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Retired US citizens navigating Portugal taxes

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(@jonesdn2020)
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Well now that we have obtained our temporary residence it is time to move on with another lovely topic. Taxes are right up there with immigration law. We cross reference all our advisors and do our own research to be informed. 

We feel pretty good about it since we had a consultation with Ricardo Chavez from All Finance Matters | Expats Portugal and he confirmed what we suspected. We just haven't gotten to the point of where the NHR kicks in versus the double taxation treaty.

This ultimately determines if we live in Portugal when the NHR ends or not. 

We have read at length the US and Portugal double taxation treaty and the follow-up technical explanation found here

We will update this post as we flush out information.

We welcome any sage advice from Expats Portugal members.

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(@jeanne)
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Joined: 2 years ago

What have you concluded regarding if/how (during the NHR period) retirement income from USA 401(k), Roth, and Social Security  will be taxed?  I have read conflicting opinions on these, all from supposedly qualified "experts". 

After the expiration of the 10-year NHR arrangement, your full income will be taxed at the same rate as all other Portuguese taxpayers. You will, however, be able to claim foreign tax credits against any USA tax liabilities.  This may mean that you build up lots of foreign tax credits that you will not use - as I recall, such credits expire after ten years.  

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(@jonesdn2020)
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@jeanne 

We have not concluded anything at this stage. It is clear as mud weather the NHR adds some additional benefits above the double taxation treaty. We are being told by several Portuguese tax accountants that US Social Security is not taxable in Portugal but have not identified if that is under NHR or double taxation treaty.

We do know that the Portuguese tax code for pensions and other income sources does not match with the US terms. This has come up with US LLC and S-Corp entities and dividends.

When the NHR expires the double taxation treaty is still in effect. Portugal will only tax you based on this treaty. We see the assumption of being taxed in Portugal as other Portugal taxpayers being misconstrued. US citizens will always have the double taxation treaty applied to their Portugal tax.

The treaty sets limits on taxes of certain income types, and some are well below the Portugal tax rates.

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(@jonesdn2020)
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Hoping for clarity on if Portugal taxes you for the entire year that you became a tax resident or only on the portion of the year you were a tax resident.

I have seen some wording about proration based on when you became a tax resident during the year, but it was not clear.

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(@itexpert7)
Joined: 2 years ago

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@jonesdn2020 
I was taxed only from the day I became tax resident.
This date is different than the day I came to Portugal, or that I became resident.
To my understanding you become tax resident when switching over the NIF address to a Portuguese address in the local Financas.

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(@jonesdn2020)
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@itexpert7 

So glad you brought that up. That was my understanding as well. I remember some tip to not update your NIF address until required by law. I thought that was 60 days after becoming a resident but need to validate that.

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(@jonesdn2020)
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We confirmed that you have 60 days to update your address with Financas.

 

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(@jonesdn2020)
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@itexpert7 

The question came up on when the NHR starts. Do you have any experience with that? We know we need to apply by March 31, 2023. We become tax residents next month in 2022. So does the NHR start in 2022?

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(@itexpert7)
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@jonesdn2020 
I believe the NHR starts from the moment you became tax resident, that that is the reason you have until  March 31st next year to apply (after which the tax return is due).
I became tax resident end of July 2021 (big delay due to Covid, as my Camara being closed and not able to see me for residency, no loss there!), and the NHR was active from that tax year. So essentially I will have 10 tax returns under NHR, over 9.5 years.

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(@dyann)
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I too, have gotten some conflicting information from "experts" so I'll be following this thread closely.

On the topic of Roth IRAs, I've been told PT doesn't have/recognize them so it is up to the tax filer to designate the appropriate 'bucket' (e.g., pension income, etc.) to report them on the return. This seems odd to me but hopefully we can get some clarity before we have to file. Of course, the US will have already taxed them, perhaps years ago, so it will be interesting to see how these are handled with PT (NHR and non-NHR) tax rules.

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(@jonesdn2020)
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@dyann 

I hate that Roth IRAs report distributions to the IRS. My 77-year-old mother took a distribution, and they reported it as taxable income. Her tax accountant did not ask questions and told her to pay 20k in taxes. 

I called her tax accountant and explained she had it for over 5 years and she is clearly over the 59 1/2 age requirement. No taxes due. I am just glad I was around to catch it when she came back from the tax accountant. 

I would not pay any taxes to Portugal for a qualified Roth IRA distribution. This is a post-tax savings account with interest earned tax free.  I would keep track of the post-tax contributions versus the gains and the method used in calculating the distributions. 

I have not seen the Portugal tax form and the buckets. I don't believe these distributions should even be reported to Portugal. They are only reported to the US IRS for penalties and taxes in the case of an unqualified distribution. 

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(@jaybay)
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If we pay US tax on US social security/401k/IRA distributions, even if these are all considered pensions by Portugal, might we still owe the 10% Portuguese tax during NHR status?  Or would the higher than 10% US tax paid on this “pension” income protect it from this new 10% tax?  Double taxation?

If the 10% is in addition to US taxes, can be a significant burden. 

thanks

Jay

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Premium Member
(@dyann)
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@jaybay - as I understand it, after listening to several webinars, the amount you may have to pay depends on whether you go NHR or not.  Will you have to pay something to PT?  Probably.  Depending on how much money we're talking about, the progressive tax scheme of PT could be better for you than the flat 10% NHR tax for "pensions".  This forum has several taped webinars (on YouTube) you can watch, if you haven't already.

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