdrawals from a 401(k) or Roth account also get taxed at the 10% rate?

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 Coop
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@jeanne Honestly, I don't know about 401(k) or Roth accounts.

I think (this is my best guess) that if the withdrawals are tax-free in the US, they would be tax-free in Portugal.

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Posted by: @coop

@jeanne Honestly, I don't know about 401(k) or Roth accounts.

I think (this is my best guess) that if the withdrawals are tax-free in the US, they would be tax-free in Portugal.

In the UK they have ISA's (investment bonds), the income from them is tax free in the UK but it isn't tax free in Portugal. Different countries, different tax laws.

I know nothing about the US 401(k) or Roth accounts but it may be prudent to seek professional advice rather than assume the US tax free status also applies in PT.

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@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.

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 Bert
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@jonesdn2020 Good Morning, This is very interesting information for me for several reasons. I moved from Sacramento California and you may or may not know there are many many native Portuguese people who immigrated to the US. 

My accountant there is from Portugal originally. I have recently returned to figuring out more specifically my tax situation now that I am here and she keeps telling me that once she files the papers to say I am a Portuguese resident (next week SEF appt yah!) I don't even have to file a Portuguese tax return. I thought that is required as a recipient of the NHR status. So, I am a little bit concerned reading all of these posts and also after having applied and received a couple of months ago NHR status. A puzzle to be solved. I also have private pensions in addition to SS and I was under the assumption that those were taxable. I would appreciate knowing your thoughts and also your accountant's contact information here in Portugal. If willing to share it, please PM me as I may have a few more questions. Many thanks.

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Admin
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@bert As a Premium member take advantage of a free consult with Carlos at All Finance Matters | Expats Portugal

He told us the same, I believe, but it was several months ago. He went through our finances and told us no tax due in Portugal.

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 Bert
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@jonesdn2020 Thanks will do

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Admin
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@bert My apologies! We dealt with Ricardo Chaves at All Finance Matters | Expats Portugal

Carlos was with another firm we consulted with.

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@coop thank you for the information. We will pay attention on how it is noted.  Tim.

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(@stevej)
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Hi Tim,

No, I've not clarified anything. I've used an accountant for my IRS this year, so hopefully things should be clearer once the process has completed.

Steve

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@stevej With regard to your particular situation (ie having been attributed NHR status prior to the introduction of the 10% rate on pensions), I am of the firm opinion that you can opt 3 ways each year.

Those would be don't apply NHR; do apply it but on original basis; do apply it but under new rules.

I'd have thought 2 of those are non-starters for you.

 

The anexo L paper version seems to confirm that you have options : Anexo L

Obviously if you're submitting electronically, it may look a bit different but on the 2nd page, Section 6B, selecting Yes for item 1 and No for item 2 ought to get you exempt from the 10%. That's what the notes say.

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@x-camone Thanks x-c,

Looking at the submission the accountant has done, that is what she did, and which is the opposite to what I did last year, when I said Yes to item 2.

A good advert for using an accountant if you don't completely understand the intricacies of the system.

Thanks, Steve

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Posted by: @stevej

...A good advert for using an accountant if you don't completely understand the intricacies of the system.

A cautionary tale on that front. When I first started out here, I used an accountant who advertised assistance with filling out tax returns. I specifically mentioned a couple of items which I was advised to simply ignore on the return (advice subsequently re-iterated by a senior member of staff at our bank branch). 

Some years later, when more competent with Portuguese language and reading up on tax returns, I found out for myself that following this advice had cost me a considerable amount over the odds in the interim in withheld tax. Part of it had also put me in breach of my obligations and thus at risk of being sanctioned, which bothered me immensely since I had been at great pains to be scrupulously transparent and honest about my financial affairs.

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Posted by: @bert

she keeps telling me that once she files the papers to say I am a Portuguese resident (next week SEF appt yah!) I don't even have to file a Portuguese tax return.

You might want to verify the validity of that advice with the tax authority. The below link gives details on who doesn't have to submit a tax return.

A friend of mine (UK army retired) was told by an accountant he didn't have to submit a PT tax return as tax due on his UK military pension is only due in the UK under the UK/PT tax treaty. A few years later he got fined for failing to submit tax returns for the previous 4 years (the limit they can go back), I can't remember if the fines totalled €1200 or €1600. No tax was due by him, that was just the fine for failing to submit tax returns.

https://eportugal.gov.pt/en/cidadaos-europeus-viajar-viver-e-fazer-negocios-em-portugal/trabalho-e-reforma-em-portugal/imposto-sobre-o-rendimento-das-pessoas-singulares-irs-em-portugal

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Admin
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@old-bloke We have that same scenario in the US but we don't trust it. We file even if we technically do not have to.

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