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PresentMonkey
11/21/2016 04:58 EST

Hello Countga:

This is what we understand:
Social Security is exempt from taxation in Portugal.
IRA, 401K etc, are taxable in Portugal.
If you have a Resident Card you have to file taxes in Portugal.
Regarding the Double Taxation Treaty: If Portugal's taxes are higher than US taxes you pay the difference to Portugal. Therefore, the double taxation prevents you from paying the amount to the US a second time to Portugal.

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mfitch5998
11/22/2016 12:37 EST

Is this correct? I wasn't aware that any additional Portuguese taxes might need to be paid, only the U.S. taxes on our 401k and SS....

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craigandmicki
11/22/2016 12:53 EST

To mfitch5998's question about what is taxed in Portugal: You will find a host of expert advice at the FB site "US Expat Taxes...". Quickly, tho, please note that Portugal will tax you on ALL income earned in the US. That includes interest on savings and checking accounts, SS, 401(k) withdrawals, capital gains, dividends. Portugal's tax rate on several of these categories is higher than the US rate. You file in Portugal first, then you file in the US. While you don't pay again when you file in the US, you won't get credit for the greater amount you paid to Portugal.

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Countga
11/23/2016 09:25 EST

Hello,
So, does the Non-Habitual Resident (NHR) exemption keep one from paying taxes on IRAs or Social Security payments or distributions for 10 years?
Why would you file in Portugal first?
Because, Portugal has higher rates for IRA distributions & Social Security payments than the US does?
You indicated any taxes paid in Portugal would not be deductible on your US tax forms, correct?
This all sounds complicated and onerous to me. What is the advantage of being here in Portugal if you are subject to higher taxes than you would have in the States? That doesn't sound too logical to me.
And, I wonder what is the benefit of any US & Portugal tax agreement?
Thank you . Countga

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klfitch
11/23/2016 09:34 EST

It does seem complicated plus not very beneficial for a US citizen. The tax rate on lower incomes are much higher in Portugal. We planned to live on money in our savings account the first couple of years (approximately 50k per year) plus take a small amount from 401k if needed. In the US, the 401k would not be taxed if under the personal exemption amount but it appears the Portuguese tax would be 28%. Is this correct?
Thanks so much.

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JAfan333
1/23/2017 22:53 EST

There a couple of things that people have said which confuse me here. I'm guessing that when you say "401K" you are talking about distributions, where you are drawing from a larger sum sitting in an investment account, i.e. you are only interested in accounting for this year's payout. Similarly, my wife and I have both traditional and Roth IRAs, and we will draw these down over many years. In the US, the entire amount received from traditional IRAs (contributions plus investment earnings) is taxable because all the income was excluded from taxes at the time it was paid into the accounts. On the other hand, Roth distributions are fully non-taxable, since already taxed income was used and the law was written to make this particularly lucrative. How will the Portuguese IRS view the Roth funds - will they tax the earnings at a full rate or??

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PFH
1/24/2017 09:04 EST

My wife and I just attended the tax seminar that Afpop sponsored in the Lagos area and it really helps spell out the tax situation here in Portugal. They are doing another tax seminar this Friday in Tavira, I would recommend anyone here to go to it. You do not need to be an Afpop member to attend. Afpop members pay 15 euros and non members pay 30 euros and you get a book written by the presenter detailing the Portuguese tax laws for the current year. It was very helpful so I do recommend it.

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BigWorld
1/24/2017 17:48 EST

I am confused about taxation of social security benefits while residing in Portugal. Are such benefits specifically exempt from Portuguese taxation by treaty, regardless of whether or not I am an official tax resident?

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PresentMonkey
1/25/2017 05:14 EST

https://www.irs.gov/pub/irs-trty/portugal.pdf

This is the Official Agreement between Portugal and the US. You can find all of your answers here. If you are unsure after reading this, speak to a tax attorney.

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KevinfromKinsaleviaNYC
1/25/2017 11:25 EST

Thanks Present Monkey. Could you possible point out the relevant section of this agreement which indicates that U.S. social security benefits are not taxable in Portugal?

Sorry but this thread has many more questions raised than have been answered and some of the answers given have been contradictory. For example, PresentMonkey originally wrote that "Social Security is exempt from taxation in Portugal.". But 2 days later, craigandmicki wrote that "Portugal will tax you on ALL income earned in the US. That includes interest on savings and checking accounts, SS, 401(k) withdrawals, capital gains, dividends."

PFH, I i will not be able to travel to Tivoli this Friday so might you let us know if you learned anything about the taxation of U.S. Social Security benefits at the Afpop seminar you attended?

I am happy to share with this group any reliable and definitive information I receive on this subject.

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PresentMonkey
1/25/2017 11:33 EST

To Kevin from NY

We did not attend any seminar.

In the PDF if you scroll to Article 20 1b on page 19

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craigandmicki
1/25/2017 11:47 EST

To Kevinfrom...question about taxes in Portugal: Suggest you ask these questions at the FB page US Expat Tax Questions. Experts on that site are reliable. I also attended two presentations on our tax treatment, have read a Portuguese and translated version of the Tax Treaty and talked with others here....all of that is behind my saying that 'ALL INCOME RECEIVED IN THE US IS TAXED FIRST IN PORTUGAL'. This includes social security, interest income, dividends, pensions.

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KevinfromKinsaleviaNYC
1/25/2017 11:55 EST

Thanks craigandmicki. US Expat Tax Questions is a closed group so I am awaiting acceptance of my request to join.

This is obviously a critical question to have answered before deciding whether to establish residency in a foreign country.

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craigandmicki
1/25/2017 12:29 EST

PresentMonkey: This tax agreement document you shared is different from the documents that Portugal uses to define what is considered taxable income to US Citizens residing in Portugal, Perhaps it is an update....but it seems to express that Soc Security is not taxed by Portugal, opposite of all other sources. Wow. We need to get some more data on this. Who DID attend the AFPOP seminar? The ones led by tax advisors that some of us attended in Cascais and Lisboa said that SS IS TAXED! Zoe

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Countga
1/25/2017 14:03 EST

Hello, I will be attending the Tax Seminar thru AFPOP on Friday in Tavira. Meanwhile, I can tell you at a seminar held in 2015 that Lugna Tax & Investment Advisors (lugna.pt) indicated in writing that Social Security was NOT taxable. So, if the rules have changed then they are recent changes. More after the seminar. Thank you, Countga

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KevinfromKinsaleviaNYC
1/25/2017 14:19 EST

Countga, I look forward to hearing back from you. One concern I have is that perhaps U.S. social security benefits are not taxed in practice but could be in theory. It may depend on whether an individual decides to file a return? If you don't file, perhaps Portugal has no easy way to chase you for the unpaid tax?

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Kasia2017
1/25/2017 16:52 EST

Would anybody know what is the tax situation with profit distributions from LLC located in US? After reading the agreement between US and PT, and talking to the US accountant I'm under the impression that income received from such source is taxable in US and has to be only reported on PT tax return.
Does anyone have a an accountant near Lisbon area that can be recommended?

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JAfan333
1/25/2017 19:53 EST

A suggestion: This thread is getting long and ranges over several very different issues. Could we break up the discussion into separate threads? I'd suggest

1) tax status for retirement income of all types
2) income from business outside of Portugal
3) income from wages and business inside Portugal
4) tax & witholding on money brought into Portugal (e.g. from savings and investment earnings)

Another thing that would be helpful would be someone's step-by-step retelling of their two-country tax process: Begin by getting Portuguese equivalent of US W2 & 1099s? When to file with US or other country of origin (extensions useful or necessary?) Also please note we're not there yet, so unless someone wants to video broadcast or upload AFPOP presentations it won't help us now, though it sounds like very helpful.

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Tadeo50
1/30/2017 18:51 EST

This is a bit of an explanation about
Non Habitual Resident Scheme.

I think it's very important information and it differs a bit about what other people mentioned here. Please read, google Non Habitual Resident.


http://www.livinginportugal.com/en/moving-to-portugal/tax-regime-for-non-habitual-residents/

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ALEXISSTRONG
1/31/2017 17:57 EST

My understanding is that Social Security income IS taxable in Portugal, unless you have applied for and received the Non Habitual Residency status, which means you don't pay taxes in Portugal for 10 years. Social Security income in PT is above (usually) the minimum income for tax-exemption here, which means it would be taxed if you are a resident.

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BigWorld
1/31/2017 20:25 EST

Curiouser and curiouser. The other question is whether the U.S. or Portugal taxes first and whose effective tax rate is higher.

Why can't some experienced accountant put together a simple schedule by country of which countries tax US SS benefits, how they determine tax residency, and what is the typical effective tax rates for such income? Maybe SSA does it? Or NARP? So frustrating.

Countga, any feedback on this issue from the seminar you attended?

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craigandmicki
2/1/2017 05:13 EST

To BigWorld's post about a book/guide regarding US/PT taxation: This has been done by Dennis Greene. You can find these resources at EuroFinesco, (http://www.eurofinesco.com) and other resources at Greenback Tax. It seems that a high number of posts on this site in response to taxation questions are guesses, based on how they are worded, versus knowledge or research, so you will find the responses rather confusing. Do your own research and you'll feel more confident. Check the sites I mentioned plus AngloInfo Lisbon; the fb page US Expat Tax Questions; the tax law that was recently posted on this site.

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Countga
2/1/2017 08:10 EST

I recently attended a seminar sponsored by AFPOP and put on by EuroFinesco. A 184 page book on Portugal Income Tax was provided. The main spokesperson was Dennis Greene, Chairman of EuroFinesco. Provided I understood correctly, whoever receives social security greater than 8,000 Euros has to file a Portugal tax return. Portugal tax returns must be filed between 1 April and 31 May. Returns must be reported in euros and there are specifics on the rate to be used. The most common method is the rate as of December 31st of each year. IRAs, Social Security, 401Ks are considered "private" pensions. It appeared to me that Mr. Greene was not well versed in USA tax laws or in the tax treaty between the USA & Portugal. He did say that it is dependent on the specific tax treaty between the 2 countries. One can also apply for the Non Habitual Resident (NHR) tax status which currently provides a 10 year hiatus on pensions. One can now apply on line for the NHR. Go to the EuroFinesco website for details.
Hope that helps. Always do your own research. Countga

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TonyJ1
2/27/2017 09:43 EST

In my reading of the treaty, social security taxes maybe taxable by the paying country as well as in the country of residence. The country of residence would grant credit for taxes paid in the paying country - see article 21 1 (b) of the treaty. In the case of residents enjoying the NHR status, this would be a non event whilst registered under the NHR scheme.

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TonyJ1
2/27/2017 09:46 EST

You should file in the US first - the general rule is that the country of residence should give you credit for foreign taxes paid - up to its own limit (also subject to documentary proof)

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TonyJ1
2/27/2017 09:55 EST

If you are a pensioner and living off foreign pensions, annuities, interest, dividends, rental income, and provided you have registered for the NHR status, most of this income (provided the source is not from a country in the Portuguese black list) will be tax free for a period of 10 years. In short, Portugal is a high tax country, but there are tax benefits to be had.

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TonyJ1
2/27/2017 10:00 EST

What exactly is an official tax resident. You are either a resident in which case you are subject to tax on a worldwide income basis, or you are not a resident (if your permanent home is not in Portugal, or you are a short term visitor. The general rule is 183 days or you have a permanent home. I

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TonyJ1
2/27/2017 10:07 EST

Social security is taxable in both countries - please see Article 21 1 (b). Portugal gives credit for US taxes limited to the US tax chargeable on the social security income if the Portuguese tax is higher, or else, limited to the Portuguese tax charge on this income. The Portuguese tax authority will not refund taxes if overpaid to the US IRS

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TonyJ1
2/27/2017 10:15 EST

I think the confusion is because of the technical language used. Social security 'maybe' taxed by the paying country - what this means is that both countries have taxing rights. It is not an exclusive right. In the case of a 'civil service' pension, only the paying country has taxing rights. The language is clear if read carefully

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KevinfromKinsaleviaNYC
2/27/2017 13:12 EST

With respect, TonyJ1, these tax treaties are far from clear. For example, you keep referring to Article 21 in discussing the taxation of social security benefits but Article 21 refers only to remuneration from government service.

Also if you read the Protocol Section 1 b) it says:

"Notwithstanding any provision of the Convention except paragraph (c) of this provision, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and the United States may tax its citizens, as if the Convention had not come into effect. "

What do you make of this?

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JAfan333
3/1/2017 19:54 EST

Question on the tax status of US Social Security income - this is NEVER more than partially taxable for US residents - you can have other income above all limits and US IRS still lets you deduct 15% in calculating your tax liability. If SS were your only income (let's hope it doesn't ever come to that!), it would be 100% tax exempt. Does the Portuguese IRS recognize the US code-defined exclusion percentages or do they other criteria?

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BigWorld
3/2/2017 00:08 EST

JAfan333,

The IRS lets you deduct 15% of what exactly?

Why is SS income 100% tax exempt?

Lastly, please explain your comment "Does the Portuguese IRS recognize the US code-defined exclusion percentages or do they other criteria?" I have no idea what this means.

No offense to you or others but I have heard so much contradictory information on this issue and am getting pretty frustrated.

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JAfan333
3/2/2017 05:21 EST

OK I left one word out of the last sentence, which should have read: "...or do they USE other criteria." Otherwise it makes sense if you make an effort. Let's try again:

Income that originates in the US gets looked over first by US IRS then Portuguese IRS. The question here is how much each government taxes US Social Security. If you look at the US IRS website (https://faq.ssa.gov/link/portal/34011/34019/Article/3831/Must-I-pay-taxes-on-Social-Security-benefits) they start out by telling you:

"Some people who get Social Security must pay federal income taxes on their benefits. But, no one pays taxes on more than 85 percent of their Social Security benefits. "

Your total taxable US-derived income will determine how much the US IRS will expect you to pay on the SS-derived part of your income, but they always exclude some part of it - at least 15% and ranging up to 100%. (Note they say "some" SS recipients pay tax). There is a Social Security Benefits Worksheet in the Form 1040 Instructions, which gives you dollar amounts not percentages, but for planning purposes, it's useful to talk about what portion of your money gets taxed. Don't expect anybody but yourself and your tax accountant to tell you what your US tax-exempted percentage is for SS, but here are two possible cases. Case 1) Say you have $2M in other US-derived income and still collect $ 20K SS, US IRS will count $17K (85%) toward your taxable income. Case 2) You have substantially less US-taxable income, US IRS may still say you can only exempt, say 75% of SS and have to pay tax on the remaining 25% ($5K) in addition to tax on whatever other income you took in and couldn't deduct any other way. So if your SS is 75% exempted and you're in an overall 15% bracket for taxable income, you'd pay (0.15)x(0.25)x($20K) = $750 on the SS portion of your taxable income,

Tax treaties are there to prevent duplicate taxation so say you are in a 15% bracket for US federal taxable income and as NHR Portuguese resident have a 20% rate, the max rate the Portuguese IRS should be allowed to tax the same income at is 5%, the difference between the two. It can also get complicated when governments have different rules about which income is taxable and which isn't.

My question is about how the Portuguese IRS determines what percentage of US SS is taxable, which would be simplest if they either exempt it all or at least accept US rules for calculating exempt percentage.

Bottom line, we can figure out or ask somebody in the US what our IRS will count as taxable, but when Portuguese IRS looks at the same income, it's not clear to me how much money they base their taxes on. Do they 1) exempt all SS, or will they 2) accept the US exemption percentages, 3) tax everything (worst case) or 4) apply some formula of their own?

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BigWorld
3/3/2017 15:45 EST

Thanks JAfan333. Your detailed explanation is extremely helpful.

I think we can all agree that these tax issues need more clarification. As I have asked in the past, can any U.S. citizens living as tax residents of Portugal tell us how you are taxed by both the U.S. and Portugal? Do you pay your full tax liability to the U.S. and then pay any additional taxes to Portugal? Or is it vice-versa.

My situation (when I start collecting social security benefits in a few years) is that my SS income falls below the threshold for any taxation in the U.S. So, as a U.S. taxpayer, I pay no U.S. tax. But as a Portuguese taxpayer, will I pay Portuguese tax on all of my SS Income with no consideration for my U.S. exemption?

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JAfan333
3/4/2017 01:04 EST

BigWorld - (Let's start inserting as standard assumption that we're talking about US citizens with Non-Habitual Resident status in Portugal.)

There are two issues here: Firstly, do you really not pay US tax? and secondly, do Portuguese authorities consider some of your US tax-exempt monies taxable?

If SS is your ONLY US-derived income, then it isn't US-taxable (at least this year). If after moving to Portugal you will still hold US investment accounts and draw on them, or plan on cashing out traditional IRAs, 401Ks etc., money you withdraw may be as much as 100% US-taxable, particularly from those accounts that were funded with pre-tax money. Same goes for interest you make on bank accounts and profits taken on stock or bond funds.....I f you have some US-derived taxable income, you need to run the numbers to see if SS will contribute a bit to your tax liability. Expect to at least file a US return every year if you do have SS income, even if you don't have tax liability being generated back home. (I think the Social Security Admin may cut you off if you don't file a tax return.)

The second type of question is why we're asking others to contribute to this discussion: How can we know what the Portuguese IRS will see as taxable? Blanket exemption for US SS payments would be nice, but several people here have said they don't think that's what they do. If not, is there a partial exemption (which describes US tax policy and is what I expect from Portugal)? I haven't seen specific tax treaty language that addresses this. Has any SS recipient now living in Portugal had their taxes done by a local expert they trust and if so, how was SS handled? Would you be willing to name your source?

Also remember that NHR status lasts 10 years, after which if you remain in Portugal you will pay normal resident tax rates. From time to time people in these discussions have mistakenly said NHR status means you don't pay taxes for ten years (a few weeks back ALEXISSTRONG in this thread). The actual tax rate is a fixed 20% of taxable income rate with various exclusions, which is actually a good deal for people with work permits and the rest of us who have to move taxable money in, since even a very modest income pushes you into and beyond the 28% bracket in PT.

Finally, I have the same question about Roth IRAs funded with already-taxed money but US IRA lets you cash them in after 59-1/2 with no tax on either principal or interest . The Portuguese IRS may want to tax the earnings, like the way US IRS deals with annuities funded with after-tax income - anybody know?

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drewmckee
3/19/2017 04:49 EST

Kevin,

I agree that it is a critical question. But the lovely weather and lifestyle count for something too. : )

Drew

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kevintuttle
6/8/2017 16:42 EST

Hi JAfan333,
I have a question about your comment that "Your total taxable US-derived income will determine how much the US IRS will expect you to pay on the SS-derived part of your income."

From the IRS documents I have read, the tax liability on one's SS benefits is based on "combined income," which is defined as: "your adjusted gross income, tax?exempt interest income and half of your Social Security benefits."

There can be, of course, a big difference between the two. Could you post a source regarding your observation on total taxable US-derived income? That would be ever so helpful for me. Thanks.

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croonerjim
6/8/2017 18:08 EST

1. Once you have been in PT for 183, PT will tax you on your worldwide income...everything.
2. If you apply for Non Habitual Residency, for 10 years you will not be taxed in PT on SS, US interest and US dividends. All else will be taxed, including capital gains and distributions from 401(k)s (just like they would be taxed in the US).
3. You must also file a US tax return. If you have paid PT taxes, you will receive a credit to be applied against your US taxes, which most likely will wipe the US taxes out. So there cannot be double taxation due to the tax treaty between our countries.
4. Depending on your type of income, you have to do the math to see if it makes sense to live in PT. But only 7 countries in the world have the exemption for US SS...although PT's is only for 10 years.
5. I practiced international tax law for 40 years.

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JAfan333
6/9/2017 04:46 EST

Kevin -
Your summary is welcome: shorter and more accurate than mine, but there's one caveat - the calculation using 1/2 of SS income applies only in certain income ranges - can be less for low-taxable income folks and as high as 85% for high earners. Earlier I was responding to people asking if it was true that SS was not taxed under Portuguese law (for answers see Croonerjim's 6/8 post), and it became clear that many didn't realize they had to determine how much SS contributes to their US tax liability. The part of SS that is taxed isn't usually presented as a percentage calculation, like I made it sound, rather it depends on the whole package you described, in a second-round calculation after your AGI is determined without SS. (Also, the phrase "US-derived income" was a red herring - the US taxes worldwide income as does PT with specific exceptions - sorry.) The SSA has a web page giving the same information you did plus rates for higher income folks who may have to use as much as 85% in the calculation (https://www.ssa.gov/planners/taxes.html) and they produced a web video or two "explaining" how SS income may be partially taxed. In practice you just have to slog through the return and later calculate percentage tax added by the SS calculation to see what your particular rate is, if that helps you to plan.

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JAfan333
6/9/2017 04:46 EST

Kevin -
Your summary is welcome: shorter and more accurate than mine, but there's one caveat - the calculation using 1/2 of SS income applies only in certain income ranges - can be less for low-taxable income folks and as high as 85% for high earners. Earlier I was responding to people asking if it was true that SS was not taxed under Portuguese law (for answers see Croonerjim's 6/8 post), and it became clear that many didn't realize they had to determine how much SS contributes to their US tax liability. The part of SS that is taxed isn't usually presented as a percentage calculation, like I made it sound, rather it depends on the whole package you described, in a second-round calculation after your AGI is determined without SS. (Also, the phrase "US-derived income" was a red herring - the US taxes worldwide income as does PT with specific exceptions - sorry.) The SSA has a web page giving the same information you did plus rates for higher income folks who may have to use as much as 85% in the calculation (https://www.ssa.gov/planners/taxes.html) and they produced a web video or two "explaining" how SS income may be partially taxed. In practice you just have to slog through the return and later calculate percentage tax added by the SS calculation to see what your particular rate is, if that helps you to plan.

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kevintuttle
6/12/2017 04:47 EST

Hi JAfan333,
Thanks for your reply. I would like to ask a question on the coattails of that: If I owe tax on my Social Security benefits but have a foreign tax credit, can this be used to offset (reduce or eliminate) the tax liability on my Social Security benefits?

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croonerjim
6/12/2017 07:46 EST

Short answer is yes..foreign tax credit can offset any US tax liability

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kevintuttle
6/12/2017 13:54 EST

Hi croonerjim,
Thank you for your helpful response.
Just to double check, the foreign tax credits that have accumulated over previous years can be used for this purpose, correct?

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MariaandJim
6/12/2017 14:27 EST

Unused foreign tax credits can be carried back 1 year or forward up to 10 years.

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kevintuttle
6/25/2017 08:40 EST

What a wonderful group! I am grateful for everyone's input.
JAfan333, I would like to ask a question about working in Portugal. I am *thinking about* doing voice overs in my laptop from my home for a foreign (non-Portuguese and non-American) company that has clients all over the world (the finished voice over recordings would be sent out to the clients electronically).
My payments would either be sent to my PayPal account or deposited directly to my US bank account.
As an American expat with Non-Habitual Residency status, would these earnings be tax exempt in Portugal? I ask as I would not be working for a Portuguese company or be paid in Portugal.

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MariaandJim
6/25/2017 10:20 EST

The short answer is no. Once you are PT tax resident, you declare all of your worldwide income. Then the NHR allows you to exemp certain items...basically US retirement income and US dividends and interest. But you will also file in the US. To the extent you pay PT tax, you will receive a foreign tax credit so you do not pay a double tax on this income.

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