US citizens or Green Card holders living in Brazil are required to file an US expat tax return every year if the amount earned surpasses the minimum threshold mandated by the IRS. In this article, we will explain the entire procedure and particularities of this taxation.
As a US Citizen or Green Card holder you are required to file a US expat tax return every year if you make more than the minimum threshold mandated by the IRS regardless of the country in which the income was earned.
Every country has its own rules and regulations on taxes, however, and not every country has an active tax treaty with the United States.
It helps to become familiar with filing requirements of the country in which you will be (or are) living and working. In this article, we are going to take a look at the taxes for which US expatriates will be responsible while living and working in the captivatingly beautiful country of Brazil.
Basic US Expat Tax Requirements and Provisions
Before we begin to examine the Brazilian tax code, we are going to cover some of the most basic US expat tax return requirements. As indicated earlier, if you are a US Citizen or Green Card holder and you made at least $9,500 in 2011 ($400 if you are self-employed and other minimum income thresholds apply for a variety of different circumstances) you are required to file a US expat tax return.
If you had at least $10K in one or more foreign accounts or you earned a profit of $1,500 or more from foreign accounts, you will not only have to claim that income on your US expat tax return, you will also be required to report all account information to the US Department of Treasury by submitting Form TD F 90-22.1, which is also referred to as FBAR (Foreign Bank Account Report)
Even though the IRS requires all citizens and Green Card holders residing and working overseas to file a US expat tax return, it does have a number of credits and exclusions available to US expats to help significantly reduce or completely eliminate US tax liability. These include:
- Foreign Housing Exclusion – The Foreign Housing Exclusion or Foreign Housing Credit allows you to either deduct your qualified housing expenses from your US taxable income or claim a credit for your qualified housing expenses against your US expat taxes. Whichever course of action you choose, the foreign housing allowance reduces your overall US tax liability.
- Foreign Earned Income Exclusion (FEIE) – By claiming the FEIE you are able to deduct up to $92,900 from your US income so no US taxes will be applied to that amount.
- Foreign Tax Credit – The Foreign Tax Credit is available to US expats who have paid or accrued foreign taxes. Expatriates are able to claim a dollar for dollar credit on their US expat taxes against all foreign income taxes.
The details and requirements of the previously mentioned credits and exclusions offered by the IRS to US expats should be examined carefully before filing your US expat tax return.
If during your research and planning phase you become overwhelmed or confused about how to take advantage of these tax saving provisions, Taxes for Expats is always able to provide a mini tax consultation that can help you develop an effective plan.
Who Qualifies as a Brazilian Resident?
In order to understand how you will be affected by taxes in Brazil, you must first understand Brazilian residency status, as it directly affects the manner in which your local and worldwide income is taxed.
If you have a permanent Brazilian visa or you hold a temporary work permit, you are classified as a Brazilian resident as soon as you arrive in Brazil.
If neither of these applies, you are a non-resident until you have been in the country for a total of 183 days out of a period of 12 months – whether or not the 183 days are consecutive. On the first day following your 183rd day, you are considered a resident of Brazil and will be taxed as such.
Income Tax Rates in Brazil
If you are classified as a Brazilian resident, you will be required to pay personal income taxes on all worldwide income.
If you are classified as a non-resident you will only be responsible for paying taxes on income earned in Brazil. You are not required to file a Brazilian tax return, however, until the time at which you actually become a resident.
The tax rates for Brazilian residents on worldwide income as established by the Brazilian Secretariat of the Federal Revenue in the currency of Brazilian Real (BRL) for 2011 are:
- R$ 0 - R$17,989.80: Exempt
- R$ 17,989.81 - R$ 26,961.00: 7.5%
- R$ 26,961.01 - R$ 35,948.40: 15%
- R$ 35,948.41 - R$ 44,918.28: 22.5%
- R$ 44,918.29 and beyond: 27.5%
Only federal income taxes are assessed in Brazil – not regional, state, or municipality taxes. It is possible, however, for some municipalities to apply a service tax of around 2% to transfers of business or real estate.
Brazilian residents are required to pay a capital gains tax of 15% and may not apply capital gains losses to other income.
Investors in the public stock exchange of Brazil, however, may be able to consider both gains and losses from security sales when calculating their Brazilian capital gains tax liability.
There are a few types of capital gains income which are exempt from Brazilian taxes. Among them are:
- Unique real estate with a value of less than R$440K
- Monthly asset sales with a monthly income of less than R$35K
- Sale of public stock exchange securities valuing less than R$20K
- Real estate earnings which are re-invested in more real estate within 180 days of having earned it
Does the United States and Brazil Have a Tax Treaty?
At this time, there is no tax treaty held between the United States and Brazil. As such, each country will completely impose its tax rules on you.
You will still qualify for the basic deductions and exclusions offered by the United States, but there are a number of taxes for which you may be responsible in both countries.
Tax Filing Deadline in Brazil
As far as corporate taxes are concerned, the Secretariat of the Federal Revenue for Brazil assigns the same tax year as each corporation’s fiscal year.
In regard to personal income taxes, a taxable period may refer to any month of the year at any time. Because income can fluctuate by the month and different rates of taxes may be withheld, it is mandatory for Brazilian residents to file a tax declaration annually.
The ultimate tax rate for determining Brazilian tax liability is based on your annual income from the previous year as reported on your tax declaration, which must be filed by the last business day of April.
Income such as investments or other capital gains are not subject to monthly withholding and must be reported annually.
Social Security Concerns to US Expats in Brazil
More often than not, a taxpayer’s Social Security obligations are determined by a Totalization Agreement held between 2 countries. Both Brazil and the US have a number of Totalization Agreements, but they do not have one with each other.
As such, you will be required to make contributions to each country’s social insurance program.
The Brazilian social insurance program contribution rate is between 8% and 11%, depending on salary, with a maximum contribution of R$381.
These contributions are deductible, however, from your monthly and annual Brazilian income tax. Additionally, the contributions to Brazil can be claimed as a cash expense on your US expat taxes.
Additional Taxes in Brazil
Beside income earned from an employer, other types of income are subject to taxation in Brazil. These types of income include:
- Non-Cash Compensation Tax: This includes assistance with housing, the value of services paid for by an employer or other party besides you, use of a company vehicle, or any other subsistence expenses which were covered by another party.
- Inheritance Tax: The country of Brazil does not assess taxes on gift, inheritances, or any other death transfer or donation; however, you may be taxed for these types of earnings on a state level. São Paulo is a Brazilian state in which gifts and inheritances are subject to a tax rate of 4%
- Sales Tax: Comparable to the VAT (Value Added Tax), Brazil has what is referred to as ICMS– a sales tax of 18% on goods sold and a 25% tax rate on certain luxury items.
Minimize Your US Tax Liability
As a resident of Brazil, you will not be able to avoid paying income taxes or other taxes applied to various types of income. Luckily, the taxes assessed in Brazil are not excessively high.
Even though you will be required to pay Brazilian taxes, you should be able to minimize or eliminate your US tax liability by claiming every available credit, deduction, and exclusion offered by the IRS.
This article was written by I.J. Zemelman, founder of Taxes for Expats.