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

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

Post by wineandplaya »

There have been some discussions about wealth taxes and taxation of Roth accounts for US expats in Spain. What I have not seen so far is what kind of effective tax rate you can expect, given some tax planning *before* becoming a tax resident of Spain. The assumption here is that the person has some freedom in deciding how much to contribute to pre-tax retirement accounts and also to move Roth contributions and possibly earnings to taxable accounts before expatriation.

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.

General income:
The top of the 30 % tax bracket corresponds to an income of 35,200 EUR/person. Of that amount, the first 12,450 EUR will be taxed at 19 %, from 12,450 to 20,200 EUR the rate is 24 % and for the remainder the tax rate is 30 %. There is also a personal allowance of 5,550 EUR (higher for age 65+). For a couple, these numbers double.
Total general income: (35,200 + 5,550) * 2 = 81,500 EUR
Total tax on general income: (0.19 * 12,450 + 0.24 * (20,200 - 12,450) + 0.30 * (35,200 - 20,200)) * 2 = 17,451 EUR.

US tax:
All US tax should be cancelled out by the Foreign Tax Credit.

Effective tax rate:
Total income: 70,000 + 81,500 = 151,500 EUR, or about 181,800 USD (using 1 EUR = 1.2 USD)
Total tax: 14,460 + 17,451 = 31,911 EUR
Effective tax rate: 31,911 / 151,500 = 21.1 %

Personally, I think a 151,500 EUR/yr income and and living in a 600,000 EUR house in Spain sounds like a pretty neat existence. A 21 % effective tax rate should probably be compared with around 10 % effective tax rate in the US, not counting a potentially substantial amount of property taxes on a 1.2*600 = 720k USD house, but on the other hand more effective use of Roths and HSAs. Anyway, the approximately 10 % less take-home pay will be easily outweighed by significantly lower cost-of-living in Spain compared to the US. The same comparison also holds for say France, which supposedly has a very favorable taxation of US expats; the cost of living in France in significantly higher than in Spain. Note that for lower incomes, the effective tax rate will be lower than that, so 21 % should be seen as an upper limit for incomes up to $180k.

Am I missing something significant? Please fix my math.
Last edited by wineandplaya on Mon May 03, 2021 3:15 pm, edited 1 time in total.
User avatar
RME
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by RME »

Hi,
This is not tax advice, but here are my comments based on my knowledge:

Wealth tax: You are correct. (You might expect ~0.5% tax in the future depending on politics.)
CURRENT TAX: 0 EUR/y (in total for both residents)
NEGATIVE FUTURE SCENARIO TAX: 7000 EUR/y (in total for both residents)

Investment income: There is a new 23% braket. (you might expect new brackets in the future).
Brackets: https://amp.65ymas.com/uploads/s1/55/46 ... horro.jpeg
CURRENT TAX: 14460 EUR/y (in total for both residents)
NEGATIVE FUTURE SCENARIO TAX: 14460 EUR/y (in total for both residents)

General income: It would be applied to retirement pensions, salary, etc. But not to investment income. The brakets are as follows: You should add up to 5% to the higher brackets depending on the autonomous community (I don't expect new brackets).
Brackets: https://www.anfix.com/hs-fs/hubfs/Tramo ... F-2021.jpg
Calculator: https://cincodias.elpais.com/herramient ... ueldo-neto
CURRENT TAX: 21222 EUR/y (in total for both residents)
NEGATIVE FUTURE SCENARIO TAX: 21222 EUR/y (in total for both residents)


TOTAL:
CURRENT TAX: 35682 EUR/y (in total for both residents)
NEGATIVE FUTURE SCENARIO TAX: 42682 EUR/y (in total for both residents)

Note: The calculations are not precise. Expect some variation.
Topic Author
wineandplaya
Posts: 170
Joined: Fri Sep 14, 2018 9:42 am

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

Post by wineandplaya »

RME wrote: Sat Apr 24, 2021 5:26 am General income: It would be applied to retirement pensions, salary, etc. But not to investment income. The brakets are as follows: You should add up to 5% to the higher brackets depending on the autonomous community (I don't expect new brackets).
Brackets: https://www.anfix.com/hs-fs/hubfs/Tramo ... F-2021.jpg
Calculator: https://cincodias.elpais.com/herramient ... ueldo-neto
CURRENT TAX: 21222 EUR/y (in total for both residents)
NEGATIVE FUTURE SCENARIO TAX: 21222 EUR/y (in total for both residents)
I tried the calculator above, and I get the same number as you (21222.6 EUR), but that amount includes "Cuotas a la Seg. Social" of 2587,6 per person. Do you really have to pay "Seguridad Social" if you are a retiree in Spain?
coffeeblack
Posts: 348
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by coffeeblack »

wineandplaya wrote: Wed Apr 21, 2021 12:23 pm There have been some discussions about wealth taxes and taxation of Roth accounts for US expats in Spain. What I have not seen so far is what kind of effective tax rate you can expect, given some tax planning *before* becoming a tax resident of Spain. The assumption here is that the person has some freedom in deciding how much to contribute to pre-tax retirement accounts and also to move Roth contributions and possibly earnings to taxable accounts before expatriation.

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 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.

General income:
The top of the 30 % tax bracket corresponds to an income of 35,200 EUR/person. Of that amount, the first 12,450 EUR will be taxed at 19 %, from 12,450 to 20,200 EUR the rate is 24 % and for the remainder the tax rate is 30 %. There is also a personal allowance of 5,550 EUR (higher for age 65+). For a couple, these numbers double.
Total general income: (35,200 + 5,550) * 2 = 81,500 EUR
Total tax on general income: (0.19 * 12,450 + 0.24 * (20,200 - 12,450) + 0.30 * (35,200 - 20,200)) * 2 = 17,451 EUR.

US tax:
All US tax should be cancelled out by the Foreign Tax Credit.

Effective tax rate:
Total income: 70,000 + 81,500 = 151,500 EUR, or about 181,800 USD (using 1 EUR = 1.2 USD)
Total tax: 14,460 + 17,451 = 31,911 EUR
Effective tax rate: 31,911 / 151,500 = 21.1 %

Personally, I think a 151,500 EUR/yr income and and living in a 600,000 EUR house in Spain sounds like a pretty neat existence. A 21 % effective tax rate should probably be compared with around 10 % effective tax rate in the US, not counting a potentially substantial amount of property taxes on a 1.2*600 = 720k USD house, but on the other hand more effective use of Roths and HSAs. Anyway, the approximately 10 % less take-home pay will be easily outweighed by significantly lower cost-of-living in Spain compared to the US. The same comparison also holds for say France, which supposedly has a very favorable taxation of US expats; the cost of living in France in significantly higher than in Spain. Note that for lower incomes, the effective tax rate will be lower than that, so 21 % should be seen as an upper limit for incomes up to $180k.

Am I missing something significant? Please fix my math.
Interesting. I used smart asset tax and in the US the effective would be around 19.5% plus or minus depending on the state you reside in.
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 »

coffeeblack wrote: Sat Apr 24, 2021 11:03 am Interesting. I used smart asset tax and in the US the effective would be around 19.5% plus or minus depending on the state you reside in.
81,500 EUR corresponds to 97,800 USD. Subtract two standard deductions (24,000 USD), leaving you with 73,800 USD subject to federal income tax, which is still in the 12 % bracket. Total tax: 10 % of the first 19,750 USD and then 12 % of the rest:
Total tax for general income: 0.10 * 19,750 + 0.12 * (73,800 - 19,750) = 8,461 USD.

Capital gain tax comes on top of that. If I understand it correctly, you'd pay zero capital gains tax up to the 80,000 USD (i.e. the first 80,000 - 73,800 = 6,200) and then 15 % after that.
Total tax for investment income: 0.15 * (70,000 * 1.2 - 6,200) = 11,670 USD.

So total tax: 8,461 + 11,670 = 20,131 USD.

Then add state taxes, which can be substantial. There are a lot of other caveats though: Social Security for example, might not be taxed if you live in the US, but taxed if you live overseas. In the US, you can also make much better use of Roth accounts as well as HSA accounts. It's also important to remember property taxes (which in the US often fund government expenses funded by income tax in Europe). Where I live, property taxes are around 2 % of assessed value, which for a 700,000 EUR house (840,000 USD) would be about 17,000 USD/yr. Spanish property taxes are a small fraction of that so it wouldn't be fair to leave out of a comparison. And as has been pointed out, autonomous regions of Spain may have higher taxation.

Anyway, I have no doubt that US taxes can often (usually) end up much lower than what you'd pay in Spain. Especially if you make good use of Roth conversions and the like. But the difference is not as big as you might expect. And when you take cost of living and not least healthcare costs into account, you should come out way ahead in a place like Spain.
coffeeblack
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by coffeeblack »

wineandplaya wrote: Sat Apr 24, 2021 2:59 pm
coffeeblack wrote: Sat Apr 24, 2021 11:03 am Interesting. I used smart asset tax and in the US the effective would be around 19.5% plus or minus depending on the state you reside in.
81,500 EUR corresponds to 97,800 USD. Subtract two standard deductions (24,000 USD), leaving you with 73,800 USD subject to federal income tax, which is still in the 12 % bracket. Total tax: 10 % of the first 19,750 USD and then 12 % of the rest:
Total tax for general income: 0.10 * 19,750 + 0.12 * (73,800 - 19,750) = 8,461 USD.

Capital gain tax comes on top of that. If I understand it correctly, you'd pay zero capital gains tax up to the 80,000 USD (i.e. the first 80,000 - 73,800 = 6,200) and then 15 % after that.
Total tax for investment income: 0.15 * (70,000 * 1.2 - 6,200) = 11,670 USD.

So total tax: 8,461 + 11,670 = 20,131 USD.

Then add state taxes, which can be substantial. There are a lot of other caveats though: Social Security for example, might not be taxed if you live in the US, but taxed if you live overseas. In the US, you can also make much better use of Roth accounts as well as HSA accounts. It's also important to remember property taxes (which in the US often fund government expenses funded by income tax in Europe). Where I live, property taxes are around 2 % of assessed value, which for a 700,000 EUR house (840,000 USD) would be about 17,000 USD/yr. Spanish property taxes are a small fraction of that so it wouldn't be fair to leave out of a comparison. And as has been pointed out, autonomous regions of Spain may have higher taxation.

Anyway, I have no doubt that US taxes can often (usually) end up much lower than what you'd pay in Spain. Especially if you make good use of Roth conversions and the like. But the difference is not as big as you might expect. And when you take cost of living and not least healthcare costs into account, you should come out way ahead in a place like Spain.
I was pointing out how close it was because many think moving to Spain may significantly raise their taxes. As you mentioned, Healthcare and cost of living would mean your WR will decrease and therefore you taxes. One other thing that goes down is your travel cost since you won't be spending as much on plane tickets. Or you could adjust up for travel and withdraw the same overall. My understanding is Portugal has a visa program that give major tax breaks for about 10 years. I believe the tax break is for Capital gains, dividends and interest. I guess it depends on which country works out best.
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 »

AFAIK, the calculator is for employed people. You don't have to pay "Seguridad Social" if not working
I guess you are using the 700k exclusion per person. For a couple it would be 700k*2. Note that in some regions it can be less than that! And nothing in Madrid. Who knows what it will be next.
Imagine a 1.4M exclusion. Your portfolio goes up to 2.8M. In means about 0.3% effective wealth rate. On the income, at a 4% withdrawal rate, this means a increase of ~7.5% in the effective rate. But I guess it may be a good problem to have.

You expect to get $70k of income with $1.4 M portfolio . 5% rule?

I guess you are assuming all your investment income is taxed as LT. If you get taxed as regualar income, you may have to pay to US some. Probably unlikely.

The most important point I'd like to make is to consider that FTC will get complicated if you ever have > 20k on foreign dividends or over 23% US bracket and you may not get everything back (you don't get the adjustment exceptions). So plan very carefully for that and make sure you understand 1116 and you can choose the adjustment exception. You may have to resource some income, I'm not sure how it all fits toguether.
fm3040
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by fm3040 »

1) Do your holdings in IRA and Roth IRA accounts count towards wealth for wealth tax purposes?
2) What if you have real estate holdings (say, your primary home in the US)? Will they count towards your wealth?
3) Is your US social security added to to your income along with any IRA withdrawals and U.S. company pension payments for income tax purposes?
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LilyFleur
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by LilyFleur »

what is the scenario for health care for retirees living in Spain?

That can be a significant expense in the United States, but some health care devices covered in the U.S. may not be covered by health insurance in the EU. For example, the Dexcom continuous glucose monitor which is expensive and covered by health insurance in the U.S. is not covered at all in England, and folks pay for it out of pocket there. Of course, health insurance in the U.S. is quite costly, too.
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 »

fm3040 wrote: Sat Apr 24, 2021 7:37 pm 1) Do your holdings in IRA and Roth IRA accounts count towards wealth for wealth tax purposes?
2) What if you have real estate holdings (say, your primary home in the US)? Will they count towards your wealth?
3) Is your US social security added to to your income along with any IRA withdrawals and U.S. company pension payments for income tax purposes?
1. No (according to other threads here)
2. If you own property in the US, it will probably be taxed, since Spain will tax your worldwide income and assets
3. Yes, that's my understanding. And also, importantly, probably *Roth* IRA/401k, withdrawals as well.
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 »

international001 wrote: Sat Apr 24, 2021 6:26 pm The most important point I'd like to make is to consider that FTC will get complicated if you ever have > 20k on foreign dividends or over 23% US bracket and you may not get everything back (you don't get the adjustment exceptions). So plan very carefully for that and make sure you understand 1116 and you can choose the adjustment exception. You may have to resource some income, I'm not sure how it all fits toguether.
That's good to know. One thing that I find perplexing is how reinvested dividends are treated. From what I understand, Spain will not tax reinvested dividends, but US does. I would assume that the non-taxation of reinvested dividends also applies to dividends held in a US ETF if you are a Spanish resident.

Does that mean that you risk getting double taxation on these dividends? For example, say that you acquire a stock/ETF in year 2020. In year 2021 it generates a dividend which is taxed in the US with no Spanish tax to offset it. In 2022 you sell the stock and have to pay tax in Spain for the capital gains from 2020 to 2022, including the 2021 dividend. So the dividend is taxed twice (in different years). Should reinvesting dividends be avoided, unless you are in the 0 % capital gains bracket in the US?
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 am not aware that reinvested dividends are not taxed in Spain. Where do you get that from?
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 »

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?
For example the Bogleheads wiki: https://www.bogleheads.org/wiki/Investing_from_Spain
Dividends
Tax is not due on dividends that are reinvested (recapitalizados), a useful property for investors wishing to minimize their taxes. When reinvesting, tax is payable only on the capital gain (plusvalía) at the eventual time of liquidation. As such, investor demand has led to the availability of many funds and ETFs in "acumulación" format — these reinvest the dividends internally — in contrast with so-called income or distributing ("distribución") funds and ETFs.
fm3040
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by fm3040 »

If the house you own in the U.S. is not in your name but a Trust, do you still need to declare it as your own so it counts towards your wealth taxes in Spain?

Are there ways of sheltering your taxable investment accounts in a similar way?
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 »

fm3040 wrote: Tue Apr 27, 2021 10:02 am If the house you own in the U.S. is not in your name but a Trust, do you still need to declare it as your own so it counts towards your wealth taxes in Spain?

Are there ways of sheltering your taxable investment accounts in a similar way?
A quick googling gives this: https://taxsummaries.pwc.com/spain/indi ... her-issues
Trusts
The legal concept of trusts does not exist in Spanish law and so it is not recognised by the Spanish tax authorities or the Spanish courts. Therefore, the tax treatment of trusts may vary on a case-by-case basis and the Spanish tax authorities usually consider that the economic reality of the trust should be analysed rather than its legal nature. A trust should always take the form of a legal entity recognised by Spanish law.
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 »

wineandplaya wrote: Tue Apr 27, 2021 6:22 am
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?
For example the Bogleheads wiki: https://www.bogleheads.org/wiki/Investing_from_Spain
Dividends
Tax is not due on dividends that are reinvested (recapitalizados), a useful property for investors wishing to minimize their taxes. When reinvesting, tax is payable only on the capital gain (plusvalía) at the eventual time of liquidation. As such, investor demand has led to the availability of many funds and ETFs in "acumulación" format — these reinvest the dividends internally — in contrast with so-called income or distributing ("distribución") funds and ETFs.
IT think it's making reference to ETFs (sold on Spanish brokers, that you shouldn't get).
Regardless, on a distribution phase, you should not reinvest dividends. Just get the dividends and use them as income. Later, sell the shares you think you want to get rid of.
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 »

wineandplaya wrote: Tue Apr 27, 2021 10:14 am
fm3040 wrote: Tue Apr 27, 2021 10:02 am If the house you own in the U.S. is not in your name but a Trust, do you still need to declare it as your own so it counts towards your wealth taxes in Spain?

Are there ways of sheltering your taxable investment accounts in a similar way?
A quick googling gives this: https://taxsummaries.pwc.com/spain/indi ... her-issues
Trusts
The legal concept of trusts does not exist in Spanish law and so it is not recognised by the Spanish tax authorities or the Spanish courts. Therefore, the tax treatment of trusts may vary on a case-by-case basis and the Spanish tax authorities usually consider that the economic reality of the trust should be analysed rather than its legal nature. A trust should always take the form of a legal entity recognised by Spanish law.
That's an interesting topic. Something else I found for succession porpses: https://www.ga-p.com/wp-content/uploads ... -trust.pdf. It's not 100% clear
assyadh
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Re: Effective tax rate on a $180k/yr retirement income for a US expat couple in Spain: 21 %?

Post by assyadh »

wineandplaya wrote: Tue Apr 27, 2021 6:22 am
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?
For example the Bogleheads wiki: https://www.bogleheads.org/wiki/Investing_from_Spain
Dividends
Tax is not due on dividends that are reinvested (recapitalizados), a useful property for investors wishing to minimize their taxes. When reinvesting, tax is payable only on the capital gain (plusvalía) at the eventual time of liquidation. As such, investor demand has led to the availability of many funds and ETFs in "acumulación" format — these reinvest the dividends internally — in contrast with so-called income or distributing ("distribución") funds and ETFs.
This refers to accumulating ETF (Acc), not your regular US based ETF for which you reinvest the divivdends. In that case the dividends are taxable.
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 »

On the general income it looks like your numbers are correct if you are filing individually and both can take the same $40,750 out of the retirement accounts and/or pensions each year. Since those accounts can't be jointly owned if one member of the couple has a lot more than 50% of the total I guess at least eventually you would be taxed some at the 37% or 45% (!) ((over only 60k EUR)) rate...don't know maybe if you put the withdrawals in a joint account right away? I presume for joint accounts each person declares 50 % of the income on their individual tax returns? Don't know, always filed jointly in US.
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 »

devich wrote: Sat May 01, 2021 9:24 pm On the general income it looks like your numbers are correct if you are filing individually and both can take the same $40,750 out of the retirement accounts and/or pensions each year. Since those accounts can't be jointly owned if one member of the couple has a lot more than 50% of the total I guess at least eventually you would be taxed some at the 37% or 45% (!) ((over only 60k EUR)) rate...don't know maybe if you put the withdrawals in a joint account right away? I presume for joint accounts each person declares 50 % of the income on their individual tax returns? Don't know, always filed jointly in US.
I don't understand your comments. The $40,750 was out of SS/IRAs distributions ($35.200+ a $5500 gift from Spain).
Also, even if you have separate accounts, you can still fill the income jointly, no?
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 »

IF you check today the Spanish news, there are plans to reduce some benefits for joint filing (reduccion de la tributacion conjunta), that I didn't even knew it existed.
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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 »

devich wrote: Sat May 01, 2021 9:24 pm On the general income it looks like your numbers are correct if you are filing individually and both can take the same $40,750 out of the retirement accounts and/or pensions each year. Since those accounts can't be jointly owned if one member of the couple has a lot more than 50% of the total I guess at least eventually you would be taxed some at the 37% or 45% (!) ((over only 60k EUR)) rate...don't know maybe if you put the withdrawals in a joint account right away? I presume for joint accounts each person declares 50 % of the income on their individual tax returns? Don't know, always filed jointly in US.
In Spain you have the option to file jointly or individually, just like in the US. This is not the case for all European countries; I know that at least Sweden removed that option many years ago.
international001 wrote: Sun May 02, 2021 6:29 am IF you check today the Spanish news, there are plans to reduce some benefits for joint filing (reduccion de la tributacion conjunta), that I didn't even knew it existed.
It would only apply to the personal allowence, right? Also in the US, filing jointly isn't as beneficial as two equal single filings.
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 Spain were to severely restrict or remove the option to file taxes jointly, could a couple get around this by getting divorced before expatriation? Because during a divorce, as US residents, IRA funds can move from one spouse to the other, right? What happens if you remarry after expatriation?
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: Sun May 02, 2021 6:27 am
devich wrote: Sat May 01, 2021 9:24 pm On the general income it looks like your numbers are correct if you are filing individually and both can take the same $40,750 out of the retirement accounts and/or pensions each year. Since those accounts can't be jointly owned if one member of the couple has a lot more than 50% of the total I guess at least eventually you would be taxed some at the 37% or 45% (!) ((over only 60k EUR)) rate...don't know maybe if you put the withdrawals in a joint account right away? I presume for joint accounts each person declares 50 % of the income on their individual tax returns? Don't know, always filed jointly in US.
I don't understand your comments. The $40,750 was out of SS/IRAs distributions ($35.200+ a $5500 gift from Spain).
Also, even if you have separate accounts, you can still fill the income jointly, no?
But if you file jointly with 81,500 EUR doesn't that get you into the 45% bracket? I've always just seen the one tax rate chart for Spain, is there a chart for single and a chart for joint as in the US?
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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 »

devich wrote: Sun May 02, 2021 11:22 am But if you file jointly with 81,500 EUR doesn't that get you into the 45% bracket? I've always just seen the one tax rate chart for Spain, is there a chart for single and a chart for joint as in the US?
EDIT:
My understanding is that, in general, the thresholds double, but with smaller allowance for the spouse. Cf. https://www.expatica.com/es/finance/tax ... edtaxspain


On closer inspection, you might be right. Spanish IRS provides some details
The joint taxation filing regime has the following general characteristics:

In order to determine the requirement to file a tax return or not, the amount of income, the gross tax base, net base and tax liability; the rules of individual taxation are generally applied, without raising or multiplying the amounts or limits based on the number of members in the family unit (special rules of exception are listed below).
https://www.agenciatributaria.es/AEAT.i ... unta.shtml

If that's indeed the case, it has implications on the optimal allocation between pre-tax income and taxable income before expatriation, for each spouse individually.
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 it would be more this part
The same scales and taxes are applied (general and autonomous or complementary) as for individual taxation
I'm really surprised, because I never thought about it. Then it doesn't really make sense to file jointly (except if one of the members just does peanuts, perhaps, because of deductions). It's a really screwed up system

I found this article https://elpais.com/economia/2021-05-02/ ... -irpf.html that explains it
Until 1989, couples were obliged to declare jointly. However, a Constitutional ruling declared that marriages were penalized. The reason: two unmarried people who pay separately the same amount as a married couple end up paying less personal income tax for the same income. How does this happen? Suppose that the members of the two couples earn the same each, 25,000 euros. In the case of the unmarried, each one will pay 19% for the first 12,450 euros subtracting the minimums, 24% for the section between 12,450 euros and 20,200, and 30% up to 25,000. On the other hand, the marriage is taxed the same as the other couple for the first 25,000 euros. But when the other 25,000 are jointly settled, they are added to the family income and are taxed at 30% up to 35,200 euros, and at 37% up to the 50,000 euros they declare in total. That is, they pay more.


This messes up your strategy, right. Perhaps you can make sure by donation that both members have about the same amount of assets, and try to balance them as you do withdraws? If you have a joint account, I think 50% of the income is imputed to each.

The silver lining is that it should be easier to get the FTC in US, if you file there as single, since you'll be less likely to have to adjust dividends.

Note also the 5.5k deduction per person. Also, since capital losses are more difficult to carry forward in Spain, if one of the members has an opportunity to get a loss, perhaps the other can get a gain and do a joint return.
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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 »

international001 wrote: Sun May 02, 2021 6:17 pm I think it would be more this part
The same scales and taxes are applied (general and autonomous or complementary) as for individual taxation
I'm really surprised, because I never thought about it. Then it doesn't really make sense to file jointly (except if one of the members just does peanuts, perhaps, because of deductions). It's a really screwed up system
Many Europeans would say that the American system is screwed up since it gives the lower earner (usually women) a large disincentive to work. German Wikipedia appears to have a lot of info on the topic for different countries (https://de.m.wikipedia.org/wiki/Ehegattensplitting).

Anyway, as far as I'm concerned, it's just a reality to try to make the best out of. Taxable holdings can easily be shifted from one spouse to another before or after expatriation so I think it's a non-issue. I'm also not sure if you have to split earnings 50-50. Trickier is pre-tax accounts and pensions, where you probably want to then severely limit the amount of holdings for the higher earning spouse. E.g. via Roth conversation 5+ years before expatriation and then withdrawals before the move. Or the most drastic strategy: getting divorced before the move (I'm curious if that would work).
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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 »

wineandplaya wrote: Sun May 02, 2021 9:16 am If Spain were to severely restrict or remove the option to file taxes jointly, could a couple get around this by getting divorced before expatriation? Because during a divorce, as US residents, IRA funds can move from one spouse to the other, right? What happens if you remarry after expatriation?
I think generally you don't want to file jointly in Spain , it gets you to the high brackets. It doesn't appear the income tax bracket limits are X 2 for joint filers. So now you're filing single in Spain and jointly in the US and is that allowed and how would that work, you'd probably have to file single in the US to match FTC to each person? US is usually better to file jointly but Spain taxes are higher so should still get no tax due in the US after FTC. Anyway, if I did it right, your 81,500 EUR general income would be taxed 22,582 EUR if done jointly vs your calculated 17,451 EUR. Never thought this would be so complex, put a chunk for paying accountants and lawyers in your retirement budget...
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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 »

wineandplaya wrote: Mon Apr 26, 2021 2:07 pm
international001 wrote: Sat Apr 24, 2021 6:26 pm The most important point I'd like to make is to consider that FTC will get complicated if you ever have > 20k on foreign dividends or over 23% US bracket and you may not get everything back (you don't get the adjustment exceptions). So plan very carefully for that and make sure you understand 1116 and you can choose the adjustment exception. You may have to resource some income, I'm not sure how it all fits toguether.
That's good to know. One thing that I find perplexing is how reinvested dividends are treated. From what I understand, Spain will not tax reinvested dividends, but US does. I would assume that the non-taxation of reinvested dividends also applies to dividends held in a US ETF if you are a Spanish resident.

Does that mean that you risk getting double taxation on these dividends? For example, say that you acquire a stock/ETF in year 2020. In year 2021 it generates a dividend which is taxed in the US with no Spanish tax to offset it. In 2022 you sell the stock and have to pay tax in Spain for the capital gains from 2020 to 2022, including the 2021 dividend. So the dividend is taxed twice (in different years). Should reinvesting dividends be avoided, unless you are in the 0 % capital gains bracket in the US?
From what I've read an EU resident, even a US citizen EU resident, can not purchase US domiciled ETF's and mutual funds, even through reinvesting dividends. As of now you can hold and sell ETF's/mutual funds. Also, US citizen buying foreign domiciled ETF's and mutual funds is subject to higher US tax rate and onerous very expensive reporting requirements that make it pretty infeasible.
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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 »

wineandplaya wrote: Tue Apr 27, 2021 6:22 am
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?
For example the Bogleheads wiki: https://www.bogleheads.org/wiki/Investing_from_Spain
Dividends
Tax is not due on dividends that are reinvested (recapitalizados), a useful property for investors wishing to minimize their taxes. When reinvesting, tax is payable only on the capital gain (plusvalía) at the eventual time of liquidation. As such, investor demand has led to the availability of many funds and ETFs in "acumulación" format — these reinvest the dividends internally — in contrast with so-called income or distributing ("distribución") funds and ETFs.
I think those that accumulate are probably domiciled in the EU and not good for US citizens to hold. High tax rate and expensive IRS form 8621 to do.
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 »

wineandplaya wrote: Sun May 02, 2021 7:18 pm
international001 wrote: Sun May 02, 2021 6:17 pm I think it would be more this part
The same scales and taxes are applied (general and autonomous or complementary) as for individual taxation
I'm really surprised, because I never thought about it. Then it doesn't really make sense to file jointly (except if one of the members just does peanuts, perhaps, because of deductions). It's a really screwed up system
Many Europeans would say that the American system is screwed up since it gives the lower earner (usually women) a large disincentive to work. German Wikipedia appears to have a lot of info on the topic for different countries (https://de.m.wikipedia.org/wiki/Ehegattensplitting).

Anyway, as far as I'm concerned, it's just a reality to try to make the best out of. Taxable holdings can easily be shifted from one spouse to another before or after expatriation so I think it's a non-issue. I'm also not sure if you have to split earnings 50-50. Trickier is pre-tax accounts and pensions, where you probably want to then severely limit the amount of holdings for the higher earning spouse. E.g. via Roth conversation 5+ years before expatriation and then withdrawals before the move. Or the most drastic strategy: getting divorced before the move (I'm curious if that would work).
So it looks German also favors separate account. I admint I was clueless about it and I thought US way was the general way

You also disincentivice poor people by giving them lower taxes taxes or subsidies, but you help them because perhaps they don't have a choice. Also it has externalities associated. Child caring is good for society, so non-working parent should be compensated. It's usually a mix of things and tax policy should try to find the right compromise.
US system allows to treat the family as a unit and share the burden. Spain doesn't do the same, but then there are systems to give money to the lower earner. That's the screwed up part.

From a random link: https://www.ennaranja.com/renta/cotitul ... -hacienda/
So, if you want a different distribution than that 50% in the income statement, you must indicate it and show that it adjusts to reality. The reason is that the Treasury understands that, unless proven otherwise, all account holders contribute the same money.
So you may want to check for advice on that and see if it's better to have joint or separate accounts. It may depend on what Hacienda actually is doing. In my experience, for instance if one spouse passes away, the other gets automatically 50% of the joint account (the other to inheritance). I guess it would be possible to proof you deserve 90%, but I don't think it's really common
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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 »

devich wrote: Mon May 03, 2021 9:08 pm

From what I've read an EU resident, even a US citizen EU resident, can not purchase US domiciled ETF's and mutual funds, even through reinvesting dividends. As of now you can hold and sell ETF's/mutual funds. Also, US citizen buying foreign domiciled ETF's and mutual funds is subject to higher US tax rate and onerous very expensive reporting requirements that make it pretty infeasible.
Do you have an authoritative source? If so open a new thread because it will interest many people.

I think the consensus is that it's Ok to open them on a US broker. They may not allow them if you told them you are not a US resident, or more likely they will only allow ETFs (no mutual funds). That's why it's important to hold only Vanguard mutual funds that can be easily converted to ETFs
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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 »

devich wrote: Mon May 03, 2021 8:48 pm
you'd probably have to file single in the US to match FTC to each person?
I think you are legally required to at least file 'married filing separately''
What would be worse if your tax bracket is 35%, in which case you don't have FTC exemptions and you may consider a divorce.
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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 »

international001 wrote: Tue May 04, 2021 10:15 am
devich wrote: Mon May 03, 2021 8:48 pm
you'd probably have to file single in the US to match FTC to each person?
I think you are legally required to at least file 'married filing separately''
What would be worse if your tax bracket is 35%, in which case you don't have FTC exemptions and you may consider a divorce.
Filing status is one thing, but more importantly from my understanding is that a divorce would enable you to transfer up to half of your pre-tax holdings to your soon-to-be ex-spouse. So if your have $2M in your IRA and your spouse has nothing, after a divorce you would each have $1M and get a much more favorable taxation.

Anyway, I'm not sure it's really a thing worthwhile discussing. After a search I've noticed that there are other threads about "strategic divorce". I think a more productive insight is that for a couple with large difference in income, the lower-earner might want to divert as much as possible to pre-tax accounts while the higher-earning spouse instead contributes to a Roth 401(k) which can be withdrawn before expatriation.
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 »

IT's fascinating. You cannot donate IRA money to your spouse, but you can divorce, donate, and then remarry.
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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 »

Based on the discussion above, I tried to come up with a set of rules of how to best make use of your US retirement accounts while still living and working in the US, assuming that your plan is to expatriate to Spain eventually. Many (but not all) of these rules should probably equally apply if your plan is to expatriate to a different country in Europe, since tax systems are relatively similar. Importantly, if you are married, you need to apply these rules individually, since "married filing jointly" will most likely not be beneficial in Spain. The assumption is that the move is going to be one-way. Finally, the rules should also apply if you're planning to move to Spain and continue your career there before retirement; for example, Spanish rules for self-employment are quite good in comparison with many other European countries, including reduced tax rates for the first two years.
  1. If you expect to be at least 59.5 years old when you expatriate, you probably want to put as much as possible into Roth accounts (401(k), IRA) etc and withdraw it all and place it in taxable just before you expatriate
  2. If you expect to be at least 55 years old when you expatriate (but not yet 59.5), you should try to make the most of the "rule-of-55". In particular, you might be able to withdraw Roth 401(k) tax-free, even if you can't withdraw your Roth IRA tax-free. If you are doing the "mega-backdoor", converting your after-tax 401(k) contributions to a Roth 401(k) might be a lot more valuable than converting it to a Roth IRA.
  3. A pre-tax account that doesn't come with withdrawal penalties, like a 457(b), should probably be withdrawn before departure, at least if it can be done without pushing you up to a very high US tax bracket.
  4. If your move is between 5 and 10 years away (and you'll be younger than 55 when you depart), consider converting some of your pre-tax 401(k) and/or IRA to Roth so that they can be withdrawn before departure. At least to the top of the 24 % tax bracket.
  5. If you are younger (20's or 30's), and plan to expatriate before your 55th or 59.5th birthday (see above), don't listen to the standard advice to prefer Roth 401(k) over traditional 401(k). Take the tax benefit for traditional 401(k) now and enjoy decades of tax-deferred growth.
  6. If you are older (40's or 50's) and plan to expatriate before your 55th or 59.5th birthday (see above), and already have large pre-tax balances, consider maxing out on your Roth 401(k) instead of pre-tax. The growth that will happen in the Roth 401(k) will be spared taxation in the US up to 25-ish % (including CG taxes, NIIT and state taxes) so definitely better than putting it in taxable. Together with the previous point, this goes opposite to the standard advice of "Roth when you are younger and pre-tax when you are in your peak earning years".
  7. If you are not able to withdraw some Roth earnings tax-free before expatriation, plan on leaving it untouched as long as possible after expatriation. It could be seen as an insurance against longevity or be part of your estate planning. Lack of RMD means that there is no hurry to withdraw the money. Even if you have to withdraw it (with Spanish tax consequences) in your 80'ies or 90'ies, you have enjoyed decades of tax-free growth. It could also be useful to have if there is a chance that you'll move back to US for some period of time. Old age and disabilities late in life will also increase your tax-free allowances in Spain.
  8. If your taxable portfolio is large enough to result in Spanish wealth tax, consider buying your condo/house in Spain instead of renting as it will increase your wealth tax free space. My understanding is that your primary residence can be sold without paying capital gain taxes in Spain if you're older than 65.
  9. If your taxable portfolio is large enough to result in a lot of Spanish wealth tax, even after potentially purchasing your primary residence, consider withdrawing less money from your Roth accounts before expatriation. You can think of the wealth tax as an additional tax drag on top of the tax drag that comes from dividends. If your total tax-drag is say 2 % per year (say 1 % due to dividends and 1 % due to wealth tax), then keeping it in Roth for 20 years will avoid losing 33 % to tax-drag (0.98^20 = 0.67). That can easily negate any benefits from getting taxed at the lower capital gains tax rate in Spain.
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 »

About right.

Since your taxes in Spain are likely to be higher than your contribution rates, it would seem the best idea is to put everything on Roth and cash out before you move. But, as you said, the tax drag on taxable may become greater if you live long (and prosper). So under that conditions it may be worth to not cash out the Roth.What implies, that it should have been on the pre-tax in the first place.

So it may be worth to come up with your own spreadsheet and calculate all your possible scenarios.

wineandplaya wrote: Thu May 06, 2021 11:20 am for example, Spanish rules for self-employment are quite good in comparison with many other European countries, including reduced tax rates for the first two years.
Really? self-employed people in Spain complain a lot about the laws. What are the advantages?

Also, consider Beckham law, that allows you to work for 7 years without being a tax resident in Spain and at a reduced tax rate. I'd be curious to understand the rules and if you can just work part time in a McDonalds.
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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 »

international001 wrote: Fri May 07, 2021 4:03 pm
wineandplaya wrote: Thu May 06, 2021 11:20 am for example, Spanish rules for self-employment are quite good in comparison with many other European countries, including reduced tax rates for the first two years.
Really? self-employed people in Spain complain a lot about the laws. What are the advantages?
Yes, I've seen people complaining, but my own experiences as self-employed there have been very positive. If I recall correctly, there is a 20 % income tax reduction for the first two years ("reducción por inicio de una actividad económica") in addition to a reduced social security rate for the first 18 months (I think it's a 75 % reduction for the first 6 months and then the reduction gradually becomes smaller). I think anyone qualifies for that if you haven't been having a business in Spain for the past 5 years. This might be outdated information. My understanding is that it's also relatively easy to elect corporate taxation for your freelance business, which gives you a flat-ish tax (I think "impuesto de sociedades" plus dividend tax) above a certain threshold. You can also reduce your taxes by contributing to a pension plan: Because of the US-Spain totalization agreement, you should be able to get a tax reduction on retirement contributions in Spain (you won't pay self-employment tax in the US). I also have good experiences with the infrastructure you have as self-employed there: I can recommend the great (and free) courses for self-employed through "Barcelona Activa" and there is a nice international coworking community, at least in Barcelona.
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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 »

Thanks for the info. So they seem to give you a push when you start.
But corporate tax (25%) + dividends (19-26%) doesn't seem to me such a great deal, unless you plan to have lots of income or lot of deferral.
Be careful with totalization agreements. Last time I check, it only applies to minimum pensions. So paying anything at all can be money lost.

But I don't really know much about it. SO explore it if you have to use it.
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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 »

international001 wrote: Sat May 08, 2021 7:04 pm Thanks for the info. So they seem to give you a push when you start.
But corporate tax (25%) + dividends (19-26%) doesn't seem to me such a great deal, unless you plan to have lots of income or lot of deferral.
Be careful with totalization agreements. Last time I check, it only applies to minimum pensions. So paying anything at all can be money lost.

But I don't really know much about it. SO explore it if you have to use it.
With the discounted rate, it's 20 % corporate tax, plus 23 % marginal tax up to 200k EUR in dividends. That's together 38 % tax, but yeah, still a lot. Anyway, you also have to factor in lower cost of living. If you've worked previously in Europe 10-15 years, I think that two years might qualify you for a (meager) Spanish pension, which might be worth a lot over time. I think that the rule is that you have to have worked 2 years out of the 15 years prior to retirement. Work in different European countries can be added together and will be added to your Spanish pension.
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 »

wineandplaya wrote: Sat May 08, 2021 9:28 pm

With the discounted rate, it's 20 % corporate tax, plus 23 % marginal tax up to 200k EUR in dividends. That's together 38 % tax, but yeah, still a lot. Anyway, you also have to factor in lower cost of living. If you've worked previously in Europe 10-15 years, I think that two years might qualify you for a (meager) Spanish pension, which might be worth a lot over time. I think that the rule is that you have to have worked 2 years out of the 15 years prior to retirement. Work in different European countries can be added together and will be added to your Spanish pension.
Adds up 43% for me ;-)
Lower cost is always the big point of moving to Spain or a EU country. But this will fade if you income is really high.
SO you are talking about getting a small Spanish pension and a small US pension. This may work (I guess totalization agreements would allow it)
Just don't plan to use your US SS credits to increase your Spanish SS because they won't go to far (I think they only count to get the minimum Spanish pension). SInce US SS distributions are progressive and Spanish SS distributions are about flat, if you can work in US pass the 1st or 2nd bend point, then it's a good deal to get a Spanish pension.
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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 »

international001 wrote: Sun May 09, 2021 11:25 am Adds up 43% for me ;-)
You cannot just add the percentages. If the corporate tax rate is 20 %, it means that 80 % will be taxable income, taxed at 23 %. So your net income is (1 - 0.20) * (1 - 0.23) = 0.616. So your effective marginal tax rate is 38.4 %.
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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 »

international001 wrote: Sun May 09, 2021 11:25 am SO you are talking about getting a small Spanish pension and a small US pension. This may work (I guess totalization agreements would allow it)
Just don't plan to use your US SS credits to increase your Spanish SS because they won't go to far (I think they only count to get the minimum Spanish pension). SInce US SS distributions are progressive and Spanish SS distributions are about flat, if you can work in US pass the 1st or 2nd bend point, then it's a good deal to get a Spanish pension.
I created a separate thread for Social Security calculations in connection with European state pensions: viewtopic.php?f=22&t=348358
In general, if I get $14k/yr from Social Security and my US-born spouse (who has contributed more years to Social Security but at a lower income) gets a similar amount, then we're talking about upwards $30k/yr just for US Social Security. Spanish state pension is designed to replace 80 % of your income, so if we work there a couple of years it might go a long way (I already have 10-ish years of work in Europe), primarily in Northern Europe where salaries are higher than in Spain. I have yet to run the numbers, but I don't think it's unrealistic to hope for another $30k/yr between the four or five European countries my spouse and I expect to get European pensions from. Of course, that's not in today's dollars (we are in our mid/late 30'ies), but it's still a significant sum on money, and it's inflation protected. Add the $100k-ish/yr we're putting into retirement accounts and hopefully we should be on track for fiscal independence in the next 10 years or so. And although $180k/yr (per this thread) would be pretty sweet, I'd be satisfied with a lot less than that.
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'll move SS discussions there.
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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 »

Moving the discussion on optional strategy for Roth vs. taxable back from the thread on Social Security: viewtopic.php?f=22&t=348358&start=50
international001 wrote: Mon May 31, 2021 5:47 pm
wineandplaya wrote: Sat May 29, 2021 1:33 pm
international001 wrote: Sat May 29, 2021 6:22 am Assume a tax cost ration of 0.50%. Over 20 years this means you loose ~10%.
My hope is to achieve a much lower tax drag than 0.5 % before retirement. I think that should be doable if I buy-and-hold a total international ETF, use foreign tax credits and make use of tax-loss harvesting. Once you retire, your tax drag should go down further since you no longer need to reinvest the dividends. But maybe I'm overly optimistic.
My example was for holding in taxable for 20 years. An approximation if you are spending some.

IF you don't expect the investments to go down, I don't understand how you could do TLH

And about foreign tax credit, you mean the credit you get for an US ETF investing ex-US (like VXUS) for the taxes paid in an ex-US country? I'm not sure how it would work, but unless Spain refunds you those (what I doubt), they are probably gone. So it may be wiser to load up on US investment.

But I'm not sure about that, I guess you can open a thread or search in the archives for info.
In a taxable account you will essentially have tax drag until you start taking distributions, i.e. start of retirement, but not much after that, because you're not reinvesting the dividends. If you are already retired and take say 4 % out of the account every year, then maybe half of that will be dividends and the rest will come from selling appreciated assets.

If you look at an ETF such as Vanguard All-World Ex-US (VEU), you might have about 2 % dividends. I personally pay a dividend tax (federal+state) of around 19.4 %. Yours might be a bit higher or lower. You can also see that VEU has had around 7 % foreign tax per year which you can recover in a taxable account but not in a Roth. So in taxable I effectively pay around 12.4 % more tax on the 2 % dividends, so around 0.25 % per year. With tax loss harvesting, you can get lower than that, during the accumulation phase. If you're 20 years away from retirement, it's still just 5 %, even without taking tax loss harvesting into account. Once in retirement, your marginal tax rate might be 20 % higher with Roth. It's probably overly optimistic to expect to be able to buy & hold an ETF for decades, but regardless, I'm nevertheless starting to arrive at the conclusion that Roth doesn't make much sense at all unless you have a way to access the earnings tax-free before expatriation, e.g. if you're already 59.5 years old.

Anyway, I think I've now come to the conclusion not to contribute more to my Roth IRA and instead redirect that money to taxable. At some point I might also limit how much I add to my pre-tax 401(k). We'll keep maxing out on my spouse's Roth IRA for now (who is lower earning and 5 years younger). I have to admit that I originally thought that Roth would still be a good deal. But with a better understanding of Spanish/European taxation and knowing that neither me nor my spouse are likely to be US residents when we are able to tap into our Roth earnings, I no longer think so.

I also think it's interesting to note that the difference between capital gains taxation between US and Spain is quite small (both around 20 %) while the difference is general income taxation can be 20+ percentage points.
Topic Author
wineandplaya
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Joined: Fri Sep 14, 2018 9:42 am

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

Post by wineandplaya »

Came across the following excellent tax guide for Spain: https://www.spenceclarke.com/wp-content ... n-2021.pdf
international001
Posts: 2013
Joined: Thu Feb 15, 2018 7:31 pm

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

Post by international001 »

wineandplaya wrote: Mon May 31, 2021 8:59 pm
In a taxable account you will essentially have tax drag until you start taking distributions, i.e. start of retirement, but not much after that, because you're not reinvesting the dividends. If you are already retired and take say 4 % out of the account every year, then maybe half of that will be dividends and the rest will come from selling appreciated assets.

If you look at an ETF such as Vanguard All-World Ex-US (VEU), you might have about 2 % dividends. I personally pay a dividend tax (federal+state) of around 19.4 %. Yours might be a bit higher or lower. You can also see that VEU has had around 7 % foreign tax per year which you can recover in a taxable account but not in a Roth. So in taxable I effectively pay around 12.4 % more tax on the 2 % dividends, so around 0.25 % per year. With tax loss harvesting, you can get lower than that, during the accumulation phase. If you're 20 years away from retirement, it's still just 5 %, even without taking tax loss harvesting into account. Once in retirement, your marginal tax rate might be 20 % higher with Roth. It's probably overly optimistic to expect to be able to buy & hold an ETF for decades, but regardless, I'm nevertheless starting to arrive at the conclusion that Roth doesn't make much sense at all unless you have a way to access the earnings tax-free before expatriation, e.g. if you're already 59.5 years old.

Anyway, I think I've now come to the conclusion not to contribute more to my Roth IRA and instead redirect that money to taxable. At some point I might also limit how much I add to my pre-tax 401(k). We'll keep maxing out on my spouse's Roth IRA for now (who is lower earning and 5 years younger). I have to admit that I originally thought that Roth would still be a good deal. But with a better understanding of Spanish/European taxation and knowing that neither me nor my spouse are likely to be US residents when we are able to tap into our Roth earnings, I no longer think so.

I also think it's interesting to note that the difference between capital gains taxation between US and Spain is quite small (both around 20 %) while the difference is general income taxation can be 20+ percentage points.
Sorry. you lost me at the 5%. What did you mean?

You keep insisting on TLH. I don't get it. That's a once in a while chance. If your investments don't go down (like in a recession), you won't be able to use it.

I'm referring to money you keep without distributions. If you are distributing 2% or higher (assume 2% dividends) of your portfolio and your investment and general income brackets are similar, it doesn't make a difference. So it would be better to have $X on taxable because tax brackets are likely to be lower than if you have that $X on taxable. So you are right to stop contributing to Roth. If you leave US before 59.5, for a tax drag of 0.50%, Roth would be only worth if you had to keep it for 20 years (0.5%*20 = 10% = Roth early withdrawal penalty). Consider tax drag may be higher on some funds, so you may want to put those in Roth.


Still, you didn't explain if holding VEU while in Spain, how you will get back that 7% of foreign tax credit.

I think all around the world tax brackets for investment are lower. But in US it can go higher. For high earners, consider NIIT of 3.8% and CA with 13.3% tax, on top of Federal 20% (37.1%!)
Topic Author
wineandplaya
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Joined: Fri Sep 14, 2018 9:42 am

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

Post by wineandplaya »

international001 wrote: Fri Jun 04, 2021 7:24 pm Sorry. you lost me at the 5%. What did you mean?

You keep insisting on TLH. I don't get it. That's a once in a while chance. If your investments don't go down (like in a recession), you won't be able to use it.

I'm referring to money you keep without distributions. If you are distributing 2% or higher (assume 2% dividends) of your portfolio and your investment and general income brackets are similar, it doesn't make a difference. So it would be better to have $X on taxable because tax brackets are likely to be lower than if you have that $X on taxable. So you are right to stop contributing to Roth. If you leave US before 59.5, for a tax drag of 0.50%, Roth would be only worth if you had to keep it for 20 years (0.5%*20 = 10% = Roth early withdrawal penalty). Consider tax drag may be higher on some funds, so you may want to put those in Roth.


Still, you didn't explain if holding VEU while in Spain, how you will get back that 7% of foreign tax credit.

I think all around the world tax brackets for investment are lower. But in US it can go higher. For high earners, consider NIIT of 3.8% and CA with 13.3% tax, on top of Federal 20% (37.1%!)
I meant that if your tax drag is 0.25 %, then over 20 years it becomes around 5 %, which isn't enough to make up for the difference in taxation between taxable and Roth (assuming no opportunity to withdraw earnings tax-free). Also, after 20 years, most of the funds will be earnings: 6 % nominal growth over 20 years means some 75+ % of account will be earnings.

My understanding is that fundamentally, tax drag come from two sources: (1) realized capital gains due to stock turnover and (2) tax on dividends. If you buy-and-hold a broad index ETF, then (1) should be very small. Secondly, the tax drag due to dividends, which will mainly depend on dividend yield and your personal capital gains tax rate, goes away once you stop reinvesting the dividends in retirement. TLH I think can be useful during the accumulation phase, if you make contributions every month then at some times your latest holdings will go underwater, possibly enough to justify TLH. This will especially be true if the returns will be small in the coming 10-20 years.

You can't do TLH once in Spain, but you also don't need to, because you probably aren't reinvesting the dividends anyway.

The withdrawal penalty for Roth is not 10 %, it's 10 % + income taxes on the earnings. That's too much to justify withdrawing earnings, even if you are moving to a place with higher tax like Spain.
Topic Author
wineandplaya
Posts: 170
Joined: Fri Sep 14, 2018 9:42 am

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

Post by wineandplaya »

Back-of-the-envelope for TLH (because math is fun):
Let's say you have the option of either putting $500/mo in taxable or in a Roth IRA. I've seen that for S&P500 there have historically been on average one correction of at least 10 % every 1.87 years (38 corrections since 1950). If you assume that every two years, the contributions for the last 6 months will go down 10 % (and you can harvest those losses), then on average, you can harvest $150/yr. Saving you maybe $30 in taxes, or 0.5 %. So TLH might compensate for 3-ish years of tax drag.

Edit: corrected bad calculations
international001
Posts: 2013
Joined: Thu Feb 15, 2018 7:31 pm

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

Post by international001 »

wineandplaya wrote: Sun Jun 06, 2021 4:03 pm Back-of-the-envelope for TLH (because math is fun):
Let's say you have the option of either putting $500/mo in taxable or in a Roth IRA. I've seen that for S&P500 there have historically been on average one correction of at least 10 % every 1.87 years (38 corrections since 1950). If you assume that every two years, the contributions for the last 6 months will go down 10 % (and you can harvest those losses), then on average, you can harvest $150/yr. Saving you maybe $30 in taxes, or 0.5 %. So TLH might compensate for 3-ish years of tax drag.

Edit: corrected bad calculations
Please, be explicit in your computations. I'm sure they are reasonable, but it's difficult to follow up assumptions.
In my mind, if you can harvest the past 6 months it would be a capital loss of (6*$500)*10%=$300 every 2 years, what is $150/year. At 20% income tax rate bracket, it would be $150*0.2=$30 taxes saved every year. You are saving every year on taxes $30/(12*$500)= 0.5%. But this is a free loan that you eventually have to pay (because cost basis decreased), so it's not .

Sure use it. But regardless how you do the math it's not going to increase the exponential annually return, just multiply your total return by a factor.

Another issue is how you can do TLH if in Spain. In Spain, you really cannot since you are supposed to sell order shares first (FIFO), but I probably if your accounts are in US nobody will look into this (another issue is if it's 100% legal). Also, capital losses rules are not as generous in Spain, you only have to offset them with some gains, and you can defer losses only for 4 years. So 4 years is the limit of your loan. You can also offset them with some amount of dividends (up to 25%), what I guess is like a loan you don't have to every pay back again.
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