Income tax on Social Security benefits earned in USA.

Updated 30/01/2020 : Portuguese government has decided to tax foreign pension income at 10%.

If a taxpayer became resident before 1 April 2020, then the 0% IRS tax rule apply, though they have until 31 March 2021 to request the NHR status. If they became tax resident on or after 1 April 2020 (until 31 December 2020), then they have until 31 March 2021 to request the NHR status, but the status applicable will be under the new rule (tax foreign pension income at 10%).

Beyond that, US citizens who are NHR in Portugal, will have to pay the following taxes for Dividends (5% up to 15%), Yields (10%) and Royalties (10%). This taxes changes according to your citizenship country.

As pointed out on another comment, under the changes to the nhr regime effective from 1 April 2020, social security and under pensions will be subject to 10% tax (or have it taxed under general rules).

Note that annuities from own investments, as opposed to annuities where the build up was employer / employee contributions (falls under above rules), are subject to a different regime which in effect will reduce the effective tax rate even lower than the 10%

Income such as interest, dividends, rental income, royalties and capital gains on fixed property may be subject to tax in the US. As the US has the right to tax this type of income, it will consequently not suffer any further tax in Portugal for the 10 years of the nhr status.  The law reads that if the other country has the right to tax this type of income, then it will not be subject to tax in Portugal.

Capital gains on financial instruments will be subject to tax in Portugal at normal rates - either scale rates or 28% at taxpayers option -financial instruments are taxed as per general rules as the nhr provisions does not specifically exclude this type of income.

Nationality does not impact the taxation on dividends, interest, royalties, capital gains. The only impact of nationality is in the case of pensions, and specifically government pensions, where the general rule and the US treaty follows this logic, only the country of source may tax government pensions (government pensions in the sense of military, police, civil servants including federal, state, county and city pensioners)

Note that the rule for pensions and the other income noted above are under different parts of the nhr provisions

Hello johnnyPT,
Thanks for your reply.
Does the Portuguese government tax authority know that USA-based Social Security benefits are considered a "government pension" by the USA and not a private pension?
Therefor taxable only in USA.
Or maybe they know it and just ignore it?
what do you think?

Thank you Tonyj1....sad news indeed....looks like Portugal feels within their authority to tax my USA-earned government pension benefits. So it also looks like its within my authority not to relocate to Portugal.

If you look at the double tax treaty, article 20 it specifically mentions that both countries have the right to tax it.

Government pensions as defined are not taxable in Portugal. Social security is treated as a private pension in most treaties - the US (also The Netherlands)  treaty being an exception. The government being the trustee (in a sense) of private pensions.

Unfortunately you have mistimed your move - the law had to be changed due to both internal and external pressures. Finland cancelled the treaty with Portugal mainly on this very aspect. Also Sweden threatened to do the same

Does this mean that Portugal will tax the interest income and dividends in our 401k and IRA?  The US doesn't tax this until the money is taken out.

Doesn't matter to us anymore...however, I think most people are under the understanding that the entire purpose for the international tax treaties is to PREVENT/AVOID double taxation. Silly me. I would certainly hate to go thru all the necessary steps for visa and expense of relocating ...and then get the shocking news AFTER we arrive....if you had any idea how long it has taken me to find anyone in Portugal who actually knows the tax rules well enough to reply....and they includes to US Consulates for Portugal who refuse to answer ANY questions about taxation.... just thankful it didn't happen to me. 
"My work here is done....time to move on"

The funds are in a 'trust' - in principle only the payouts are taxable, the growth not. Though I have not seen definite tax rulings or tax cases on this. Basing thiscomment on basic principles.

The basic purpose of double tax treaties is to split the cake - forget the headings. You should have a look at the full title of double tax treaties - usually includes 'prevention of tax evasion' or words to that effect. The basic rule on pensions is that the country of residence has the right to tax its residents unless the treaty (if there is one) says otherwise. This is the case with the US Portugal treaty. The nhr provisions are a 'bonus' provided in the internal law in order to attract retirees. Very few European countries have similar provisions (tax holiday) in their internal laws.

thanks Tony...unbelievable that one government can legally decide to redefine the meanings of "public" and "private"...astounding.
When you mix attorneys with taxation, the result is rarely good for a taxpayer.
I'm going to speculate here that immigration from USA to Portugal might be headed for a drop....once again, I'm just glad we found out BEFORE we moved.   thanks to you.

This is defined in the treaty - the treaty has been approved by the Senate etc in the US. This is standard with most double tax treaties - you can take any combination. It also applies for Portuguese people settling in the US earning Portuguese pensions, or Portuguese people settling in Brasil, British people settling in Portugal or in France, French people settling in Portugal, etc. You must not take this personally -  this is how states have decided to split the cake. Some treaties do differ from this template, but this is the general rule. In the case of the US / Portugal treaty - the US had the power to 'dictate' to Portugal being a much more powerful 'partner' - but, I am sure if I looked at the US treaties with other partners, they probably follow the same or a similar template to the Portugal Us treaty.

Michael, don't forget that you also have to pay the US taxes on your social security distributions to the US IRS.  Maybe not all of it.  Depending on your income for that year it could be up to 85% of it.  But the taxes that you will have to pay the US and PT combined is usually the equivalent of the higher rate of the 2.  It is not in addition to.  So, let's say, just as example, it is 12% to the US and 10% to PT, it will be 12% in the end somewhat but not equally split between the US and PT.

And let's say you decide not to move to PT, and stay in the US.  You will have to pay state taxes as well.

You will have to do the math based on how much social security distribution you and your wife expect to get + other income sources.

No we don't....we have no additional income to add to it. As I said in my original post, we will not have ANY INCOME from employment from any worldwide source...other than USA-earned government pension Social Security benefits.

now makes me wonder if Portugal has some plan to entitle themselves to my savings account if i move it to a Portuguese bank...

If you earn interest in Portugal - then subject to taxation. If  the account is in the US and you earn interest there, not subject to tax in Portugal under the nhr. Thereafter it will be subject to tax in Portugal.

Tonyj1
that's consoling to know....but we would still be on the hook for 10% of our Social Security benefits even if we have NO ADDITIONAL INCOME OF ANY KIND in USA or in Portugal...according to those making above posts.
NHR is only good for those signed up before April 1, 2020.

This whole discussion made me curious why PT decided to tax foreign source pensions.  It turns out, PT's tax treaty with some countries (e.g. UK, Finland, Sweden), gives PT the taxing rights to those countries' pensions.  And since they are not taxing them, those EU countries are complaining of discriminatory tax benefits.

For Americans, no matter where we are, Uncle Sam will tax us.  What will change for us is that we will need to include this information when we file our taxes to PT and a slight difference in the total tax we will have to pay combined to both countries.

For married couple receiving between $32k and $44k, only 50% is taxable.

Let's assume the couple receive 40k USD a year from social security which is only 50% taxable assuming a 12% fed tax rate.  That results into $2,400 owed to the IRS.  At PT's 10%, that results to $4,000 which  will result into $1,600 owed to PT.

But this quickly changes for those couple receiving over $44k where 85% of it becomes taxable.  Let's take a number.  $45k at 12% fed rate.  This results into $4,590 owed to the US. At 10% PT rate, this is only $4,500 which will result into no tax being paid to PT.

It boils down to how much pension one receives and what US federal tax rate one falls into.

My wife and I receive $43,000 per year from SS. We do not have ANY additional income.
Our accountant tells us the USA levies no tax against that income and no additional income....but Portugal thinks they are entitled to 10% of it.

Yes
The socialist Portuguese state will freeze all assets it can, including bank accounts.

dennislg wrote:

This whole discussion made me curious why PT decided to tax foreign source pensions.

For 2 reasons:
- The old tax exemption regime for NHR raised many criticisms from some European Union countries, such as Sweden and Finland, as already said here, mainly questioning the fact that it is a tool for raising revenue and tax competition. These countries even reviewed tax agreements (they tore up the agreement) with Portugal so as not to lose the tax revenue of their pensioners due to the Portuguese scheme.

- The government party PS did not have a majority in parliament and gave in some matters like this one, to a left-wing party BE, in order to allow a majority to make the government viable. BE party is one of the most critical parties to the NHR tax-free regime.

It may one day return to the old scheme if the parliamentary majority is different....

Michael, I'm not sure why your accountant is saying you will not owe taxes for a $43,000 (joint filer) social security benefit.  You may want to show him/her this info from SSA's website.  It may be possible that s/he found some deductions to lower your total income.

paulopereirra wrote:

Yes
The socialist Portuguese state will freeze all assets it can, including bank accounts.

Only if there are debts to the state. In normal circumstances they will not touch banking accounts

JohnnyPT wrote:

dennislg wrote:

This whole discussion made me curious why PT decided to tax foreign source pensions.

It may one day return to the old scheme if the parliamentary majority is different....

Unlikely - there is too much pressure from other countries and there is the fear that double tax treaties maybe cancelled. Though a new government may tweak it.

There was a time when US social security benefits were not taxed.  That changed in 1984 when the US started classifying them as taxable income as part of the Amendment of 1983.

paulopereirra wrote:

Yes
The socialist Portuguese state will freeze all assets it can, including bank accounts.

Hi Paulo,
I don't understand this post of yours. How does this fit into the NHR regime under discussion here? Even if it does, it seems to me it doesn't make sense. Portugal is still a state of law and not a totalitarian regime...  It is not a party (which will lead to a Government)  that freezes accounts, the accounts are frozen by the banks, by an judicial officer of a court who asks the Banco de Portugal for information about all bank accounts in which the debtor holds them. It may have to do with legal proceedings taking place in any court, or debts for example to the finance or social security authorities. Even if it is ironic, the observation did not make it clear. I apologise for that... 

It reminds me of a situation that occurred in August this year with the President of the Republic, Marcelo, who was insistently questioned by a woman at the Oporto Book Fair. He ended up saying: "The Portuguese voted for this party. Tell the Portuguese to vote for another party". 

I think this will change for lot of US people to drop PT from the list of countries where to retire.  PT was on my list to consider and I have dropped it based on the reading of PT tax laws and the treaty and still on the list to visit only

Please see the following link:

https://www.investopedia.com/countries- … es-5071965


List of Countries Without Income Taxes

If you or your business is still interested in moving to an income-tax free country, the first task is to decide where you're going to relocate. Some countries make it harder to secure citizenship than others, and each locale—some rather remote—comes with unique costs, challenges, and risks...

Below are all 23 countries that do not levy income taxes on their citizens and residents:

Bahrain, Bermuda, British Virgin Islands, Brunei, Cayman Islands, Kuwait, Maldives, Monaco, Nauru, Norfolk Island, Oman, Pitcairn Islands, Qatar, Saint Barthélemy, Saint Kitts and Nevis Islands, Somalia, Bahamas, United Arab Emirates, Turks and Caicos Islands, Vanuatu, Wallis and Futuna, Western Sahara... and Vatican City (limited to cardinals, Holy See diplomats and authorized residents with papal authorization to reside in the State)

Most of them are Arab countries and remote islands.... the only European territory is Monaco. Here what you don't pay in taxes, you pay in too absurd cost of living...

Is it worth it?...   

Decisions to relocate is usually a combination of financial and non-financial reasons.  And even with financial reasons alone, one must look at all the cost, cost avoidance, etc.

As mentioned previously, depending on your Adjusted Gross Income (AGI), you may not actually owe over what the US requires.  Thus, that 10% tax on pension may not even affect you. 

If you stay in the US, you should factor in also the state tax on top of the fed tax that you will have to pay and additional medicare expenses.  Medicare only covers Plan A assuming you fully contributed to medicare.  Plans B, C, and D are one's cost.  If I'm not mistaken, after 1 year of residency, public healthcare in PT becomes available. 

Add the cost of housing, food, and clothing, etc.

So, you are no longer considering Portugal for retirement. Are you seeking a country with no taxes? Can you kindly share more details. Thanks

Hi Rbellia,

I am also curious to know that.... a country where you don't pay taxes, have good living conditions, reasonable/good health system (much cheaper than in the US, as long as you are not president, of course...), and other affordable facilities... And by the way, a country that receives you well and speaks English or at least, tries to understand you

Money is not everything.  The best way to know that, is to remember that you can get ill someday.

For me...Portugal exceeds my expectations. I"m only looking now to assess neighborhoods against climate change impacts and would welcome feedback about rising sea levels, flooding and/or climate change hot weather and/or fires so that I can shop wisely for a home.

To all above who have contributed answers to my urgent inquiry, I thank you. but am I hearing some of you saying there is some (legal) way to avoid Portugal taxing my USA-Based Social Security income? To repeat...I will NOT be working in Portugal and my ONLY income stream will be from Social Security. Most of the replies above assumed I would be combining SS with some other income stream...NOT the case.
Portugal is/would be a wonderful retirement (if you can stay out of the way of those increasingly serious pesky wild fires) but I just hate the thought of giving 10% of my ONLY income to them....when it want even earned there. I am still open to legal ways to avoid (not "evade") this tax.

JohnnyPT...your replies above about Portugal taxing my USA-earned Social Security benefits are interesting. Maybe you are a Portuguese tax advisor or CPA?
please private message me at [email protected] ...i am always hoping that I have somehow mis understood and there is NO TAX on my SS income...let's discuss it more in detail.

Curious..how much would the tax be in the US? I'll be looking at this situation in 5 years or so. Also in the American Entrepreneurs in Portugal, there is a link to an invite for an upcoming free webinar next week which will include discussion around taxes.

Thanks for the info 
This can be useful to Michael or other US expats looking for info about Portugal

WEBINAR on U.S/Portugal Taxes for Expats (Lisbon Portugal Time)

https://www.eventbrite.sg/e/webinar-on- … 9704929667

Mon, November 2, 2020
5:00 PM – 6:00 PM WET
Online Event
Free - Need registration
Speakers:
Augusto Paulino (Head of Tax - Partner Your Advisory)
https://grupoyour.com/en/contactos/

Derren Joseph (Partner, Hayden T. Joseph & Co. )


About this Event:

Common Questions Involving Portugal and U.S. Tax Reporting:
Are Pension Funds Taxable in the US?
Is there a tax treaty with Portugal?
Is there a FATCA Agreement with Portugal?
Do I report interest income or dividends from Portugal?
Do I report Rental Income from Portugal?
Is my Portuguese Company Reportable in the U.S?
The Portuguese tax system is one of Europe's most generous destinations and quickly becoming a popular destination for expats from the US and other countries. It has various tax treaties with other countries, including a tax treaty with the US, ensuring that you should not pay tax more than once on any income in multiple jurisdictions.
Taxes can be intimidating and confusing. Fortunately, there are experts to help demystify the constantly evolving tax landscape.
Join this discussion of the U.S and Portugal's critical tax rules and learn how you can legally minimize your tax burden internationally.

I am not an international tax professional.  Although this forum is a good starting point, I would strongly suggest that anyone who is contemplating relocating to another country hire an international tax professional that specializes in the country (countries) that you are considering moving to.  I would think it would only cost a few hundred dollars, at most. 

For me, I have several years before I will relocate.  I plan to consult (hire) an international tax professional to give me advice specific to my situation (my sources of income, and the country I plan to move to).  Also, I am not planning to buy real estate when I move, rather rent.  So if for some reason the country I pick decides to stick it to me on taxes, I could hopefully move to another more friendly country.

The webinar JohnnyPT mentioned should be a good one to attend.  This is scheduled for Nov. 2.  I attended their webinar for Spain yesterday.  They had both a US and Spanish accountants in the Zoom call.  The US accountant explains/provides context to the Spanish accountant who answers the questions.  The Q&A allotted was about 35 minutes but you'll get a lot of information and also get an opportunity to ask your question.  So, I'm assuming they will use the same format.