The answers provided by our specialists have the goal of providing more general tax information. They should not, under any hypothesis, be considered specific tax advice by the website users, for their personal and business matters. Concrete cases will always have to be assessed in an isolated way, so that the respective facts and circumstances can be effectively analyzed, aiming to have the best applicable tax and business strategies. Another important remark: some of the matters brought here will also demand the interaction with other duly licensed professionals. These include but are not limited to attorneys, financial and insurance consultants. For that reason, for the effective and correct service to our clients, BT7 Partners operates alongside these professionals in order to provide the best practices, strategies and solutions from both the fiscal and business viewpoints, strictly following the best rules of compliance.
In the United States, in addition to the Federal Government, some states also collect Individual Income Tax. However, Florida, Nevada, Texas and Alaska, among others, do not collect this tax.
The states of California, New York and Hawaii.
As a rule of thumb, someone with an F visa, as well as someone with a J or M visa, is exempt from filing tax returns in the US for up to 5 years, when it comes to revenue from foreign sources. However, some precautions must be taken. For example, in regard to complying with the respective American immigration rules and submitting an annual form to the IRS in order to report the days of physical presence and the academic institution information. Another precaution is the one related to adopting possible steps aiming to acquire the permanent residency authorization, which can potentially “cancel” the aforementioned exemption benefit. It must be stressed that said exemption benefit may no longer apply if the person has certain types of revenue. For this reason, it is important to pay close attention to the particularities of each case, in order to adopt the best strategies.
At which point a person becomes a tax resident and is required to file tax returns in the United States?
For non-US citizens, tax residency in the country usually happens in the following scenarios: when receiving the Green Card, or when remaining in the country for over 182 days, which is called “substantial presence.” The way the 182 days are calculated may differ from other countries. In the United States, they take into account the days present not only in the current year, but also the two previous years.
Each financial year has a different weight for the purposes of the calculation (the current year of the test considers 100% of the days; the previous year considers 1/3 of those days; the year before that considers 1/6 of the days). If the total sum exceeds 182 days, the person becomes a tax resident for the current year. The effects of characterizing this residency as such may be retroactive to the first day of presence in that particular year.
Can someone with a student visa be excluded from this rule and not file tax returns in the United States, even though they have been in the country for over 182 days?
As a rule of thumb, yes. However, it is necessary to be aware of compliance with your visa requirements concerning the connection to the educational institution. In addition, you must deliver the respective annual form to the North American fiscal authority, the IRS, as mentioned in question 3 above. It is important to highlight that some revenue may eventually not be covered by exemption, thus requiring a more thorough analysis of the concrete case.
Is someone who lives in the United States and has been hired by a company with a work visa considered a tax resident?
When working for an American employer, it is necessary to take the Substantial Presence Test mentioned in question 4 in order to determine your tax resident status in the country. However, if the person already has a Green Card, they automatically become a tax resident.
Is someone who files tax returns in the United States required to continue to file income tax returns in Brazil?
If you have not formalized your Definitive Exit from the country, by delivering the respective Statement to the Federal Revenue, you are required to file income tax returns in Brazil, even if you are also considered a tax resident in the United States
First of all, it is important to clarify that, with formalizing the Definitive Exit, your Tax ID (CPF) number will not be automatically cancelled. In addition, it will not prevent you from having real estate properties and corporate participation in Brazilian companies.
However, there will be other consequences, such as the impossibility of adopting the SIMPLES Nacional regime through the companies in which you are a partner. Another example is the impossibility of continue to manage these companies, as well as not being able to use the Reduction Factor for the purposes of Capital Gains calculations.
The Statement of Definitive Exit may also restrict the financial investment portfolio in Brazil, almost limiting said portfolio to investing in some funds, CDBs and Private Pension Funds.
In other words: you must be cautious, you must know all the consequences and plan this step very well ahead of time.
The correct answer is: it depends. Each case is different and must be studied appropriately. Basically, one must consider that the Brazilian tax model focuses on ‘consumption’, while the US focuses on collecting tax on ‘income’. For this reason, the Brazilian model ends up penalizing the poor.
Both require declaring all sorts of income – salaries, retirement – and any type of investment gains, financial and real estate income… In other words, it uses a global base – anything the person may have earned with revenue, and the location of its source (global tax bases) does not matter.
One of the main differences is in the way proprietary information is reported. In the United States, as a general rule, one does not declare the amounts of financial investments they have in the country; only those from abroad. When it comes to real estate, it is more common to report data on property only if they are being economically exploited – if they are being rented, for example – or when they are sold, in order to inform the capital gains or losses.
Will someone who does not submit a Statement of Definitive Exit from Brazil and, therefore, continues to file for income tax returns in both countries end up paying twice the taxes on the same income?
That depends on the type of revenue and the location of the source. In addition, it must fulfill the other requirements provided in both countries’ tax rules.
In other words, the compensation for what has been paid in one country will also depend on which country the revenue generated from. For example: for financial gains in Brazil, you first pay in Brazil and then seek compensation, when permitted, in the United States. If the revenue was generated in the United States, the reverse applies.
The great majority of American states that collect local income tax does not allow for using the amounts paid abroad as a credit. For an effective analysis, the respective rules for each state must be assessed, as well as any occasional forecasts in agreements entered into by the USA.
The advantages will depend on the activity the person intends to carry out. In some cases, it can help to separate the risk and reduce the tax burden, for example. Keep in mind that there is very specific legislation that must be studied and evaluated cautiously, and complied with rigorously, with the participation of an attorney who is duly licensed in the respective jurisdiction so that the legal points are also assessed in advance.
Many Brazilian citizens own offshore companies. Does the American legislation allow for this? In which cases?
The use of offshore companies is not prohibited per American tax rules. However, said rules have a series of tests and requirements to be met, and most cases result in the impossibility of fiscal approval of revenue determined by such companies.
What is the biggest and most common mistake Brazilians make when dealing with tax issues in the United States?
Lack of planning! In most cases, people tend to first immigrate to the United States, obtain visas, become tax residents and only then think about the taxes. The correct, the indispensable way is to analyze and do fiscal planning before immigrating, in order to organize a consistent set of actions, strictly within the law and exploring possibilities allowed by the authorities. Real estate, patrimonhy, family situation, succession, investments… All of this must be assessed and planned for.
Another common mistake is for the tax resident in the United States to think they must only declare to the IRS what they own in the United States, thus not reporting what they own in Brazil, as well as the respective revenues from Brazilian sources.
Some Brazilians, when arriving in the United States, also tend to make mistakes in regard to the definition of the type of business they are starting, which in some cases ends up generating a higher tax burden.
Can’t I just file tax returns in Brazil only for my Brazilian income and in the US for my American income?
Absolutely not. You must file all of your income in both countries. And, within the limitations of tax rules, request credit for compensation of part of the income tax amount to be paid.
It depends on each individual situation. In general, it is possible to say that the middle class is more penalized in Brazil than in the United States. Especially when we take into account the total tax load over income, consumption and patrimony.
Brazil’s Federal Revenue is very well organized, having an efficient cross-linking data system, as well as an excellent technological capacity. In the United States, the IRS is equally efficient. However, given the market size and the number of reports to be processed, the agency is still expanding and improving the data cross-checking and tracking of all taxpayer activity. In both cases, though, the same situation applies: good taxpayers, who comply with the legislation and only plan fiscal structures strictly within the law, don’t have any problems.
Is it true that opening bank accounts in the United States has become a lot more difficult for foreign citizens?
Restrictions have been expanded in order to follow recently created compliance rules. For example: opening the account usually requires the physical presence of the person wishing to open a checking account (some banks allowed for opening an account online before). However, it is incorrect to state that it has become too difficult to do so. Each bank has its own protocol, but, in general, it is possible, as long as the person has the necessary documents and substantiation.
No, but the client must fill out the forms indicating their non-tax resident condition, aside from meeting the requirements provided by the chosen financial institution.
Can the person who formalizes their Definitive Exit and becomes a tax resident in the United States keep a bank account in Brazil?
When formalizing the Definitive Exit, the individual may keep a non-resident bank account. In this case, they will pay higher fees and face restrictions on the type of financial investment they are authorized to make.
What is the maximum amount of time someone can hold a student visa in the United States, without having to file Income Tax returns?
The time limit allowed by the legislation would be a maximum of five calendar years, except in conditions depending on meeting specific requirements, to be confirmed by special documentation. In other words, during the five calendar years, the student would not be subjected to the Substantial Presence Test with the 182-day deadline, as long as they meet the visa requirements and submit the respective form to the IRS every year, in order to exclude the physical presence days. Even in this case, they may not be exempt from paying taxes when they have certain types of revenue, for example, and thus the situation must be assessed with due caution.
Does someone who starts working for a company in the United States have to file Individual Income Tax returns? Starting when?
In case the foreign citizen does not hold a Green Card, the Substantial Present Test shall apply in order to determine the type of tax residency. In other words, once the period is concluded, the person holding a work visa becomes a tax resident. Keep in mind that there are American Social Security taxes to be collected, which require an analysis of any Welfare Agreements entered into by the USA.
Yes, as long as the legislation of the state in which they plan on starting the business is complied with. As a rule of thumb, it is interesting to initially request an individual taxpayer number, and once the company is opened, request an Employer Identification Number (EIN), which is the equivalent of a CNPJ (Corporate Taxpayer ID) in Brazil.
Não, a abertura da empresa não altera automaticamente o status fiscal da pessoa física que for a sua sócia/acionista.
Many people organize a Trust in the United States. What is the advantage and what are the conditions for it?
In general, a TRUST is a fiduciary agreement through which the holder of patrimony appoints someone to be in charge of managing it on behalf of one or more beneficiaries in case the holder defaults. For the correct and efficient creation of a Trust, it is crucial to have the participation of an attorney duly licensed in the jurisdiction. One of the advantages of a Trust is waiving the need for an inventory process when the asset holder passes away. In regards to taxes, there are several rules to be followed in order for the tax residency of the Trust to be determined, as well as for the respective strategies to be implemented in order to optimize the tax burden of the beneficiaries, both by the Trust itself and by the asset holder, depending on the case.
Aside from the participation of an attorney licensed in the respective jurisdiction, the participation of financial and insurance consultants is usually necessary.
Is it possible for a Brazilian citizen, non-US resident, to purchase real estate? Is it a very complicated operation?
Yes, it is possible. However, it will always be convenient for the buyer to assess the fiscal and succession consequences of the purchase, in addition to the property’s conditions, pricing and payment methods. Depending on the situation, resource origin, if the buyer is an individual or a legal entity, and for what purpose the property will be used, several options may be considered, and the buyer must choose the most appropriate one.
Yes, some car dealers and real estate companies in the United States are open to that, depending on the conditions presented by the buyer.
Can a couple who files for Income Tax returns in Brazil do the same in the United States, or must they file separately?
They may file jointly or separately. It is up to the couple to decide.
Deductibility for the purposes of Individual Income Tax Returns is allowed, but because of the requirements that need to be met, a large portion of the taxpayers ends up not being able to take advantage of these paid amounts as deductibles. On the corporate side, expenses tend to be considered deductible, but it is necessary to comply with the respective criteria so that in the future these expenses are not added by the IRS.
How true is it that the Trump Administration reduced taxes? Is this something that will apply only to the wealthy?
With the 2017 Tax Reform, the tax burden was reduced, both for individuals and corporations. The Trump Administration reduced the maximum rate from 39.6 to 37% for individuals. In addition, it redistributed the tax brackets, thus benefiting taxpayers in general. For legal entities (corporations), the maximum rate was reduced from 35 to 21%.
No, there are no advantages, as currently there is no treaty between the two countries to regulate income taxation more directly and specifically. Thus, the general rules on the US side are applied.
Does someone who contributes to a retirement pension through INSS (Brazilian Social Security) have any advantages when becoming a tax resident in the United States?
Recently, a Social Security Agreement was entered into by both countries. Based on this agreement, there is the possibility of contribution periods being added and the Social Security of each country paying retirement in the proportion of the installment for contribution time, as long as the remaining rules of each jurisdiction are followed.
From the fiscal viewpoint, what changes if a tax resident who has a Green Card becomes a US citizen?
Nothing changes. The person continues to be treated as a tax resident and is subject to the same fiscal rules applicable to Green Card holders.
Does a tax resident in the United States who is transferred to a different country for work continue to file for Individual Income Tax Returns in the United States?
Assuming that the tax residency in the USA is based on American citizenship or on obtaining a Green Card, the individual who is away from the USA for work in another country is still subject to American taxation. However, the individual may try to seek “protection” from an International Treaty in order to avoid double income taxation, depending on the country where they work. Another option is to try and seek the application of the partial exclusion rules for certain revenues, in order for said revenues to not be taxed in the United States.
Do people who hold passports from other countries (besides Brazil) have any fiscal advantages in the USA?
No. Simply holding a passport of another country does not bring any fiscal advantages in the United States.
What are the main forms that a Brazilian who has gained the status os tax residente must get used to in the United States?
The most common one is the 1040, the Individual Income Tax Return form. Another one is the W-9, which will be required by local financial institutions to the detriment of Form W-8, which was required in case of maintaining a non-resident status.
Until what age can children be included as dependentes in their parent’s Income Tax returns in the United States?
As a rule of thumb, children up to 18 years of age may be included in the parents’ tax returns. From 18 to 24 years of age, if they are full-time students.