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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.
I found this article recently and thought it was pretty informative for us even though it is based on the UK. https://www.portugalresident.com/tax-and-pensions/
"In Portugal, in order to be taxed as a pension, there must be an employer contribution (since pension income is effectively deferred employment income)."
We did not have any employer contributions to our 401K accounts. I had my employer match my deferred comp account which I cashed out prior to moving here.
"Personal pensions without employer’s contributions can be considered a savings scheme and receive the favourable tax treatment applied to life assurance policies."
I am in the process of breaking down our 401K contributions and any capital gains. I doubt there are any gains anymore. If I had employer contributions, I would break that out as well.
Hmm. 'Personal pensions without employer’s contributions' - would a ROTH account fall under that?
@jeanne I believe that is what Ricardo told me. I would have an accounting of my deposits and gains just in case but I think it is similar to a dividend and not taxed in Portugal. There may be some nuances between the UK and US Roth. The article mentions "Personal pensions without employer’s contributions can be considered a savings scheme and receive the favourable tax treatment applied to life assurance policies." This link explains the tax treatment on those: https://www.onelife.com/portugal/#:~:text=Indeed%2C%20with%20regards%20to%20taxation%2C%20the%20unique%20treatment,either%20income%20tax%20or%20stamp%20duty%20in%20Portugal.
You should be able to claim the amount you pay in PT as a Foreign Tax Credit against your US tax liability.
@jeanne Thanks very much.
So, from what I understand from my attorney and tax preparer here in Portugal, I have to pay 10% on my social security pension, which can be taken as a credit on my USA taxes. So it appears I did this in the wrong order - USA tax prep first, then Portuguese. Should have been Portugal first. I am awaiting a response from my US CPA. I have an NHR, so this is the deal for 10 years. This is my first filing, so I am paying only the portion of the year I was here in 2022 for a reduced amount on the social security. This year, 2023, I will have to pay a full year's 10% to Portugal for that.
The USA and one country in Africa, I think, are the only two in the entire world that tax you no matter where you are, and whether or not you ever intend to return. Thanks for the help jeannemarie, et al.
@crecarole I was wondering about the order but I was under the understanding that Portugal was first but that may be based on tax return payments. We structured our income to be tax free in the US and Portugal for several years so we will not have any real-world experience for a while.
I am still wondering about social security and Portugal taxing it at 10%. I have a resource that says this is incorrect so we will definitely be reaching out to him when the time comes.
I have read all the tax treaty info and technical explanation that followed but I am just coming up to speed on the arbitration cases that have been resolved. I believe that may be the missing link in my understanding of our Portugal tax liability and the advice being given by different Portugal tax accountants.
@jonesdn2020 Hi: Well, I am still confused. It must be nice to have structured your income situation so that no tax would be due for a while. 😉 I am not in a position to have done that. I am surprised by all of this from both sides of the Atlantic, as the cost for tax is much higher than I anticipated and might even eventually have me consider moving back, which I was intent on NEVER doing.
@crecarole These guys seem to be on top of the tax situation. I like their tax calculator https://mytaxes.pt/
We will need to get to the bottom line when the NHR expires but moving back to the US on Medicare is a instant 5-6k cost hit per year and per person, I believe, over living here and that is just the first expense that comes to mind.
@crecarole And I forgot to add that unused foreign tax credits can be carried forward for 10 years. So if you did/have not used them for your most recent USA filing, you should be able to apply them to your return for next year.
@jeanne Thank you for that info. I wasn't aware of that part. I think my CPA hasn't actually filed yet, although the paperwork is complete - something about having to wait for one year due to the FBAR. I am completely out of my comfort zone with all of this.....
@jonesdn2020 Thanks very much. I will check them out. I am completely out of my depth on this whole thing I think part of the problem is that the Portuguese attorney/CPA is not recognizing the "deductions" aspect of USA taxes. Because I am self-employed, I can write off a lot of tax in the US. But she said it is impossible, if I didn't pay tax on that income in the USA, I will have to pay it here. That is totally against everything I have ever seen about this topic since I started researching moving here. Thanks for your help and guidance.
@crecarole It is very possible that deductions that are recognized under USA tax law are not recognized under PT tax law. Don't expect that what you are accustomed to deducting in the USA will also be deductible in PT.
What it comes down to is you file your PT tax return subject to PT tax law, and then take advantage of the automatic filing extension for expats to later file your USA taxes as you always have [following USA tax law, deductions, etc] but offset the taxes you paid in PT against your USA tax liability by applying Foreign Tax Credits.
As I mentioned in my earlier post, Foreign Tax Credits remain valid for 10 years, so if something got guddled this year, you can still take advantage of those unused FT Credits in your next year's filing - no loss there.
@jeanne As you pointed out in another thread even though you can get an extension you are liable for any taxes due on April 15th in the US? So good idea to pay anything you potentially owe by that time?
@jonesdn2020 Correct. 'Knowing that you have until Oct. 16, 2023, to file your paperwork could feel like a big relief, but remember that your extension bought you additional time to file, not more time to pay. Make sure to still estimate your taxes owed and submit an estimated payment as soon as possible to prevent late-payment fees and interest from racking up.'
Here a good description.
https://www.nerdwallet.com/article/taxes/how-to-get-tax-extension-online
@jeanne Hi:
Thanks again. What is incomprehensible to me is why I should have to pay Portuguese taxes on income earned in the USA (only). I itemize deductions in the USA and that reduces my tax liability. I just can't understand why Portugal should get tax money for something that doesn't remotely concern Portugal. That money doesn't even come into Portugal, I have maintained a US account. I totally understand the 10% Portuguese tax due on social security (after 2020), but not on regular income from home. I am still confused and waiting for more info from both "experts" here and abroad. Unfortunately, my CPA of 38 years passed away last year so I had to find a new person to file last year's taxes in the USA. I looked for someone who is familiar with expathood. Sigh.....
@crecarole It might be worth your while to look into filing an amended USA tax return.
FYI. for future years - Americans living abroad can request an extension to their filing due date. This may enable you to file your PT taxes first and then apply any available foreign tax credits against your (later) USA filing. Here's a link with some info on that (it's for 2022, but the arrangement is still essentially the same)
https://brighttax.com/blog/how-to-file-us-expat-tax-extension-2022/
@jeanne Hello: Thank you, my US accountant already filed for an extension. There seems to be a battle going on between my Portuguese attorney/CPA and the US CPA. They are going to contact each other directly. It's a mess!
I have US friends here that are retired and they had no issues with their tax filings in either place. I am still working, (although fazing out work-should have been retired when I moved here last year), and that US income is in addition to my social security. That is a complication that my friends don't have, plus I guess I may have picked the wrong people to do both my USA taxes and my Portuguese taxes! Yikes. Once through this maze of issues, it will be better for tax year 2023, although I am still working. A Portuguese friend has just given me a reference for a CPA here in Portugal. I may use their person next year, or this year to intervene in the battle. LOL.
@crecarole I ran across these tax accountants for expats recently and if I had a complicated scenario, I would have engaged them. https://www.tytle.io/
We may need someone like this in several years. They seem to fix the issue of having disjointed tax reps in each country.
@jonesdn2020 Thanks alot for this link. I will look into them. I chose a new USA CPA based on his excellent reputation working with expats. He has a number of clients in Portugal, so I would have suspected he knows what he is doing-until now. At least, that's what I thought before all this came up.
Seriously, nothing has prepared me, despite a few years of extensive research prior to moving, for a heavy tax liability in Portugal. I don't even make that much money! LOL. Unlike many expats I am not well heeled. I chose Portugal over France and Spain because taxes were lighter. Well, we will see how this all turns out. Thanks again for the link, I will definitely check them out. There is another company recommended by those big "expat relocation sites" that want you to buy all their materials and attend seminars. I have to see if I can find that info and will add it here when I do. I seem to recall looking into that company a couple years ago and they also had a really good reputation. Obrigada!
