Oh S$!t, We're Going to Court in Portugal
How Could I Be This Stupid?
Have you ever done something incredibly stupid when you thought you were being clever? Well, I did…and we are paying (literally) for it.
I Thought I Was Being Clever
In December 2023 I was looking at our finances. My longterm readers know I keep a spreadsheet that projects how long our investments will last. As I was reviewing our Vanguard account I noticed some significant appreciation of non-qualified (non-IRA/Roth) funds. As this money had been sitting untouched for many years, one fund had doubled and the other had tripled. I quickly accessed the IRS.gov site to determine the current capital gains rate. I learned that if a couple had less than $89,000 in income in 2023 they did not pay capital gains. Denise’s pension is below that threshold and I had not remembered taking other money out of investments during the year. Our income would be above this level starting in 2024 when we start receiving Social Security. So great, I could sell one of the funds and realize a $69,000 gain tax-free.
When it came time to do my US taxes I saw that I had taken money out of my IRA on 2 January 2023! I had forgotten all about it! The withdrawal put us above $89,000. Oh s$!t, we were going to have to pay capital gains tax in the US. I beat myself up about this for several sleepless nights. Since I had simply reinvested the money in a different stock mutual fund, I had to move other money to pay the IRS. I hate when I am stupid when I think I am being smart.
Oh S$!t, F%@k, D*#m
Last week I received an email from All Finance Matters (AFM), the Portuguese firm located in Tavira that files our Portuguese taxes. It read:
We have submitted your tax return, please see proof attached.
Capital gains from the sale of shares will be taxed in Portugal at a flat rate of 28%.
The other incomes are tax exempt.
WTF? I scanned through all the emails I had on file from AFM. I had met with them to review the NHR rules and to discuss what could be done to minimize Portuguese taxes after our 10-year NHR tax scheme. There it was…a 28% tax on capital gains during and after NHR.
While I berated myself I took some comfort in thinking that the 28% would be reduced by the amount I paid in the US. But then the other shoe dropped:
Capital gains are always taxed at 28%, during and after the NHR.
It is a fix tax rate, so it is not possible to deduct anything.
We don't agree with the tax authority since tax has already been paid at source. However, the tax authority will tax.
The only option is to lodge a complaint and possibly go to court after the assessment note has been issued.
There has already been a court case this year in which the court ruled in favor of the taxpayer and not the tax authority.
Anybody Know a Good Portuguese Tax Attorney?
So let’s review what this mistake could cost:
US Capital Gains: $ 10,350
Portuguese Tax: € 19,320
Needless to say, I have continued to communicate with AFM on this matter. It turns out they work with a Portuguese Tax Lawyer who can assist us. It would appear that we will first have to fork over the amount due. Then file an administrative claim (Reclamação Graciosa), which will cost about 1000€ (including VAT). The taxing authority has up to 4 months to respond to the claim, and will likely deny it. We then go to Phase 2 which is either a judicial claim or arbitration. It was suggested that arbitration is faster and it was there that there has already been a favorable ruling. The approximate fee for Phase 2 is 1890€. The good news is if one wins, the taxes paid plus interest, court and legal fees are refunded.
Why am I Exposing My Stupidity?
I realize many other retirees are not as fortunate as we are. And as a progressive … I have never fretted too much about paying taxes.
I share this with you now simply to make you aware that capital gains are taxed in Portugal even during NHR. And, unless we win we will pay taxes twice on the gain. So plan accordingly…and if anyone has had any experience with this sort of situation, please share it below or email me.
Até à próxima semana, Continuo a bater-me…
Nanc
Update August 2024: We don’t need to go to court. The Portuguese taxing authority has determined that such income should NOT be taxed during NHR as it is taxed by the US. We received this update from our accountants this morning: “We are pleased to inform you that your tax return has been successfully validated by the tax authority.
As a result, your tax liability is zero.”
In Case You Missed It: Last week I told you that Kalie and Josh, from ExpatsEverywhere, asked me to be on their podcast. I said yes…and you can find the interview here. (If you want to skip their advertising, sorry Kalie and Josh, you need to use the fast-forward function until you get to the 12-minute point of the podcast.) I then learned they would be video-taping it for their YouTube channel.
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.