If you’re an American expat living in Australia, you probably have questions about your U.S. tax responsibilities. Do you need to file U.S. taxes? Will you have to pay taxes in both Australia and the U.S? How is the tax year determined? What are the filing deadlines?
Let’s explore US tax issues as they pertain to you – the Australian US expat.
According to US tax regulations, US citizens and Lawful Permanent Residents (Green card holders) are required to file an annual tax return (Form 1040) to report their worldwide income, regardless of where they reside and where their income is sourced. (Exception applies for certain low-income individuals.) Even if you pay taxes in Australia, you must still file a US return. Besides for a tax return, you may have other filing obligations, which will be explained below.
As a US citizen living abroad, you are entitled to an automatic two-month filing extension through June 15th, with no need to apply. In addition, you can apply for another extension through October 15th, either via mail or e-file; this must be done before June 15th. Because the Australian tax year ends six months later than the US tax year, we always suggest that our Australian clients apply for the additional extension, and at the same time try to file their Australian tax return as soon as possible. This plan usually enables the taxpayer to file his US return in a timely manner.
Even though Australian taxes are reported based on a July-June fiscal year, US taxes need to be reported by the January through December calendar year. As a US expat residing in Australia, you need to calculate your income according to the US calendar year and convert your earnings into US dollars. When converting your earnings to US dollars, you should convert using the specific Foreign Exchange rate on the date of payment, a monthly average, or annual average rate.
In Australia, employer and employee contributions to superannuation funds are not reported as wage income, and are taxed at a flat 15% rate. In contrast, for US tax purposes, these contributions are actually included as wage income on the tax return and are subject to ordinary income tax rates. In addition, accrued earnings from super funds are taxable for US purposes.
No one wants to pay tax twice on the same income. US tax laws and the US-Australia tax treaty provide for several helpful ways to avoid double taxation.
Taxes paid to Australia generally tend to be higher than US taxes due. The highest Australian tax rate is 45%, whereas the highest US tax rate is 37%. Residents of Australia with Australian-sourced income can use Australian taxes paid to offset US taxes due; as such, US expats residing in Australia will most often be left with no US tax obligations on their Australian-sourced income.
Another option available to US expats residing in Australia is to utilize the US foreign earned income exclusion. Use of this exclusion will allow Australian expats to exclude up to $105,900 of their foreign earned income in 2019. An additional housing allowance may also be applicable. This is specifically beneficial for Australian expats that want to file their US tax return at the close of the US tax year and do not want to wait until after completion of their tax assessment from the following Australian tax year.
The Totalization Agreement between the US and Australia, created in 2002, helps taxpayers avoid paying double social security tax. It allows for an exemption from US self-employment tax for US expats residing in Australia. Taxpayers need to report the self-employment income on their annual US income tax return, and then claim the exemption from the related social security tax.
There are various other filings that may be relevant to US taxpayers living abroad. The most common is the Foreign Bank Account Report (FBAR), a Treasury Department information return. This needs to be filed by a US person who holds interest in foreign accounts with an aggregate highest balance of $10,000 or more during the tax year. Others forms include Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations), Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts), and Form 8938 (Statement of Specified Foreign Financial Assets). These are all filings that report required information, but generally do not result in the assessment and payment of tax.
All high-earning individuals with income from passive sources are subject to US net investment income tax (NIIT). This is a 3.8% flat tax assessed on passive income of individuals who earn more than $200,000 ($250,000 threshold for married filing jointly taxpayers), and it applies even to passive income from Australian sources. Many Australian residents in this situation are unpleasantly surprised by this tax, as the Australian income tax they paid on their passive income cannot be used to offset the NIIT.
If a US citizen or green card holder is married to a spouse who is neither a citizen nor resident of the US, then the spouse’s income is not required to be reported to the IRS at all. That being said, one has the option to elect, via section 6013(g) election, to file jointly with the non-US spouse in order to take advantage of a higher standard deduction; in some situations, this can lower the overall tax liability. Another scenario where making this election is advantageous is when adding the spouse’s income to the return will increase eligibility for the “Additional Child Tax Credit Refunds” (Form 8812).
However, there are downsides to making the election. Firstly, once the election is made, all of the spouse’s worldwide income must be reported to the IRS. As such, the election is not advisable in most cases, as the results will often be worse than when filing alone. In addition, in a case where no election is made, there exists the option of transferring ownership of income-producing assets to the non-US spouse, thereby decreasing the taxable income reportable to the IRS. If the election is made, that possibility is lost. For more information see ELECTION TO TREAT NON-RESIDENT ALIEN SPOUSE AS A US RESIDENT (IRC 6013(g))
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