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A Totalization Agreement is a treaty established between two country’s Social Security departments for the purposes of eliminating double contributions of social security taxes. This agreement dictates which country will be able to collect social security taxes from workers and companies, depending upon the living and working arrangements. With the Brazilian Totalization Agreement, the US now has a contract with more than 25 countries, but each agreement is different.
The Brazilian Totalization Agreement with the US allows workers to pay into only one social security system at a time, and still receive credit for that work with the other country. This means that even if you work in Brazil for many years, you will not lose out on your Social Security benefits when you file for them at retirement age. The same goes for Brazilians working in the US as well.
Most social security taxes do not reach your US tax return filings. This is because when you work as an employee in the US, the social security taxes are withheld by your employer (along with other deductions such as Medicare, federal & state income taxes, and retirement contributions) and you receive the rest. This is not the case for self-employed individuals (independent contractors). When you are self-employed, your gross income and expenses are entered on your tax return and netted out to get your total profit or loss from your operations throughout the year. If you show a profit, you will not only pay income taxes on your income, but you will also have to pay the social security and Medicare taxes on that income as well (instead of paying them throughout the year like an employee). These taxes are called Self-Employment taxes (SE taxes), and are calculated out. Learn more about self employment taxes here.
With the Totalization Agreement, you will only pay social security taxes to the country you are living in, therefore eliminating the Self-Employment taxes on your return, and potentially saving you hundreds or thousands on your US taxes. This does not mean that you get out of paying self-employment tax; it just means that you will pay them through the Brazilian system instead of the US. Please note: You will need to consult with a Brazilian tax expert in order to calculate out how much you would pay for their Social Security taxes.
When claiming an exclusion from paying self-employed taxes on your US return due to the Totalization Agreement, you will need to obtain a certificate of coverage from the Brazilian National Social Insurance Institute. A copy of this certificate of coverage will need to be attached to your tax return each year. Generally only one certificate of coverage letter will need to be obtained, and a copy of the same letter is all that’s needed for the tax return attachment.
Now that there is a Totalization Agreement with Brazil, Americans can feel free to travel there without fear of paying more in taxes to the US!
In other Totalization Agreement news, the US and Hungary have signed an agreement similar to the Brazil/US Totalization Agreement, but it still awaits final approval before it becomes signed into law! Make sure to check back for more information on that.
Questions About Filing US Expat Taxes in Brazil?
For more detailed information regarding US expats in Brazil, check out this blog post. If you have questions about filing your US expat taxes or would like help completing your tax forms, please contact us now.