It’s tax time in both the US and Brazil. so a good point to cover this topic.
For US citizens, moving to another country usually results in dramatically more complicated taxes. Why? Well the US is one of only two nations in the world that taxes it’s citizen based on their citizenship, not based on their physical location or where the income is generated.
So yes, if you’re a US citizen, the tax obligation follows you for life.
This post relates to US citizen expats living in Brazil. Any other combination of citizenship and location doesn’t apply here.
It goes without saying, none of this is tax advice. Don’t make any decision based on what you read here. Do your own research with competent professionals in each country you’re affected by. I am not a tax or financial professional, this is just my experience and understanding.
Here’s a couple of important points to get out of the way:
- As a citizen of the US you owe tax to the US on your global income.
- As a tax resident of Brazil, you owe Brazil tax on your global income.
- Brazil and the US do not have a tax treaty in place to prevent double taxation.
- Double taxation is indirectly prevented in this scenario, because both countries will credit the tax you owe them with the amount you pay in tax to another country.
Phew! Let’s break that down a bit.
I had earned income for a while while in Brazil. The income was derived form a US based employer. I had to pay taxes monthly to Brazil on the income, however the amount I paid to Brazil was reduce directly dollar for dollar (or real for real) by the amount of federal tax I paid on the income derived for the month (not state, or social security, or medicare). So if I made $1000 dollars, and paid $100 in federal tax, the amount I owed Brazil on the full $1000 (which they would consider about R$5000 at the current exchange rate) was reduced by $100 (or actually R$500, again at the current exchange rate).
Taking the same example, I made $1000, and paid the US $100 in federal tax. Brazil sees that income as R$5000, and i owe tax of $1000 reals. That R$1000 BRL tax is reduced by R$500, so not I only pay the remaining R$500. This is because I paid $100 to the US, and converted to the value in Reals, that’s about R$500, which is directly deducted form the R$1000 I owe.
Net/Net: If you’re keeping score, out of pocket, I’m effectively paying the full rate of the country that costs more, in this case Brazil.
Fast forward to tax season. The US has a tax credit called the Foreign Tax Credit (FTC). You can receive a non-refundable credit on the tax you owe to the US for any legal tax you pay to a foreign government. There is also a Foreign Earned Income Exemption but I’m not covering that hear. Depending on you income level and tax burden your US tax professional will figure out the best set of options to use.
So lets expand on the above example: making $1000/month, pay $100/month in taxes to the US, and Paying another R$500 BRL to Brazil.
I file taxes int he US, and claim a foreign tax credit on the other $500/month I paid to Brazil. At this point I have paid $1200 in federal tax to the US, and R$6000 to Brazil. The R$6000 converted to it’s value in dollars is $1200, and that $1200 offsets the $1200 I paid, so I get a refund check for $1200.
In all, using this very simple example, I paid $0 to the US and R$6000 to Brazil.
Now, don’t get the idea this broadly applies. The income tax brackets for Brazil and the US are different. Int he US you pay a lot less for lower levels of income, where as in Brazil the top tax bracket is applied at a relatively low level of income. That means if you make less you end up paying more total tax by living in Brazil.
So far we’ve discussed earned income, from working. As I understand this all applies to investment income as well. If you transition from working, to deriving income from a basket of assets, you’re tax scenario changes a bit. We will cover that in a future post.
-Sirsandals