U.S. Retiree Living in Brazil

[gideontax]

I'm a retired U.S. citizen living in Brazil.  My income is from passive income, namely dividends and capital gains on U.S. ETFs.  I have to pay taxes in Brazil on those earnings.  To my knowledge, there is no tax treaty between the U.S. and Brazil.

From what I understand, I may be able to get a foreign tax credit on my U.S. return for taxes paid in Brazil.  What I'm unclear about is the ratio of foreign income to worldwide income.  Since all of my income comes from U.S. ETFs of U.S. companies, is my foreign income considered to be 0, and thus the ratio of foreign to worldwide income 0, and finally resulting in a foreign tax credit of 0?

[pk]

@gideontax , a general method of reducing the double taxation bite  ( on passive income that is taxed by US and the other country ) is to resource the US sourced passive income ( interest, dividend etc. )  for purposes of form 1116  ( Foreign Tax Credit ).  But this   strategy works when  the two countries involved have  " double taxation " clause  in a tax treaty between them.  Since Brazil does not have a tax treaty with US, the only other-way is to  take a deduction  under the SALT  ( State And Local Taxes ) category , limited to US$10,000.  This would work if  ,and only if,  you can benefit from itemized  deductions .

Is there more I can do for you ?

pk

[gideontax]

That is very helpful.  Thank you.

There is a hypothetical situation that I'm wondering about.  I believe that Portugal has a tax treaty with the U.S.  So if I lived there instead of in Brazil, would I be able to resource dividends and capital gains on my U.S. ETFs and (assuming I have no other income) and also get a 100% tax credit in the U.S. for the dividend and capital gains paid to Portugal using form 1116 (up to the applicable taxes in the U.S.)?

And then if I were to do a traditional to Roth IRA conversion, would I also be able to resource that to Portugal and get a 100% tax credit in the U.S. for taxes paid on the conversion in Portugal?

[pk]

@gideontax  in general  resourcing of US income that is also taxed by a foreign taxing authority is possible for all countries that  US  has a tax treaty with.  Obviously if  you want to  use Portugal as your home, then yes Portugal has a tax treaty with US.

Note that while US would recognize  100% of the taxes paid to a foreign taxing authority, the allowable amount for the current tax year  is limited on form 1116 -- lower of  what you have paid  or  the US tax liability allocated to this doubly taxed income..

On Roth or similar tax advantaged  income , I have to go refresh my knowledge on US-Portugal Tax treaty for specifics, but in general  if an amount  is taxed by the Foreign Taxing Authority as " income", then it is eligible  for  Foreign Tax Credit treatment ( again depending on exact facts and circumstances ).

Is there more I can do for you?

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If your questions is not of interest to the community  and/or  personal to your situation, you are welcome to  PM me   ( just no Personally Identifiable Info , please ).

[gideontax]

I would like to pursue understanding better the tax implications of living in Portugal.  Specifically the following:  dividend taxes are 28% in Portugal, and 15% for qualified dividends in the U.S. (ignoring exclusions and investment income tax).  But Portugal only taxes 7.2% of retirement income, including of course amounts converted from traditional to Roth IRAs.  So I'm wondering if there's a way on my U.S. taxes that I can somehow offset the extra taxes paid on dividends in Portugal against the income tax owed in the U.S. on the Roth conversion.  Or perhaps I should instead consider trying to use the foreign earned income tax exclusion to lower my income taxes owed on the Roth conversion.  

You mentioned the possibility of PMing you.  I have to admit that I don't know what that means.

[pk]

@gideontax , 

(a)   " Or perhaps I should instead consider trying to use the foreign earned income tax exclusion to lower my income taxes owed on the Roth conversion. " ------  Earned Income Exclusion is only available for  " Active" income such as wages, self-employment etc.   The conversion of IRAs to Roth  is  pension income  ( taxed a ordinary income but not as active income , there  is also no FICA/ SECA component ). 

(b) " Specifically the following:  dividend taxes are 28% in Portugal, and 15% for qualified dividends in the U.S. (ignoring exclusions and investment income tax).  But Portugal only taxes 7.2% of retirement income, including of course amounts converted from traditional to Roth IRAs.  So I'm wondering if there's a way on my U.S. taxes that I can somehow offset the extra taxes paid on dividends in Portugal against the income tax owed in the U.S. on the Roth conversion"   ------ I cannot comment and/or suggest  on this  because I am not familiar with the tax laws  of Portugal.   I can  comment / answer  ONLY to the extent   the  Tax Treaty exposes  tax concepts. ------  Fundamentally  the US  applicability of the US-Portugal tax treaty. 

(c) Very strongly suggest a discussion with  tax professional;  familiar with  Portugal tax laws.   Conceptually I would guess that there will be significant  similarity  between  Portugal and Brazil  tax laws.

(d)  The conversion of  traditional IRA to Roth IRA i.e.  recognition of a distribution of trad. IRA , paying taxes on this  and  locking it away as Roth to continue to grow, implies  essentially   paying taxes on an undistributed income  and therefore I would assume that to Portugal it would look like an income and taxes as pension income. And therefore  that foreign tax would be eligible for  foreign tax credit.   But note from my answer above that the allowable credit for the  year would  be the lesser of  foreign taxes  ;paid  or the limited amount  due to limitations  on form 1116  ( the ratiometric allocation  ).

Hope this makes sense .

PM ( Private Mail ) is using the little  envelope  shown on the screen at the top right  of the post.

pk