Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

For residents of Spain.
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wineandplaya
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by wineandplaya »

My takeaway is that TLH further undermines the difference between taxable and Roth somewhat.

I don't think TLH or lack thereof in Spain matters much. If you're in the distribution phase then, you shouldn't have much capital losses.
international001
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by international001 »

Another thought.

Perhaps you are not overpaying so much in Spain vs US.
At your level of retirement income, perhaps you'll be hitting the tax torpedo (40% marginal tax rates when taking US SS). So if you retired in US, you'd be paying more taxes that a simple assumption would tell.
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Zardoz
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by Zardoz »

wineandplaya wrote: Wed Apr 21, 2021 12:23 pm My assumptions are as follows:
- The couple owns a 600,000 EUR home in Spain, no mortgage
- They have 1,400,000 EUR in a taxable portfolio
- Their pre-tax retirement account withdrawals (401(k), IRAs), pensions and Social Security together individually (EDIT: "married filing jointly" not advantageous in Spain as discussed below) take them to the top of the 30 % income tax bracket in Spain
- All tax rates are for 2021. I took the numbers from here: https://www.expatica.com/es/finance/tax ... in-471614/

Wealth tax:
There is no wealth tax due since the assets are within the tax-free allowance of 700,000 EUR/person plus 300,000 EUR for home ownership. This assumes that they don't reside in an an autonomous community with different limits.

Investment income:
If you withdraw 5 % per year from the taxable portfolio, you'll have 70,000 EUR/yr in investment income taxed at the "savings rate" in Spain. For first 6,000 EUR/person this means 19 % and the remainder will fall into the 21 % tax bracket.
Total investment income: 70,000 EUR
Total tax on investment income: 0.19 * 2 * 6,000 + 0.21 * (70,000 - 2 * 6,000) = 14,460 EUR.
Double checking this example - if there is 1,400,000 EUR in the taxable portfolio and the couple withdraws 5% from it, is the entire withdrawal of 70,000 EUR taxable in Spain, including the original principal? Or would only the portion of the withdrawal that was comprised of interest, dividends, and capital gains be taxable, as in the US?
Withdrawal Phase Plan: Equities <= 50% | TIPS, I Bonds | VPW Worksheet | TPAW | Social Security @70
Topic Author
wineandplaya
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by wineandplaya »

Zardoz wrote: Thu Feb 17, 2022 1:16 am
wineandplaya wrote: Wed Apr 21, 2021 12:23 pm My assumptions are as follows:
- The couple owns a 600,000 EUR home in Spain, no mortgage
- They have 1,400,000 EUR in a taxable portfolio
- Their pre-tax retirement account withdrawals (401(k), IRAs), pensions and Social Security together individually (EDIT: "married filing jointly" not advantageous in Spain as discussed below) take them to the top of the 30 % income tax bracket in Spain
- All tax rates are for 2021. I took the numbers from here: https://www.expatica.com/es/finance/tax ... in-471614/

Wealth tax:
There is no wealth tax due since the assets are within the tax-free allowance of 700,000 EUR/person plus 300,000 EUR for home ownership. This assumes that they don't reside in an an autonomous community with different limits.

Investment income:
If you withdraw 5 % per year from the taxable portfolio, you'll have 70,000 EUR/yr in investment income taxed at the "savings rate" in Spain. For first 6,000 EUR/person this means 19 % and the remainder will fall into the 21 % tax bracket.
Total investment income: 70,000 EUR
Total tax on investment income: 0.19 * 2 * 6,000 + 0.21 * (70,000 - 2 * 6,000) = 14,460 EUR.
Double checking this example - if there is 1,400,000 EUR in the taxable portfolio and the couple withdraws 5% from it, is the entire withdrawal of 70,000 EUR taxable in Spain, including the original principal? Or would only the portion of the withdrawal that was comprised of interest, dividends, and capital gains be taxable, as in the US?
I would assume only gains are taxable, as in the US. So taking into account the (tax-free) principal, the tax should get a bit lower. Might be hard to quantity tho, since it will depend on things like inflation and how long the stocks are sitting in the account.
international001
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by international001 »

Why would the principal be taxable (I was surprised by the question)?
Were you thinking on wealth tax or on mark-to-value taxation (kind of a PFIC, that I don't think exists in Spain)

BTW, you never know what the future will bring law wise. Radical left party is saying they consider 'great fortunes' after 1.5M
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Zardoz
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by Zardoz »

international001 wrote: Thu Feb 17, 2022 5:49 pm Why would the principal be taxable (I was surprised by the question)?
Were you thinking on wealth tax or on mark-to-value taxation (kind of a PFIC, that I don't think exists in Spain)
Yes, I agree that tax on the principal would be surprising. I'm glad to hear that's not the case (outside of the wealth tax). The reason I asked about it was that the math in the original post implies tax being levied on the principal:
wineandplaya wrote: Wed Apr 21, 2021 12:23 pm Investment income:
If you withdraw 5 % per year from the taxable portfolio, you'll have 70,000 EUR/yr in investment income taxed at the "savings rate" in Spain. For first 6,000 EUR/person this means 19 % and the remainder will fall into the 21 % tax bracket.
Total investment income: 70,000 EUR
Total tax on investment income: 0.19 * 2 * 6,000 + 0.21 * (70,000 - 2 * 6,000) = 14,460 EUR.
We could refine this example a bit to account for the fact that not all of the 70,000 EUR withdrawal will be taxable. For example, assume the portfolio is 50/50 stocks/bonds, dividends are 2%, and bonds pay 2% interest. In that case, the first 2% (28,000 EUR) of the withdrawal is taxable. Of the remaining 3%, let's presume negligible capital gains on the 1.5% taken from bonds. Then the open question is how much of the 1.5% taken from stocks is due to capital gains? If, for example, the stock side of the portfolio has appreciated by 100%, half of the 1.5% is taxable.

Total investment income: 14,000 int + 14,000 div + 21,000 bonds + 21,000 stocks = 70,000 EUR
Total tax on investment income: 0.19 * 2 * 6,000 + 0.21 * ((28,000 + 10,500) - 2 * 6,000) = 7,845 EUR

This could be reduced further if unrealized capital gains are lower. Someone who's planning their move in advance might want to use Tax Gain Harvesting to realize capital gains at the lower US capital gains rate in the years preceding the move.

In this example, the portfolio has 350,000 EUR in unrealized gains. The couple could even harvest all of these gains at a maximum rate of 15% if they so desired, paying 52,500 EUR to the US before the move, and thereby reducing their yearly investment income in Spain to just the 2% of their portfolio that is kicked off as interest and dividends:

Total tax on investment income: 0.19 * 2 * 6,000 + 0.21 * (28,000 - 2 * 6,000) = 5,640 EUR
Withdrawal Phase Plan: Equities <= 50% | TIPS, I Bonds | VPW Worksheet | TPAW | Social Security @70
Topic Author
wineandplaya
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by wineandplaya »

If I expected 2 % interest and no capital gains on bonds, I would hold no bonds.

Anyway, I don't think it's fair to say that the math above is incorrect because you can optimizing it further by strategically withdrawing the principal - it just means that 21 % in this case is really an "upper bound" and you might be able to do better. If you buy and hold stocks over several decades, I would assume most of it be gains anyway. Also, if inflation is high, the relative value of the principal erodes fast.
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Zardoz
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by Zardoz »

wineandplaya wrote: Fri Feb 18, 2022 6:25 am Anyway, I don't think it's fair to say that the math above is incorrect because you can optimizing it further by strategically withdrawing the principal - it just means that 21 % in this case is really an "upper bound" and you might be able to do better.
Indeed, everyone's portfolio will be different. I just thought it would be interesting to work through another example, to solidify my understanding. Thanks for posting the original example, and for the link to the helpful Spence Clark tax guide!
Withdrawal Phase Plan: Equities <= 50% | TIPS, I Bonds | VPW Worksheet | TPAW | Social Security @70
international001
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by international001 »

Yes.. for all taxable portfolios cost basis is often washed up because it depends on when you got the lots
You could also think on doing some tax gain harvesting before moving to Spain to increase the cost basis.

I'm more concerned about the 5% part. Today, even 4% is considered a stretch.
devich
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by devich »

international001 wrote: Tue Apr 27, 2021 5:14 am I am not aware that reinvested dividends are not taxed in Spain. Where do you get that from?
As an EU resident you can't buy US domiciled mutual funds and ETF's, not even through dividend reinvestment. You can only hold US mutual funds and ETF's you bring with you if they are "reporting funds", which I've found hard to get a handle on. You can buy EU domiciled funds but they have punitive US annual reporting fees. And on and on, many layers in the onion.
international001
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by international001 »

I think this doesn't apply if you are a US citizen

https://www.bogleheads.org/wiki/EU_inve ... and_PRIIPs

Please, feel free to open a new thread if you think that's incorrect. This matters to many.
TedSwippet
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by TedSwippet »

international001 wrote: Sun Apr 24, 2022 6:41 pm I think this doesn't apply if you are a US citizen

https://www.bogleheads.org/wiki/EU_inve ... and_PRIIPs

Please, feel free to open a new thread if you think that's incorrect. This matters to many.
Brokers and platforms are the entities subject to, and implementing, the PRIIPs rules. They have to apply these rules to all EU and UK residents, regardless of their citizenship(s).

The intersection of PRIIPs with the US's "exceptional" extraterritorial citizenship-based taxation rules and its spiteful PFIC rules is what creates a problem, but only for US citizens. Citizens of other countries are largely unaffected by PRIIPs, because they can readily use the full range of non-US domiciled ETFs. Full details in the wiki:

US tax pitfalls for a US person living abroad : FATCA, PFIC and PRIIPs - Bogleheads
international001
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by international001 »

THen the link I sent is incorrect (THat part 'This article contains details specific to investors in the European Union (EU). However, it does not apply to residents of the EU who are also United States (US) citizens or US permanent residents.')

Anyway, I haven't have any problem as US person opening brokerage accounts in foreign countries (just with stocks, no ETFs).
Also, it seems that many EU residents are successful at maintaining US brokerages accounts. I think IB will even allow you to open one.

So I'm not sure how well is all this enforced. Last resource I guess would be to invest in individual stocks.
TedSwippet
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by TedSwippet »

international001 wrote: Tue Apr 26, 2022 4:53 pm THen the link I sent is incorrect (THat part 'This article contains details specific to investors in the European Union (EU). However, it does not apply to residents of the EU who are also United States (US) citizens or US permanent residents.')
No. The banner at the page top is an indication that the article is written for EU investors who are not also US citizens. EU investors who are also US citizens simply cannot invest in the same way as every other EU non-US citizen, and so should ignore this article.
international001
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by international001 »

TedSwippet wrote: Tue Apr 26, 2022 5:06 pm
international001 wrote: Tue Apr 26, 2022 4:53 pm THen the link I sent is incorrect (THat part 'This article contains details specific to investors in the European Union (EU). However, it does not apply to residents of the EU who are also United States (US) citizens or US permanent residents.')
No. The banner at the page top is an indication that the article is written for EU investors who are not also US citizens. EU investors who are also US citizens simply cannot invest in the same way as every other EU non-US citizen, and so should ignore this article.
Ok.. So I suppose it's a logic consideration. I guess for EU Residents that are also US citizens some points may apply , but out of scope for that doc
TedSwippet
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by TedSwippet »

international001 wrote: Wed Apr 27, 2022 4:15 pm
TedSwippet wrote: Tue Apr 26, 2022 5:06 pm
international001 wrote: Tue Apr 26, 2022 4:53 pm THen the link I sent is incorrect (THat part 'This article contains details specific to investors in the European Union (EU). However, it does not apply to residents of the EU who are also United States (US) citizens or US permanent residents.')
No. The banner at the page top is an indication that the article is written for EU investors who are not also US citizens. EU investors who are also US citizens simply cannot invest in the same way as every other EU non-US citizen, and so should ignore this article.
Ok.. So I suppose it's a logic consideration. I guess for EU Residents that are also US citizens some points may apply , but out of scope for that doc
Exactly.

For most of the planet, assessing which wiki articles are relevant to you, and which to ignore, is pretty simple. If you are a US resident, the US pages. If you are a US nonresident alien, the non-US pages. US citizens who live outside the US are the problem. In essence they need a whole extra wiki, some unholy combination of parts of the US stuff, and some (but far from all) of the non-US stuff. Unfortunately, it is really hard to separate the strands from the current articles, and so the compromise is to mark certain articles as "for US investors" or "for non-US (or some country or region) investors", add a few pages that specifically outline the gremlins for US citizen expats, and then hope that these people can work things out for themselves.

The largest problem comes from articles that recommend or suggest particular funds or ETFs. EU based ones would be a US tax death-sentence for US investors, and US based ones are often a US tax death-sentence for non-US investors. It is a nightmare. And the particular article you referenced gives a whole host of EU based ETF suggestions, all of which would be US tax horrors if held by a US citizen living in the EU.
wesgreen
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by wesgreen »

Not the first to say this, and I'm sure I speak for many, when I say thank you, TedSwippet, for your insights!
WhiteMaxima
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by WhiteMaxima »

wineandplaya wrote: Mon Jun 07, 2021 6:04 am My takeaway is that TLH further undermines the difference between taxable and Roth somewhat.

I don't think TLH or lack thereof in Spain matters much. If you're in the distribution phase then, you shouldn't have much capital losses.
If you live less 183 days/year in Spain, you don't need to worry about this.
international001
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by international001 »

WhiteMaxima wrote: Tue May 17, 2022 2:05 pm
wineandplaya wrote: Mon Jun 07, 2021 6:04 am My takeaway is that TLH further undermines the difference between taxable and Roth somewhat.

I don't think TLH or lack thereof in Spain matters much. If you're in the distribution phase then, you shouldn't have much capital losses.
If you live less 183 days/year in Spain, you don't need to worry about this.
And according to the news (look up Shakira) it's difficult they'll catch you if you don't

What makes me think about the 3 points of residency check by the treaty:
2. Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting
States, then his status shall be determined as follows:
(a) he shall be deemed to be a resident of the State in which he has a permanent home
available to him; if he has a permanent home available to him in both States, he shall be deemed
to be a resident of the State with which his personal and economic relations are closer (center of
vital interests);
(b) if the State in which he has his center of vital interests cannot be determined, or if he
does not have a permanent home available to him in either State, he shall be deemed to be a
resident of the State in which he has an habitual abode;
(c) if he has an habitual abode in both States or in neither of them, he shall be deemed
to be a resident of the State of which he is a national;
(d) if he is a national of both States or of neither of them, the competent authorities of
the Contracting States shall settle the question by mutual agreement.
Is this just BS in practical terms? Does it everything come to d interpreted as 183 days?
e.g. I have been told by lawyers that sometimes even a hotel can be considered a permanent home
But even beyond that, I have also heard if you live in Spain for just 100 days but you intend to come back, then you are still resident of Spain


Has this been discussed in any thread?
gt4715b
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by gt4715b »

Is there a link to some official source saying that 401ks and IRAs are not considered as part of the basis for the wealth tax? I'm considering living in Spain so this is a really big deal for me.
international001
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by international001 »

Check out this thread viewtopic.php?t=160380 . Bets seem to say it's not.
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