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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.
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.
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.
@jonesdn2020 Hi. My federal civil service pension (CSRS) is $75K a year. When my NHR expires after 10 years, my Portuguese tax rate will be around 40% ($30K). My effective tax rate in the US is around 10%. So the US would tax me around $7500. That leaves me on the hook for $22.5K to pay Portugal. I'd better set my budget now for $52.5K disposable income annually (in US dollars) so I won't have to move after my NHR expires.
@melvinj Is your federal civil service pension not a government pension in the eyes of Portugal?
@melvinj Oh, my. I did not expect this big tax number for Portugal. After this year when I retire fully, I will probably only have social security so my tax may not be as bad then as it appears to be for 2022 and 2023. My eyeballs have been popping out of my head over it all, and reading what you have stated, I might need smelling salts to keep from fainting! 😲
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.
@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.
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.
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?
@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.
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.
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.
@jonesdn2020 Hi. My US tax advisor told me that with my ROTH account, only the money that I paid in and the interest earned on that money is tax free. Whatever amount my employer paid in and the interest earned on that portion is taxable.
@melvinj It depends on what type of ROTH account you have - the rules are different for a ROTH 401[k] and a Designated ROTH account. It sounds like you may have a ROTH 401[k] to which your employer also contributed.
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
@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.
@jaybay We have a webinar coming out soon with Ricardo from AFM that will be on the Expats Portugal YouTube channel.
Ricardo mentioned no taxes on 401k distributions. He did mention taxes on Social Security but I think we need to follow up with him. US SS is paid by us and our employers at a 50-50 rate. So, half the money is ours pretax. The US taxes SS no matter where you reside.
Now imagine in the US you have SS and 401k and Interest and get a tax rate after deductions of 10%. With the NHR you get the standard deduction of 4104 and interest and 401k are not taxable. You would be left with SS and you paid 10% in the US to offset PT taxes.
We really need to find recent PT NHR filers falling under the new NHR rules.
Do you know when the webinar w Ricardo from AFM (that you mentioned)will be? This is a pretty critical issue for us. Thanks
@jaybay Hoping this week. We have been busy for the last week with our kids visiting so we need to finish the editing this week.
@jaybay First, the tax treaty assures that US social security is only taxed by the US. For IRA and 401k distributions (i.e. "pensions"), assuming you have elected the NHR, then you would owe 10% to PT, however again the treaty kicks in such that this taxation offsets your liability to the IRS. In most cases this is wash, as the US is higher so, essentially you are just splitting where you make the tax payments.
@lawbrief: HI: I am very confused, because I received my completed US tax return and FBAR, and I had a chunk of money due to the USA, even though I am small fish with no US investments, etc. I had some work income and Social Security in the USA. My Portuguese attorney just sent me, literally minutes ago, the Portuguese return showing I am paying almost the same amount to Portugal! This would negate one of the main reasons I moved out of the USA in the first place. This is my very first experience with this, having moved to Portugal last year, 2022. Can anyone help? THANKS!!!
@crecarole This raises a couple of questions: did you register as a NTR before the end of 2022? In any event, was the social security excluded from the PT tax, which it should have been under the tax treaty. Last, what were the other sources of the US income?
@lawbrief We were registered for NHR in 2022 which is our first year as Portugal tax residents. We did a partial year return from 10/10 to the end of the year.
We only have my government pension and interest income for last year and this year. We won't be taking 401k distributions until next year and social security won't be until 2027.
The video I saw with an accountant from Reports Day, LDA in the Algarve was on a expat youtube video where he debunked the 10% US social security tax in Portugal.
@jonesdn2020 I'm wondering which YouTube channel you saw that on. I'm curious because the 'American in Portugal' YT channel had an interview with an accountant in the Algarve a while back. The accountant declared with certainty that SS would not be subject to PT taxation. But when I recently tried to find that interview again, I couldn't find it. I contacted Veronica [owner of the channel] and she told me that she had taken the YT video down precisely because there was uncertainly regarding SS.
@jeanne Yes, it was Veronica, and I couldn't find it either. I did note the accountant's firm for follow up. Reports Day, LDA.
