This is a collision between the online tax return and the US DTT. There is the widely held view that because the US can tax capital gains of a US citizen under the savings clause, that the PT tax should be zero. But the tax return follows PT law and doesn't allow that. It seems like most people end up where Mike is, that the cost of pursuing the correct treatment is more than the amount at issue in a single year, so we have only a single challenge. Over time, and over all the folks affected, it would be a different matter.
It might be worse, too, since you can't take an FTC for a tax not legally levied; you have to pursue all legal remedies first.
I've often thought that a GoFundMe effort would make sense here, for a challenge properly presented.
This is also an area where tax planning pre-move makes sense. Post move, with the stock market hitting new highs, a lot of people might feel locked in.
Thanks for your candidness and for sharing. I know how you feel; last year I had to fork over €15K to Finanças for pension income. BTW, the outfit I used to file my IRS (not AFM) seemed to know less than I did about filling for expatriates. Good luck with your court case. Hoping it will be decided in your favor.
I am hoping that you will be successful with your dispute and I am also hoping that eventually all that precedent will lead to the PT tax authority become consistent about not taxing capital gains for US citizens.
With respect to calculating the cost basis of your gain, be sure to check if using the applicable exchange rate at the time you purchased the funds is advantageous in your situation. For the sale of the funds, of course you'd use the exchange rate of the day you sold.
Thanks for sharing your stupidity with us. I'm stupid, too, though on a smaller scale. I sold some stock options last year - a much smaller amount - but AFM notified me that I will have to pay the 28% capital gains tax on them. They had mentioned the possibility of contesting the assessment, but didn't mention the cost. Based on your numbers, the cost to contest for me would almost equal the tax I'm going to pay. So I'll have to do some more analysis (read "coin flipping") to decide if I want to go down that route.
So far, our experience has been that the "no double taxation" thing is, like much else here, a suggestion rather than a hard-and-fast rule.
Obviously, I am NOT a tax expert...but I wonder what this means for US citizens who sell a house in the US after becoming PT tax residents...would PT attempt to tax any gain even though that gain is not taxed in US?
Urgh, this post broke me out in a cold sweat and it’s not even my money. So sorry you’re going through this and I hope your appeal is successful. Unfortunately as ex pats we all end up doing clever dumb things - we’ve done many 😂
Nancy I am so sorry this has happened to you but I absolutely appreciate you sharing your story. We are in the phone with our US broker right this minute to discuss this. We had no idea about the double taxation on Cap Gains. You have helped a lot of people with this post, I wish you the best of luck in your case and hope things go your way.
You’re not alone. Based on research and observations via my business, taxes are the one thing most Americans moving to Portugal get wrong. After interviews with 8 international tax advisors, it seems somewhat unique to Portugal. This could be due to a number of things but I put a lot of blame on regular and social media inaccurately promoting Portugal’s NHR as “tax free living”.
This, along with general hype about it being a “cheap” place to live, has attracted a group of first-world immigrants who are less informed and prepared for the financial and tax realities of living abroad, in Portugal.
Nancy, this is not you. You’ve clearly done lots of homework. But so many have not. The Portuguese IRS is learning to check foreign resident tax returns. In the past, almost no one was audited. This is changing. It’s easy money for the gov’t.
I offer this comment as a reminder: please do your financial homework before moving and use trustworthy vetted professionals in this area at least for the first year.
Good old tax to get the conversation going 🙄. Since I’m not American my knowledge of tax affairs is zero, but can tell you the willingness of Finanças to resolve bona fide and fair tax queries is ZERO. Sadly I’ve learned this the hard way. I’m also hugely skeptical about legal services in PT having been burned a number of times. N.B. Choose the attorney wisely, preferably not one recommended by a tax representative.
Oy, sorry to hear this. We’re all living and learning here as newbies. Thanks for your brave sharing. The thread is very helpful in regards to 🇵🇹 🇺🇸 taxes, thanks 🙏
Sorry, had to delete the post. You can only apply a foreign tax credit( FTC) in the USA for foreign sourced income. As your income is sourced in the US you cannot take the FTC in the states for Capital Gains sourced in the US.
In my research, my understanding was that based on treaty and NHR, capital gains from selling stocks in American companies, if you have had them for more than one year and have not been a tax resident in Portugal for more than 5 years will be exempt from taxation in Portugal. I would ask the lawyer to look into this rule.
I’m asking Armin for a citation regarding what he said. None of the PT tax people I’ve consulted with or worked with have said that. So I’m asking for his reference.
This has been a big topic of discussion with the expats in Portugal. Everyone has been told different things on Cap Gains by "experts". I believe one of the sources of confusion is that in general we are new relative to expats from the UK. Most experts are far more familiar with the UK agreements than the USA and I believe Brit cap gains are not taxed here. So, "maybe" some are getting mislead.
You mention - "If you paid or accrued income taxes to a foreign country
on foreign source income and are subject to U.S. tax on
your foreign source income, you may be able to take either
a credit or an itemized deduction for those taxes."
Can this be interpreted differently? I read it that you are now reading this from a viewpoint of being, here, in Portugal. Meaning, you paid foreign tax in Portugal on foreign (outside Portugal) income. I do believe you get credited in the USA for what you pay here, so you do not pay 15%+28%, you ultimately (and eventually, depending on when you apply the credit to the US taxes) pay a total of 28%. I believe this credit can be carried forward up to 10 years in the USA. This seems to be the consensus up here, but there are till those that believe we are exempt here because of the recent result on the case you mentioned...Hopefully there have been more than one by now. The problem is the accumulated credit over the years may never catch up to itself.....and maybe the only way to completely use it is to move back before the credits expire (or to a country that does not charge on US sourced cap gains).
Ahh, the DTT re capital gains rears its ugly head again. As mentioned in many previous comments, this is a contested, ugly and gray area. It has been successfully challenged under the "savings clause" before, but as mentioned, has not (yet) changed the AT's interpretation of the law. Thank you for taking it on in the courts, more of us should do so. This is ONLY an issue with US taxpayers, who are taxed by the US based on citizenship and not on residency: hopefully more US taxpayers who come up against this should challenge it. The flip side is that you can deduct the PT taxes from your US taxes through various avenues, as mentioned in other comments.
I appreciate the honest update and sharing that expat life comes with its pitfalls.
This is a collision between the online tax return and the US DTT. There is the widely held view that because the US can tax capital gains of a US citizen under the savings clause, that the PT tax should be zero. But the tax return follows PT law and doesn't allow that. It seems like most people end up where Mike is, that the cost of pursuing the correct treatment is more than the amount at issue in a single year, so we have only a single challenge. Over time, and over all the folks affected, it would be a different matter.
It might be worse, too, since you can't take an FTC for a tax not legally levied; you have to pursue all legal remedies first.
I've often thought that a GoFundMe effort would make sense here, for a challenge properly presented.
This is also an area where tax planning pre-move makes sense. Post move, with the stock market hitting new highs, a lot of people might feel locked in.
Thanks for your candidness and for sharing. I know how you feel; last year I had to fork over €15K to Finanças for pension income. BTW, the outfit I used to file my IRS (not AFM) seemed to know less than I did about filling for expatriates. Good luck with your court case. Hoping it will be decided in your favor.
I am hoping that you will be successful with your dispute and I am also hoping that eventually all that precedent will lead to the PT tax authority become consistent about not taxing capital gains for US citizens.
With respect to calculating the cost basis of your gain, be sure to check if using the applicable exchange rate at the time you purchased the funds is advantageous in your situation. For the sale of the funds, of course you'd use the exchange rate of the day you sold.
Hi Nancy,
Thanks for sharing your stupidity with us. I'm stupid, too, though on a smaller scale. I sold some stock options last year - a much smaller amount - but AFM notified me that I will have to pay the 28% capital gains tax on them. They had mentioned the possibility of contesting the assessment, but didn't mention the cost. Based on your numbers, the cost to contest for me would almost equal the tax I'm going to pay. So I'll have to do some more analysis (read "coin flipping") to decide if I want to go down that route.
So far, our experience has been that the "no double taxation" thing is, like much else here, a suggestion rather than a hard-and-fast rule.
Mike
I consider you a smart guy...so it appears I am in good company!
Oh my. This changes a lot of things for us…. Thanks so much for sharing your experience. 💜
Obviously, I am NOT a tax expert...but I wonder what this means for US citizens who sell a house in the US after becoming PT tax residents...would PT attempt to tax any gain even though that gain is not taxed in US?
Real estate, under the treaty is only taxed where the property is located.
Securities are taxed first in Portugal, then in the US. So you would take double taxation credit on the US return.
A deduction maybe, not a credit. So, unless your itemized deductions are higher than the standard deduction, you lose...
Urgh, this post broke me out in a cold sweat and it’s not even my money. So sorry you’re going through this and I hope your appeal is successful. Unfortunately as ex pats we all end up doing clever dumb things - we’ve done many 😂
Nancy I am so sorry this has happened to you but I absolutely appreciate you sharing your story. We are in the phone with our US broker right this minute to discuss this. We had no idea about the double taxation on Cap Gains. You have helped a lot of people with this post, I wish you the best of luck in your case and hope things go your way.
You’re not alone. Based on research and observations via my business, taxes are the one thing most Americans moving to Portugal get wrong. After interviews with 8 international tax advisors, it seems somewhat unique to Portugal. This could be due to a number of things but I put a lot of blame on regular and social media inaccurately promoting Portugal’s NHR as “tax free living”.
This, along with general hype about it being a “cheap” place to live, has attracted a group of first-world immigrants who are less informed and prepared for the financial and tax realities of living abroad, in Portugal.
Nancy, this is not you. You’ve clearly done lots of homework. But so many have not. The Portuguese IRS is learning to check foreign resident tax returns. In the past, almost no one was audited. This is changing. It’s easy money for the gov’t.
I offer this comment as a reminder: please do your financial homework before moving and use trustworthy vetted professionals in this area at least for the first year.
Good old tax to get the conversation going 🙄. Since I’m not American my knowledge of tax affairs is zero, but can tell you the willingness of Finanças to resolve bona fide and fair tax queries is ZERO. Sadly I’ve learned this the hard way. I’m also hugely skeptical about legal services in PT having been burned a number of times. N.B. Choose the attorney wisely, preferably not one recommended by a tax representative.
Oy, sorry to hear this. We’re all living and learning here as newbies. Thanks for your brave sharing. The thread is very helpful in regards to 🇵🇹 🇺🇸 taxes, thanks 🙏
Sorry, had to delete the post. You can only apply a foreign tax credit( FTC) in the USA for foreign sourced income. As your income is sourced in the US you cannot take the FTC in the states for Capital Gains sourced in the US.
ouchie
Hi Nancy,
In my research, my understanding was that based on treaty and NHR, capital gains from selling stocks in American companies, if you have had them for more than one year and have not been a tax resident in Portugal for more than 5 years will be exempt from taxation in Portugal. I would ask the lawyer to look into this rule.
Good luck, hope you win!
Regards,
Can you please share your citation for this? I have not heard it mentioned before. Thanks!
Please consult your PT tax acct
I’m asking Armin for a citation regarding what he said. None of the PT tax people I’ve consulted with or worked with have said that. So I’m asking for his reference.
This has been a big topic of discussion with the expats in Portugal. Everyone has been told different things on Cap Gains by "experts". I believe one of the sources of confusion is that in general we are new relative to expats from the UK. Most experts are far more familiar with the UK agreements than the USA and I believe Brit cap gains are not taxed here. So, "maybe" some are getting mislead.
You mention - "If you paid or accrued income taxes to a foreign country
on foreign source income and are subject to U.S. tax on
your foreign source income, you may be able to take either
a credit or an itemized deduction for those taxes."
Can this be interpreted differently? I read it that you are now reading this from a viewpoint of being, here, in Portugal. Meaning, you paid foreign tax in Portugal on foreign (outside Portugal) income. I do believe you get credited in the USA for what you pay here, so you do not pay 15%+28%, you ultimately (and eventually, depending on when you apply the credit to the US taxes) pay a total of 28%. I believe this credit can be carried forward up to 10 years in the USA. This seems to be the consensus up here, but there are till those that believe we are exempt here because of the recent result on the case you mentioned...Hopefully there have been more than one by now. The problem is the accumulated credit over the years may never catch up to itself.....and maybe the only way to completely use it is to move back before the credits expire (or to a country that does not charge on US sourced cap gains).
Ahh, the DTT re capital gains rears its ugly head again. As mentioned in many previous comments, this is a contested, ugly and gray area. It has been successfully challenged under the "savings clause" before, but as mentioned, has not (yet) changed the AT's interpretation of the law. Thank you for taking it on in the courts, more of us should do so. This is ONLY an issue with US taxpayers, who are taxed by the US based on citizenship and not on residency: hopefully more US taxpayers who come up against this should challenge it. The flip side is that you can deduct the PT taxes from your US taxes through various avenues, as mentioned in other comments.