U.S. Expat Retirement in Europe: A Looming Tax Storm?
- itllbefunretiremen
- Sep 12
- 6 min read
Updated: Sep 17
For the millions of Americans retired or retiring across Europe, financial planning has long been a balancing act between local tax laws and the unique demands of the U.S. tax system. Favorable regimes, like Portugal's recently ended Non-Habitual Resident (NHR) program, have offered years of stability and significant savings.
However, a potential "perfect storm" is brewing. As special tax incentives for foreign residents evolve or expire across the continent, many retirees are facing the prospect of higher local taxes.
At the same time, the U.S. is seriously considering a monumental shift from its current Citizenship-Based Taxation to a Residence-Based Taxation (RBT) system.
While this proposed U.S. change sounds like a welcome simplification, its current form could create an unforeseen—and costly—double-taxation trap for retirees. This article will break down what these combined changes could mean for Americans living in Portugal, France, Spain, and Italy, using a detailed case study to illustrate the potential financial impact.
What is Residence-Based Taxation (RBT)?
To understand the proposed changes, it's important to know how the U.S. tax system is unique.
Current System: Citizenship-Based Taxation (CBT) The U.S. is one of only two countries in the world that taxes its citizens based on who they are (their citizenship), not where they live. Under CBT, if you are a U.S. citizen, you must report your worldwide income to the IRS and potentially pay U.S. taxes, no matter where you reside.
Proposed System: Residence-Based Taxation (RBT) RBT would align the U.S. with the rest of the world. Under this system, U.S. citizens living abroad would only be taxed by the U.S. on their U.S.-source income (like income from a U.S. business, U.S. rental properties, or, critically, U.S. retirement accounts). Your foreign-earned income would no longer be subject to U.S. tax.
While the move away from taxing citizens on worldwide income sounds good on the surface, the current proposals could have unintended and costly consequences for retirees.
To illustrate the impact, let's analyze the potential tax burden for a hypothetical retired couple, John and Mary, across these four popular retirement destinations.
The John and Mary Case Study
Annual Social Security Income: $50,000 (Exempt from host country tax under all four treaties)
Annual Traditional IRA Withdrawals: $40,000 (Taxable by the host country)
Total Annual Income: $90,000
Here’s how their tax situation could evolve across three key scenarios.
Scenario 1: The "Golden Years" – Today with Portugal's NHR Status
This is the situation many retirees in Portugal currently enjoy. (we'll address France, Spain & Italy as well)
Portuguese Taxes:
Their U.S. Social Security is exempt from Portuguese tax under the U.S.-Portugal Tax Treaty.
Their $40,000 IRA withdrawal is considered foreign pension income and is taxed at a flat, favorable rate of 10%.
Portuguese Tax Bill: ~$4,000
U.S. Taxes:
They file a U.S. tax return on their worldwide income.
They use the Foreign Tax Credit for the ~$4,000 paid to Portugal, which directly reduces or completely eliminates their U.S. tax liability on the IRA income.
Combined Result: John and Mary pay tax in one country (Portugal) at a low rate. There is no double taxation. Their approximate total tax burden is $4,000.
Scenario 2: The Local Shift – After NHR Ends (U.S. System Unchanged)
Once their 10-year NHR term expires, John and Mary become standard Portuguese tax residents.
Portuguese Taxes:
Crucially, their U.S. Social Security remains exempt from Portuguese tax due to the U.S.-Portugal Tax Treaty. This provision overrides Portugal's standard rules.
Only their $40,000 IRA withdrawal is subject to Portugal's standard progressive tax rates.
Estimated Portuguese Tax Bill: ~$11,000 - $13,000 (depending on deductions).
U.S. Taxes:
The U.S. system remains the same. They can still claim a Foreign Tax Credit for the significant taxes paid to Portugal on their IRA, which will still likely wipe out their U.S. tax liability on that income.
Combined Result: While their tax bill increases due to Portugal's standard rates on their IRA, the treaty and the Foreign Tax Credit still protect them from double taxation. Their approximate total tax burden is $11,000 - $13,000.
Scenario 3: The Double Squeeze – After NHR Ends AND with U.S. Residence-Based Taxation
This is the critical future scenario. The proposed RBT system would treat John and Mary as "non-resident aliens," and their U.S.-based retirement income would be considered "U.S.-source."
U.S. Taxes (The First Hit):
Under RBT, their $40,000 IRA withdrawal is U.S.-source income. It would be subject to a U.S. withholding tax. Let's estimate a 20% U.S. tax.
They would lose the ability to claim U.S. deductions like the standard deduction for this income.
Crucially, they cannot use the Foreign Tax Credit.
U.S. Tax Bill on IRA: ~$8,000
Portuguese Taxes (The Second Hit):
Their U.S. Social Security remains exempt.
Portugal will tax the full $40,000 IRA withdrawal at its standard progressive rates, just as in Scenario 2. Portugal does not offer a credit for the tax they just paid to the U.S.
Estimated Portuguese Tax Bill: ~$11,000 - $13,000
Combined Result: They are now taxed by both countries on the same IRA income.
Total Tax Bill: ~$19,000 - $21,000
Comparative Tax Scenarios: Portugal, Italy, Spain & France
The chart below estimates John and Mary's total tax bill under the different scenarios. The core issue demonstrated is how the proposed U.S. RBT system could create double taxation on their IRA income (Scenario 3).
Country | Scenario | Host Country Tax (on $40k IRA) | U.S. Tax (on $40k IRA) | Total Estimated Tax Burden | Double Taxation? |
Portugal | 1. Favorable Regime (NHR) | ~$4,000 (10% flat rate) | $0 (Foreign Tax Credit) | ~$4,000 | No |
2. Standard Tax System | ~$11,000 - $13,000 | $0 (Foreign Tax Credit) | ~$11,000 - $13,000 | No | |
3. Standard System + U.S. RBT | ~$11,000 - $13,000 | ~$8,000 (Withholding Tax) | ~$19,000 - $21,000 | Yes | |
Italy | 1. Favorable Regime (7% Flat Tax)* | ~$2,800 (7% flat rate) | $0 (Foreign Tax Credit) | ~$2,800 | No |
2. Standard Tax System | ~$10,000 - $12,000 | $0 (Foreign Tax Credit) | ~$10,000 - $12,000 | No | |
3. Standard System + U.S. RBT | ~$10,000 - $12,000 | ~$8,000 (Withholding Tax) | ~$18,000 - $20,000 | Yes | |
Spain | 1. & 2. Standard Tax System** | ~$9,000 - $11,000 | $0 (Foreign Tax Credit) | ~$9,000 - $11,000 | No |
3. Standard System + U.S. RBT | ~$9,000 - $11,000 | ~$8,000 (Withholding Tax) | ~$17,000 - $19,000 | Yes | |
France | 1. & 2. Standard Tax System** | ~$2,000 - $3,000 | $0 (Foreign Tax Credit) | ~$2,000 - $3,000 | No |
3. Standard System + U.S. RBT | ~$2,000 - $3,000 | ~$8,000 (Withholding Tax) | ~$10,000 - $11,000 | Yes |
Italy's 7% flat tax is only for new residents in specific southern municipalities. *Spain and France do not have widely applicable favorable regimes for retirement income comparable to Portugal's NHR or Italy's 7% tax. Their standard system applies from the start. Note that France's low tax estimate is due to its "parts" system, which significantly benefits married couples at this income level.
What This Means For Our Community
As the chart clearly shows, even with treaties protecting our Social Security, the enactment of the currently proposed U.S. RBT system could lead to a significant increase in your overall tax burden due to double taxation on retirement distributions.
And don't worry you still get to file your USA taxes just like always.
While RBT is intended to provide relief for Americans working abroad, it could inadvertently penalize retirees across Europe.
How to Prepare
Stay Informed: These changes are not yet law in the U.S. and will evolve. Follow news from reputable expat tax sources and advocacy groups.
Plan Ahead: Understand when your special tax status (like NHR) expires and model what your host country's tax liability will look like under its standard rates.
Consult a Professional: It is more important than ever to work with a cross-border tax advisor who understands the laws in both the U.S. and your country of residence. They can help you navigate these complexities and explore potential strategies.
Voice Your Concerns: Engage with organizations that advocate for Americans abroad. They are actively working to address the flaws in the current RBT proposals to protect retirees from this kind of double taxation.
We will continue to monitor these developments and provide updates as they become available. Staying informed and prepared is our best strategy for navigating the road ahead.
Disclaimer: This article is for informational purposes only and does not constitute financial or legal advice. The tax scenarios described are simplified estimates based on 2024/2025 tax rules and may not account for all deductions, credits, or regional differences. Tax laws are complex and subject to change. Please consult a qualified, cross-border tax professional for advice tailored to your individual situation.**
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